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share'' hospitals and for purchases by some federal governmental departments such as the Department
of Veterans Affairs and the Department of Defense. The rebates paid to state Medicaid programs are
based on pricing data reported by manufacturers on a monthly and quarterly basis to the Centers for
Medicare and Medicaid Services, the federal agency which administers the Medicaid drug rebate
program. These data include the average manufacturer price, or AMP, and in the case of innovator
products, the best price for each drug. As a result of the enactment of the Healthcare Reform Act, rebates
also are due on the utilization of Medicaid managed care organizations, effective March 23, 2010.
Pursuant to the Healthcare Reform Act, the amount of the Medicaid rebate for each unit of a drug has
been increased. For most innovator products, in general a drug marketed under a new drug application,
or NDA, the minimum rebate has been increased from 15.1% to 23.1% of the AMP for that product, or if it
is greater, the difference between the AMP and the best price for the drug. The Medicaid rebate for
innovator products also includes an additional rebate amount if price increases for the drug exceed the
rate of inflation since the product's launch, and in the case of certain line extension products, the
additional rebate can be tied to the price of the original version of the product. The Healthcare Reform Act
also caps the total rebate amount for innovator drugs at 100% of the AMP for the drug. In addition, the
Healthcare Reform Act and subsequent legislation enacted in August of 2010 changed the definition of
AMP. Regulations have been proposed to implement the Medicaid prescription drug provisions of the
enacted statutory changes. There may be additional increases in rebates or other costs and charges from
government agencies. Regulations continue to be issued and coverage expanded by various
governmental agencies relating to these programs, increasing the cost and complexity of compliance.
Health reform also expanded the number of safety net providers and hospitals that receive discounted
pricing on out-patient medicines. In some countries other than the U.S., reimbursement, pricing and
profitability of prescription pharmaceuticals and biopharmaceuticals are subject to government control.
We are unable to predict what additional legislation or regulation, if any, relating to the healthcare industry
or third-party coverage and reimbursement may be enacted in the future or what effect such legislation or
regulation would have on our business.
Also, we expect managed care plans will continue to put pressure on the pricing of pharmaceutical and
biopharmaceutical products due to a trend toward managed health care, the increasing influence of
health maintenance organizations and additional legislative proposals. Cost control initiatives could
decrease the price that we, or any potential collaborators, receive for any of our future products, which
could adversely affect our profitability. These initiatives may also have the effect of reducing the
resources that pharmaceutical and biotechnology companies can devote to in-licensing drug candidates
and the research and development of new drugs, which could reduce our resulting revenue. Any cost
containment measures or other reforms that are adopted could have a negative impact on our ability to
commercialize successfully our products or could limit or eliminate our spending on development of new
drugs and affect our profitability.
Other legislation affecting government expenditures more broadly have the potential to affect negatively
our product revenues and prospects for continued profitability. For example, the Budget Control Act of
2011 that was signed into law on August 2, 2011 to reduce federal government expenditures may result in
reduced payment rates for drugs under different government health care programs. The implementation
of this law could decrease the price that we and our potential collaborators receive for our future products.
We, or our collaborators, may not obtain favorable reimbursement rates for our drug candidates.
The commercial success of our drug candidates will depend on the availability and adequacy of coverage
and reimbursement from third-party payors, including government and private insurance plans. Third-
party payors are increasingly challenging the prices charged for pharmaceuticals and other medical
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products. Our products may be considered less cost-effective than existing products and, as such,
coverage and reimbursement to the patient may not be available or be sufficient to allow the sale of our
products on a competitive basis or on a profitable basis.
In addition, the market for our drug candidates will depend significantly on access to third-party payors'
drug formularies, or lists of medications for which third-party payors provide coverage and
reimbursement. Industry competition to be included in such formularies can result in downward pricing
pressures on pharmaceutical companies. As such, we cannot provide assurances that our products will
be placed on third-party payors' formularies. To the extent that our products are listed on third-party
payors' formularies, we or our collaborators may not be able to negotiate favorable reimbursement rates
for our products. If we, or our collaborators, fail to obtain an adequate level of reimbursement for our
products by third-party payors, sales of the drugs would be adversely affected or there may be no
commercially viable market for the products.
The drug research and development industry has a history of patent and other intellectual
property litigation and we may be involved in costly intellectual property lawsuits.
The drug research and development industry has a history of patent and other intellectual property
litigation and we believe these lawsuits are likely to continue. Legal proceedings relating to intellectual
property would be expensive, take significant time and divert management's attention from other
business concerns. Because we produce drug candidates for a broad range of therapeutic areas and
provide many different capabilities in this industry, we face potential patent infringement suits by
companies that control patents for similar drug candidates or capabilities or other suits alleging
infringement of their intellectual property rights. There could be issued patents of which we are not aware
that our products infringe or patents that we believe we do not infringe that we are ultimately found to
infringe. Moreover, patent applications are in many cases maintained in secrecy for 18 months after filing
or even until patents are issued. The publication of discoveries in the scientific or patent literature
frequently occurs substantially later than the date on which the underlying discoveries were made and
patent applications were filed. Because patent applications can take many years to issue, there may be
currently pending applications of which we are unaware that may later result in issued patents that we
infringe with our products. In addition, technology created under our research and development
collaborations may infringe the intellectual property rights of third parties, in which case we may not
receive milestone or royalty revenue from those collaborations.
If we do not prevail in an infringement lawsuit brought against us, we might have to pay substantial
damages, including triple damages, and we could be required to stop the infringing activity or obtain a
license to use the patented technology or redesign our products so as not to infringe the patent. We may
not be able to enter into licensing arrangements at a reasonable cost or effectively redesign our products.
Any inability to secure licenses or alternative technology could delay the introduction of our products or
prevent us from manufacturing or selling products.
The intellectual property rights we rely on to protect our proprietary drug candidates and the
technology underlying our tools and techniques may be inadequate to prevent third parties from
using our technology or developing competing capabilities or to protect our interests in our
proprietary drug candidates.
Our success depends in part on our ability to protect patents and maintain the secrecy of proprietary
processes and other technologies we develop for the testing and synthesis of chemical compounds in the
drug discovery process. We currently have numerous U.S. patents and patent applications on file with the
U.S. Patent and Trademark Office as well as around the world.
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