DENDREON CORP – 10-K – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Edgar Online, Inc.

OVERVIEW

  We are a biotechnology company focused on the discovery, development and commercialization of novel therapeutics that may significantly improve cancer treatment options for patients. Our product portfolio includes active cellular immunotherapy and small molecule product candidates to treat a wide range of cancers.  PROVENGE® (sipuleucel-T) is our only commercialized product licensed by the United States Food and Drug Administration ("FDA"), and is a first in class autologous cellular immunotherapy for the treatment of asymptomatic or minimally symptomatic, metastatic, castrate-resistant (hormone-refractory) prostate cancer. Commercial sale of PROVENGE began in May 2010. In January 2011, we announced plans to seek marketing authorization for the sale of PROVENGE in Europe. Prostate cancer is the most common non-skin cancer among men in the United States, with over one million men currently diagnosed with the disease, and the second leading cause of cancer deaths in men in the United States. We own worldwide rights for PROVENGE.                                           42

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  We have incurred significant losses since our inception. As of December 31, 2011, our accumulated deficit was $1.56 billion and our net loss for the year ended December 31, 2011 was $337.8 million. We have incurred net losses as a result of research and development expenses, clinical trial expenses, contract manufacturing and facility expenses, costs associated with the commercial launch of PROVENGE and general and administrative expenses in support of our operations and research efforts. We anticipate that near term we will continue to fund our ongoing research, development and general operations from available cash, including proceeds from our January 2011 convertible notes offering, and revenue generated from commercial sales of PROVENGE. However there can be no assurance that available cash and cash generated through current operations will be sufficient to continue to conduct our operations and expand according to our business plans. The majority of our resources continue to be used in support of the commercialization of PROVENGE. Even if we are able to successfully realize our commercialization goals for PROVENGE, because of the numerous risks and uncertainties associated with commercialization of a biologic, we are unable to predict when we will become profitable, if at all. Even if we do produce revenues and achieve profitability, we may not be able to maintain or increase profitability.  Revenue generated from the sale of PROVENGE since FDA approval on April 29, 2010 is $261.5 million, including $213.5 million in product sales during 2011. During 2010, we supported commercial sale of PROVENGE from the available capacity at our manufacturing facility in Morris Plains, New Jersey (the "New Jersey Facility"). On March 10, 2011, the FDA approved the remainder of the New Jersey Facility for the commercial manufacture of PROVENGE. In addition, on June 29, 2011 the FDA approved our facility in Orange County, California (the "Orange County Facility") for the commercial manufacture of PROVENGE and on August 26, 2011 the FDA approved our facility in Atlanta, Georgia (the "Atlanta Facility") for the commercial manufacture of PROVENGE. The approval of the additional capacity in our New Jersey Facility and two new facilities in California and Georgia significantly increased our manufacturing capacity and geographic coverage for the supply of PROVENGE. Approximately 590 infusion sites had been authorized by us for treatment using PROVENGE as of the end of 2011.  On June 30, 2011, the Centers for Medicare and Medicaid Services (the "CMS") issued a final National Coverage Determination ("NCD") for PROVENGE, completing the analysis commenced one year prior and requiring Medicare contractors to cover the use of PROVENGE for on-label use. The NCD standardized coverage processes across the country for all Medicare patients with asymptomatic or minimally symptomatic metastatic castrate-resistant (hormone-refractory) prostate cancer and provides the local Medicare Administrative Contractors ("MACs") specific criteria, consistent with the label, on how PROVENGE should be covered. PROVENGE was issued a product specific Q-code effective July 1, 2011, which allows for electronic submission of claims. During November 2011, CMS also updated their coverage policy for PROVENGE to cover the infusion costs associated with the administration of PROVENGE, making coverage for PROVENGE consistent with all other infused biologics.  On August 3, 2011, as a result of a decrease in anticipated revenue growth in 2011, we announced plans to reduce expenses, including workforce-related expenses, to align with our near-term manufacturing requirements. On September 2, 2011, our Board of Directors approved a reduction in force of approximately 25% of our total workforce, or approximately 500 employees. The employees affected by the reduction in force were notified the week of September 6, 2011.  On September 1, 2011 we provided written notice to GlaxoSmithKline LLC ("GSK") of termination of our Development and Supply Agreement, effective October 31, 2011. This agreement was originally entered into as a potential second source for the commercial production and supply of the antigen used in the manufacture of PROVENGE.  As part of the workforce reduction and contract termination, we recorded a charge of $38.6 million for the year ended December 31, 2011 related to severance, other termination benefits and outplacement services, non-cash stock compensation due to the accelerated vesting of options and restricted stock awards of certain employees, contract termination costs and other associated costs.  

In January 2011, we announced plans to seek marketing authorization for the sale of PROVENGE in Europe. Following a number of pre-submission meetings with European Union National Agencies, we expect

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  that data from our Phase 3 D9902B IMPACT (IMmunotherapy for Prostate AdenoCarcinoma Treatment) study, supported by data from our D9901 and D9902A studies, will be sufficient to seek regulatory approval for PROVENGE in the E.U. Using clinical data contained in our United States Biologics License Application, we filed our marketing authorization application ("MAA") with the European Medicines Agency ("EMA"), which was validated on January 25, 2012. To accelerate the regulatory timeline, we will initially manufacture product for our MAA through a contract manufacturing organization. We anticipate a regulatory decision from the E.U. in mid-2013.  

As of December 31, 2011, our manufacturing operations employed approximately 865 individuals and our commercial team included approximately 150 individuals employed in sales, marketing, and market access support.

  Other potential product candidates we have under development include our investigational active cellular immunotherapy, DN24-02, directed against HER2/neu for the treatment of patients with bladder, breast, ovarian and other solid tumors expressing HER2/neu. In December 2010 we filed an Investigational New Drug application with the FDA for DN24-02 for the treatment of urothelial carcinoma, including bladder cancer following surgical resection, and we enrolled our first patient in this trial in September 2011. Active cellular immunotherapies directed at carbonic anhydrase 9 ("CA9"), an antigen highly expressed in renal cell carcinoma, and carcinoembryonic antigen ("CEA"), an antigen expressed in colorectal and other cancers, are in pre-clinical development. We are also developing an orally-available small molecule targeting TRPM8 that could be applicable to multiple types of cancer in advanced cancer patients. We completed our Phase 1 clinical trial initiated in 2009 to evaluate TRPM8 and are in the process of analyzing the data.  

CRITICAL ACCOUNTING ESTIMATES

  We make judgmental decisions and estimates with underlying assumptions when applying accounting principles to prepare our consolidated financial statements. Certain critical accounting policies requiring significant judgments, estimates, and assumptions are detailed below. We consider an accounting estimate to be critical if (1) it requires assumptions to be made that are uncertain at the time the estimate is made and (2) changes to the estimate or different estimates that could have reasonably been used would have materially changed our consolidated financial statements. The development and selection of these critical accounting policies have been reviewed with the Audit Committee of our Board of Directors.  We believe the current assumptions and other considerations used to estimate amounts reflected in our consolidated financial statements are appropriate. However, should our actual experience differ from these assumptions and other considerations used in estimating these amounts, the impact of these differences could have a material impact on our consolidated financial statements.  

Revenue Recognition

Product Revenue

  We recognize revenue primarily from the sale of PROVENGE. Revenue from the sale of PROVENGE is recorded net of product returns and estimated price discounts, including rebates and chargebacks offered pursuant to mandatory federal and state government programs and, commencing in the fourth quarter of 2011, to members of Group Purchasing Organizations ("GPOs") with which we have contracts. Revenue from sales of PROVENGE is recognized upon our confirmed product delivery to and issuance of the product release form to the physician site. Product returns are limited to those instances in which the provider receives the product but does not infuse the product prior to expiry, either due to timing or the failure of the product to meet specifications and pass site inspection. Due to the limited usable life of PROVENGE of approximately 18 hours from the completion of the manufacturing process to patient infusion, actual return information is known and credited against sales in the month incurred.  As we executed drop shipment agreements with credit worthy third-party wholesalers (the "Wholesalers") to sell PROVENGE, the Wholesalers assume all bad debt risk from the physician site or institution, and no allowance for bad debt is recorded. Under the terms of our distribution agreements, our return policy allows for the                                           44 

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  return of product that has expired prior to delivery, product that expires prior to infusion, product that is defective or damaged following delivery and product that cannot be infused because it does not otherwise meet specified requirements.  Our product is subject to certain required pricing discounts via rebates and/or chargebacks pursuant to mandatory federal and state government programs, and accordingly our revenue recognition policy requires estimates of rebates and chargebacks. We have agreements with the CMS providing for a rebate on sales to eligible Medicaid patients, the Public Health Service ("PHS") providing for a chargeback on sales to PHS-eligible Providers, and Federal Supply Schedule ("FSS") customers, including the Department of Veteran Affairs and the Department of Defense, providing for a chargeback on sales to eligible patients.  For sales of our product to eligible Medicaid patients, the healthcare provider purchases our product at full price, and then receives a rebate from the state for the amount paid in excess of the contract price. The state, in turn, invoices us for the amount of the rebate. Estimated rebates payable under Medicaid are recognized in the same period that the related revenue is recognized, resulting in a reduction in product sales revenue, and are classified as other accrued liabilities until paid. Our estimate of rebates payable is based on information we gather related to the physician site as well as health insurance information related to the patient being treated. Since there is often a delay between product sale and the processing and payment of the Medicaid rebates, we evaluate our estimates regularly, and adjust our estimates as necessary.  Chargebacks occur when a contracted healthcare provider purchases our product at fixed contract prices that are lower than the price we charge the Wholesalers. The Wholesaler, in turn, charges us back for the difference between the price initially paid by the Wholesaler and the contract price paid to the Wholesaler by the healthcare providers. These chargebacks are estimated and recorded in the period that the related revenue is recognized, resulting in a reduction in product sales revenue and trade accounts receivable. The following table is a roll forward of our accrued chargebacks for the year ended December 31, 2011:                                                                       Accrued     (in thousands)                                               Chargebacks

    Balance at December 31, 2010                                $           - 

Current provision related to sales made in current period 13,040

     Current provision related to sales made in prior period               

136

     Payments/credits                                                   

(6,111 )

      Balance at December 31, 2011                                $       

7,065

    In the fourth quarter of 2011, we entered into agreements with certain GPOs which contract for the purchase of PROVENGE on behalf of their members and provide certain contract administration services. Eligible members of the GPOs purchase PROVENGE at the wholesaler acquisition cost, and may be entitled to receive a rebate on eligible purchases at the end of each quarter. Estimated rebates payable to GPOs are recognized in the same period that the related revenue is recognized, resulting in a reduction in product sales revenue, and are classified as other accrued liabilities until paid. Our estimate of rebates payable is based on information we gather related to sales of our product to eligible GPO members.  Royalty Revenue  In the third quarter of 2011, we began receiving royalties on Merck's sales of VICTRELISTM (boceprevir), for the treatment of chronic hepatitis C, which was approved in May 2011. We received royalties on worldwide net sales of boceprevir pursuant to the terms of a license and collaboration agreement. In the fourth quarter of 2011, we sold this royalty to an unrelated third-party for $125.0 million and recognized the full amount as revenue. No revenue will be recorded related to this royalty in future periods.  

Inventory

  Inventories are determined at the lower of cost or market value with cost determined under the specific identification method. Inventories consisted of raw materials as of December 31, 2011 and 2010, but we may also have work in process at any given time. We began capitalizing raw material inventory in mid-April 2009, in                                           45 

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  anticipation of the potential approval for marketing of PROVENGE in the first half of 2010. At this time, our expectation of future benefits became sufficiently high to justify capitalization of these costs, as regulatory approval was considered probable and the related costs were expected to be recoverable through the commercialization of the product. Costs incurred prior to  were recorded as research and development expense in our statements of operations. As of April 2009, we had approximately $26.4 million in inventory, based on our current standard cost, which was previously expensed and could be used for the commercial and clinical manufacture of PROVENGE, training or additional research and development efforts.  As of December 31, 2011, approximately $4.7 million of our zero-cost inventory remained on hand. We estimate the remaining balance of this inventory will be used in research and commercial operations during the first quarter of 2012. As a result, cost of product revenue reflects, and will continue to reflect in the first quarter of 2012, a lower average per unit cost of raw materials.  

Convertible Senior Notes due 2016

  The Company's 2.875% Convertible Senior Notes due 2016 (the "2016 Notes"), issued in the first quarter of 2011, are convertible at the option of the holder, and we may choose to satisfy conversions, if any, in cash, shares of our common stock, or a combination of cash and shares of our common stock, based on a conversion rate initially equal to 19.5160 shares of our common stock per $1,000 principal amount of the 2016 Notes, which is equivalent to an initial conversion price of approximately $51.24 per share. Should a holder of the 2016 Notes exercise their conversion option during the next twelve month period, it is our intention to satisfy the conversion with shares of our common stock.  The 2016 Notes are accounted for in accordance with Accounting Standards Codification ("ASC") 470-20, "Debt with Conversion and Other Options." Under ASC 470-20, issuers of certain convertible debt instruments that have a net settlement feature and may be settled in cash upon conversion, including partial cash settlement, are required to separately account for the liability (debt) and equity (conversion option) components of the instrument. The carrying amount of the liability component of the 2016 Notes, as of the issuance date, was calculated by estimating the fair value of a similar liability issued at an 8.1% effective interest rate, which was determined by considering the rate of return investors would require in the Company's debt structure. The amount of the equity component was calculated by deducting the fair value of the liability component from the principal amount of the 2016 Notes and resulted in a corresponding increase to debt discount. The debt discount is being amortized as interest expense through the earlier of the maturity date of the 2016 Notes or the date of conversion.  Fair Value  We measure and report at fair value our cash equivalents and investment securities. We also measured and reported at fair value our warrant liability, prior to exercise of the warrants in the second quarter of 2010. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability, an exit price, in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.  Assets and liabilities typically recorded at fair value on a non-recurring basis include long-lived assets measured at fair value due to an impairment assessment under ASC 360-10, "Property, Plant and Equipment," and asset retirement obligations initially measured under ASC 410-20, "Asset Retirement and Environmental Obligations."  

Accounting for Stock-Based Compensation

  Stock-based compensation cost is estimated at the grant date based on the award's fair value and is recognized on the accelerated method as expense over the requisite service period. The fair value of our stock options is calculated using the Black-Scholes-Merton ("BSM") option pricing model. The BSM model requires various highly judgmental assumptions including volatility, forfeiture rates and expected option life. If any of the assumptions used in the BSM model change significantly, stock-based compensation expense for new awards may differ materially in the future from that recorded in the current period.                                           46

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  We also grant restricted stock awards that generally vest and are expensed over a four-year period. In 2010 and 2011, we granted restricted stock awards with certain performance conditions to certain executive officers and key employees. At each reporting date, we are required to evaluate whether achievement of the performance conditions is probable. Compensation expense is recorded over the appropriate service period based upon our assessment of accomplishing each performance provision or the occurrence of other events which may cause the awards to accelerate and vest.  

Recent Accounting Pronouncements

  In 2011, the Financial Accounting Standards Board (the "FASB") issued two Accounting Standard Updates ("ASU") which amend guidance for the presentation of comprehensive income. The amended guidance requires an entity to present components of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements. The current option to report other comprehensive income and its components in the statement of stockholders' equity will be eliminated. Although the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under existing guidance. These ASUs are effective for us in the first quarter of 2012 and retrospective application will be required. These ASUs will change our financial statement presentation of comprehensive income but will not impact our results of operations, cash flows or financial position.  

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009

 Revenue                                                 Year Ended December 31,                                            2011          2010       2009                                                   (In thousands)                  Product revenue         $ 213,511     $ 47,957     $   -                  Royalty revenue           128,020           18        19                  Collaborative revenue          82           82        82                   Total revenue           $ 341,613     $ 48,057     $ 101    Product revenue of $213.5 million in 2011 and $48.0 million in 2010 resulted from the commercial sale of PROVENGE following FDA approval on April 29, 2010. Product revenue for 2010 reflects approximately eight months of product sales activity. We expect product revenue to increase in 2012 as we expand commercialization.  Revenue from the sale of PROVENGE is recorded net of product returns and estimated pricing discounts via rebates and/or chargebacks, offered pursuant to mandatory federal and state government programs and to members of GPOs. Our revenue recognition requires estimates of rebates and chargebacks each period. We recorded estimated rebates of approximately $0.8 million during the year ended December 31, 2011. No rebates were recorded for the year ended December 31, 2010. During the year ended December 31, 2011, we recorded estimated chargebacks of approximately $13.2 million. No chargebacks were recorded for the year ended December 31, 2010.  In the third quarter of 2011, we began receiving royalties on Merck's sales of VICTRELISTM (boceprevir), for the treatment of chronic hepatitis C, which was approved in May 2011. We received royalties on worldwide net sales of boceprevir pursuant to the terms of a license and collaboration agreement. We recorded royalty revenue of $3.0 million during the year ended December 31, 2011, related to royalties received on sales of this product in the second and third quarters of 2011. In the fourth quarter of 2011, we sold this royalty for $125.0 million to an unrelated third-party and recognized the full amount as revenue, as we have no further obligations under the agreement. No revenue will be recorded related to this royalty in future periods.  

Collaborative revenue resulted from the recognition of deferred revenue related to a license agreement.

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   Table of Contents  Cost of Product Revenue                                                  Year Ended December 31,                                             2011           2010       2009                                                    (In thousands)                Cost of product revenue   $   159,090     $ 28,520     $   -                Gross profit(1)                54,421       19,437         -    

(1) Gross profit is calculated by subtracting cost of product revenue from

product revenue.

   The increase in cost of product revenue in 2011 was due to increased sales of PROVENGE and increased approved manufacturing capacity. Cost of product revenue includes the costs of manufacturing and distributing PROVENGE. Prior to FDA approval of these facilities, these costs were classified as selling, general and administrative expense. Upon FDA approval of the remaining capacity of the New Jersey Facility in March 2011, the Orange County Facility in June 2011 and the Atlanta Facility in August 2011, all commercial manufacturing costs at these facilities are included in cost of product revenue. Costs related to the manufacture of PROVENGE for clinical patients are classified as research and development expense.  We incurred substantial costs associated with the portion of the New Jersey Facility that was not operational during the first quarter of 2011 and the year ended December 31, 2010, as well as at the Orange County Facility for the first half of 2011 and the Atlanta Facility into the third quarter of 2011.  We began capitalizing raw material inventory in mid-April 2009, in anticipation of the potential approval for marketing of PROVENGE in the first half of 2010. At this time, our expectation of future benefits became sufficiently high to justify capitalization of these costs, as regulatory approval was considered probable and the related costs were expected to be recoverable through the commercialization of the product. Costs incurred prior to mid-April 2009 were recorded as research and development expense in our statements of operations. As of April 2009, we had approximately $26.4 million in inventory, based on our current standard cost, which was previously expensed and could be used for the commercial and clinical manufacture of PROVENGE, training or additional research and development efforts.  As of December 31, 2011, approximately $4.7 million of our zero-cost inventory remained on hand. We estimate the remaining balance of this inventory will be used in research and commercial operations during the first quarter of 2012. As a result, cost of product revenue reflects, and will continue to reflect in the first quarter of 2012, a lower average per unit cost of raw materials.  Gross margins on new product introductions generally increase over the life of the product as utilization of capacity increases and manufacturing efforts on product cost reduction are successful. As we expand our product distribution, we anticipate cost of product revenue as a percentage of product revenue will decline in future years.                                           48 

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Research and Development Expenses

  Research and development expenses were $74.3 million in 2011, $75.9 million in 2010 and $61.6 million in 2009. Expenses related to our research and development activities are categorized as either costs associated with clinical programs, discovery research or contract manufacturing expenses. Our research and development expenses were as follows:                                                         Year Ended December 31,                                                    2011          2010       2009                                                           (In millions)         Clinical programs:         Direct costs                             $   14.0       $ 10.5     $  5.0         Indirect costs                               28.4         47.4       51.7          Total clinical programs                      42.4         57.9      

56.7

         Contract manufacturing expenses              19.5          9.9      

-

         Discovery research                           12.4          8.1      

4.9

Total research and development expense $ 74.3$ 75.9$ 61.6

    Direct research and development costs associated with our clinical programs include clinical trial site costs, clinical manufacturing costs, costs incurred for consultants and other outside services, such as data management and statistical analysis support, and materials and supplies used in support of the clinical programs. Indirect costs of our clinical programs include wages, payroll taxes and other employee-related expenses, including stock-based compensation, rent, utilities and other facilities-related maintenance costs. Costs attributable to contract manufacturing expenses include technology transfer and process development costs related to developing second source suppliers. Costs attributable to our discovery research programs represent our efforts to develop and expand our product pipeline. The costs in each category may change in the future and new categories may be added.  

Our current product candidates and potential targets for the focus of new product candidates in research and development include:

• DN24-02, our investigational active cellular immunotherapy for the

treatment of patients with bladder, breast, ovarian and other solid tumors

expressing HER2/neu. In December 2010, we filed an IND application with the

FDA for DN24-02 for the treatment of HER2+ urothelial carcinoma, including

bladder cancer, following surgical resection. The trial will randomize

patients to DN24-02 or standard of care, with a primary endpoint of overall

        survival. We enrolled our first patient in this trial in September 2011.         Targeted enrollment is approximately 180 patients at clinical sites         throughout the United States.    

• CA9 and CEA, antigen targets for the study of potential active cellular

        immunotherapies, currently both in pre-clinical development.         •   TRPM8 (Transient Receptor Potential, sub-family M), a target for         manipulation by small molecule drug therapy. We are developing an

orally-available, small molecule targeting TRPM8 that could be applicable

to multiple types of cancer in advanced cancer patients. We completed our

Phase 1 clinical trial initiated in 2009 to evaluate TRPM8 and are in the

process of analyzing the data.

   For the years ended December 31, 2011, 2010 and 2009, research and development costs incurred related to these product candidates and potential targets were as follows:                                          Year Ended December 31,                                   2011           2010         2009                                            (In millions)                       DN24-02   $    3.0       $    1.2     $    0.2                       CA9            2.0            1.0            -                       TRPM8          0.5            1.5          2.5                                  $    5.5       $    3.7     $    2.7                                             49 

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Research and development costs associated with CEA for each period presented were immaterial.

  The significant majority of our historical research and development expense has been in connection with PROVENGE in the United States. In 2011 we commenced work in connection with our intention to seek approval of PROVENGE for marketing in the E.U. Research and development costs associated with PROVENGE in the United States for each period presented, and associated with PROVENGE in the E.U. in 2011, were as follows:                                                   Year Ended December 31,                                              2011          2010       2009                                                     (In millions)                PROVENGE - United States    $   49.9       $ 72.2     $ 58.9                PROVENGE - European Union       18.9            -          -                                             $   68.8       $ 72.2     $ 58.9    The nature and efforts required to complete a prospective research and development project are typically indeterminable at very early stages when research is primarily conceptual and may have multiple applications. Once a focus towards developing a specific product candidate has been developed, we obtain more visibility into the efforts that may be required to reach conclusion of the development phase. However, there are inherent risks and uncertainties in developing novel biologics in a rapidly-changing industry environment. To obtain approval of a product candidate from the FDA, we must, among other requirements, submit data supporting safety and efficacy as well as detailed information on the manufacture and composition of the product candidate. In most cases, this entails extensive laboratory tests and pre-clinical and clinical trials. The collection of this data, as well as the preparation of applications for review by the FDA and other regulatory agencies outside the United States, is costly in time and effort, and may require significant capital investment.  We may encounter significant difficulties or costs in our efforts to obtain FDA approvals or approvals to market products in foreign markets. For example, the FDA or the equivalent in jurisdictions outside the United States may determine that our data is not sufficiently compelling to warrant marketing approval and may require that we engage in additional clinical trials or provide further analysis which may be costly and time-consuming. Regardless of the nature of our efforts to complete development of our products and receive marketing approval, we may encounter delays that render our product candidates uncompetitive or otherwise preclude us from marketing products.  We may be required to obtain additional funding to complete development of product candidates or in order to commercialize approved products. However such funding may not be available to us on terms we deem acceptable or at all. Our ability to access additional capital is dependent on the success of our business and the perception by the market of our future business prospects. In the event we were unable to obtain necessary funding, we might halt or temporarily delay ongoing development projects.  

Selling, General and Administrative Expenses

  Selling, general and administrative expenses were $361.3 million in 2011, $235.8 million in 2010 and $38.6 million in 2009. Selling, general and administrative expenses primarily consisted of salaries and wages, stock-based compensation, consulting fees, sales and marketing fees and administrative costs to support our operations. In addition, selling, general and administrative expenses include the expenses associated with the portion of the New Jersey Facility which was not commercially operational during the first quarter of 2011 and the year ended December 31, 2010, the Orange County Facility for the first half of 2011 and the Atlanta Facility into the third quarter of 2011, and related costs of personnel in training. The significant increase in selling, general and administrative expenses in 2011 as compared to 2010, and 2010 as compared to 2009, was primarily attributable to higher payroll costs from increased headcount and commercial product launch activities, including non-operational manufacturing capacity.  

Each of our facilities requires approval by the FDA prior to the manufacture of PROVENGE (for clinical or commercial manufacture), and accordingly, are not operational until such approval. We incurred pre-operational

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  costs associated with the portion of the New Jersey Facility which was not commercially operational during the first quarter of 2011, the Orange County Facility for the first half of 2011 and the Atlanta Facility into the third quarter of 2011. These costs include facilities-related expenditures prior to FDA approval, administrative costs associated with training personnel and training a workforce to operate the facility upon FDA approval, as well as the cost of outside consultants and other administrative expenses. In addition, we have incurred start-up costs related to the transfer of technology and training at the facilities. Pre-operational costs incurred at the facilities and related to start-up activities for the years ended December, 2011 and 2010 were approximately $87.0 million and $105.0 million, respectively. Similar costs are classified as cost of product revenue when the related commercial operations commence.  

Restructuring and Contract Termination Expenses

Restructuring

  On August 3, 2011, as a result of a decrease in anticipated revenue growth in 2011, we announced plans to reduce expenses, including workforce-related expenses, to align with our near-term manufacturing requirements. On September 2, 2011, our Board of Directors approved a reduction in force of approximately 25% of our total workforce, or approximately 500 employees. The employees affected by the reduction in force were notified the week of September 6, 2011.  As a result of this workforce reduction, we recorded a charge of $19.4 million related to severance, other termination benefits, outplacement services and non-cash stock compensation due to the accelerated vesting of options and restricted stock awards of certain employees. The amount is included in "Restructuring and contract termination" in the statement of operations for the year ended December 31, 2011.  We do not expect to incur additional restructuring charges in 2012 related to severance and other termination benefits in connection with the September 2011 restructuring. We expect to pay the amounts owed within the next three months.  

Contract Termination

  On September 1, 2011 we provided written notice to GSK of termination of our Development and Supply Agreement, effective October 31, 2011. The agreement was originally entered into as a potential second source for the commercial production and supply of the antigen used in the manufacture of PROVENGE. We terminated the agreement due to unforeseen delays and implementation difficulties experienced by GSK in achieving the commercial purpose of the agreement. Assets included in our prepaid expense and other current assets balance related to the agreement were deemed unusable and, as such, we incurred an expense of $14.8 million, included in "Restructuring and contract termination" in the statement of operations for the year ended December 31, 2011. As the manufacturing phase had not yet commenced, and as no production runs or product batches had been initiated as of September 1, 2011, all previously issued product orders were cancelled.  As a result of the contract termination, we recorded a charge of $19.2 million for the year ended December 31, 2011. The amount is included in "Restructuring and contract termination" in the statement of operations for the year ended December 31, 2011. Refer to ITEM 3 for further discussion of a legal proceeding related to this matter.  Interest Income  Interest income was $1.4 million in 2011, $1.1 million in 2010 and $1.0 million in 2009. The increase in interest income in 2011 was primarily due to increased holdings of cash and investments as a result of the net proceeds of $607.1 million realized from the offering of our 2016 Notes in January and February 2011. The slight increase in interest income in 2010 as compared to 2009 was primarily due to higher average investment balances during 2010.  

Interest Expense

  Interest expense was $47.7 million in 2011, $1.6 million in 2010 and $2.3 million in 2009. The increase in interest expense in 2011 as compared to 2010 was due to the issuance of our 2016 Notes in the first quarter of 2011, which resulted in non-cash interest expense related to amortization of the debt discount and debt issuance                                           51 

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  costs of $23.0 million for the year ended December 31, 2011. In addition, we incurred interest expense of $16.8 million for the year ended December 31, 2011, based on the 2.875% stated coupon rate of our 2016 Notes. Refer to Liquidity and Capital Resources: Financings from the Sale of Securities and Issuance of Convertible Notes for further discussion of the accounting for our 2016 Notes.  The decrease in interest expense in 2010 compared to 2009 was primarily due to increased capitalized interest expense in 2010 related to the construction of our manufacturing facilities.  

Warrant Liability

  Non-operating loss associated with the increase in our warrant liability for the years ended December 31, 2010 and 2009 was $142.6 million and $118.8 million, respectively. The fair value was calculated using the BSM model and was revalued at each reporting period and at the date of exercise in May 2010. Therefore the fair value of the warrants will have no future impact on our results of operations.  

Income Taxes

We recognized $0.4 million in income tax benefit in 2010 relating to refundable credits, compared with no income tax expense or benefit in 2011 or 2009.

  As of December 31, 2011, we had federal and state net operating loss carryforwards ("NOLs") of approximately $1.08 billion and $341.0 million, respectively. We also had federal and state research and development credit carryforwards ("R&D credits") of approximately $24.9 million and $2.6 million, respectively. The NOLs and R&D credits expire at various dates, beginning in 2012 through 2031, if not utilized. Utilization of the NOLs and R&D credits may be subject to annual limitations due to the ownership change limitations provided by the Internal Revenue Code of 1986. The annual limitations may result in the expiration of NOLs and R&D credits before utilization.  Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets include net operating loss carryforwards, research credits and stock-based compensation. Our total deferred tax assets of $461.9 million and $353.6 million at December 31, 2011 and 2010, respectively, have been fully offset by a valuation allowance.  Realization of deferred tax assets is dependent on future earnings, if any, the timing and amount of which are uncertain. Accordingly, the deferred tax assets have been offset by a valuation allowance. The valuation allowance relates primarily to net deferred tax assets from operating losses. Excess tax benefits associated with stock option exercises are recorded directly to stockholders' equity only when realized. As a result, the excess tax benefits included in net operating loss carryforwards, but not reflected in deferred tax assets, for fiscal years 2011 and 2010 are $156.1 million and $146.7 million, respectively.  

Stock-Based Compensation Expense

We recorded stock-based compensation expense in the consolidated statements of operations for 2011, 2010 and 2009 as follows:

                                                       Year Ended December 31,                                                   2011          2010       2009                                                          (in millions)           Cost of product revenue               $    5.7       $  1.5     $    -           Research and development                   7.3          8.4        8.2           Selling, general and administrative       42.3         30.4        9.0           Restructuring                              5.0            -          -                                                  $   60.3       $ 40.3     $ 17.2                                             52 

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  Total stock-based compensation expense recognized in the consolidated statement of operations for 2011, 2010 and 2009 increased our net loss per share by $0.41, $0.29 and $0.16, respectively. The increase in stock-based compensation expense in 2011 and 2010 was primarily related to increased headcount and the increased valuation of stock options and restricted stock awards granted in 2010 and in the first half of 2011 as a result of our increased stock price.  

LIQUIDITY AND CAPITAL RESOURCES

Cash Uses and Proceeds

  As of December 31, 2011, we had approximately $617.7 million in cash, cash equivalents, and short-term and long-term investments. To date, we have financed our operations primarily through proceeds from the sale of equity and convertible debt securities, cash receipts from collaborative agreements, interest income, commercial sale of PROVENGE and, most recently, the sale of the boceprevir royalty.  Net cash used in operating activities for the years ended December 31, 2011, 2010 and 2009 was $242.3 million, $267.5 million and $85.0 million, respectively. Expenditures related to operating activities in these periods were a result of costs associated with the commercial launch of PROVENGE in 2011 and 2010, research and development expenses including clinical trial costs, contract manufacturing costs and selling, general and administrative expenses in support of our operations. The increase in net cash used in operating activities in 2011 and 2010, as compared to 2009, resulted from expenses associated with the commercial launch of PROVENGE including working capital needs to support increased inventory and increased selling, general and administrative expense, primarily as a result of an increase in personnel from 414 as of December 31, 2009 to 1,316 as of December 31, 2010 and to 1,495 as of December 31, 2011. This increase in net cash used in operating activities in 2011 was offset by cash received from the commercial sale of PROVENGE and the sale of the boceprevir royalty in the fourth quarter of 2011.  Net cash used in investing activities for the years ended December 31, 2011, 2010 and 2009 was $71.8 million, $90.0 million and $208.1 million, respectively. Since our inception, investing activities, other than purchases and maturities of short-term and long-term investments, consisted primarily of purchases of property and equipment. Purchases of property and equipment of $140.6 million in 2010 were substantially higher than $25.4 million in 2011 and $65.9 million in 2009, due to expenditures for the three manufacturing facility build-outs.  Net cash provided by financing activities was $608.2 million in 2011, $80.7 million in 2010 and $643.3 million in 2009. Cash provided by financing activities in 2011 was due to the offering of our 2016 Notes, from which we realized net proceeds of approximately $607.1 million. Cash provided by financing activities in 2010 was due to the exercise of the warrants in exchange for 8.0 million shares of common stock, resulting in aggregate cash proceeds of $71.4 million. The decrease in net cash provided by financing activities in 2010 was primarily due to the absence of any public offerings in 2010, while cash provided from common stock issuances in May 2009 and December 2009 resulted in net proceeds of $630.3 million.  We believe that our current cash on hand as of December 31, 2011, together with revenue generated from commercial sales of PROVENGE and the reduced levels of spending following the restructuring during the third quarter of 2011, will be sufficient to meet our anticipated expenditures for at least the next 12 months as we expand our operations, continue our clinical trials, apply for regulatory approvals, potentially invest in commercial infrastructure outside the United States and invest in research and product development. The majority of our resources continue to be used in support of the commercialization of PROVENGE in the United States. We expect revenue from PROVENGE product sales could be a significant source of cash. However, we may need to raise additional funds to meet potential long-term liquidity needs including:    

• continued investment in marketing, manufacturing, information technology

and other infrastructure and activities related to the commercialization of

        PROVENGE in the United States,    

• continuing and expanding our internal research and development programs,

• engaging in clinical trials outside of the United States, commercial

infrastructure development and other investment in order to support the

commercialization of PROVENGE in territories outside the United States, and

      •   working capital needs.                                            53 

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  Table of Contents  Leases and Other Commitments  Office Leases  In February 2011, we entered into a lease with Northwestern Mutual Life Insurance Company for office space of 179,656 rentable square feet in Seattle, Washington. The initial lease term is for five and a half years, with one renewal term of two and a half years. The aggregate rent payable under the initial lease term is approximately $22.3 million. The lease required us to provide the landlord with a letter of credit as a security deposit. We have provided the bank that issued the letter of credit on our behalf, a security deposit of $2.2 million to guarantee the letter of credit. The deposit is recorded as a long-term investment as of December 31, 2011.  Also in February 2011, we entered into a sublease with Zymogenetics, Inc. for laboratory and office space of 97,365 rentable square feet in Seattle, Washington. The lease term is for eight years. The aggregate rent payable under the lease term is approximately $24.3 million. The lease required us to provide the landlord with a letter of credit of $1.1 million as a security deposit, which is recorded as a long-term investment as of December 31, 2011.  

Prior to moving to these two facilities, we had leased space at three locations in Seattle, Washington, all of which leases expired in 2011.

Manufacturing Facilities Leases

  In August 2005, we entered into an agreement to lease the New Jersey Facility, which represents approximately 158,000 square feet of commercial manufacturing space in Morris Plains, New Jersey. The lease agreement originally expired in November 2012; however in November 2011 we entered into an amendment to this lease agreement to extend the lease through November 2022. This lease may be extended at our option for an additional ten-year period and a five-year period, with the same terms and conditions except for rent, which adjusts upon renewal to market rate. The aggregate rent payable under the ten-year extension is $12.7 million.  The New Jersey lease required us to provide the landlord with a letter of credit. We have provided the bank that issued the letter of credit on our behalf a security deposit of $2.0 million to guarantee the letter of credit. The deposit is recorded as a long-term investment as of December 31, 2011 and 2010 on our consolidated balance sheets. As part of an agreement with the Township of Hanover relating to the permitting of the expansion of the New Jersey Facility, which was substantially completed in May 2010, we had $1.9 million in long-term investments as of December 31, 2010 being held as a security deposit to ensure completion of certain improvements at the property. In March 2011, this security deposit was reduced to $0.3 million and is recorded as a long-term investment on our consolidated balance sheet as of December 31, 2011.  In July 2009, we entered into a lease with Majestic Realty Co. for the Atlanta Facility, consisting of approximately 156,000 square feet in Atlanta, Georgia for use as a manufacturing facility following build-out. The lease commenced when we took possession of the building upon completion of construction of the building shell in March 2010. The initial lease term is ten and a half years, with five renewal terms of five years each. The aggregate rent payable for the Atlanta Facility under the initial lease term is $6.7 million.  In August 2009, we entered into a lease with Knickerbocker Properties, Inc. XLVI for the Orange County Facility, consisting of existing building space totaling approximately 184,000 rentable square feet for use as a manufacturing facility following build-out which was substantially completed in 2010. The initial lease term is for ten and a half years, expiring in December 2019, with five renewal terms of five years each. The lease includes a one-time purchase option exercisable during the first three years of the lease term. The aggregate rent payable under the initial lease term is $13.6 million.  The Orange County Facility lease required us to provide the landlord with a letter of credit of $2.1 million as a security deposit, which is secured by a deposit of $2.2 million recorded as a long-term investment on our consolidated balance sheets.  

The three manufacturing facility leases each have a provision requiring that we restore the building to its original condition upon lease termination. Accordingly, we have accrued the estimated costs of dismantlement and restoration associated with these obligations.

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Production and Supply Expenses

  We have a supply agreement with Fujifilm Diosynth Biotechnologies, formerly Diosynth RTP, Inc. ("Fujifilm") covering the commercial production of the recombinant antigen used in the manufacture of PROVENGE. On May 12, 2010, we entered into a Second Amendment to the supply agreement to extend the term of the agreement through December 31, 2018, and unless terminated, the agreement will renew automatically thereafter for additional 5-year terms. The agreement may be terminated upon written notice by us or Fujifilm at least 24 months before the end of a renewal term or by either party in the event of an uncured material breach or default by the other party.  We currently have commitments with Fujifilm to purchase antigen under three orders. We have a remaining obligation of $10.8 million under the 2011 order, for which delivery commenced in the second quarter 2011. In addition, we entered into commitments with Fujifilm to purchase antigen in 2012 for a total of $41.5 million and in 2013 for a total of $43.8 million.  

Software and Equipment Financing

  We have entered into various agreements for the lease of software licenses and equipment. The leases have been treated as capital leases. The capital leases, with an aggregate remaining obligation at December 31, 2011 of $13.2 million, bear interest at rates ranging from 2.9% to 11.7% per year.  

Financings from the Sale of Securities and Issuance of Convertible Notes

Equity Offering Proceeds

  In December 2009, we received net proceeds of $409.5 million after deducting underwriting commissions and estimated offering expenses from our issuance of 17.3 million shares of common stock at the public offering price of $24.75 per share.  In May 2009, we received net proceeds of $220.8 million after deducting underwriting commissions and estimated offering expenses from our issuance of 12.0 million shares of common stock at the public offering price of $19.20 per share.  

Issuance of Convertible Notes

2016 Notes

  On January 14, 2011, we entered into an underwriting agreement with J.P. Morgan Securities LLC (the "Underwriter") relating to the offer and sale of $540 million aggregate principal amount of our 2016 Notes. Under the terms of the underwriting agreement, we granted the Underwriter an option, exercisable within 30 days of the date of the agreement, to purchase up to an additional $80 million aggregate principal amount of 2016 Notes to cover overallotments. We issued $540 million in aggregate principal amount of the 2016 Notes upon the closing of the offering on January 20, 2011. Net proceeds to us, after payment of underwriting fees and estimated expenses, were approximately $528.8 million. On January 31, 2011, the Underwriter exercised the overallotment option in full, and we closed on the sale of the additional $80 million in principal amount of the 2016 Notes on February 3, 2011. Net proceeds to us from the exercise of the overallotment option, after deducting underwriting fees and other offering expenses, were approximately $78.3 million.  On January 20, 2011, we entered into the First Supplemental Indenture (the "Supplemental Indenture") with The Bank of New York Mellon Trust Company, N.A., as trustee (the "Trustee"), to our existing Base Indenture (the "Base Indenture" and, together with the Supplemental Indenture, the "2016 Indenture"), dated as of March 16, 2007. The 2016 Indenture sets forth the rights and provisions governing the 2016 Notes. Interest is payable on the 2016 Notes semi-annually in arrears on January 15 and July 15 of each year, beginning on July 15, 2011. Record dates for payment of interest on the 2016 Notes are each January 1 and July 1.  The 2016 Notes are convertible at the option of the holder, and we may choose to satisfy conversions, if any, in cash, shares of our common stock, or a combination of cash and shares of our common stock, based on a conversion rate initially equal to 19.5160 shares of our common stock per $1,000 principal amount of the 2016 Notes, which is equivalent to an initial conversion price of approximately $51.24 per share. The conversion rate                                           55

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  will be increased under certain circumstances described in the 2016 Indenture; however, the number of shares of common stock issued upon conversion of a 2016 Note will not exceed 27.3224 per $1,000 principal amount of 2016 Notes, subject to adjustment in accordance with the 2016 Indenture. Should a holder exercise their conversion option during the next twelve month period, it is our intention to satisfy the conversion with shares of our common stock. Consequently, the 2016 Notes are classified as a long-term liability as of December 31, 2011.  The conversion rate will be adjusted upon the occurrence of certain events, including stock dividends or share splits, the issuance of rights, options or warrants, spin-offs or other distributed property, cash dividends or distributions, or tender offers or exchange offers. We will not make an adjustment to the conversion rate for any transaction described above (other than share split or share combination) if each holder of the 2016 Notes has the right to participate in such transaction at the same time and upon the same terms as holders of our common stock, and solely as a result of holding the 2016 Notes, without having to convert the 2016 Notes and as if a number of common shares were held equal to the applicable conversion rate multiplied by the principal amount of 2016 Notes held.  The 2016 Notes are subject to repurchase by us at the option of the holders following a "fundamental change," as defined in the 2016 Indenture. If a fundamental change occurs, holders of the 2016 Notes may require us to repurchase all or a portion of their 2016 Notes for cash at a repurchase price equal to 100% of the principal amount of the 2016 Notes to be repurchased, plus any accrued and unpaid interest and other amounts due thereon. However, if a fundamental change occurs and a holder elects to convert the 2016 Notes, we will under certain circumstances, increase the applicable conversion rate for the 2016 Notes surrendered for conversion by a number of additional shares of common stock, based on the date on which the fundamental change occurs or becomes effective and the price paid per share of our common stock in the fundamental change as specified in the 2016 Indenture. At our option, we will satisfy our conversion obligation with cash, shares of our common stock or a combination of cash and shares, unless the consideration for our common stock in any fundamental change is comprised entirely of cash, in which case the conversion obligation will be paid in cash. The number of additional shares of common stock was determined such that the fair value of the additional shares would be expected to approximate the fair value of the convertible option at the date of the fundamental change.  In addition, we may from time to time increase the conversion rate, to the extent permitted by law, by any amount for any period of time if the period is at least 20 business days and we provide 15 business days prior written notice of such increase. In addition, we may increase the conversion rate if the Board of Directors determines that such increase would avoid or diminish United States federal income tax to holders of the common stock in connection with a dividend or distribution. The 2016 Indenture contains customary covenants.  The 2016 Notes are accounted for in accordance with ASC 470-20, under which issuers of certain convertible debt instruments that have a net settlement feature that may be settled in cash upon conversion, including partial cash settlement, are required to separately account for the liability (debt) and equity (conversion option) components of the instrument. The liability component of the 2016 Notes, as of the issuance date, was calculated by estimating the fair value of a similar liability issued at an 8.1% effective interest rate, which was determined by considering the rate of return investors would require in the Company's debt structure. The amount of the equity component was calculated by deducting the fair value of the liability component from the principal amount of the 2016 Notes and resulted in a corresponding increase to debt discount. The debt discount is being amortized as interest expense through the earlier of the maturity date of the 2016 Notes or the date of conversion.  The application of ASC 470-20 resulted in the initial recognition of $132.9 million as the debt discount recorded in additional paid-in capital for the 2016 Notes. At December 31, 2011, the net carrying amount of the liability component, which is recorded as a long-term liability in the consolidated balance sheet, was $508.4 million, and the remaining unamortized debt discount was $111.6 million. Amortization of the debt discount and debt issuance costs for the year ended December 31, 2011 resulted in non-cash interest expense of $23.0 million. In addition, interest expense based on the 2.875% stated coupon rate of the 2016 Notes was $16.8 million for the year ended December 31, 2011.                                           56

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2014 Notes

  In 2007, an aggregate of $85.3 million of the 2014 Notes was sold in a private placement to qualified institutional buyers. Proceeds from the offering, after deducting placement fees and our estimated expenses, were approximately $82.3 million. The 2014 Notes were issued at face principal amount and pay interest of 4.75% semi-annually in arrears on June 15 and December 15 of each year. Record dates for payment of interest on the 2014 Notes are each June 1 and December 1. In certain circumstances, additional amounts may become due as additional interest. We can elect that the sole remedy for an event of default for our failure to comply with the "reporting obligations" provisions of the indenture under which the 2014 Notes were issued (the "2014 Indenture"), for the first 180 days after the occurrence of such event of default would be for the holders of the 2014 Notes to receive additional interest on the 2014 Notes at an annual rate equal to 1% of the outstanding principal amount of the 2014 Notes. We recorded interest expense, including the amortization of debt issuance costs, related to the 2014 Notes of $1.5 million, $3.9 million and $2.9 million during 2011, 2010 and 2009, respectively.  The 2014 Notes are convertible into our common stock at the option of the holder, initially at the conversion price of $10.28 per share, equal to a conversion rate of approximately 97.2644 shares per $1,000 principal amount of the 2014 Notes, subject to adjustment. There may be an increase in the conversion rate of the 2014 Notes under certain circumstances described in the 2014 Indenture; however, the number of shares of common stock issued will not exceed 114.2857 per $1,000 principal amount of the 2014 Notes.  The 2014 Notes are subject to repurchase by us at the option of the holder following a "fundamental change," as defined in the 2014 Indenture. If a fundamental change occurs, holders of the 2014 Notes may require us to repurchase all or a portion of their 2014 Notes for cash at a repurchase price equal to 100% of the principal amount of the 2014 Notes to be repurchased, plus any accrued and unpaid interest and other amounts due thereon. However, a holder that converts 2014 Notes in connection with a fundamental change may, in some circumstances, be entitled to an increased conversion rate (i.e., a lower per share conversion price) as a make whole premium. The increased conversion rates were determined such that the fair value of the additional shares would be expected to approximate the fair value of the convertible option at the date of the fundamental change.  In addition, the conversion rate will be adjusted upon the occurrence of certain events, including stock dividends or share splits, the issuance of rights or warrants, other distribution of property, cash dividends or distributions, or tender offers or exchange offers. We will not make an adjustment to the conversion rate for any transaction described above (other than share split or share combination) if each holder of the 2014 Notes has the right to participate in such transaction at the same time and upon the same terms as holders of our common stock, and solely as a result of holding the 2014 Notes, without having to convert the 2014 Notes and as if a number of common shares were held equal to the applicable conversion rate multiplied by the principal amount of 2014 Notes held.  In addition, we may from time to time increase the conversion rate, to the extent permitted by law, by any amount for any period of time if the period is at least 20 business days and we provide 15 business days prior written notice of such increase. In addition, we may increase the conversion rate if the Board of Directors determines that such increase would avoid or diminish United States federal income tax to holders of the common stock in connection with a dividend or distribution. The 2014 Indenture contains customary covenants.  In April 2009, $11.5 million in principal amount of the 2014 Notes were converted by holders of the 2014 Notes, resulting in the issuance of approximately 1.1 million shares of common stock. In May 2009, we exchanged approximately 2.1 million shares of our common stock for $21.2 million principal face amount of the 2014 Notes. In December 2010, we exchanged 24.9 million principal face amount of the 2014 Notes for approximately 2.5 million shares of common stock, which included a premium of approximately 129,000 shares. The premium is recorded as a loss on debt conversion of $4.7 million in other expense in the consolidated statement of operations for 2010.  

As of December 31, 2011 and 2010, the aggregate principal amount of the 2014 Notes outstanding was $27.7 million.

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Contractual Commitments

The following are contractual commitments at December 31, 2011 associated with supply agreements and debt and lease obligations, including interest:

                                           Total         1 Year       2-3 Years       4-5 Years        Thereafter                                                                    (In thousands) Contractual Commitments: Convertible senior notes (2016 Notes) (including interest)(1)        $ 691,301      $  8,913      $   35,650      $  646,738                 - Convertible senior subordinated notes (2014 Notes) (including interest)(1)                             30,973         1,315          29,658               -                 - Facility lease obligations (including interest)(2)                  25,526         1,862           3,806           4,028            15,830 Contractual commitments(3)               96,062        52,231          43,831               -                 - Capital leases (including interest)(4)                             15,333         3,390           8,176           3,767                 - Operating leases(5)                      69,531        10,565          20,464          18,493            20,009                                        $ 928,726      $ 78,276      $  141,585      $  673,026      $     35,839       

(1) See Note 10 to our Consolidated Financial Statements for additional

    information related to the 2016 Notes and 2014 Notes.    

(2) See Note 9 to our Consolidated Financial Statements for additional

information related to our facility lease obligations. Our facility lease

obligation commitment reflects the initial term of the lease and a renewal

    period.    

(3) See Note 16 to our Consolidated Financial Statements for additional

    information related to our contractual commitments with Fujifilm.    

(4) See Note 9 to our Consolidated Financial Statements for additional

    information related to our capital lease obligations.    

(5) See Note 16 to our Consolidated Financial Statements for additional

information related to contractual commitments under non-cancelable operating

leases, including the land portion of our manufacturing facilities and the

maintenance component of capital leases.

OFF-BALANCE SHEET ARRANGEMENTS

We have no material off-balance sheet arrangements.

FORWARD-LOOKING STATEMENTS

  Some of the statements contained in this annual report are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. We have based these forward-looking statements largely on our expectations and projections about future events and financial trends affecting the financial condition and/or operating results of our business. Forward-looking statements involve risks and uncertainties, particularly those risks and uncertainties inherent in the process of discovering, developing and commercializing drugs that are safe and effective for use as human therapeutics. There are important factors that could cause actual results to be substantially different from the results expressed or implied by these forward-looking statements, including, among other things:   

• our ability to successfully commercialize PROVENGE and grow sales in the

United States sufficient to sustain our operations;    

• whether we have adequate financial resources and access to capital to fund

continued development and potential commercialization of other potential

        product candidates we may develop;    

• our ability to gain regulatory approval for PROVENGE in the E.U. and other

        potential markets;                                            58 

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• our ability to successfully manufacture PROVENGE and any other product

         candidates with required quality;         •   the extent and speed at which the cost of PROVENGE and any other product

candidates we may develop are reimbursed by government and third-party

        payors;         •   the extent to which PROVENGE and any products that we are able to

commercialize will be accepted by the market as first line preferred

         therapy and prescribed by physicians;         •   our ability to complete and achieve positive results in ongoing and new

        clinical trials;    

• our dependence on single-source vendors for some of the components used in

        our product candidates;    

• our dependence on our intellectual property and ability to protect our

proprietary rights and operate our business without conflicting with the

        rights of others;    

• the effect that any litigation including intellectual property litigation,

        or product liability claims may have on our business and operating and         financial performance;    

• our expectations and estimates concerning our future operating and

        financial performance;    

• the impact of competition and regulatory requirements and technological

        change on our business;       •   our ability to recruit and retain key personnel;       •   our ability to enter into future collaboration agreements;         •   anticipated trends in our business and the biotechnology industry         generally; and       •   other factors described under Item 1A, "Risk Factors".   In addition, in this annual report the words "believe," "may," "will," "estimate," "continue," "anticipate," "intend," "plan," "expect," "potential," "possible," or "opportunity," the negative of these words or similar expressions, as they relate to us, our business, future financial or operating performance or our management, are intended to identify forward-looking statements. We do not intend to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Past financial or operating performance is not necessarily a reliable indicator of future performance and you should not use our historical performance to anticipate results or future period trends. 

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