form10_k12312011.htm





UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

______________

FORM 10-K
(Mark One)

x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2011
 
Or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ___________ to ___________

Commission File No. 000-23143

______________

PROGENICS PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)

Delaware
13-3379479
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification Number)

______________

777 Old Saw Mill River Road
Tarrytown, NY 10591
(Address of principal executive offices, including zip code)

Registrant’s telephone number, including area code: (914) 789-2800

                               Securities registered pursuant to Section 12(b) of the Act:
                         Title of each class                                                                                                  Name of each exchange on which registered
                                      Common Stock, par value $0.0013 per share                                                                                                                                   The NASDAQ Stock Market LLC

                   Securities registered pursuant to Section 12(g) of the Act:
None
______________
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yes o   No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.Yes o   No x

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 ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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 x   No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.                                                                                                                                                                                          ¨

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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Act:
Large Accelerated Filer  ¨
Accelerated Filer  x
Non-accelerated Filer  ¨ (Do not check if a smaller reporting company)
Smaller Reporting Company  ¨

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

The aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant on June 30, 2011, based upon the closing price of the Common Stock on The NASDAQ Stock Market LLC on that date of $7.18 per share, was $144,724,374 (1).
(1)  
Calculated by excluding all shares that may be deemed to be beneficially owned by executive officers, directors and five percent stockholders of the Registrant, without conceding that any such person is an “affiliate” of the Registrant for purposes of the Federal securities laws.
As of March 5, 2012, a total of 33,861,834 shares of Common Stock, par value $.0013 per share, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
Specified portions of the Registrant’s definitive proxy statement to be filed in connection with solicitation of proxies for its 2012 Annual Meeting of Shareholders are hereby incorporated by reference into Part III of this Form 10-K where such portions are referenced.



 
 

 

TABLE OF CONTENTS

PART I
   
Item 1.
1
Item 1A.
10
Item 1B.
18
Item 2.
18
Item 3.
18
Item 4.
 
18
PART II
   
Item 5.
19
Item 6.
20
Item 7.
21
Item 7A.
33
Item 8.
33
Item 9.
33
Item 9A.
34
Item 9B.
 
34
PART III
   
Item 10.
35
Item 11.
35
Item 12.
35
Item 13.
35
Item 14.
 
35
PART IV
   
Item 15.
 
36
F-1
S-1
E-1




PART I

This document and other public statements we make may contain statements that do not relate strictly to historical fact, any of which may be forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. When we use the words “anticipates,” “plans,” “expects” and similar expressions, we are identifying forward-looking statements. Forward-looking statements involve known and unknown risks and uncertainties which may cause our actual results, performance or achievements to be materially different from those expressed or implied by forward-looking statements. While it is impossible to identify or predict all such matters, these differences may result from, among other things, the inherent uncertainty of the timing and success of, and expense associated with, research, development, regulatory approval and commercialization of our products and product candidates, including the risks that clinical trials will not commence or proceed as planned; products appearing promising in early trials will not demonstrate efficacy or safety in larger-scale trials; clinical trial data on our products and product candidates will be unfavorable; our products will not receive marketing approval from regulators or, if approved, do not gain sufficient market acceptance to justify development and commercialization costs; competing products currently on the market or in development might reduce the commercial potential of our products; we, our collaborators or others might identify side effects after the product is on the market; or efficacy or safety concerns regarding marketed products, whether or not originating from subsequent testing or other activities by us, governmental regulators, other entities or organizations or otherwise, and whether or not scientifically justified, may lead to product recalls, withdrawals of marketing approval, reformulation of the product, additional pre-clinical testing or clinical trials, changes in labeling of the product, the need for additional marketing applications, declining sales or other adverse events.

We are also subject to risks and uncertainties associated with the actions of our corporate, academic and other collaborators and government regulatory agencies, including risks from market forces and trends; potential product liability; intellectual property, litigation, environmental and other risks; the risk that we may not be able to enter into favorable collaboration or other relationships or that existing or future relationships may not proceed as planned; the risk that current and pending patent protection for our products may be invalid, unenforceable or challenged, or fail to provide adequate market exclusivity, or that our rights to in-licensed intellectual property may be terminated for our failure to satisfy performance milestones; the risk of difficulties in, and regulatory compliance relating to, manufacturing products; and the uncertainty of our future profitability.

Risks and uncertainties also include general economic conditions, including interest and currency exchange-rate fluctuations and the availability of capital; changes in generally accepted accounting principles; the impact of legislation and regulatory compliance; the highly regulated nature of our business, including government cost-containment initiatives and restrictions on third-party payments for our products; trade buying patterns; the competitive climate of our industry; and other factors set forth in this document and other reports filed with the U.S. Securities and Exchange Commission (SEC). In particular, we cannot assure you that RELISTOR® will be commercially successful or be approved in the future in other formulations, indications or jurisdictions, or that any of our other programs will result in a commercial product.

We do not have a policy of updating or revising forward-looking statements and we assume no obligation to update any statements as a result of new information or future events or developments. It should not be assumed that our silence over time means that actual events are bearing out as expressed or implied in forward-looking statements.

Available Information

We file annual, quarterly and current reports, proxy statements and other documents with the SEC under the Securities Exchange Act of 1934. The SEC maintains an Internet website that contains reports, proxy and information statements and other information regarding issuers, including Progenics, that file electronically with the SEC. You may obtain documents that we file with the SEC at http://www.sec.gov, and read and copy them at the SEC’s Public Reference Room at 100 F Street NE, Washington, DC 20549. You may obtain information on operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. We also make available our annual, quarterly and current reports and proxy materials on http://www.progenics.com.

Additional information concerning Progenics and its business may be available in press releases or other public announcements and quarterly and current reports and documents filed with the SEC.


Item 1. Business

Progenics Pharmaceuticals is dedicated to the development of innovative medicines to treat disease. Our focus is on the treatment of cancer.

RELISTOR. Our first commercial drug is RELISTOR®, for the treatment of opioid induced constipation (OIC) in patients with advanced illnesses, such as cancer. OIC is the constipation that often arises when patients take opioids for pain relief. RELISTOR is the only prescription medicine approved in the United States to treat this form of constipation. RELISTOR subcutaneous injection is now approved in the U.S. and over 50 other counties around the world. In the U.S. RELISTOR is marketed by our commercial partner Salix Pharmaceuticals, a leading specialty pharmaceutical company focusing on gastrointestinal diseases; it is sold outside the U.S. by sublicensees of Salix. Our partner Ono Pharmaceutical is currently developing subcutaneous RELISTOR for Japan.

Together with Salix we have applied to the U.S. Food and Drug Administration to expand the population that can be treated with subcutaneous RELISTOR to include patients taking opioids for non-cancer pain, and who suffer from OIC as a result. This population includes patients taking opioids for conditions such as back pain or joint pain. The FDA’s action date on this marketing application under the Prescription Drug User Fee Act (PDUFA) is April 27, 2012.

We also recently announced results from a Phase 3 clinical test of an oral form of RELISTOR, in which the efficacy of oral methylnaltrexone was comparable to that reported in clinical studies of subcutaneous methylnaltrexone in subjects with chronic, non-cancer pain, and the overall observed safety profile in patients treated was comparable to placebo.  
 
PSMA ADC. Our lead oncology product candidate under development is PSMA ADC, which we are currently testing in a Phase 1 trial in men with advanced prostate cancer. PSMA ADC is an antibody-drug conjugate which targets prostate specific membrane antigen (PSMA), a protein found on the surface of prostate cancer tumor cells. This ADC combines our own proprietary antibody to PSMA with auristatin E (MMAE), a potent cytotoxic drug. MMAE and the conjugation technology for PSMA ADC is licensed to us by Seattle Genetics, a clinical stage biotechnology company focusing on monoclonal antibody-based therapies for cancer and autoimmune diseases. We expect that the ongoing Phase 1 trial of PSMA ADC will be completed in 2012 and if the results are successful we plan then to commence a Phase 2 trial of PSMA ADC in advanced prostate cancer. PSMA is also expressed on cells in the growing blood vessels, or neovasculature, that supplies many other forms of cancers. We have not yet explored in clinical trials the potential of PSMA ADC for treatment of these other cancers.

PI3K. As a part of our work in oncology, we are conducting preclinical development of novel multiplex phosphoinositide 3-kinase (PI3K) inhibitors. We believe these compounds may be effective in blocking signaling pathways that are critical in the growth of aggressive cancers, particularly RAS-mutated tumors.

Future Plans and Recent Events. With our focus on the development of medicines to treat cancer, we are seeking opportunities to expand our oncology pipeline through in-licensing and acquisitions. We have discontinued work on programs outside of this focus and are working to out-license them.
 
On March 14, 2012, Progenics and company founder Paul J. Maddon entered into an agreement providing for his retirement as Chief Science Officer.  He will continue as a member of the Progenics Board and a Vice Chairman.  In connection with Dr. Maddon’s retirement and termination of his employment agreement, Progenics has agreed to pay him an amount equal to $1,789,333 and provide other benefits under the agreement.




Here is a summary of our current RELISTOR efforts and our product candidate pipeline:
     
 RELISTOR®    
     
Marketed commercial product
 
Approved indication
 
Status
 
     
RELISTOR-Subcutaneous injection
 
Treatment of OIC in advanced-illness patients receiving palliative care when laxative therapy has not been sufficient
 
 
Marketed in the U.S., E.U., Canada, Australia and elsewhere; Licensed to Salix Pharmaceuticals worldwide other than Japan
 
           
Clinical product candidates
 
Proposed indication
 
Status
 
           
RELISTOR-Subcutaneous injection
 
Treatment of OIC in patients with non-cancer pain
 
PDUFA action date of April 27, 2012 for pending sNDA
 
           
RELISTOR-Subcutaneous injection
 
Treatment of OIC (Japan)
 
Development being conducted by Ono Pharmaceutical
 
           
RELISTOR-Oral
 
Treatment of OIC
 
Phase 3 testing completed
 
     
ONCOLOGY
         
           
Clinical product candidate
 
Proposed indication
 
Status
 
   
PSMA ADC
 
Prostate cancer
 
Phase 1 in advanced prostate cancer
 
           
Research
 
Proposed indication
 
Status
 
   
Multiplex PI3K inhibitor compounds
 
Cancer
 
Discovery research
 
           
           
       
Please note:

RELISTOR is a registered trademark. In this document, RELISTOR refers to methylnaltrexone – the active ingredient of RELISTOR - as it has been and is being developed and commercialized by or in collaboration with Progenics. Subcutaneous RELISTOR has received regulatory marketing approval for specific indications, and references to RELISTOR do not imply that any other form or possible use of the drug has received such approval. The approved U.S. label for RELISTOR also provides that use of RELISTOR beyond four months has not been studied. Full U.S. prescribing information is available at www.RELISTOR.com. Other approved labels for RELISTOR apply in ex-US markets.

In summarizing the status of our commercialization and product candidates:

(i)   Research and discovery means initial research related to specific molecular targets, synthesis of new chemical entities, assay development or screening for identification and optimization of lead compound(s). This work precedes pre-clinical investigations, which involves lead compound(s) undergoing toxicology, formulation and other testing in preparation for clinical trials.
         (ii)  
Phase 1-3 clinical trials are safety and efficacy tests in humans:
             1:           Initial evaluation of safety in humans; study method of action and metabolization.
             2:           Evaluation of safety, dosing and activity or efficacy; continue safety evaluation.
             3:           Larger scale evaluation of safety, efficacy and dosage.


RELISTOR

Opioid-based medications such as morphine and codeine are used to control moderate-to-severe pain in patients receiving palliative care, undergoing surgery, experiencing chronic pain or with other medical conditions. Opioids relieve pain by interacting with receptors located in the brain and spinal cord, but also activate receptors in the gut, often resulting in constipation, referred to as opioid-induced constipation or OIC. As a result of OIC, many patients may stop or reduce their opioid therapy, opting to endure pain in order to obtain relief from their OIC and its associated side effects.

RELISTOR, the first approved treatment for OIC that addresses the underlying mechanism of this condition, is a selective, peripherally acting, mu-opioid-receptor antagonist that decreases the constipating side effects induced by opioid pain medications in the gastrointestinal tract without diminishing the ability of these medications to relieve pain. Relief of OIC is an important need that is not adequately met by any other approved drug or intervention. Because of its chemical composition, RELISTOR has restricted access to the blood-brain barrier to enter the central nervous system, where pain is perceived. Outside the central nervous system, RELISTOR competes with opioid pain medications for binding sites on opioid receptors, displacing the pain medications only in the periphery and selectively “turning off” the constipating effects of those medications on the gastrointestinal tract without affecting pain relief occurring in the central nervous system.

Under our 2011 License Agreement, Salix is responsible for further developing and commercializing subcutaneous RELISTOR, including completing clinical development necessary to support regulatory marketing approvals for potential new indications and formulations of the drug. Through December 31, 2011, we have received under this Agreement a $60.0 million upfront cash payment and $0.2 million in respect of Salix ex-U.S. sublicensee revenue and are eligible to receive (i) up to $40.0 million upon U.S. marketing approval for subcutaneous RELISTOR in non-cancer pain patients, (ii) up to $50.0 million upon U.S. marketing approval of an oral formulation of RELISTOR, (iii) up to $200.0 million of commercialization milestone payments upon achievement of specified U.S. sales targets, (iv) royalties ranging from 15 to 19 percent of net sales by Salix and its affiliates, and (v) 60% of any upfront, milestone, reimbursement or other revenue (net of costs of goods sold, as defined, and territory-specific research and development expense reimbursement) Salix receives from sublicensees outside the U.S. In the event that either marketing approval is subject to a Black Box Warning or Risk Evaluation and Mitigation Strategy (REMS), payment of a portion of the milestone amount would be deferred, and subject, to achievement of the first commercialization milestone.

Subcutaneous RELISTOR. RELISTOR has been approved by regulatory authorities in the U.S., countries in the European Union, Canada and Australia since 2008 for treatment of OIC in advanced-illness patients receiving palliative care when laxative therapy has not been sufficient. Marketing applications are pending elsewhere throughout the world. Salix, Progenics, and Progenics’ former collaborator Wyeth have transitioned U.S., European and other marketing authorizations and are transitioning additional commercialization outside the U.S. and Japan. Salix has secured distribution and marketing partners for RELISTOR in the European territory and has licensed Link Medical Products Pty Limited for distribution in Australia, New Zealand, South Africa and certain other markets in Asia. Salix is continuing efforts to secure additional distribution partners and/or sublicensees.

RELISTOR net sales and related royalties earned through the end of 2011 are set forth below. Our recognition of royalty revenue for financial reporting purposes is explained in Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) and our financial statements included elsewhere in this document. Royalties in 2011 are based on net sales reported by Salix; royalties through September 30, 2010 were based on net sales reported by Wyeth.

 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
 
Full
Year
         
(in thousands)
       
2011:
 
Net Sales
$3,300
 
$5,200
 
$9,700
 
$8,800
 
$27,000
Royalties Earned
     -
 
     527
 
  1,240
 
  1,279
 
    3,046
2010:
 
Net Sales
$4,200
 
$3,800
 
$4,100
 
$4,000
 
$16,100
Royalties Earned
     625
 
     581
 
     620
 
    -
 
    1,826
2009:
 
Net Sales  $1,900    $3,200    $3,300   $3,900   $12,300
Royalties Earned       280         487        497        589       1,853
2008:                  
Net Sales
   n.a
 
$2,100
 
    $800
 
$1,500
 
 $4,400
Royalties Earned
   n.a
 
     321
 
      117
 
     227
 
       665


 
 
Progenics began developing RELISTOR in 2001 and continued development and commercialization worldwide except Japan with Wyeth Pharmaceuticals (now a Pfizer Inc. subsidiary) pursuant to a 2005 collaboration agreement that was terminated in October 2009. Under our 2008 License Agreement, Ono began clinical testing of RELISTOR subcutaneous injection in June 2009. See Licenses – RELISTOR. In addition to our pending sNDA for subcutaneous RELISTOR in non-cancer pain patients, we have also received U.S., E.U. and Canadian approvals to market RELISTOR in pre-filled syringes, which are designed to ease preparation and administration for patients and caregivers, and expect Salix to begin distributing RELISTOR in this presentation later this year.

Oral RELISTOR. As noted above, we and Salix recently announced top-line data from a phase 3 trial of oral RELISTOR in patients with non-cancer pain.

Oncology

Through PSMA Development Company LLC, our wholly owned subsidiary, we conduct research and development programs directed at prostate specific membrane antigen, or PSMA, a protein that is abundantly expressed on the surface of prostate cancer cells as well as cells in the newly formed blood vessels of many other solid tumors. The principal focus of these efforts is our fully human monoclonal ADC, which utilizes technology licensed to us from Sloan-Kettering Institute for Cancer Research and Seattle Genetics, and is designed to deliver a chemotherapeutic agent to cancer cells by targeting the three-dimensional structure of the PSMA protein on these cells and binding to and internalizing within the cell. We believe a PSMA-directed therapy may have application in prostate cancer and solid tumors of other types of cancer. We are conducting a phase 1 clinical trial of PSMA ADC for the treatment of prostate cancer which we expect will be completed in 2012, and if the results are successful we plan then to commence a Phase 2 trial of PSMA ADC in advanced prostate cancer.

We also recently presented data from preclinical studies of novel multiplex phosphoinositide 3-kinase (PI3K) inhibitors -- synthetic, small-molecule compounds identified by us that in laboratory studies have blocked both PI3K, a key regulator of one molecular signaling pathway, and MNK, an oncogenic kinase in the Ras pathway. We believe simultaneously blocking these interlinked cellular pathways may provide a strategy to combat some of the most aggressive forms of cancer.

We are seeking to in-license or acquire opportunities in the oncology field and related supportive, diagnostic and/or other areas that are complementary to these ongoing initiatives and our oncology focus generally.

Licenses

Following is a summary of significant license agreements under which we have in- and/or out-licensed rights to use certain technologies and materials related to RELISTOR and product candidates in our pipeline.

RELISTOR. Under our License Agreement, Salix Pharmaceuticals is responsible for further developing and commercializing subcutaneous RELISTOR worldwide other than Japan, including completing clinical development necessary to support regulatory marketing approvals for potential new indications and formulations, and marketing and selling the product. Salix is marketing RELISTOR directly through its specialty sales force in the U.S., and outside the U.S., directly through distribution and marketing partners and sublicensing regional companies. Among the rights we have licensed to Salix are our exclusive rights to develop and commercialize methylnaltrexone, the active ingredient of RELISTOR, which we in-licensed from the University of Chicago and for which we are obligated to make milestone and royalty payments to the University. Salix is paying us royalties ranging from 15 to 19 percent on its net sales of RELISTOR as well as 60% of any upfront, milestone, reimbursement or other revenue (net of costs of goods sold, as defined, and territory-specific research and development expense reimbursement) it receives from sublicensees in respect of any country outside the U.S.

We have licensed to Ono Pharmaceutical the rights to subcutaneous RELISTOR in Japan, where Ono is responsible for developing and commercializing subcutaneous RELISTOR, including conducting clinical development to support regulatory marketing approval and will own the subcutaneous filings and approvals relating to RELISTOR. We received a $15.0 million upfront payment from Ono, and are entitled to receive up to an additional $20.0 million upon achievement of development milestones. Ono is also obligated to pay us royalties and commercialization milestones on sales of subcutaneous RELISTOR in Japan. Ono has the option to acquire the rights to develop and commercialize other formulations of RELISTOR in Japan, on terms to be negotiated separately. Supervision of and consultation with respect to Ono’s development and commercialization responsibilities are carried out by joint committees. The Ono License contains, among other terms, provisions which permit termination by either party upon the occurrence of certain events.



PSMA. PSMA Development Company LLC has a collaboration agreement with Seattle Genetics under which SGI has granted it an exclusive worldwide license to SGI’s proprietary ADC technology. PSMA LLC has the right to use this technology, which is based in part on technology licensed by SGI from third parties, to link chemotherapeutic agents to PSMA LLC’s monoclonal antibodies that target prostate specific membrane antigen utilizes technology licensed to us from Sloan-Kettering. PSMA LLC is responsible for research, product development, manufacturing and commercialization of all products, and may sublicense the ADC technology to a third party manufacturer. PSMA LLC is obligated to make maintenance and milestone payments aggregating up to $14.3 million and to pay royalties to SGI and its licensors, as applicable, on a percentage of net sales. The SGI agreement terminates at the latest of (i) the tenth anniversary of the first commercial sale of each licensed product in each country or (ii) the latest date of expiration of patents underlying the licensed products. PSMA LLC may terminate the agreement upon advance written notice, and SGI may terminate if PSMA LLC fails to cure a breach of an SGI in-license within a specified time period after written notice. In addition, either party may terminate the agreement after written notice upon an uncured breach or in the event of bankruptcy of the other party. As of December 31, 2011, PSMA LLC has paid approximately $3.8 million under this agreement, including $1.0 million in milestone payments.

PSMA LLC also has a worldwide exclusive licensing agreement with Abgenix (now Amgen Fremont, Inc.) to use its XenoMouse® technology for generating fully human antibodies to PSMA. PSMA LLC is obligated to make development and commercialization milestone payments with respect to products incorporating an antibody generated utilizing the XenoMouse technology. As of December 31, 2011, PSMA LLC has paid $0.9 million under this agreement and is obligated to pay up to an additional $6.3 million if certain milestones are met, along with royalties based upon net sales of antibody products, if any. This agreement may be terminated, after an opportunity to cure, by Abgenix for cause upon 30 days prior written notice; PSMA LLC has the right to terminate upon 30 days prior written notice. The agreement continues until the later of the expiration of the XenoMouse technology patents that may result from pending patent applications or seven years from the first commercial sale of the products.

Patents and Proprietary Technology

Protection of our intellectual property rights is important to our business. In addition to seeking U.S. patent protection for many of our inventions, we generally file patent applications in Canada, Japan, European countries that are party to the European Patent Convention and additional foreign countries on a selective basis in order to protect the inventions that we consider to be important to the development of our foreign business. Generally, patents issued in the U.S. are effective for either (i) 20 years from the earliest asserted filing date, if the application was filed on or after June 8, 1995, or (ii) the longer of 17 years from the date of issue or 20 years from the earliest asserted filing date, if the application was filed prior to that date.

In certain instances, the U.S. patent term can be extended up to a maximum of five years to recapture a portion of the term during which the FDA regulatory review was being conducted. The duration of foreign patents varies in accordance with the provisions of applicable local law, although most countries provide for patent terms of 20 years from the earliest asserted filing date and allow patent extensions similar to those permitted in the U.S.

We also rely on trade secrets, proprietary know-how and continuing technological innovation to develop and maintain a competitive position in our product areas. We generally require our employees, consultants and corporate partners who have access to our proprietary information to sign confidentiality agreements.

Information with respect to our patent portfolio regarding our therapeutic and research programs, as of year-end 2011, is set forth below.

RELISTOR and
 
Number of Patents
 
Expiration
 
Number of Patent Applications
Product Candidates
 
U.S.
 
International
 
Dates (1)
 
U.S.
 
International
RELISTOR
 
8
 
30
 
2015-2028
 
22
 
179
                     
Oncology (PSMA; PI3K)
 
7
 
25
 
2013-2026
 
6
 
20
                     
Other
 
-
 
-
 
-
 
1
 
4
                     
                                                       (1)  
Patent term extensions and pending patent applications may extend the period of patent protection afforded our products and product candidates under development.



Patents may not enable us to preclude competitors from commercializing drugs in direct competition with our products, and consequently may not provide us with any meaningful competitive advantage. See Risk Factors.

We are aware of intellectual property rights held by third parties that relate to products or technologies we are developing. For example, we are aware of others investigating methylnaltrexone and other peripheral opioid antagonists as well as PSMA or related compounds, and of patents and applications held or filed by others in those areas. While the validity of issued patents, patentability of claimed inventions in pending applications and applicability of any of them to our programs are uncertain, patent rights asserted against us could adversely affect our ability to commercialize or collaborate with others regarding our products.

Research, development and commercialization of a biopharmaceutical product often require choosing between alternative development and optimization routes at various stages in the development process. Preferred routes depend upon subsequent discoveries and test results and cannot be identified with certainty at the outset. There are numerous third-party patents in our field, and we may need to obtain a license under a patent in order to pursue the preferred development route of one or more of our product candidates. The need to obtain a license would decrease the ultimate profitability of the applicable product. If we cannot negotiate a license, we might have to pursue a less desirable development route or terminate the entire program altogether.

Government Regulation

Progenics and its product candidates are subject to comprehensive regulation by the U.S. FDA and comparable authorities in other countries. Pharmaceutical regulation currently is a topic of substantial interest in lawmaking and regulatory bodies in the U.S. and internationally, and numerous proposals exist for changes in FDA and non-U.S. regulation of pre-clinical and clinical testing, safety, effectiveness, approval, manufacture, labeling, marketing, export, storage, recordkeeping, advertising, promotion and other aspects of biologics, small molecule drugs and medical devices, many of which, if adopted, could significantly alter our business and the current regulatory structure described below. See Risk Factors.

FDA Regulation. FDA approval of our product candidates, including a review of the manufacturing processes and facilities used to produce them, are required before they may be marketed in the U.S. This process is costly, time consuming and subject to unanticipated delays, and a drug candidate may fail to progress at any point.

None of our product candidates other than RELISTOR has received marketing approval from the FDA or any other regulatory authority. The process required by the FDA before product candidates may be approved for marketing in the U.S. generally involves:

·    pre-clinical laboratory and animal tests;

·    submission to and favorable review by the FDA of an IND (Investigational New Drug) application before clinical trials may begin;

·    adequate and well-controlled human clinical trials to establish the safety and efficacy of the product for its intended indication (animal and other nonclinical studies also are typically conducted during each phase of human clinical trials);

·    submission to the FDA of a marketing application; and

·    FDA review of the marketing application in order to determine, among other things, whether the product is safe and effective for its intended uses.

Pre-clinical tests include laboratory evaluation of product chemistry and animal studies to gain preliminary information about a product’s pharmacology and toxicology and to identify safety problems that would preclude testing in humans. Products must generally be manufactured according to current Good Manufacturing Practices, and pre-clinical safety tests must be conducted by laboratories that comply with FDA good laboratory practices regulations.

Results of pre-clinical tests are submitted to the FDA as part of an IND which must become effective before clinical trials may commence. The IND submission must include, among other things, a description of the sponsor’s investigational plan; protocols for each planned study; chemistry, manufacturing and control information; pharmacology and toxicology information and a summary of previous human experience with the investigational drug. Unless the FDA objects to, makes comments or raises questions concerning an IND, it becomes effective 30 days following submission, and initial clinical studies may begin. Companies often obtain affirmative FDA approval, however, before beginning such studies.



Clinical trials involve the administration of the investigational new drug to healthy volunteers or to individuals under the supervision of a qualified principal investigator. Clinical trials must be conducted in accordance with the FDA’s Good Clinical Practice requirements under protocols submitted to the FDA that detail, among other things, the objectives of the study, parameters used to monitor safety and effectiveness criteria to be evaluated. Each clinical study must be conducted under the auspices of an Institutional Review Board, which considers, among other things, ethical factors, safety of human subjects, possible liability of the institution and informed consent disclosure which must be made to participants in the trial.

Clinical trials are typically conducted in three sequential phases, which may overlap. During phase 1, when the drug is initially administered to human subjects, the product is tested for safety, dosage tolerance, absorption, metabolism, distribution and excretion. Phase 2 involves studies in a limited population to evaluate preliminarily the efficacy of the product for specific, targeted indications, determine dosage tolerance and optimal dosage and identify possible adverse effects and safety risks.

When a product candidate is found in phase 2 evaluation to have an effect and an acceptable safety profile, phase 3 trials are undertaken in order to further evaluate clinical efficacy and test for safety within an expanded population. Safety studies are conducted in accordance with the FDA’s International Conference on Harmonization (ICH) Guidelines. Phase 2 results do not guarantee a similar outcome in phase 3 trials. The FDA may suspend clinical trials at any point in this process if it concludes that clinical subjects are being exposed to an unacceptable health risk.

A New Drug Application, or NDA, is an application to the FDA to market a new drug. A Biologic License Application, or BLA, is an application to market a biological product. The new drug or biological product may not be marketed in the U.S. until the FDA has approved the NDA or issued a biologic license. The NDA must contain, among other things, information on chemistry, manufacturing and controls; non-clinical pharmacology and toxicology; human pharmacokinetics and bioavailability; and clinical data. The BLA must contain, among other things, data derived from nonclinical laboratory and clinical studies which demonstrate that the product meets prescribed standards of safety, purity and potency, and a full description of manufacturing methods. Supplemental NDAs (sNDAs) are submitted to obtain regulatory approval for additional indications for a previously approved drug.

The results of the pre-clinical studies and clinical studies, the chemistry and manufacturing data, and the proposed labeling, among other things, are submitted to the FDA in the form of an NDA or BLA. The FDA may refuse to accept the application for filing if certain administrative and content criteria are not satisfied, and even after accepting the application for review, the FDA may require additional testing or information before approval of the application, in either case based upon changes in applicable law or FDA policy during the period of product development and FDA regulatory review. The applicant’s analysis of the results of clinical studies is subject to review and interpretation by the FDA, which may differ from the applicant’s analysis, and in any event, the FDA must deny an NDA or BLA if applicable regulatory requirements are not ultimately satisfied. If regulatory approval of a product is granted, such approval may be made subject to various conditions, including post-marketing testing and surveillance to monitor the safety of the product, or may entail limitations on the indicated uses for which it may be marketed. Finally, product approvals may be withdrawn if compliance with regulatory standards is not maintained or if problems occur following initial marketing.

Both before and after approval is obtained, a product, its manufacturer and the sponsor of the marketing application for the product are subject to comprehensive regulatory oversight. Violations of existing or newly-adopted regulatory requirements at any stage, including the pre-clinical and clinical testing process, the approval process, or thereafter, may result in various adverse consequences, including FDA delay in approving or refusal to approve a product, withdrawal of an approved product from the market or the imposition of criminal penalties against the manufacturer or sponsor. Later discovery of previously unknown problems may result in restrictions on the product, manufacturer or sponsor, including withdrawal of the product from the market.

Regulation Outside the U.S. Whether or not FDA approval has been obtained, approval of a pharmaceutical product by comparable government regulatory authorities in foreign countries must be obtained prior to marketing the product there. The approval procedure varies from country to country, and the time required may be longer or shorter than that required for FDA approval. The requirements for regulatory approval by governmental agencies in other countries prior to commercialization of products there can be rigorous, costly and uncertain, and approvals may not be granted on a timely basis or at all.

In European Union countries, Canada, Australia and Japan, regulatory requirements and approval processes are similar in principle to those in the United States. Regulatory approval in Japan requires that clinical trials of new drugs be conducted in Japanese patients. Depending on the type of drug for which approval is sought, there are currently two potential tracks for marketing approval in the E.U. countries: mutual recognition and the centralized procedure. These review mechanisms may ultimately lead to approval in all E.U. countries, but each method grants all participating countries some decision-making authority in product approval. The centralized procedure, which is mandatory for biotechnology derived products, results in a recommendation in all member states, while the E.U. mutual recognition process involves country-by-country approval.



In other countries, regulatory requirements may require additional pre-clinical or clinical testing regardless of whether FDA approval has been obtained. This is the case in Japan, where Ono is responsible for developing and commercializing the subcutaneous form of RELISTOR and where trials are required to involve patient populations which we and our other collaborators have not examined in detail. If the particular product is manufactured in the U.S., we must also comply with FDA and other U.S. export provisions. In most countries outside the U.S., coverage, pricing and reimbursement approvals are also required which may affect the profitability of the affected product.

Other Regulation. In addition to regulations enforced by the FDA, we are also subject to regulation under the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances Control Act, the Resource Conservation and Recovery Act and various other current and potential future federal, state or local regulations. Biopharmaceutical research and development involves the controlled use of hazardous materials, chemicals, viruses and various radioactive compounds. Even strict compliance with safety procedures for storing, handling, using and disposing of such materials prescribed by applicable regulations cannot completely eliminate the risk of accidental contaminations or injury from these materials, which may result in liability for resulting legal and regulatory violations as well as damages.

Manufacturing
 
Under our License Agreement, Salix is responsible for the manufacture and supply, at its expense, of all active pharmaceutical ingredient (API) and finished and packaged products for its RELISTOR commercialization efforts, including contracting with contract manufacturing organizations (CMOs) for supply of RELISTOR API and subcutaneous and oral finished drug product. See Risk Factors.

Having closed our biologics pilot production facilities in 2011, we plan to engage third-party CMOs for manufacturing additional clinical trial supplies of our PSMA monoclonal antibody and to continue using CMOs for other portions of the PSMA ADC manufacturing process. If we are unable to arrange for satisfactory CMO services, or otherwise were to determine to establish a new manufacturing capacity, we would need to expand our manufacturing staff and facilities or obtain new facilities. In order to establish a full-scale commercial manufacturing facility for any of our product candidates, we would need to spend substantial additional funds, hire and train significant numbers of employees and comply with the extensive FDA regulations applicable to such a facility.

Sales and Marketing

We from time to time seek strategic collaborations and other funding support for product candidates in our pipeline. We expect that we would market other products for which we obtain regulatory approval through co-marketing, co-promotion, licensing and distribution arrangements with third-party collaborators, and might also consider contracting with professional detailing and sales organizations to perform promotional and/or medical-scientific support functions for them. See Risk Factors.

Competition

Competition in the biopharmaceutical industry is intense and characterized by ongoing research and development and technological change. We face competition from many for-profit companies and major universities and research institutions in the U.S. and abroad. We face competition from companies marketing existing products or developing new products for diseases targeted by our technologies. Many of our competitors have substantially greater resources, experience in conducting pre-clinical studies and clinical trials and obtaining regulatory approvals for their products, operating experience, research and development and marketing capabilities and production capabilities than we do. Our products and product candidates under development may not compete successfully with existing products or products under development by other companies, universities and other institutions. Drug manufacturers that are first in the market with a therapeutic for a specific indication generally obtain and maintain a significant competitive advantage over later entrants and therefore, the speed with which industry participants move to develop products, complete clinical trials, approve processes and commercialize products is an important competitive factor.

RELISTOR is the first FDA-approved product for any indication involving OIC. We are, however, aware of products in pre-clinical or clinical development that target the side effects of opioid pain therapy. Adolor Corporation (acquired by Cubist Pharmaceuticals in 2011) markets ENTEREG® (alvimopan) for the treatment of postoperative ileus, and has completed a phase 2 study of a compound for opioid-bowel dysfunction in chronic-pain patients. Sucampo Pharmaceuticals, Inc., in collaboration with Takeda Pharmaceutical Company Limited, markets AMITIZA® (lubiprostone), a selective chloride channel activator, for chronic idiopathic (non-opioid related) constipation, and recently completed a phase 3 clinical trial of this drug in opioid-induced bowel dysfunction. A Nektar Therapeutics-AstraZeneca PLC collaboration is conducting phase 2 studies of an oral peripheral mu-opioid receptor antagonist in patients with OIC and a related combination product is in early stage development. Alkermes, Inc. has completed a phase 2 clinical study of an oral peripherally-restricted opioid antagonist, and has a combination product in preclinical testing. Theravance, Inc. has completed phase 2 clinical testing of an oral peripheral mu-opioid antagonist. In Europe, Mundipharma International Limited markets TARGIN® (oxycodone/naloxone), a combination of an opioid and a systemic opioid antagonist, and Movetis NV, which has recently been acquired by Shire plc, is conducting a phase 3 clinical trial with prucalopride in patients with constipation induced by opioid based pain medications.



Radiation and surgery are two traditional forms of treatment for prostate cancer. If the disease spreads, hormone (androgen) suppression therapy is often used to slow the cancer’s progression, but this form of treatment can eventually become ineffective. We are aware of several competitors who are developing alternative treatments for castrate-resistant prostate cancer, some of which are directed against PSMA, including Zytiga® (abiraterone acetate), Medivation, Inc.’s MDV3100, and Algeta ASA’s Alpharadin® (radium-223 chloride).

Recent evidence suggests that activation of complementary oncogenic pathways can confer resistance to PI3K inhibition, requiring co-administration of agents targeting these “resistance” pathways. We are aware of several competitors who are developing small molecule PI3K inhibitors that co-target additional oncogenic pathways.

A significant amount of research in the biopharmaceutical field is carried out at academic and government institutions. An element of our research and development strategy has been to in-license technology and product candidates from academic and government institutions. These institutions are sensitive to the commercial value of their findings and pursue patent protection and negotiate licensing arrangements to collect royalties for use of technology they develop. They may also market competitive commercial products on their own or in collaboration with competitors and compete with us in recruiting highly qualified scientific personnel, which may result in increased costs or decreased availability of technology or product candidates from these institutions to other industry participants.

Competition with respect to our technologies and products is based on, among other things, product efficacy, safety, reliability, method of administration, availability, price and clinical benefit relative to cost; timing and scope of regulatory approval; sales, marketing and manufacturing capabilities; collaborator capabilities; insurance and other reimbursement coverage; and patent protection. Competitive position in our industry also depends on a participant’s ability to attract and retain qualified personnel, obtain patent protection or otherwise develop proprietary products or processes, and secure sufficient capital resources for the typically substantial period between technological conception and commercial sales.

Product Liability

The testing, manufacturing and marketing of our product candidates and products involves an inherent risk of product liability attributable to unwanted and potentially serious health effects. To the extent we elect to test, manufacture or market product candidates and products independently, we bear the risk of product liability directly. We maintain product liability insurance coverage in the amount of $10.0 million per occurrence, subject to a deductible and a $10.0 million aggregate limitation. Where local statutory requirements exceed the limits of our existing insurance or local policies of insurance are required, we maintain additional clinical trial liability insurance to meet these requirements. This insurance is subject to deductibles and coverage limitations. The availability of and cost of maintaining insurance may change over time.

Human Resources

At December 31, 2011, we had 105 full-time employees, 21 of whom hold Ph.D. degrees, three of whom hold M.D. degrees and two of whom hold both Ph.D. and M.D. degrees. At that date, 78 employees were engaged in research and development, medical, regulatory affairs and manufacturing related activities and 27 were engaged in finance, legal, administration and business development. We consider our relations with our employees to be good. None of our employees is covered by a collective bargaining agreement.

Item 1A. Risk Factors

Overview; Significance of our RELISTOR collaborations and our focus on oncology.
 
Our business and operations entail a variety of serious risks and uncertainties. Our business is inherently risky. We are subject to the risks of failure inherent in the development of product candidates based on new technologies. We, or our RELISTOR collaborators, must complete successfully clinical trials and obtain regulatory approvals for potential commercial products. Once approved, commercial products sales are subject to general and industry-specific local and international economic pressures such as those experienced worldwide over the last five years. Our product candidates other than RELISTOR are in pre-clinical or early clinical development. As an oncology-focused research and development strategy, these risks continue to be significant, and may increase to the extent the oncology space becomes more competitive or less favored in the commercial marketplace. We now rely on Salix to complete development and obtain regulatory approvals for additional formulations of and indications for RELISTOR, and in the Japanese market, we rely on Ono to conduct successful clinical trials and obtain regulatory approvals. The research and development programs on which we are now focusing involve novel approaches to human therapeutics. There is little precedent for the successful commercialization of products based on our technologies, and there are a number of technological challenges that we must overcome to complete most of our development efforts. We may not be able successfully to develop further any of our products.



In addition to the risks we face in our research and development activities and our business as a publicly held commercial enterprise devoted to developing and commercializing high-technology consumer products, the transitioning of RELISTOR to our new partner Salix has presented us with new risks. Major risks we face in both our own research and development efforts and Salix’s and Ono’s development and commercialization efforts for RELISTOR include the following:

We are dependent on Salix, Ono and other business partners to develop and commercialize RELISTOR in their respective areas, exposing us to significant risks.

We are and will be dependent upon Salix, Ono and any other business partner(s) with which we may collaborate in the future to perform and fund development, including clinical testing of RELISTOR, make related regulatory filings and manufacture and market products, including for new indications and in new formulations, in their respective territories. Revenues from the sale of RELISTOR now depend entirely upon the efforts of Salix and its sublicensees, which have significant discretion in determining the efforts and resources they apply to sales of RELISTOR. Ono will have similar discretion with respect to sales in Japan. Neither may be effective in obtaining approvals for new indications and/or formulations, marketing existing or future products, or arranging for necessary sublicense or distribution relationship. Our business relationships with Salix, Ono and other partners may not be scientifically, clinically or commercially successful. For example, Salix is a larger pharmaceutical company than Progenics with a variety of marketed products. Unlike Wyeth and Pfizer, however, Salix is not a large diversified pharmaceutical company and does not have resources commensurate with such companies. Salix has its own corporate objectives, which may not be consistent with our best interests, and may change its strategic focus or pursue alternative technologies in a manner that results in reduced or delayed revenues to us. Changes of this nature might also occur if Salix were acquired or if its management changed.

We may have future disagreements with Salix and Ono concerning product development, marketing strategies, manufacturing and supply issues, and rights relating to intellectual property. Both of them have significantly greater financial and managerial resources than we do, which either could draw upon in the event of a dispute. Disagreements between either of them and us could lead to lengthy and expensive litigation or other dispute-resolution proceedings as well as extensive financial and operational consequences to us, and have a material adverse effect on our business, results of operations and financial condition.

We are subject to extensive regulation, which can be costly and time consuming and can subject us to unanticipated fines and delays.

Our business and products are subject to comprehensive regulation by the FDA and comparable authorities in other countries. These agencies and other entities regulate the pre-clinical and clinical testing, safety, effectiveness, approval, manufacture, labeling, marketing, export, storage, recordkeeping, advertising, promotion and other aspects of our products. If we violate regulatory requirements at any stage, whether before or after marketing approval is obtained, we may be subject to forced removal of a product from the market, product seizure, civil and criminal penalties and other adverse consequences. We cannot guarantee that approvals of proposed products, processes or facilities will be granted on a timely basis, or at all. If we experience delays or failures in obtaining approvals, commercialization of our product candidates will be slowed or stopped. Even if we obtain regulatory approval, the approval may include significant limitations on indicated uses for which the product could be marketed or other significant marketing restrictions. Under our License Agreement, we are dependent on Salix for compliance with these regulations as they apply to RELISTOR.

Our products may face regulatory, legal or commercial challenges even after approval.

Even if a product receives regulatory approval:

·    It might not obtain labeling claims necessary to make the product commercially viable (in general, labeling claims define the medical conditions for which a drug product may be marketed, and are therefore very important to the commercial success of a product), or may be required to carry Black Box or other warnings that adversely affect its commercial success.

·    Approval may be limited to uses of the product for treatment or prevention of diseases or conditions that are relatively less financially advantageous to us than approval of greater or different scope, or subject to an FDA-imposed Risk Evaluation and Mitigation Strategy (REMS) that limits the sources from and conditions under which it may be dispensed.

·    Side effects identified after the product is on the market might hurt sales or result in product recalls or withdrawals from the market.



·    Efficacy or safety concerns regarding a marketed product, or manufacturing or other problems, may lead to a recall, withdrawal of marketing approval, reformulation of the product, additional pre-clinical testing or clinical trials, changes in labeling, the need for additional marketing applications, declining sales or other adverse events. These potential consequences may occur whether or not the concerns originate from subsequent testing or other activities by us, governmental regulators, other entities or organizations or otherwise, and whether or not they are scientifically justified. If products lose previously received marketing and other approvals, our financial results would be adversely affected.

·    We or our collaborators will be subject to ongoing FDA obligations and continuous regulatory review, and might be required to undertake post-marketing trials to verify the product’s efficacy or safety or other regulatory obligations.

Competing products in development may adversely affect acceptance of our products.

We are aware of a number of products and product candidates described in this Annual Report under Business – Competition which compete or may potentially compete with RELISTOR. Any of these approved products or product candidates, or others which may be developed in the future may achieve a significant competitive advantage relative to RELISTOR, and, in any event, the existing or future marketing and sales capabilities of these competitors may impair Salix’s and/or Ono’s ability to compete effectively in the market.

We are also aware of competitors which are developing alternative treatments for disease targets to which our research and development programs are directed, any of which – or others which may be developed in the future – may achieve a significant competitive advantage relative to any product we may develop.

Developing product candidates may require us to obtain additional financing. Our access to capital funding is uncertain.

We expect to continue to incur significant development expenditures for our product candidates, and do not have committed external sources of funding for most of these projects. These expenditures will be funded from cash on hand, or we may seek additional external funding for them, most likely through collaborative, license or royalty financing agreements with one or more pharmaceutical companies, securities issuances or government grants or contracts. We cannot predict when we will need additional funds, how much we will need, the form any financing may take (such as securities issuance or royalty or other financing), or whether additional funds will be available at all, especially in light of current conditions in global credit and financial markets. Our need for future funding will depend on numerous factors, such as the availability of new product development projects or other opportunities which we cannot predict, and many of which are outside our control. We cannot assure you that any currently-contemplated or future initiatives for funding our product candidate programs will be successful.

Our access to capital funding is always uncertain. Stresses in international markets are still affecting access to capital. We may not be able at the necessary time to obtain additional funding on acceptable terms, or at all. Our inability to raise additional capital on terms reasonably acceptable to us would seriously jeopardize our business.

If we raise funds by issuing and selling securities, it may be on terms that are not favorable to existing stockholders. If we raise funds by selling equity securities, current stockholders will be diluted, and new investors could have rights superior to existing stockholders. Raising funds by selling debt securities often entails significant restrictive covenants and repayment obligations.

If we are unable to negotiate collaborative agreements, our cash burn rate could increase and our rate of product development could decrease.

We may not be successful in negotiating additional collaborative arrangements with pharmaceutical and biotechnology companies to develop and commercialize product candidates and technologies. If we do not enter into new collaborative arrangements, we would have to devote more of our resources to clinical product development and product-launch activities, seeking additional sources of capital, and our cash burn rate would increase or we would need to take steps to reduce our rate of product development.

If testing does not yield successful results, our products will not be approved.

Regulatory approvals are necessary before product candidates can be marketed. To obtain them, we or our collaborators must demonstrate a product’s safety and efficacy through extensive pre-clinical and clinical testing. During this process, we may find that, for example, results of pre-clinical studies are inconclusive or not indicative of results in human clinical trials, or that potential products do not have the desired efficacy or have undesirable side effects or other characteristics that preclude marketing approval or limit their potential commercial use if approved. We, our collaborators or regulators may also suspend or terminate clinical trials if we or they believe that the participating subjects are being exposed to unacceptable health risks, or after reviewing test results, we or our collaborators may abandon projects which we previously believed to be promising.


 
Clinical testing is very expensive and can take many years. Results attained in early human clinical trials may not be indicative of results in later clinical trials. In addition, many of our investigational or experimental drugs are at an early stage of development, and successful commercialization of early stage product candidates requires significant research, development, testing and approvals by regulators, and additional investment. Our products in the research or pre-clinical development stage may not yield results that would permit or justify clinical testing. Our failure to demonstrate adequately the safety and efficacy of a product under development would delay or prevent marketing approval, which could adversely affect our operating results and credibility.
 
Setbacks in clinical development programs could adversely affect us.

We and our collaborators continue to conduct clinical trials, including trials of RELISTOR and other drug candidates. If the results of these or future trials are not satisfactory, we or our collaborators encounter problems enrolling subjects, clinical trial supply issues or other difficulties arise, or we or our collaborators experience setbacks in developing drug formulations, including raw material-supply, manufacturing or stability difficulties, the entire development program for that product or candidate could be adversely affected, resulting in delays in trials or regulatory filings for further marketing approval. Conducting additional clinical trials or making significant revisions to the clinical development plan would lead to delays in regulatory filings. If clinical trials indicate a serious problem with the safety or efficacy of a product or candidate, we or our collaborators may stop development or commercialization of affected products. Since RELISTOR is our only approved product, any setback of these types with respect to it could have a material adverse effect on our business, results of operations and financial condition.

Ono is conducting required clinical trials with Japanese patients to obtain regulatory approval of RELISTOR in Japan. There can be no assurance that these clinical trials will yield results adequate for that regulatory approval.

If the results of current or future clinical studies of our product candidates are not satisfactory, we would need to reconfigure our clinical trial programs to conduct additional trials or abandon the program involved.

Clinical trials often take longer than expected.

Projections that we publicly announce of commencement and duration of clinical trials may not be certain. For example, we have experienced clinical trial delays in the past as a result of slower than anticipated enrollment. These delays may recur. Delays can be caused by, among other things, deaths or other adverse medical events; regulatory or patent issues; interim or final results of ongoing clinical trials; failure to enroll clinical sites as expected; competition for enrollment from clinical trials; scheduling conflicts with participating clinicians and institutions; disagreements, disputes or other matters arising from collaborations; our inability to obtain necessary funding; or manufacturing problems.

We have limited experience in conducting clinical trials, and we rely on others to conduct, supervise or monitor some or all aspects of some of our clinical trials. In addition, certain clinical trials for our product candidates may be conducted by government-sponsored agencies, and consequently will be dependent on governmental participation and funding. Under our License Agreement with Salix, Salix generally has responsibility for conducting RELISTOR clinical trials, including all trials outside of the United States other than Japan, where Ono has the responsibility for clinical trials. We have less control over the timing and other aspects of these clinical trials than if we conducted them entirely on our own.

Our product candidates may not obtain regulatory approvals needed for marketing.

None of our product candidates other than RELISTOR has been approved by applicable regulatory authorities for marketing. The process of obtaining FDA and foreign regulatory approvals often takes many years and can vary substantially based upon the type, complexity and novelty of the products involved. We have had only limited experience in filing and pursuing applications and other submissions necessary to gain marketing approvals. Products under development may never obtain marketing approval from the FDA or other regulatory authorities necessary for commercialization.

Even if our products obtain marketing approval, they may not be accepted in the marketplace.

The commercial success of our products will depend upon their acceptance by the medical community and third party payors as clinically useful, cost effective and safe. If health care providers believe that patients can be managed adequately with alternative, currently available therapies, they may not prescribe our products, especially if the alternative therapies are viewed as more effective, as having a better safety or tolerability profile, as being more convenient to the patient or health care providers or as being less expensive. For pharmaceuticals administered in an institutional setting, the ability of the institution to be adequately reimbursed could also play a significant role in demand for our products. Even if our products obtain marketing approval, they may not achieve market acceptance. If any of our products do not achieve market acceptance, we will likely lose our entire investment in that product.



Market acceptance of approved products such as RELISTOR also is affected by the timing of regulatory approvals, product launches and reimbursement programs for existing and expanded uses by our collaborators or generic, over-the-counter or other competitors; price increases for the product and relative prices of competing products; product development efforts for new indications; availability of sufficient commercial quantities of the product; success in arranging for necessary sublicense or distribution relationships; and general and industry-specific local and international economic pressures such as those experienced worldwide over the last five years.
 
Marketplace acceptance depends in part on competition in our industry, which is intense.

The extent to which any of our products achieves market acceptance will depend on competitive factors. Competition in our industry is intense, and it is accentuated by the rapid pace of technological development. There are currently marketed products that will compete with the product candidates that we are developing. There are product candidates in pre-clinical or clinical development that target the side effects of opioid pain therapy, and a marketed product for the treatment of post-operative ileus could compete with RELISTOR. Many of our competitors have substantially greater research and development capabilities and experience and greater manufacturing, marketing, financial and managerial resources than we do. These competitors may develop products that are superior to those we are developing and render our products or technologies non-competitive or obsolete. If our product candidates receive marketing approval but cannot compete effectively in the marketplace, our operating results and financial position would suffer. Competition with respect to our technologies and products is based on, among other things, product efficacy, safety, reliability, method of administration, availability, price and clinical benefit relative to cost; timing and scope of regulatory approval; sales, marketing and manufacturing capabilities; collaborator capabilities; insurance and other reimbursement coverage; and patent protection. Competitive disadvantages in any of these factors could materially harm our business and financial condition.

If we or our collaborators are unable to obtain sufficient quantities of the raw and bulk materials needed to make our products, development and commercialization of our product candidates could be slowed or stopped.

Salix or Ono may not be able to fulfill manufacturing obligations for RELISTOR, either on their own or through third-party suppliers. Our existing arrangements with suppliers for our other product candidates may not result in the supply of sufficient quantities of our product candidates needed to accomplish our clinical development programs, and we may not have the right and in any event do not currently have the capability to manufacture these products if our suppliers are unable or unwilling to do so. We currently arrange for supplies of critical raw materials used in production of our product candidates from single sources. We do not have long-term contracts with any of these suppliers. Any delay or disruption in the availability of raw materials would slow or stop product development and commercialization of the relevant product. A delay or disruption of supplies of RELISTOR would have a material adverse effect on the RELISTOR franchise, and therefore on our business as a whole.

Manufacturing resources could limit or adversely affect our ability to commercialize products.

Under our License Agreement, Salix is responsible for obtaining supplies of RELISTOR, including contracting with contract manufacturing organizations (CMOs) for supply of RELISTOR active pharmaceutical ingredient (API) and subcutaneous and oral finished drug product. These arrangements may not be on optimally-advantageous terms, and as a result of our royalty and other interests in RELISTOR’s commercial success will subject us to risks that the counterparties may not perform optimally in terms of quality or reliability.

We engage third parties for manufacturing product candidates and means of administration for them, which may not be optimally cost-effective. In doing so, we also do not control many aspects of the manufacturing process, including compliance with cGMP and other regulatory requirements. We may not be able to obtain adequate supplies from third-party manufacturers in a timely fashion for development or commercialization purposes, and commercial quantities of products may not be available from contract manufacturers at acceptable costs.

In order to commercialize our product candidates successfully, we or our collaborators would need to be able to manufacture or arrange for the manufacture of products in commercial quantities, in compliance with regulatory requirements, at acceptable costs and in a timely manner. Manufacture of our product candidates can be complex, difficult to accomplish even in small quantities, difficult to scale-up for large-scale production and subject to delays, inefficiencies and low yields of quality products. The cost of manufacturing some of our products may make them prohibitively expensive. If adequate supplies of any of our product candidates or related materials are not available on a timely basis or at all, our clinical trials could be seriously delayed, since these materials are time consuming to manufacture and cannot be readily obtained from third-party sources.



If we were to decide to establish a commercial-scale manufacturing facility in the future, we would require substantial additional funds and be required to hire and train significant numbers of employees and comply with applicable regulations.

We are dependent on patents and other intellectual property rights. The validity, enforceability and commercial value of these rights are highly uncertain.

We must obtain, maintain and enforce patent and other rights to protect our intellectual property. The patent position of biotechnology and pharmaceutical firms is highly uncertain and involves many complex legal and technical issues. There is no clear policy involving the breadth of claims allowed, or the degree of protection afforded, under patents in this area. Accordingly, patent applications owned by or licensed to us may not result in patents being issued. We are aware of others who have patent applications or patents containing claims similar to or overlapping those in our patents and patent applications. Because of these considerations and potential post-issuance events discussed below, it is generally difficult to determine the relative strength or scope of a biotechnology patent position in absolute terms at any given time. Patents that we own or license may not enable us to preclude competitors from commercializing drugs, and consequently may not provide us with any meaningful competitive advantage.

We own or have licenses to a number of issued patents. The issuance of a patent, however, is not conclusive as to its validity or enforceability, which can be challenged in litigation. Our patents may be successfully challenged. We may incur substantial costs in litigation seeking to uphold the validity of patents or to prevent infringement. If the outcome of litigation is adverse to us, third parties may be able to use our patented invention without payment to us. Third parties may also avoid our patents through design innovation.

Most of our product candidates, as well as RELISTOR, incorporate to some degree intellectual property licensed from third parties. We can lose the right to patents and other intellectual property licensed to us if the related license agreement is terminated due to a breach by us or otherwise. Our ability, and that of our collaboration partners, to commercialize products incorporating licensed intellectual property would be impaired if the related license agreements were terminated.

The license agreements from which we derive or out-license intellectual property provide for various royalty, milestone and other payment, commercialization, sublicensing, patent prosecution and enforcement, insurance, indemnification and other obligations and rights, and are subject to certain reservations of rights. While we generally have the right to defend and enforce patents licensed by us, either in the first instance or if the licensor chooses not to do so, we must usually bear the cost of doing so. Under our License Agreement, Salix generally has control over defense and enforcement of our RELISTOR patents. With respect to Japan, Ono has certain limited rights to prosecute, maintain and enforce relevant intellectual property. With most of our in-licenses, the licensor bears the cost of engaging in all of these activities, although we may share in those costs under specified circumstances.

We also rely on unpatented technology, trade secrets and confidential information. Third parties may independently develop substantially equivalent information and techniques or otherwise gain access to our technology or disclose our technology, and we may be unable to effectively protect our rights in unpatented technology, trade secrets and confidential information. We require each of our employees, consultants and advisors to execute a confidentiality agreement at the commencement of an employment or consulting relationship with us. These agreements may, however, not provide effective protection in the event of unauthorized use or disclosure of confidential information.

If we do not achieve milestones or satisfy conditions regarding some of our product candidates, we may not maintain our rights under related licenses.

We are required to make substantial cash payments, achieve milestones and satisfy other conditions, including filing for and obtaining marketing approvals and introducing products, to maintain rights under our intellectual property licenses. Due to the nature of these agreements and the uncertainties of research and development, we may not be able to achieve milestones or satisfy conditions to which we have contractually committed, and as a result may be unable to maintain our rights under these licenses. If we do not comply with our license agreements, the licensors may terminate them, which could result in our losing our rights to, and therefore being unable to commercialize, related products.
 
If we infringe third-party patent or other intellectual property rights, we may need to alter or terminate a product development program.

There may be patent or other intellectual property rights belonging to others that require us to alter our products, pay licensing fees or cease certain activities. If our products infringe patent or other intellectual property rights of others, the owners of those rights could bring legal actions against us claiming damages and seeking to enjoin manufacturing and marketing of the affected products. If these legal actions are successful, in addition to any potential liability for damages, we could be required to obtain a license in order to continue to manufacture or market the affected products. We may not prevail in any action brought against us, and any license required under any rights that we infringe may not be available on acceptable terms or at all. We are aware of intellectual property rights held by third parties that relate to products or technologies we are developing. For example, we are aware of other groups investigating PSMA or related compounds, monoclonal antibodies directed at targets relevant to PSMA ADC, and methylnaltrexone and other peripheral opioid antagonists, and of patents held, and patent applications filed, by these groups in those areas. While the validity of these issued patents, patentability of these pending patent applications and applicability of any of them to our programs are uncertain, if asserted against us, any related patent or other intellectual property rights could adversely affect our ability to commercialize our products.

 
15

 
Research, development and commercialization of a biopharmaceutical often require choosing between alternative development and optimization routes at various stages in the development process. Preferred routes depend on subsequent discoveries and test results and cannot be predicted with certainty at the outset. There are numerous third-party patents in our field, and we may need to obtain a license under a patent in order to pursue the preferred development route of one or more of our products or product candidates. The need to obtain a license would decrease the ultimate profitability of the applicable product. If we cannot negotiate a license, we might have to pursue a less desirable development route or terminate the program altogether.

We are dependent upon third parties for a variety of functions. These arrangements may not provide us with the benefits we expect.

We rely in part on third parties to perform a variety of functions. We are party to numerous agreements which place substantial responsibility on clinical research organizations, consultants and other service providers for the development of our products. We also rely on medical and academic institutions to perform aspects of our clinical trials of product candidates. In addition, an element of our research and development strategy has been to in-license technology and product candidates from academic and government institutions in order to minimize investments in early research. We have entered into agreements under which we are now dependent on Ono and Salix, respectively, for the commercialization and development of RELISTOR. We may not be able to maintain our relationships with them, or establish new ones for RELISTOR or other drug candidates on beneficial terms. We may not be able to enter new arrangements without undue delays or expenditures, and these arrangements may not allow us to compete successfully.

We lack sales and marketing infrastructure and related staff, which will require significant investment to establish and in the meantime may make us dependent on third parties for their expertise in this area.

We have no established sales, marketing or distribution infrastructure. If we receive marketing approval for a pharmaceutical product, significant investment, time and managerial resources will be required to build the commercial infrastructure required to market, sell and support it. Should we choose to commercialize a product directly, we may not be successful in developing an effective commercial infrastructure or in achieving sufficient market acceptance. Alternatively, we may choose to market and sell products through distribution, co-marketing, co-promotion or licensing arrangements with third parties. We may also consider contracting with a third party professional pharmaceutical detailing and sales organization to perform the marketing function for one or more products. To the extent that we enter into distribution, co-marketing, co-promotion, detailing or licensing arrangements for the marketing and sale of product candidates, any revenues we receive will depend primarily on the efforts of third parties. We will not control the amount and timing of marketing resources these third parties devote to our products.

We are exposed to product liability claims, and in the future may not be able to obtain insurance against claims at a reasonable cost or at all.

Our business exposes us to product liability risks, which are inherent in the testing, manufacturing, marketing and sale of pharmaceutical products. We may not be able to avoid product liability exposure. If a product liability claim is successfully brought against us, our financial position may be adversely affected. We are indemnified by Salix under our License Agreement for product liability exposure arising from its marketing and sales of RELISTOR, and maintain our own product liability insurance coverage in the amount of $10.0 million per occurrence, subject to a deductible and a $10.0 million annual aggregate limitation and other clinical trial or other insurance as required by contract and local laws. Pursuant to our Transition Agreement, we released Wyeth from its indemnification responsibility for product liability exposure arising from its marketing and sales of RELISTOR.

Product liability insurance for the biopharmaceutical industry is generally expensive, when available at all, and may not be available to us at a reasonable cost in the future. Our current insurance coverage and indemnification arrangements may not be adequate to cover claims brought against us, and are in any event subject to the insuring or indemnifying entity discharging its obligations to us.

We handle hazardous materials and must comply with environmental laws and regulations, which can be expensive and restrict how we do business. If we are involved in a hazardous waste spill or other accident, we could be liable for damages, penalties or other forms of censure.

Our research and development work and manufacturing processes involve the use of hazardous, controlled and radioactive materials. We are subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of these materials. Despite procedures that we implement for handling and disposing of these materials, we cannot eliminate the risk of accidental contamination or injury. In the event of a hazardous waste spill or other accident, we could be liable for damages, penalties or other forms of censure. We may be required to incur significant costs to comply with environmental laws and regulations in the future.

If we lose key management and scientific personnel on whom we depend, our business could suffer.

We are dependent upon our key management and scientific personnel, the loss of whom could require us to identify and engage qualified replacements, and could cause our management and operations to suffer in the interim. Competition for qualified employees among companies in the biopharmaceutical industry is intense. Future success in our industry depends in significant part on the ability to attract, retain and motivate highly skilled employees, which we may not be successful in doing.




If health care reform measures are enacted, our operating results and our ability to commercialize products could be adversely affected.

In recent years, there have been numerous proposals to change the health care system in the U.S. and in other jurisdictions. Some of these proposals have included measures that would change the nature of and regulatory requirements relating to drug discovery, clinical testing and regulatory approvals, limit or eliminate payments for medical procedures and treatments, or subject the pricing of pharmaceuticals to government control. Outside the U.S., and particularly in the E.U., the pricing of prescription pharmaceuticals is subject to governmental control. In addition, as a result of the trend towards managed health care in the U.S., as well as legislative proposals to reduce government insurance programs, third-party payors are increasingly attempting to contain health care costs by limiting both coverage and the level of reimbursement of new drug products, including relatively expensive products which may be perceived to provide relatively limited benefits to patients with potentially terminal conditions. Consequently, significant uncertainty exists as to the reimbursement status of newly approved health care products.

If we or any of our collaborators succeed in bringing one or more of our product candidates to market, third party payors may establish and maintain price levels insufficient for us to realize an appropriate return on our investment in product development. Significant changes in the health care system in the U.S. or elsewhere, including changes resulting from adverse trends in third-party reimbursement programs, could have a material adverse effect on our operating results and our ability to raise capital and commercialize products.

A substantial portion of our past funding has come from federal government grants and research contracts. We cannot rely on these grants or contracts as a continuing source of funds.

A portion of our revenues to date has been derived from federal government grants and research contracts. During the last three years, we generated revenues from awards made to us by the NIH to partially fund some of our programs. Most of these resources have been directed toward candidates which we have discontinued work on or are now seeking to out-license. In any event, we cannot rely on grants or additional contracts as a continuing source of funds, as funds available under these grants and/or contracts must be applied toward the research and development programs specified by the government rather than for all our programs generally, and are subject to adjustment based on the results of periodic audits. The government’s obligation to make payments under these grants and/or contracts is subject to appropriation by the U.S. Congress for funding in each year, which is subject to being scaled back due to budgetary constraints.

We have a history of operating losses.

Progenics has incurred substantial losses since its founding. A large portion of our revenues has historically consisted of upfront and milestone payments from licensing transactions. While we reported a profit in 2011 as a result of the upfront payment we received from Salix, the timing and amount of such transactions is highly unpredictable and uncertain. We have derived no significant revenues from product sales and have only in the last several years derived revenue from royalties. We may not achieve significant product sales or royalty revenue for a number of years, if ever. We expect to incur operating losses in the future, which could increase significantly if we expand our clinical trial programs and other product development efforts. Our ability to achieve and sustain profitability is dependent in part on obtaining regulatory approval for and then commercializing our products, either alone or with others. We may not be able to develop and commercialize products beyond subcutaneous RELISTOR. Our operations may not be profitable even if any of our other products under development are commercialized.

Our stock price has a history of volatility and may be affected by selling pressure. You should consider an investment in our stock as risky and invest only if you can withstand a significant loss.

Our stock price has a history of significant volatility. At times, our stock price has been volatile even in the absence of significant news or developments. The stock prices of biotechnology companies and securities markets generally have been subject to dramatic price swings in recent years, and financial and market conditions during that period have resulted in widespread pressures on securities of issuers throughout the world economy. Factors that may have a significant impact on the market price of our common stock include the results of clinical trials and pre-clinical studies undertaken by us or others; delays, terminations or other changes in development programs; developments in marketing approval efforts; developments in collaborator or other business relationships, particularly regarding RELISTOR, PSMA ADC or other significant products or programs; technological innovation or product announcements by us, our collaborators or our competitors; patent or other proprietary rights developments; governmental regulation; changes in reimbursement policies or health care legislation; safety and efficacy concerns about products developed by us, our collaborators or our competitors; our ability to fund ongoing operations; fluctuations in our operating results; purchases we may make under our 2008 share repurchase program, or discontinuation of any such purchases; and general market conditions.



Sales of substantial numbers of shares of common stock could cause a decline in the market price of our stock. We require substantial external funding to finance our research and development programs and may seek such funding through the issuance and sale of our common stock. We have in place a shelf registration statement which may be used for the issuance of up to $100.0 million of our common stock, preferred stock, debt securities, warrants and other rights units to investors, as well as registration statements registering shares issuable pursuant to our equity compensation plans. Sales of our securities pursuant to these registration statements could cause the market price or our stock to decline. Any sales by existing stockholders or holders of options, or other rights, may have an adverse effect on our ability to raise capital and may adversely affect the market price of our common stock.

Our principal stockholders are able to exert significant influence over matters submitted to stockholders for approval.

At 2011 year end, our directors and executive officers and stockholders affiliated with Tudor Investment Corporation together beneficially owned or controlled approximately one-fifth of our outstanding shares of common stock and our five largest other stockholders beneficially owned or controlled in the aggregate approximately two-fifths of our shares. Should these parties choose to act together, they could exert significant influence in determining the outcome of corporate actions requiring stockholder approval and otherwise control our business. This control could have the effect of delaying or preventing a change in control of the Company and, consequently, could adversely affect our stock price.

Anti-takeover provisions may make removal of our Board and/or management more difficult, discouraging hostile bids for control that may be beneficial to our stockholders.

Our Board is authorized, without further stockholder action, to issue from time to time shares of preferred stock in one or more designated series or classes. The issuance of preferred stock, as well as provisions in some outstanding stock options that provide for acceleration of exercisability upon a change of control, and Section 203 and other provisions of the Delaware General Corporation Law could make the takeover or the removal of our Board or management more difficult; discourage hostile bids for control in which stockholders may receive a premium for their shares; and otherwise dilute the rights of common stockholders and depress the market price of our stock.

Item 1B. Unresolved Staff Comments

There were no unresolved SEC staff comments regarding our periodic or current reports under the Exchange Act as of December 31, 2011.

Item 2. Properties

As of December 31, 2011, we occupy in total approximately 106,149 square feet of laboratory, manufacturing and office space on a single campus in Tarrytown, New York, under lease agreements expiring in June 2012 and December 2020. In addition to rents due under these arrangements, we are obligated to pay additional facilities charges, including utilities, taxes and operating expenses.

Item 3. Legal Proceedings

We are not a party to any material legal proceedings. From time to time we may be subject or a party to claims or legal proceedings arising in the ordinary course of business, none of which we currently believe will have a material adverse effect on our financial condition or results of operations.

Item 4. Not Applicable




PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Price Range of Common Stock

Our common stock is quoted on The NASDAQ Stock Market LLC under the symbol PGNX. The following table sets forth, for the periods indicated, the high and low sales price per share of the common stock, as reported on NASDAQ.

     
High
   
Low
2011:
Fourth quarter
$
9.19
 
$
5.01
 
Third quarter
 
7.93
   
4.50
 
Second quarter
 
8.69
   
5.97
 
First quarter
 
6.50
   
5.32
             
2010:
Fourth quarter
 
5.69
   
4.41
 
Third quarter
 
5.72
   
4.00
 
Second quarter
 
7.00
   
4.25
 
First quarter
 
5.50
   
4.16

On March 5, 2012, the last sale price for our common stock, as reported by The NASDAQ Stock Market LLC, was $9.01. There were approximately 135 holders of record of our common stock as of that date.

Comparative Stock Performance Graph

The graph below compares, for the past five years, the cumulative stockholder return on our common stock with the cumulative stockholder return of (i) the Nasdaq Stock Market (U.S.) Index and (ii) the Nasdaq Pharmaceutical Index, assuming an investment in each of $100 on December 31, 2006.

performance graph
 
Dividends

We have not paid any dividends since the Company’s inception and currently anticipate that all earnings, if any, will be retained for development of our business and that no dividends on our common stock will be declared in the foreseeable future.


Item 6. Selected Financial Data

The selected financial data presented below as of December 31, 2011 and 2010 and for each of the three years in the period ended December 31, 2011 are derived from our audited financial statements, included elsewhere herein. The selected financial data presented below with respect to the balance sheet data as of December 31, 2009, 2008 and 2007 and for each of the two years in the period ended December 31, 2008 are derived from our audited financial statements not included herein. The data set forth below should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Financial Statements and related Notes included elsewhere herein.

   
Years Ended December 31,
 
   
2011
   
2010
   
2009
   
2008
   
2007
 
   
(in thousands, except per share data)
 
Statement of Operations Data:
                             
Revenues:
                             
Collaboration revenue
  $ 76,764     $ 1,413     $ 44,351     $ 59,885     $ 65,455  
Royalty income
    3,046       1,826       2,372       146       -  
Research grants and contract
    4,810       4,573       1,968       7,460       10,075  
Other revenues
    176       140       256       180       116  
Total revenues
    84,796       7,952       48,947       67,671       75,646  
Expenses:
                                       
Research and development
    53,183       50,640       49,798       82,290       95,234  
License fees – research and development
    578       1,270       1,058       2,830       942  
General and administrative
    18,248       22,832       25,106       28,834       27,901  
Royalty expense
    405       241       237       15       -  
Depreciation and amortization
    2,066       2,853       5,078       4,609       3,027  
Total expenses
    74,480       77,836       81,277       118,578       127,104  
Operating income (loss)
    10,316       (69,884 )     (32,330 )     (50,907 )     (51,458 )
Other income:
                                       
Interest income
    65       64       1,481       6,235       7,770  
Gain on sale of marketable securities
    -       -       237       -       -  
Total other income
    65       64       1,718       6,235       7,770  
Net income (loss) before income taxes
    10,381       (69,820 )     (30,612 )     (44,672 )     (43,688 )
Income tax benefit
    -       95       -       -       -  
Net income (loss)
  $ 10,381     $ (69,725 )   $ (30,612 )   $ (44,672 )   $ (43,688 )
Per share amounts on net income (loss):
                                       
Basic
  $ 0.31     $ (2.14 )   $ (0.98 )   $ (1.48 )   $ (1.59 )
Diluted
  $ 0.31     $ (2.14 )   $ (0.98 )   $ (1.48 )   $ (1.59 )

   
December  31,
 
   
2011
   
2010
   
2009
   
2008
   
2007
 
   
(in thousands)
 
Balance Sheet Data:
                             
Cash and cash equivalents
  $ 70,105     $ 47,918     $ 90,903     $ 56,186     $ 10,423  
Marketable and auction rate securities
    3,332       3,608       5,293       85,188       159,947  
Working capital
    65,890       42,207       95,388       85,983       102,979  
Total assets
    80,110       62,738       113,613       157,833       189,539  
Deferred revenue – current
    204       -       -       -       -  
Deferred revenue – long term
    162       -       -       -       9,131  
Other liabilities – long term
    1,497       1,635       -       266       359  
Total stockholders’ equity
    71,801       51,308       107,607       119,369       147,499  


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A)

Overview

General. Progenics Pharmaceuticals is dedicated to the development of innovative medicines to treat disease. Our focus is on the treatment of cancer.

Our first commercial drug is RELISTOR®, for the treatment of opioid induced constipation (OIC) in patients with advanced illnesses, such as cancer. OIC is the constipation that often arises when patients take opioids for pain relief. RELISTOR is the only prescription medicine approved in the United States to treat this form of constipation. RELISTOR subcutaneous injection is now approved in the U.S. and over 50 other counties around the world. In the U.S. RELISTOR is marketed by our commercial partner Salix Pharmaceuticals, a leading specialty pharmaceutical company focusing on gastrointestinal diseases; it is sold outside the U.S. by sublicensees of Salix. Our partner Ono Pharmaceutical is currently developing subcutaneous RELISTOR for Japan. Our current principal sources of revenue from operations are upfront, commercialization milestone, royalty and revenue-sharing payments from Salix’s RELISTOR operations.

Together with Salix we have applied to the U.S. Food and Drug Administration to expand the population that can be treated with subcutaneous RELISTOR to include patients taking opioids for non-cancer pain, and who suffer from OIC as a result. This population includes patients taking opioids for conditions such as back pain or joint pain. The FDA’s action date on this marketing application under the Prescription Drug User Fee Act (PDUFA) is April 27, 2012. We also recently announced results from a Phase 3 clinical test of an oral form of RELISTOR, in which the efficacy of oral methylnaltrexone was comparable to that reported in clinical studies of subcutaneous methylnaltrexone in subjects with chronic, non-cancer pain, and the overall observed safety profile in patients treated was comparable to placebo.

Our lead oncology product candidate is PSMA ADC, a fully human monoclonal antibody-drug conjugate (ADC) directed against prostate specific membrane antigen (PSMA), a protein found at high levels on the surface of prostate cancer cells and also on the neovasculature of a number of other types of solid tumors. We are conducting a phase 1 clinical trial of PSMA ADC for the treatment of prostate cancer which we expect will be completed in 2012, and if the results are successful we plan then to commence a Phase 2 trial of PSMA ADC in advanced prostate cancer. As a part of our work in oncology, we are also conducting preclinical development of novel multiplex phosphoinositide 3-kinase (PI3K) inhibitors. We believe these compounds may be effective in blocking signaling pathways that are critical in the growth of aggressive cancers, particularly RAS-mutated tumors. With our focus on the development of medicines to treat cancer, we are seeking opportunities to expand our oncology pipeline through in-licensing and acquisitions. We have discontinued work on programs outside of this focus and are working to out-license them.

Our sources of revenues for the year ended December 31, 2011 have been payments under our collaboration agreements, including $76.8 million from upfront payments and collaboration reimbursements and $3.0 million from royalties, and $4.8 million from research grants from NIH related to our oncology and virology programs. Salix, Progenics and former collaborator Wyeth have transitioned U.S., European and other marketing authorizations and are transitioning additional commercialization outside of the U.S. and Japan. Salix has secured distribution and marketing partners for RELISTOR in Europe and has granted a license to Link Medical Products Pty Limited for distribution in Australia, New Zealand, South Africa and certain other markets in Asia. Royalty income in 2011 is based only on net sales reported by Salix; royalty income through September 30, 2010 was based on net sales reported by Wyeth. Salix is continuing its efforts to secure additional distribution partners and/or sublicensees. To date, our product sales have consisted solely of limited revenues from the sale of research reagents and we expect that those sales will not significantly increase over current levels in the near future.

A majority of our expenditures to date have been for research and development activities. During 2011, expenses for our RELISTOR research program were $23.2 million compared to $23.3 million in 2010 and $7.8 million in 2009. Expenses for our cancer and HIV research programs were $18.2 million and $3.8 million, respectively, during 2011 compared to (i) $14.7 million and $5.5 million, respectively in 2010 and (ii) $20.1 million and $11.8 million, respectively, in 2009. Our expenses and reimbursement revenue related to RELISTOR in the future will depend on the amount of research and development work we perform upon requests by Salix or Ono. We also expect to incur a significant amount of development expenses for our oncology programs as these programs progress. We expect future expenses related to research and development for which we receive reimbursement from the NIH, including the HIV program, to decline to the extent we out-license these programs.

At December 31, 2011, we held $70.1 million in cash and cash equivalents, an increase of $22.2 million from $47.9 million at December 31, 2010. We expect that this amount will be sufficient to fund operations as currently anticipated beyond one year. We may require additional funding in the future, and if we are unable to conclude favorable collaboration, license, asset sale, capital raising or other financing transactions, we will have to reduce, delay or eliminate spending on some current operations, and/or reduce salary and other overhead expenses, to extend our remaining operations. We expect funding from the NIH to decline in the future to the extent we out-license existing NIH-funded programs not in the oncology area. We expect to incur operating losses during the near term. At December 31, 2011, cash, cash equivalents and auction rate securities increased $21.9 million to $73.4 million from $51.5 million at December 31, 2010.



RELISTOR. RELISTOR has been approved by regulatory authorities in the U.S., countries in the European Union, Canada and Australia since 2008 for treatment of OIC in advanced-illness patients receiving palliative care when laxative therapy has not been sufficient. Marketing applications are pending elsewhere throughout the world.

Under our 2011 License Agreement, Salix is responsible for further developing and commercializing subcutaneous RELISTOR, including completing clinical development necessary to support regulatory marketing approvals for potential new indications and formulations of the drug. Through December 31, 2011, we have received under this Agreement a $60.0 million upfront cash payment and $0.2 million in respect of Salix ex-U.S. sublicensee revenue and are eligible to receive (i) up to $40.0 million upon U.S. marketing approval for subcutaneous RELISTOR in non-cancer pain patients, (ii) up to $50.0 million upon U.S. marketing approval of an oral formulation of RELISTOR, (iii) up to $200.0 million of commercialization milestone payments upon achievement of specified U.S. sales targets, (iv) royalties ranging from 15 to 19 percent of net sales by Salix and its affiliates, and (v) 60% of any upfront, milestone, reimbursement or other revenue (net of costs of goods sold, as defined, and territory-specific research and development expense reimbursement) Salix receives from sublicensees outside the U.S. In the event that either marketing approval is subject to a Black Box Warning or Risk Evaluation and Mitigation Strategy (REMS), payment of a portion of the milestone amount would be deferred, and subject, to achievement of the first commercialization milestone.

RELISTOR was previously developed and commercialized worldwide except Japan with Wyeth pursuant to a 2005 collaboration agreement that was terminated in October 2009. Salix, Progenics, and Progenics’ former collaborator Wyeth have transitioned U.S., European and other marketing authorizations and are transitioning additional commercialization outside the U.S. and Japan. Salix has secured distribution and marketing partners for RELISTOR in the European territory and has licensed Link Medical Products Pty Limited for distribution in Australia, New Zealand, South Africa and certain other markets in Asia. Salix is continuing efforts to secure additional distribution partners and/or sublicensees. Royalty income in 2011 is based on net sales reported by Salix; royalty income through September 30, 2010 was based on net sales reported by Wyeth. Under the Transition Agreement, Wyeth paid us $10.0 million in six quarterly installments through January 2011. Wyeth also provided financial resources for the development of a multi-dose pen for subcutaneous RELISTOR for which we recognized $1.6 million in 2011 and $1.2 million in 2010.

Together with Salix we have applied to the U.S. Food and Drug Administration to expand the population that can be treated with subcutaneous RELISTOR to include patients taking opioids for non-cancer pain, and who suffer from OIC as a result. This population includes patients taking opioids for conditions such as back pain or joint pain. We have also received U.S., E.U. and Canadian approvals to market RELISTOR in pre-filled syringes, which are designed to ease preparation and administration for patients and caregivers, and expect Salix to introduce that product in 2012. In return for our October 2008 out-license to Ono Pharmaceutical of the rights to subcutaneous RELISTOR in Japan, we received an upfront payment of $15.0 million and the right to receive potential milestones, upon achievement of development responsibilities by Ono, of up to $20.0 million, commercial milestones and royalties on sales by Ono of subcutaneous RELISTOR in Japan. Ono also has the option to acquire from us the rights to develop and commercialize in Japan other formulations of RELISTOR on terms to be negotiated separately. Ono may request us to perform activities related to its development and commercialization responsibilities beyond our participation in joint committees and specified technology transfer related tasks which will be at its expense, and reimbursable at the time we perform these services.

Royalty and milestone payments will depend on success in development and commercialization of RELISTOR, which is dependent on many factors, such as the actions of Salix and Ono and any other business partner(s) with which we may collaborate, decisions by the FDA and other regulatory bodies, the outcome of clinical and other testing of RELISTOR, and our own efforts. Many of these matters are outside our control. In particular, we cannot guarantee that Salix will be successful in furthering the development and commercialization of the RELISTOR franchise.

Oncology. We recently announced preliminary data from a phase 1 clinical trial of a fully human monoclonal ADC directed against PSMA for the treatment of prostate cancer and recently presented data from preclinical studies of novel multiplex phosphoinositide 3-kinase (PI3K) inhibitors for the treatment of cancer.



Results of Operations (amounts in thousands unless otherwise noted)

Revenues:

Our sources of revenue during the years ended December 31, 2011, 2010 and 2009, included our License Agreement with Salix, Transition Agreement with Wyeth, our License Agreement with Ono, our research grants from the NIH and, to a small extent, our sale of research reagents.

Sources of Revenue
 
2011
 
2010
 
2009
 
2011 vs. 2010
 
2010 vs. 2009
               
Percent Change
                     
Collaboration revenue
 
$    76,764
 
$     1,413
 
$     44,351
 
5,333%
 
(97%)
Royalty income
 
3,046
 
1,826
 
2,372
 
     67%
 
(23%)
Research grants
 
4,810
 
4,573
 
1,968
 
      5%
 
132%
Other revenues
 
176
 
140
 
256
 
    26%
 
(45%)
   
$    84,796
 
$     7,952
 
$     48,947
 
   966%
 
(84%)

Collaboration revenue:

Salix Collaboration. During the year ended December 31, 2011, we recognized $75,091 of revenue from Salix, which includes $59,634 from the $60,000 upfront cash payment under the License Agreement, $225 in respect of Salix ex-U.S. sublicensee revenue and $15,232 as reimbursement of our expenses, including $2,172 of manufacturing supplies, in accordance with the License Agreement. As of December 31, 2011, $204 and $162 are recorded in deferred revenue – current and long-term, respectively.

Wyeth Collaboration. During the years ended December 31, 2011 and 2010, we recognized $1,630 and $1,383, respectively, of revenue from Wyeth, as reimbursement of our expenses under the 2009 Transition Agreement.

During the years ended December 31, 2010 and 2009, we recognized $1,383 and $29,298, respectively, of revenue from Wyeth, consisting of (i) $0 and $14,562, respectively, of the $60,000 upfront payment we received upon entering into our 2005 collaboration, (ii) $0 and $4,736, respectively, as reimbursement of our development expenses, and (iii) $1,383 and $10,000, respectively, as reimbursement of our expenses under the 2009 Transition Agreement.

Ono Collaboration. During the years ended December 31, 2011 and 2010, we recognized $43 and $30, respectively, of reimbursement revenue for activities requested by Ono.

During the years ended December 31, 2010 and 2009, we recognized $30 and $53, respectively, of reimbursement revenue for activities requested by Ono and in 2009 recognized the $15,000 upfront payment as revenue, due to satisfying our performance obligations.

Royalty income. We began earning royalties from net sales by Wyeth of subcutaneous RELISTOR in June 2008. Under our 2009 Transition Agreement, Wyeth continued to distribute RELISTOR in the U.S. until April 1, 2011, in Europe until October 1, 2011, and in Australia until December 1, 2011, at which times Salix assumed those responsibilities. Royalties due to us during 2011 are attributable only to Salix net sales in those territories from the date in which Salix assumed responsibility, the basis for 2011 royalty income. From April 1, 2011 to December 31, 2011, we earned royalty income of $3,046 based on net sales of RELISTOR reported by Salix or its sublicensees.

During the years ended December 31, 2010 and 2009, royalties of $1,826 and $1,853, respectively, were owed to us based on the net sales of RELISTOR reported by Wyeth and we recognized royalty revenue of $1,826 and $2,372, respectively. During the fourth quarter of 2010, no royalties were payable to us.

     RELISTOR Net Sales Reported by Collaborators
   
Years Ended December 31,
   
2011
 
2010
 
2009
U.S.
 
$    21,500
 
$    9,500
 
$     7,100
Ex-U.S.
 
       5,500
 
      6,600
 
       5,200
   Global
 
$    27,000
 
$  16,100
 
$   12,300




Research grants. During the years ended December 31, 2011 and 2010, we recognized $4,810 and $4,573, respectively, as revenue from federal government grants by the NIH to partially offset costs related to our research and development programs. The increase in grant revenue resulted from new grant awards and higher reimbursable expenses in 2011 than in 2010.

During the years ended December 31, 2010 and 2009, we recognized $4,573 and $1,968, respectively, as revenue from federal government grants primarily by the NIH to partially offset costs related to our research and development programs. The increase in grant revenue resulted from new grants awarded in June 2009 and September 2010, and the $733 received as part of the U.S. government’s qualifying therapeutic discovery project.

We expect revenue from the NIH to decline in the future to the extent we out-license existing NIH-funded programs not in the oncology area.

Other revenues, primarily from orders for research reagents, increased to $176 for the year ended December 31, 2011 from $140 for the year ended December 31, 2010 and decreased from $256 for the year ended December 31, 2009.

Expenses:

Research and Development Expenses include scientific labor, clinical trial costs, supplies, product manufacturing costs, consulting, license fees, royalty payments and other operating expenses. Research and development expenses increased to $54,166 for the year ended December 31, 2011 from $52,151 for the year ended December 31, 2010, and from $51,093 for the year ended December 31, 2009. During 2011, the increase in research and development expenses over those in 2010 was primarily due to higher (i) clinical trial costs from activities related to oral methylnaltrexone phase 3 study and regulatory filing fees for the submission of the sNDA for subcutaneous RELISTOR and (ii) purchases of manufacturing supplies on behalf of Salix, partially offset by a decrease in consulting expenses for RELISTOR and lower compensation expenses. Compensation expenses decreased in 2011 compared to 2010 primarily from lower share-based compensation partially offset by higher salaries and benefits. See Liquidity and Capital Resources – Uses of Cash, for details of the changes in these expenses by project. Primarily in 2011 and 2009, Salix and Wyeth reimbursed us for development expenses we incurred related to RELISTOR. Portions of our expenses related to our HIV, HCV and PSMA programs are funded through grants from the NIH (see Revenues- Research Grants). The changes in research and development expense, by category of expense, are as follows:

 
2011
 
2010
 
2009
 
2011 vs. 2010
 
2010 vs. 2009
             
Percent change
Salaries and benefits
$18,658
 
$18,469
 
$21,576
 
1%
 
(14%)

2011 vs. 2010   Salaries and benefits increased due to accrued severance expenses related to headcount reduction and higher accrued bonus expense, partially offset by a decrease in salary expenses due to a decline in average headcount to 104 from 138 for the years ended December 31, 2011 and 2010, respectively, in the research and development departments.

2010 vs. 2009   Salaries and benefits decreased due to a decline in average headcount to 138 from 175 for the years ended December 31, 2010 and 2009, respectively, in the research and development departments.

 
2011
 
2010
 
  2009
 
                 2011 vs. 2010
 
                   2010 vs. 2009
 
             
Percent change
Share-based compensation
  $4,499
 
$5,091
 
   $7,225
 
  (12%)
 
         (30%)
 

2011 vs. 2010   Share-based compensation decreased for the year ended December 31, 2011 compared to the year ended December 31, 2010 due to lower restricted stock and employee stock purchase plan expenses, partially offset by an increase in stock option plan expenses.

2010 vs. 2009   Share-based compensation decreased for the year ended December 31, 2010 compared to the year ended December 31, 2009 due to lower stock option plan, restricted stock and employee stock purchase plan expenses.

For the year ended December 31, 2011, share-based compensation included restricted stock and option plan expenses from (i) accelerated vesting of outstanding awards to non-management employees in connection with a change in program eligibility and termination of the Company’s employee stock purchase plans (which we expect to result in a decline in future share-based compensation), and (ii) a shift in headcount from general and administrative departments to research and development. See Critical Accounting Policies − Share-Based Payment Arrangements.



 
     2011
 
       2010
 
  2009
 
2011 vs. 2010
 
2010 vs. 2009
             
Percent change
Clinical trial costs
    $10,099
 
      $7,056
 
   $2,198
 
43%
 
221%

2011 vs. 2010   Clinical trial costs increased primarily due to higher expenses for (i) RELISTOR ($3,385), from increased clinical trial expenses including activities related to oral methylnaltrexone phase 3 study and regulatory filing fees for the submission of the sNDA for subcutaneous RELISTOR, partially offset by decreases in expenses for Cancer ($218) and HIV ($122), all for the year ended December 31, 2011 compared to the year ended December 31, 2010.

2010 vs. 2009   Clinical trial costs increased primarily due to higher expenses for (i) RELISTOR ($5,224), from increased clinical trial activities for oral methylnaltrexone phase 3 study and (ii) Cancer ($352), partially offset by a decrease in expenses for HIV ($718), due to a decline in PRO 140 clinical trial activities, all for the year ended December 31, 2010 compared to the year ended December 31, 2009.

 
    2011
 
       2010
 
  2009
 
2011 vs. 2010
 
2010 vs. 2009
             
Percent change
Laboratory and manufacturing supplies
      $4,203
 
      $2,388
 
                   $3,011
 
 76%
 
 (21%)

2011 vs. 2010   Laboratory and manufacturing supplies increased due to higher expenses for (i) RELISTOR ($1,562), primarily due to purchases of manufacturing supplies on behalf of Salix, (ii) Cancer ($166), resulting from increase in expenses for PSMA ADC, and (iii) Other projects ($199), partially offset by a decrease in HIV ($112), all for the year ended December 31, 2011 compared to the year ended December 31, 2010.

2010 vs. 2009   Laboratory and manufacturing supplies decreased due to lower expenses for (i) Cancer ($485), due to reduced expenses for PSMA ADC, (ii) HIV ($136), resulting from a decline in the purchases of manufacturing supplies and (iii) Other ($631), partially offset by an increase in RELISTOR ($629), due to higher expenses for the multi-dose pen, all for the year ended December 31, 2010 compared to the year ended December 31, 2009.

 
    2011
 
       2010
 
  2009
 
2011 vs. 2010
 
2010 vs. 2009
             
Percent change
Contract manufacturing and subcontractors
      $6,713
 
      $6,853
 
   $8,040
 
   (2%)
 
(15%)
 
2011 vs. 2010   Contract manufacturing and subcontractors decreased due to lower expenses for (i) Cancer ($288), resulting from a decline in manufacturing expenses for PSMA ADC, (ii) RELISTOR ($2), due to lower contract manufacturing expenses for the multi-dose pen, and (iii) Other projects ($72), partially offset by increases in HIV ($222), for HIV Vaccine, all for the year ended December 31, 2011 compared to the year ended December 31, 2010.

2010 vs. 2009   Contract manufacturing and subcontractors decreased due to lower (i) Cancer expenses ($2,287), resulting from a decline in manufacturing expenses for PSMA ADC, (ii) Other ($962) and (iii) HIV expenses ($362), resulting from a decline in manufacturing expenses for PRO 140, partially offset by an increase in RELISTOR expenses ($2,424), due to higher contract manufacturing expenses for the multi-dose pen, all for the year ended December 31, 2010 compared to the year ended December 31, 2009.

These expenses are related to the conduct of clinical trials, including manufacture by third parties of drug materials, testing, analysis, formulation and toxicology services, and vary as the timing and level of such services are required.

 
    2011
 
        2010
 
   2009
 
2011 vs. 2010
 
2010 vs. 2009
             
Percent change
Consultants
       $1,270
 
      $3,310
 
   $1,007
 
 (62%)
 
229%

2011 vs. 2010   Consultants expenses decreased due to lower expenses for RELISTOR ($2,082), HIV ($41) and Other projects ($1), partially offset by an increase in Cancer ($84), all for the year ended December 31, 2011 compared to the year ended December 31, 2010.

2010 vs. 2009   Consultants expenses increased due to higher expenses for RELISTOR ($2,478) and Cancer ($41), partially offset by decreases in consultants expenses for HIV ($160) and Other projects ($56), all for the year ended December 31, 2010 compared to the year ended December 31, 2009.

These expenses are related to the monitoring of clinical trials as well as the analysis of data from completed clinical trials and vary as the timing and level of such services are required.



 
    2011
 
        2010
 
   2009
 
2011 vs. 2010
 
2010 vs. 2009
             
Percent change
License fees
          $578
 
      $1,270
 
   $1,058
 
 (54%)
 
  20%

2011 vs. 2010   License fees decreased primarily due to lower expenses for HIV ($664) and RELISTOR ($28), all for the year ended December 31, 2011 compared to the year ended December 31, 2010.

2010 vs. 2009   License fees increased primarily due to higher expenses for HIV ($428), partially offset by lower expenses for Cancer ($149) and RELISTOR ($67), all for the year ended December 31, 2010 compared to the year ended December 31, 2009.
 
 
   2011
 
        2010
 
   2009
 
2011 vs. 2010
 
2010 vs. 2009
             
Percent change
Royalty expense
          $405
 
         $241
 
      $237
 
68%
 
2%

2011 vs. 2010   We recognized $405 and $241, respectively, of royalty expenses during the years ended December 31, 2011 compared to the same period in 2010, due to increased net sales of RELISTOR in 2011.

2010 vs. 2009   We incurred $241 and $185, respectively, of royalty costs and recognized $241 and $237, respectively, of royalty expenses during the years ended December 31, 2010 and 2009.

 
   2011
 
2010
 
2009
 
2011 vs. 2010
 
2010 vs. 2009
             
Percent change
Other operating expenses
      $7,741
 
     $7,473
 
  $6,741
 
4%
 
11%

2011 vs. 2010   Other operating expenses increased for the year ended December 31, 2011 compared to the year ended December 31, 2010, primarily due to higher expenses for rent ($237), insurance ($89) and travel ($20), partially offset by a decrease in facilities ($78).

2010 vs. 2009   Other operating expenses increased for the year ended December 31, 2010 compared to the year ended December 31, 2009, primarily due to higher expenses for rent ($1,015) and insurance ($6), partially offset by a decrease in facilities ($193), travel ($5) and other operating expenses ($91).

General and Administrative Expenses decreased to $18,248 for the year ended December 31, 2011 from $22,832 for the year ended December 31, 2010 and from $25,106 for the year ended December 31, 2009, as follows:

 
   2011
 
2010
 
2009
 
2011 vs. 2010
 
2010 vs. 2009
             
Percent change
Salaries and benefits
      $7,228
 
     $8,086
 
  $8,257
 
(11%)
 
 (2%)

2011 vs. 2010   Salaries and benefits decreased for the year ended December 31, 2011 compared to the same period in 2010, due to a decline in average headcount to 32 from 39, in the general and administrative departments, and lower accrued bonus expense, partially offset by accrued severance expenses related to headcount reduction.

2010 vs. 2009   Salaries and benefits decreased for the year ended December 31, 2010 compared to the same period in 2009, due to a decline in average headcount to 39 from 49, in the general and administrative departments, partially offset by higher bonus expense.

 
   2011
 
2010
 
2009
 
2011 vs. 2010
 
2010 vs. 2009
             
Percent change
Share-based compensation
      $1,863
 
     $4,424
 
   $5,761
 
(58%)
 
(23%)

2011 vs. 2010   Share-based compensation decreased due to lower restricted stock, stock option and employee stock purchase plans expenses for the year ended December 31, 2011 compared to the year ended December 31, 2010.

2010 vs. 2009   Share-based compensation decreased due to lower restricted stock, stock option and employee stock purchase plans expenses for the year ended December 31, 2010 compared to the year ended December 31, 2009.

For the year ended December 31, 2011, share-based compensation included restricted stock and option plan expenses from (i) accelerated vesting of outstanding awards to non-management employees in connection with a change in program eligibility and termination of the Company’s employee stock purchase plans (which we expect to result in a decline in future share-based compensation), and (ii) a shift in headcount from general and administrative departments to research and development. See Critical Accounting Policies − Share-Based Payment Arrangements.




 
   2011
 
2010
 
2009
 
2011 vs. 2010
 
2010 vs. 2009
             
Percent change
Consulting and professional fees
      $4,389
 
     $5,843
 
   $6,696
 
(25%)
 
(13%)

2011 vs. 2010   Consulting and professional fees decreased due to lower patent ($1,203), legal ($497) and other fees ($13), which were partially offset by an increase in consulting ($137), tax accounting ($63) and audit fees ($59), all for the year ended December 31, 2011 compared to the year ended December 31, 2010.

2010 vs. 2009   Consulting and professional fees decreased due to lower patent ($785), audit and compliance ($176), legal ($33) and other fees ($21), which were partially offset by an increase in consulting ($147) and public relations fees ($15), all for the year ended December 31, 2010 compared to the year ended December 31, 2009.

 
   2011
 
2010
 
2009
 
2011 vs. 2010
 
2010 vs. 2009
             
Percent change
Other operating expenses
      $4,768
 
     $4,479
 
   $4,392
 
6%
 
2%
  
2011 vs. 2010   Other operating expenses increased due to higher expenses for rent ($82), taxes ($59), computer software ($87) and other operating expenses ($122), partially offset by decreases in recruiting ($51) and travel ($10), all for the year ended December 31, 2011 compared to the year ended December 31, 2010.

2010 vs. 2009   Other operating expenses increased due to higher expenses for rent ($341) and recruiting ($106), partially offset by a decrease in investor relations ($79), taxes ($35), conferences and seminars ($27), travel ($23) and other operating expenses ($196), all for the year ended December 31, 2010 compared to the year ended December 31, 2009.

 
   2011
 
2010
 
 2009
 
2011 vs. 2010
 
2010 vs. 2009
             
Percent change
Depreciation and amortization
      $2,066
 
     $2,853
 
   $5,078
 
(28%)
 
(44%)
   
2011 vs. 2010   Depreciation and amortization expense decreased to $2,066 for the year ended December 31, 2011 from $2,853 for the year ended December 31, 2010, primarily due to lower leasehold improvement amortization expenses.

2010 vs. 2009   Depreciation and amortization expense decreased to $2,853 for the year ended December 31, 2010 from $5,078 for the year ended December 31, 2009, primarily due to lower capital expenditures in 2009.

Other income:

 
   2011
 
2010
 
 2009
 
2011 vs. 2010
 
2010 vs. 2009
             
Percent change
Interest income
      $65
 
         $64
 
   $1,481
 
2%
 
(96%)

2011 vs. 2010   Interest income increased to $65 for the year ended December 31, 2011 from $64 for the year ended December 31, 2010. For the years ended December 31, 2011 and 2010, investment income remained unchanged at $65, while amortization of premiums, net of discounts, was $0 and ($1) for years ended December 31, 2011 and 2010, respectively.

2010 vs. 2009   Interest income decreased to $64 for the year ended December 31, 2010 from $1,481 for the year ended December 31, 2009. For the years ended December 31, 2010 and 2009, investment income decreased to $65 from $2,075, respectively, due to lower interest rates for cash equivalents, lower average balance of cash equivalents and marketable securities in 2010 than in 2009. Amortization of premiums, net of discounts, was ($1) and ($594) for years ended December 31, 2010 and 2009, respectively.

Interest income, as reported, is primarily the result of investment income from our marketable and auction rate securities, decreased by the amortization of premiums we paid or increased by the amortization of discounts we received for those securities. Other income also includes $237 of gains from the sale of marketable securities in 2009.

Income Taxes:

For the year ended December 31, 2011 we recognized $10,381 in pre-tax income primarily as a result of the $60,000 Salix upfront cash payment. Our taxable income for the year is expected to be offset fully with net operating loss carry-forwards. For the years ended December 31, 2010 and 2009, we had losses both for book and tax purposes. We received a federal tax refund of $95 in 2010 from new legislation permitting the carryback of NOLs to 2005 as well as permitting the suspension of limitations on alternative minimum tax NOL utilization.

Net Income (Loss):

Our net income was $10,381 for the year ended December 31, 2011, and our net losses were $69,725 for the year ended December 31, 2010 and $30,612 for the year ended December 31, 2009.



Liquidity and Capital Resources

We have to date funded operations principally through payments received from private placements of equity securities, public offerings of common stock, collaborations, grants and contracts, royalties, interest on investments, proceeds from the exercise of outstanding options and warrants, and through September 30, 2011, sales of our common stock under our two employee stock purchase plans (Purchase Plans) which were terminated during 2011.

Under the Salix License Agreement, we received through December 31, 2011, a $60,000 upfront cash payment and $225 in respect of Salix ex-U.S. sublicensee revenue and are eligible to receive development and commercialization milestone payments plus royalties on net sales and 60% of any upfront, milestone, reimbursement or other revenue (net of costs of goods sold, as defined, and territory-specific research and development expense reimbursement) Salix receives from ex-U.S. sublicensees.

Our expenses and reimbursement revenue related to RELISTOR have declined substantially in the second half of 2011, since Salix assumed direct responsibility for expenses under third-party contracts we have assigned to it. Under the Salix License Agreement, we are reimbursed for Salix approved full-time equivalents (FTE) and third-party development expenses incurred and paid by us after February 3, 2011. For the year ended December 31, 2011, we incurred $23,197 of RELISTOR related expenses for which we have received reimbursements from Salix and Wyeth totaling $14,659 and $1,630, respectively, through December 31, 2011, and in respect of which we expect to receive $58 during the first quarter of 2012.

At December 31, 2011, we held $70,105 in cash and cash equivalents, an increase of $22,187 from $47,918 at December 31, 2010. We expect that this amount will be sufficient to fund operations as currently anticipated beyond one year. In addition, at December 31, 2011 and 2010, our investment in auction rate securities classified as long-term assets on the Consolidated Balance Sheets amounted to $3,332 and $3,608, respectively.

We may require additional funding in the future, and if we are unable to enter into favorable collaboration, license, asset sale, capital raising or other financing transactions, we will have to reduce, delay or eliminate spending on some current operations, and/or reduce salary and other overhead expenses, to extend our remaining operations.

Our cash flow from operating activities was positive for the year ended December 31, 2011, due to the receipt in 2011 of a $60,000 Salix upfront payment, $225 in respect of Salix ex-U.S. sublicensee revenue and $16,289 in reimbursement payments from Salix and Wyeth, partially offset by expenditures on our research and development programs and general and administrative costs. Our cash flow from operating activities was negative for the years ended December 31, 2010 and 2009 due primarily to the excess of expenditures on our research and development programs and general and administrative costs over cash received from collaborators and government grants to fund such programs, as described below. See Risk Factors.

During the third quarter of 2011, we put in place a shelf registration statement with the SEC which may be used for the issuance of up to $100.0 million of common stock, preferred stock, debt securities, warrants, other rights and units. We do not have any current plans for issuing securities under this registration statement, which may be used up to three years from its effective date.

Sources of Cash

Operating Activities. During the year ended December 31, 2011 we received $79,998 under our collaborations, consisting of (i) $60,000 Salix upfront cash payment and $225 in respect of Salix ex-U.S. sublicensee revenue (ii) $14,659 in reimbursement payments under the Salix License Agreement, (iii) $1,767 in royalties from Salix, (iv) $3,317 under the Transition Agreement with Wyeth and (v) $30 under the License Agreement with Ono. During the years ended December 31, 2010 and 2009, we received $10,351 and $6,385, respectively, from Wyeth, consisting of (i) $0 and $3,172 as reimbursements payments under the 2005 Wyeth collaboration, (ii) $7,906 and $1,666 under the Transition Agreement, (iii) $2,415 and $1,494 in royalties and (iv) $30 and $53, respectively under the License Agreement with Ono. Reimbursements under the 2005 collaboration have ceased as a result of its termination.

Under our License Agreement with Ono, we are entitled to receive potential milestone payments, upon achievement of development milestones by Ono, of up to $20,000, commercial milestones and royalties on sales of subcutaneous RELISTOR in Japan. Ono is also responsible for development and commercialization costs for subcutaneous RELISTOR in Japan.

We have partially funded research programs through awards from the NIH. For the years ended December 31, 2011, 2010 and 2009, we received $5,178, $4,315 and $2,865, respectively, of revenue from all of our NIH awards including the $733 received as part of the federal government’s qualifying therapeutic discovery project. We expect funding from the NIH to decline in the future to the extent we out-license existing NIH-funded programs not in the oncology area.



Changes in Accounts receivable and Accounts payable for the years ended December 31, 2011, 2010 and 2009 resulted from the timing of receipts from the NIH, Salix, Wyeth and Ono, and payments made to trade vendors in the normal course of business.

Other than amounts to be received from Salix and Ono, we have no committed external sources of capital. Other than revenues from RELISTOR, we expect no significant product revenues for a number of years, as it will take at least that much time, if ever, to bring our product candidates to the commercial marketing stage.

Investing Activities. We redeem money market funds and use proceeds from maturities to provide funding for operations. Of $70,105 in cash and cash equivalents, $64,068 are guaranteed by the U.S. Treasury or Federal Deposit Insurance Corporation’s guarantee program. Our auction rate securities of $3,332 include $2,392 of securities collateralized by student loan obligations subsidized by the U.S. government. These investments, while rated investment grade by the Standard & Poor’s and Moody’s rating agencies and predominantly having scheduled maturities greater than ten years, are heavily concentrated in the U.S. financial sector.

We have received all scheduled interest payments on the auction rate securities we hold at December 31, 2011. We will not realize cash in respect of the principal amount of these securities until the issuer calls or restructures the underlying security, the underlying security matures and is paid, or a buyer outside the auction process emerges.

We monitor markets for our investments, but cannot guarantee that additional losses will not be required to be recorded. Valuation of securities is subject to uncertainties that are difficult to predict, such as changes to credit ratings of the securities and/or the underlying assets supporting them, default rates applicable to the underlying assets, underlying collateral value, discount rates, counterparty risk, ongoing strength and quality of market credit and liquidity and general economic and market conditions. We do not believe the carrying values of our investments are other than temporarily impaired and therefore expect the positions will eventually be liquidated without significant loss.

Our money market funds are purchased and, in the case of auction rate securities, sold by third-party brokers in accordance with our investment policy guidelines. Our brokerage account requires that all securities be held to maturity unless authorization is obtained from us to sell earlier. In fact, we had a history of holding all securities to maturity prior to the second quarter of 2009, when we decided to sell a portion of our securities which had scheduled maturities between the fourth quarter of 2009 and the third quarter of 2010. The proceeds from these sales were $24.8 million, resulting in a gain of $0.2 million.

We expect to recover the amortized cost of all of our investments at maturity. Because we do not anticipate having to sell these securities in order to operate our business and believe it is not more likely than not that we will be required to sell these securities before recovery of principal, we do not consider these securities to be other than temporarily impaired at December 31, 2011.

Financing Activities. During the years ended December 31, 2011, 2010 and 2009, we received cash of $3,726, $3,896 and $4,874, respectively, from the exercise of stock options and from the sale of our common stock under our Purchase Plans. The amount of cash we receive from these sources fluctuates commensurate with headcount levels and changes in the price of our common stock on the grant date for options exercised, and on the sale date for shares sold under the Purchase Plans.

Unless we obtain regulatory approval from the FDA for additional product candidates and/or enter into agreements with corporate collaborators with respect to our additional technologies, we will be required to fund our operations in the future through sales of common stock or other securities, royalty or other financing agreements and/or grants and government contracts. Adequate additional funding may not be available to us on acceptable terms or at all. Our inability to raise additional capital on terms reasonably acceptable to us may seriously jeopardize the future success of our business.

Uses of Cash

Operating Activities. The majority of our cash has been used to advance our research and development programs. Our total expenses for research and development from inception through December 31, 2011 have been approximately $636.0 million. For various reasons, including the early stage of certain of our programs, the timing and results of our clinical trials, our dependence in certain instances on third parties, many of which are outside of our control, we cannot estimate the total remaining costs to be incurred and timing to complete all our research and development programs.



For the years ended December 31, 2011, 2010 and 2009, research and development costs incurred, by project, were as follows:

   
2011
   
2010
   
2009
 
       
RELISTOR
  $ 23,197     $ 23,325     $ 7,759  
Cancer
    18,168       14,690       20,127  
HIV
    3,772       5,447       11,787  
Other programs
    9,029       8,689       11,420  
Total
  $ 54,166     $ 52,151     $ 51,093  

We may require additional funding to continue our research and product development programs, conduct pre-clinical studies and clinical trials, fund operating expenses, pursue regulatory approvals for our product candidates, file and prosecute patent applications and enforce or defend patent claims, if any, and fund product in-licensing and any possible acquisitions.

Investing Activities. During the years ended December 31, 2011, 2010 and 2009, we have spent $226, $2,171 and $901, respectively, on capital expenditures. These expenditures have been primarily related to leasehold improvements and the purchase of laboratory equipment for our research and development projects.

Contractual Obligations

Our funding requirements, both for the next 12 months and beyond, will include required payments under operating leases and fixed and contingent payments under our licensing and collaboration agreements. The following table summarizes our contractual obligations as of December 31, 2011 for future payments under these agreements:

         
Payments due by Year-end
 
   
Total
   
2012
      2013-2014       2015-2016    
Thereafter
 
   
(in millions)
 
Operating leases
  $ 23.1     $ 2.5     $ 4.8     $ 5.0     $ 10.8  
License and collaboration agreements:
                                       
- Fixed payments
    2.4       0.2       0.5       0.6       1.1  
- Contingent payments (1)
    85.4       2.4       2.3       -       80.7  
Total
  $ 110.9     $ 5.1     $ 7.6     $ 5.6     $ 92.6  
_______________

(1)  
Based on assumed achievement of milestones covered under each agreement, the timing and payment of which is highly uncertain.

We periodically assess the scientific progress and merits of each of our programs to determine if continued research and development is commercially and economically viable. Certain of our programs have been terminated due to the lack of scientific progress and prospects for ultimate commercialization. Because of the uncertainties associated with research and development in these programs, the duration and completion costs of our research and development projects are difficult to estimate and are subject to considerable variation. Our inability to complete research and development projects in a timely manner or failure to enter into collaborative agreements could significantly increase capital requirements and adversely affect our liquidity.

Our cash requirements may vary materially from those now planned because of results of research and development and product testing, changes in existing relationships or new relationships with licensees, licensors or other collaborators, changes in the focus and direction of our research and development programs, competitive and technological advances, the cost of filing, prosecuting, defending and enforcing patent claims, the regulatory approval process, manufacturing and marketing and other costs associated with the commercialization of products following receipt of regulatory approvals and other factors.

The above discussion contains forward-looking statements based on our current operating plan and the assumptions on which it relies. There could be deviations from that plan that would consume our assets earlier than planned.

Off-Balance Sheet Arrangements and Guarantees

We have no obligations under off-balance sheet arrangements and do not guarantee the obligations of any other unconsolidated entity.



Critical Accounting Policies

We prepare our financial statements in conformity with accounting principles generally accepted in the United States of America. Our significant accounting policies are disclosed in Note 2 to our financial statements included in this Annual Report on Form 10-K for the year ended December 31, 2011. The selection and application of these accounting principles and methods requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as certain financial statement disclosures. On an ongoing basis, we evaluate our estimates. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The results of our evaluation form the basis for making judgments about the carrying values of assets and liabilities that are not otherwise readily apparent. While we believe that the estimates and assumptions we use in preparing the financial statements are appropriate, these estimates and assumptions are subject to a number of factors and uncertainties regarding their ultimate outcome and, therefore, actual results could differ from these estimates.

We have identified our critical accounting policies and estimates below. These are policies and estimates that we believe are the most important in portraying our financial condition and results of operations, and that require our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We have discussed the development, selection and disclosure of these critical accounting policies and estimates with the Audit Committee of our Board of Directors.

Revenue Recognition. We recognize revenue from all sources based on the provisions of the SEC’s Staff Accounting Bulletin (SAB) No. 104 (SAB 104) and ASC 605 Revenue Recognition.

In October 2009, the FASB updated ASC 605 Revenue Recognition by specifying how to separate deliverables in multiple-deliverable arrangements, and how to measure and allocate arrangement consideration to one or more units of accounting. Under ASC 605, the delivered item(s) are separate units of accounting, provided (i) the delivered item(s) have value to a collaborator on a stand-alone basis, and (ii) if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item(s) is considered probable and substantially in our control. We adopted this update on January 1, 2011.

Royalty revenue is recognized based upon net sales of related licensed products. Royalty revenue is recognized in the period the sales occur, provided that the royalty amounts are fixed or determinable, collection of the related receivable is reasonably assured and we have no remaining performance obligations under the arrangement providing for the royalty.

Amounts not expected to be recognized within one year of the balance sheet date are classified as long-term deferred revenue. The estimate of the classification of deferred revenue as short-term or long-term is based upon the periods in which we expect to perform joint committee services.

Share-Based Payment Arrangements. Our share-based compensation to employees includes non-qualified stock options, restricted stock and shares issued under our Purchase Plans, which are compensatory under ASC 718 Compensation – Stock Compensation. We account for share-based compensation to non-employees, including non-qualified stock options and restricted stock, in accordance with ASC 505 Equity.

The fair value of each non-qualified stock option award is estimated on the date of grant using the Black-Scholes option pricing model. The model requires input assumptions with respect to (i) expected volatility of our common stock, which is based upon the daily quoted market prices on The NASDAQ Stock Market LLC over a period equal to the expected term, (ii) the period of time over which employees, officers, directors and non-employee consultants are expected to hold their options prior to exercise, (iii) zero expected dividend yield due to never having paid dividends and not expecting to pay dividends in the future, and (iv) risk-free interest rates for periods within the expected term of the options, which are based on the U.S. Treasury yield curve in effect at the time of grant.

Historical volatilities are based upon daily quoted market prices of our common stock on The NASDAQ Stock Market LLC over a period equal to the expected term of the related equity instruments. We rely only on historical volatility since it provides the most reliable indication of future volatility. Future volatility is expected to be consistent with historical; historical volatility is calculated using a simple average calculation; historical data is available for the length of the option’s expected term and a sufficient number of price observations are used consistently. Since our stock options are not traded on a public market, we do not use implied volatility.

The expected term of options granted represents the period of time that options granted are expected to be outstanding based upon historical data related to exercise and post-termination cancellation activity. The expected term of stock options granted to our Chief Executive Officer (CEO), Chief Science Officer (CSO) and non-employee directors and consultants are calculated separately from stock options granted to employees and other officers.


 
We apply a forfeiture rate to the number of unvested awards in each reporting period in order to estimate the number of awards that are expected to vest. Estimated forfeiture rates are based upon historical data on vesting behavior of employees. We adjust the total amount of compensation cost recognized for each award, in the period in which each award vests, to reflect the actual forfeitures related to that award. Changes in our estimated forfeiture rate will result in changes in the rate at which compensation cost for an award is recognized over its vesting period.
 
Changes in the assumptions used to compute the fair value of the option awards are likely to affect the fair value of the non-qualified stock option awards and the amount of compensation expense recognized in future periods. A higher volatility, longer expected term and higher risk-free rate increases the resulting compensation expense recognized in future periods as compared to prior periods. Conversely, a lower volatility, shorter expected term and lower risk-free rate decreases the resulting compensation expense recognized in future periods as compared to prior periods.

For performance-based stock option awards vesting of a defined portion of each award will occur earlier if a defined performance condition is achieved; more than one condition may be achieved in any period. We estimate the probability of achievement of each performance condition and use those probabilities to determine the requisite service period of each award. The requisite service period for the award is the shortest of the explicit or implied service periods. In the case of the CSO's options, the explicit service period is nine years and 11 months from the respective grant dates. The implied service periods related to the performance conditions are the estimated times for each performance condition to be achieved. Thus, compensation expense will be recognized over the shortest estimated time for the achievement of performance conditions for that award (assuming that the performance conditions will be achieved before the cliff vesting occurs). For performance and market-based stock option awards to our CEO (consisting of options in 2010) and CSO (consisting of options in 2010 and 2009 and options and restricted stock in 2008), vesting occurs on the basis of the achievement of specified performance or market-based milestones. The options have an exercise price equal to the closing price on our common stock on the date of grant. The awards are valued using a Monte Carlo simulation model and the expense related to these grants will be recognized over the shortest estimated time for the achievement of the performance or market conditions. On July 1, 2011, we granted an option to our CEO which vests on the basis of the achievement of specified performance-based milestones. The option has an exercise price equal to the closing price of our common stock on the date of grant. The award is valued using the Black-Scholes option pricing model and the expense related to this grant will be recognized during the period in which one of the performance milestones is achieved. The awards will not vest unless one of the performance milestones is achieved or the market condition is met. Changes in the estimate of probability of achievement of any performance or market condition will be reflected in compensation expense of the period of change and future periods affected by the change.

Research and Development Expenses Including Clinical Trial Expenses. Clinical trial expenses, which are included in research and development expenses, represent obligations resulting from our contracts with various clinical investigators and clinical research organizations in connection with conducting clinical trials for our product candidates. Such costs are expensed as incurred, and are based on the total number of patients in the trial, the rate at which the patients enter the trial and the period over which the clinical investigators and clinical research organizations to provide services. We believe that this method best approximates the efforts expended on a clinical trial with the expenses we record. We adjust our rate of clinical expense recognition if actual results differ from our estimates. In addition to clinical trial expenses, we estimate the amounts of other research and development expenses, for which invoices have not been received at the end of a period, based upon communication with third parties that have provided services or goods during the period. Such estimates are subject to change as additional information becomes available.

Fair Value Measurements. Our available-for-sale investment portfolio consists of money market funds and auction rate securities, and is recorded at fair value in the accompanying Consolidated Balance Sheets in accordance with ASC 320 Investments – Debt and Equity Securities. The change in the fair value of these investments is recorded as a component of other comprehensive income (loss).

We continue to monitor markets for our investments and consider the impact, if any, of market conditions on the fair market value of our investments.

We expect to recover the amortized cost of all of our investments at maturity. Currently, we do not anticipate having to sell these securities in order to operate our business and we believe that it is not more likely than not that we will be required to sell these securities before recovery of principal. We do not believe the carrying values of our investments are other than temporarily impaired and therefore expect the positions will eventually be liquidated without significant loss.

Valuation of securities is subject to uncertainties that are difficult to predict, such as changes to credit ratings of the securities and/or the underlying assets supporting them, default rates applicable to the underlying assets, underlying collateral value, discount rates, counterparty risk, ongoing strength and quality of market credit and liquidity and general economic and market conditions. The valuation of the auction rate securities we hold is based on an internal analysis of timing of expected future successful auctions, collateralization of underlying assets of the security and credit quality of the security.



Impact of Recently Issued Accounting Standards

In June 2011, the FASB issued ASU No. 2011-05, which requires that comprehensive income and the related components be presented in a single continuous statement or in two separate but consecutive statements. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, except for the deferral of the effective date related to the presentation of reclassification of items out of accumulated other comprehensive income under ASU No. 2011-12, which was issued in January 2012. We are currently evaluating the effect this ASU will have on our consolidated financial statements.

In May 2011, the FASB issued ASU No. 2011-04, which is the result of joint efforts by the FASB and International Accounting Standards Board to develop a single, converged fair value framework. The converged guidance specifies how to measure fair value and what disclosures to provide about fair value measurements. The ASU is effective for interim and annual periods beginning after December 15, 2011. We are currently evaluating the effect this ASU will have on our consolidated financial statements.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Our primary investment objective is to preserve principal. Our available-for-sale investments consist of money market funds and auction rate securities, all of which had interest rates that were variable and totaled $67,400 at December 31, 2011. As a result, we do not believe that we have a material exposure to interest-rate risk.

At December 31, 2011, we continue to hold approximately $3,332 (4.9% of assets measured at fair value) of auction rate securities, in respect of which we have received all scheduled interest payments. The principal amount of these remaining auction rate securities will not be accessible until the issuer calls or restructures the underlying security, the underlying security matures and is paid or a buyer outside the auction process emerges.

We continue to monitor the market for auction rate securities and consider the impact, if any, of market conditions on the fair market value of our investments. We believe that the failed auctions experienced to date are not a result of the deterioration of the underlying credit quality of these securities, although valuation of them is subject to uncertainties that are difficult to predict, such as changes to credit ratings of the securities and/or the underlying assets supporting them, default rates applicable to the underlying assets, underlying collateral value, discount rates, counterparty risk, ongoing strength and quality of market credit and liquidity, and general economic and market conditions. We do not believe the carrying values of these auction rate securities are other than temporarily impaired and therefore expect the positions will eventually be liquidated without significant loss.

The valuation of the auction rate securities we hold is based on an internal analysis of timing of expected future successful auctions, collateralization of underlying assets of the security and credit quality of the security. We re-evaluated the valuation of these securities as of December 31, 2011 and the temporary impairment amount decreased $24 from $292 at December 31, 2010 to $268. A 100 basis point increase to our internal analysis would result in a $36 increase in the temporary impairment of these securities as of the year ended December 31, 2011.

Item 8. Financial Statements and Supplementary Data

See page F-1, Index to Consolidated Financial Statements.

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

None.



Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the timelines specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our CEO and Chief Financial Officer (CFO), as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives, and in reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. We have a Disclosure Committee consisting of members of our senior management which monitors and implements our policy of disclosing material information concerning the Company in accordance with applicable law.

As required by SEC Rule 13a-15(e), we carried out an evaluation, under the supervision and with the participation of our management, including our CEO and our CFO, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our CEO and CFO concluded that our current disclosure controls and procedures, as designed and implemented, were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting, as such term is defined in the Exchange Act Rules 13a-15(f) and 15d-15(f) during our fiscal quarter ended December 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Management’s Report on Internal Control Over Financial Reporting

Internal control over financial reporting is a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our Board, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our management is responsible for establishing and maintaining adequate internal control over financial reporting and it includes policies and procedures that:

·    Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;

·    Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorization of our management and directors; and

·    Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management has used the framework set forth in the report entitled Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, known as COSO, to evaluate the effectiveness of our internal control over financial reporting. Management has concluded that our internal control over financial reporting was effective as of December 31, 2011. The effectiveness of our internal control over financial reporting as of December 31, 2011 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.

Item 9B. Other Information

None.


PART III

The information required by the Form 10-K Items listed in the following table will be included under the respective headings specified for such Items in our definitive proxy statement for our 2012 Annual Meeting of Stockholders to be filed with the SEC:

Item of Form 10-K
Location in 2012 Proxy Statement
   
Item 10. Directors, Executive Officers and Corporate Governance
Election of Directors.
Board and Committee Meetings.
Executive Officers of the Company.
Section 16(a) Beneficial Ownership Reporting and Compliance.
Code of Business Ethics and Conduct.*
*The full text of our code of business ethics and conduct is available on our website (http://www.progenics.com/documents.cfm).
   
Item 11. Executive Compensation
Executive Compensation.
Compensation Committee Report.
Compensation Committee Interlocks and Insider Participation.
   
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Equity Compensation Plan Information.
Security Ownership of Certain Beneficial Owners and Management.
   
Item 13. Certain Relationships and Related Transactions, and Director Independence
Certain Relationships and Related Transactions.
Affirmative Determinations Regarding Director Independence and Other Matters.
   
Item 14. Principal Accounting Fees and Services
Fees Billed for Services Rendered by our Independent Registered Public Accounting Firm.
Pre-approval of Audit and Non-Audit Services by the Audit Committee.




PART IV

Item 15. Exhibits, Financial Statement Schedules

The following documents or the portions thereof indicated are filed as a part of this Report.

 
        (a)
Documents filed as part of this Report:

 
Consolidated Financial Statements of Progenics Pharmaceuticals, Inc.:

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets at December 31, 2011 and 2010

Consolidated Statements of Operations for the years ended December 31, 2011, 2010 and 2009

Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss) for the years ended December 31, 2011, 2010 and 2009

Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2010 and 2009

Notes to Consolidated Financial Statements

 
        (b)
Financial Statement Schedules

All financial statement schedules referred to in Item 12-01 of Regulation S-X are inapplicable and therefore have been omitted.

 
        (c)
Item 601 Exhibits

Those exhibits required to be filed by Item 601 of Regulation S-K are listed in the Exhibit Index immediately following the signature page hereof and preceding the exhibits filed herewith, and such listing is incorporated herein by reference.




PROGENICS PHARMACEUTICALS, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 
Page
 
F-2
Financial Statements:
 
 
 
F-3
 
F-4
 
F-5
 
F-6
F-7



 
F-1
 
 


 
 Report of Independent Registered Public Accounting Firm
 

To the Board of Directors and Stockholders of
Progenics Pharmaceuticals, Inc.

In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a) present fairly, in all material respects, the financial position of Progenics Pharmaceuticals, Inc. and its subsidiaries at December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



/s/ PricewaterhouseCoopers LLP
New York, New York
March 15, 2012



 
F-2
 
 

PROGENICS PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except for par value and share amounts)


    December 31,  
     2011        2010  
Assets
             
Current assets:
             
Cash and cash equivalents
$
70,105
   
$
47,918
 
Accounts receivable
 
1,516
     
2,283
 
Other current assets
 
919
     
1,801
 
Total current assets
 
72,540
     
52,002
 
Auction rate securities
 
3,332
     
3,608
 
Fixed assets, at cost, net of accumulated depreciation and amortization
 
4,038
     
5,878
 
Other assets
 
200
     
1,250
 
Total assets
$
80,110
   
$
62,738
 
               
Liabilities and Stockholders’ Equity
             
Current liabilities:
             
Accounts payable and accrued expenses
$
6,331
   
$
9,683
 
Deferred revenue - current
 
204
     
-
 
Other current liabilities
 
115
     
112
 
Total current liabilities
 
6,650
     
9,795
 
Deferred revenue – long term
 
162
     
-
 
Other liabilities
 
1,497
     
1,635
 
Total liabilities
 
8,309
     
11,430
 
Commitments and contingencies (Note 9)
             
Stockholders’ equity:
             
Preferred stock, $.001 par value; 20,000,000 shares authorized; issued and outstanding – none
 
-
     
-
 
Common stock, $.0013 par value; shares authorized – 80,000,000 in 2011 and 40,000,000 in 2010; issued – 34,046,409 in 2011 and 33,325,802 in 2010
 
44
     
43
 
Additional paid-in capital
 
463,440
     
453,353
 
Accumulated deficit
 
(388,674
)
   
(399,055
)
Accumulated other comprehensive loss
 
(268
)
   
(292
)
Treasury stock, at cost (200,000 shares in 2011 and 2010)
 
(2,741
)
   
(2,741
)
Total stockholders’ equity
 
71,801
     
51,308
 
Total liabilities and stockholders’ equity
$
80,110
   
$
62,738
 


The accompanying notes are an integral part of the financial statements.


 
F-3
 
 

PROGENICS PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for loss per share data)


 
Years Ended December 31,
 
2011
 
2010
 
2009
Revenues:
                   
Collaboration revenue
$
76,764
 
$
1,413
   
$
44,351
 
Royalty income
 
3,046
   
1,826
     
2,372
 
Research grants
 
4,810
   
4,573
     
1,968
 
Other revenues
 
176
   
140
     
256
 
Total revenues
 
84,796
   
7,952
     
48,947
 
                     
Expenses:
                   
Research and development
 
53,183
   
50,640
     
49,798
 
License fees – research and development
 
578
   
1,270
     
1,058
 
General and administrative
 
18,248
   
22,832
     
25,106
 
Royalty expense
 
405
   
241
     
237
 
Depreciation and amortization
 
2,066
   
2,853
     
5,078
 
Total expenses
 
74,480
   
77,836
     
81,277
 
                     
Operating income (loss)
 
10,316
   
(69,884
)
   
(32,330
)
                     
Other income:
                   
Interest income
 
65
   
64
     
1,481
 
Gain on sale of marketable securities
 
-
   
-
     
237
 
Total other income
 
65
   
64
     
1,718
 
                     
Net income (loss) before income taxes
 
10,381
   
(69,820
)
   
(30,612
)
                     
         Income tax benefit
 
-
   
95
     
-
 
                     
Net income (loss)
$
10,381
 
$
(69,725
)
 
$
(30,612
)
                     
Net income (loss) per share - basic
$
0.31
 
$
(2.14
)
 
$
(0.98
)
Weighted-average shares - basic
 
33,375
   
32,590
     
31,219
 
                     
Net income (loss) per share - diluted
$
0.31
 
$
(2.14
)
 
$
(0.98
)
Weighted-average shares - diluted
 
33,494
   
32,590
     
31,219
 


The accompanying notes are an integral part of the financial statements.


 
F-4
 
 

PROGENICS PHARMACEUTICALS, INC.
 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)
For the Years Ended December 31, 2011, 2010 and 2009
(in thousands)
   
Common Stock
   
Additional
         
Accumulated
Other
   
Treasury Stock
       
   
Shares
   
Amount
   
Paid-In
Capital
   
Accumulated
Deficit
   
Comprehensive
Income (Loss)
   
Shares
   
Amount
   
Total
 
 
Balance at December 31, 2008
    30,807     $ 40     $ 422,085     $ (298,718 )   $ (1,297 )     (200 )   $ (2,741 )   $ 119,369  
 
Comprehensive loss:
                                                               
Net loss
    -       -       -       (30,612 )     -       -       -       (30,612 )
Net unrealized gain on marketable and auction rate securities
    -       -       -       -       990       -       -       990  
Total comprehensive loss:
                                                            (29,622 )
Compensation expenses for share-based payment arrangements
    -       -       12,986       -       -       -       -       12,986  
Issuance of restricted stock, net of forfeitures
    266       -       -       -       -       -       -       -  
Sale of common stock under employee stock purchase plans and exercise of stock options
    1,069       2       4,872       -       -       -       -       4,874  
 
Balance at December 31, 2009
    32,142       42       439,943       (329,330 )     (307 )     (200 )     (2,741 )     107,607  
 
Comprehensive loss:
                                                               
Net loss
    -       -       -       (69,725 )     -       -       -       (69,725 )
Net unrealized gain on marketable and auction rate securities
    -       -       -       -       15       -       -       15  
Total comprehensive loss:
                                                            (69,710 )
Compensation expenses for share-based payment arrangements
    -       -       9,515       -       -       -       -       9,515  
Issuance of restricted stock, net of forfeitures
    173       -       -       -       -       -       -       -  
Sale of common stock under employee stock purchase plans and exercise of stock options
    1,011       1       3,895       -       -       -       -       3,896  
 
Balance at December 31, 2010
    33,326       43       453,353       (399,055 )     (292 )     (200 )     (2,741 )     51,308  
 
Comprehensive income:
                                                               
Net income
    -       -       -       10,381       -       -       -       10,381  
Net unrealized gain on auction rate securities
    -       -       -       -       24       -       -       24  
Total comprehensive income:
                                                            10,405  
Compensation expenses for share-based payment arrangements
    -       -       6,362       -       -       -       -       6,362  
Forfeitures of restricted stock
    (38 )     -       -       -       -       -       -       -  
Sale of common stock under employee stock purchase plans and exercise of stock options
    758       1       3,725       -       -       -       -       3,726  
 
Balance at December 31, 2011
    34,046     $ 44     $ 463,440     $ (388,674 )   $ (268 )     (200 )   $ (2,741 )   $ 71,801  
 
 

The accompanying notes are an integral part of the financial statements.

 
F-5
 
 

PROGENICS PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)


 
Years Ended December 31,
 
2011
 
2010
 
2009
Cash flows from operating activities:
             
Net income (loss)
$
10,381
   
$
(69,725
)
 
$
(30,612
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
                     
Depreciation and amortization
 
2,066
     
2,853
     
5,078
 
Write-off of fixed assets
 
-
     
-
     
334
 
Amortization of discounts, net of premiums, on marketable securities
 
-
     
-
     
889
 
Expenses for share-based compensation awards
 
6,362
     
9,515
     
12,986
 
Gain on sale of marketable securities
 
-
     
-
     
(237
)
Changes in assets and liabilities:
                     
Decrease (increase) in accounts receivable
 
767
     
5,239
     
(6,185
)
Decrease (increase) in other current assets
 
882
     
(333
)
   
2,063
 
Decrease (increase) in other assets
 
1,050
     
617
     
(1,667
)
(Decrease) increase in accounts payable and accrued expenses
 
(3,352
)
   
3,847
     
(660
)
Increase (decrease) in deferred revenue - current
 
204
     
-
     
(31,645
)
Increase (decrease) in other current liabilities
 
3
     
(58
)
   
113
 
Increase in deferred revenue – long term
 
162
     
-
     
-
 
(Decrease) increase in other liabilities
 
(138
)
   
1,635
     
(266
)
Net cash provided by (used in) operating activities
 
18,387
     
(46,410
)
   
(49,809
)
Cash flows from investing activities:
                     
Capital expenditures
 
(226
)
   
(2,171
)
   
(901
)
Sales/maturities of marketable and auction rate securities
 
300
     
1,700
     
80,233
 
Decrease (increase) in restricted cash
 
-
     
-
     
320
 
Net cash provided by (used in) investing activities
 
74
     
(471
)
   
79,652
 
Cash flows from financing activities:
                     
Proceeds from the exercise of stock options and sale of common stock under the Employee Stock Purchase Plan
 
3,726
     
3,896
     
4,874
 
Net cash provided by financing activities
 
3,726
     
3,896
     
4,874
 
Net increase (decrease) in cash and cash equivalents
 
22,187