fprx-10q_20170331.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

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

For the quarterly period ended March 31, 2017

or

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

For the transition period from                      to                      

Commission File Number: 001-36070

 

Five Prime Therapeutics, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

26-0038620

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

Two Corporate Drive

South San Francisco, California 94080

(415) 365-5600

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

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      No  

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

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

 

 

 

 

Emerging growth company

 

  

  

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

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

As of May 1, 2017, the number of outstanding shares of the registrant’s common stock was 28,785,903.

 

 

 

 

 


 

TABLE OF CONTENTS

 

PART I.

  

FINANCIAL INFORMATION

  

4

 

  

 

Item 1.

  

Financial Statements

  

4

 

  

 

  

 

Condensed Balance Sheets as of March 31, 2017 and December 31, 2016

  

4

 

  

 

  

 

Condensed Statements of Operations for the Three Months Ended March 31, 2017 and 2016

  

5

 

  

 

  

 

Condensed Statements of Comprehensive Loss for the Three Months Ended March 31, 2017 and 2016

  

6

 

  

 

  

 

Condensed Statements of Cash Flows for the Three Months Ended March 31, 2017 and 2016

  

7

 

  

 

  

 

Notes to Condensed Financial Statements

  

8

 

  

Item 2.

  

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

14

 

  

Item 3.

  

 

Quantitative and Qualitative Disclosures About Market Risk

  

23

 

  

Item 4.

  

 

Controls and Procedures

  

23

PART II.

  

 

OTHER INFORMATION

  

24

 

  

Item 1.

  

 

Legal Proceedings

  

24

 

  

Item 1A.

  

 

Risk Factors

  

24

 

  

Item 6.

  

 

Exhibits

  

48

 

  

 

  

 

Signatures

  

49

 

  

 

  

 

Exhibit Index

  

50

In this report, unless otherwise stated or the context otherwise indicates, references to “Five Prime,” “the company,” “we,” “us,” “our” and similar references refer to Five Prime Therapeutics, Inc. The Five Prime logo and RIPPS® are our registered trademarks. This report also contains registered marks, trademarks and trade names of other companies. All other trademarks, registered marks and trade names appearing in this report are the property of their respective holders.

 

 

 

2


 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA

This Quarterly Report on Form 10-Q contains forward-looking statements. In some cases you can identify these statements by forward-looking words such as “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “would,” “project,” “plan,” “expect,” or similar expressions, or the negative or plural of these words or expressions. These forward-looking statements include statements concerning the following:

 

our estimates regarding our expenses, revenues, anticipated capital requirements and our needs for additional financing;

 

our receipt of future milestone payments and/or royalties, and the timing of such payments;

 

our or our partners’ ability to timely advance drug candidates into and through clinical data readouts and successful completion of clinical trials;

 

the timing of the initiation, progress and results of preclinical studies and research and development programs;

 

our expectations regarding the potential safety, efficacy or clinical utility of our product candidates;

 

the implementation, timing and likelihood of success of our plans to develop companion diagnostics for our product candidates;

 

our ability to establish and maintain collaborations and necessary licenses;

 

the implementation of our business model and strategic plans for our business, product candidates and technology;

 

the scope of protection we establish and maintain for intellectual property rights covering our product candidates and technology;

 

the size of patient populations targeted by products we or our partners develop and market adoption of such products by physicians and patients;

 

the timing or likelihood of regulatory filings and approvals;

 

the ability to negotiate adequate reimbursement and pricing for our drug candidates by third parties and government authorities;

 

developments relating to our competitors and our industry; and

 

our expectations regarding licensing, acquisitions and strategic operations.

These statements are only current predictions and are subject to known and unknown risks, uncertainties and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from those anticipated by the forward-looking statements. We discuss many of these risks in this report in greater detail under the heading “Risk Factors” and elsewhere in this report. You should not rely upon forward-looking statements as predictions of future events.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by law, we are under no duty to update or revise any of the forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this report.

We obtained the industry, market and competitive position data in this quarterly report from our own internal estimates and research as well as from industry and general publications and research surveys and studies conducted by third parties. While we believe that each of these studies and publications is reliable, we have not independently verified market and industry data from third-party sources. While we believe our internal company research is reliable and the market definitions we use are appropriate, neither such research nor these definitions have been verified by any independent source.

 

 

 

3


 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

FIVE PRIME THERAPEUTICS, INC.

Condensed Balance Sheets

(In thousands)

 

 

March 31,

 

 

December 31,

 

 

2017

 

 

2016

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

47,184

 

 

$

7,653

 

Marketable securities

 

333,133

 

 

 

414,095

 

Receivables from collaborative partners

 

5,909

 

 

 

3,959

 

Income tax receivable

 

4,677

 

 

 

4,670

 

Prepaid and other current assets

 

8,290

 

 

 

9,748

 

Total current assets

 

399,193

 

 

 

440,125

 

Restricted Cash

 

1,543

 

 

 

1,543

 

Property and equipment, net

 

7,934

 

 

 

6,207

 

Other long-term assets

 

411

 

 

 

406

 

Total assets

$

409,081

 

 

$

448,281

 

Liabilities and stockholders' equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

807

 

 

$

334

 

Accrued personnel-related expenses

 

3,678

 

 

 

7,957

 

Other accrued liabilities

 

17,018

 

 

 

15,435

 

Deferred revenue, current portion

 

14,193

 

 

 

14,150

 

Deferred rent, current portion

 

649

 

 

 

865

 

Total current liabilities

 

36,345

 

 

 

38,741

 

Deferred revenue, long-term portion

 

14,630

 

 

 

17,856

 

Other long-term liabilities

 

1,057

 

 

 

109

 

Commitments

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

Common stock, $0.001 par value; 100,000,000 shares authorized, 28,771,794 issued and 27,897,564 outstanding at March 31, 2017. 28,550,006 issued and 27,509,077 outstanding at December 31, 2016

 

28

 

 

 

27

 

Additional paid-in capital

 

396,093

 

 

 

396,635

 

Accumulated other comprehensive loss

 

(244

)

 

 

(39

)

Accumulated deficit

 

(38,828

)

 

 

(5,048

)

Total stockholders' equity

 

357,049

 

 

 

391,575

 

Total liabilities and stockholders' equity

$

409,081

 

 

$

448,281

 

 

The accompanying notes are an integral part of these unaudited condensed financial statements.

 

 

 

4


 

FIVE PRIME THERAPEUTICS, INC.

Condensed Statements of Operations

(In thousands, except per share amounts)

 

 

Three Months Ended

 

 

March 31,

 

 

2017

 

 

2016

 

Collaboration revenue

$

10,135

 

 

$

6,520

 

Operating expenses:

 

 

 

 

 

 

 

Research and development

 

33,760

 

 

 

18,856

 

General and administrative

 

10,486

 

 

 

8,057

 

Total operating expenses

 

44,246

 

 

 

26,913

 

Loss from operations

 

(34,111

)

 

 

(20,393

)

Interest and other income, net

 

668

 

 

 

536

 

Loss before income tax

 

(33,443

)

 

 

(19,857

)

Income tax benefit

 

 

 

 

6,817

 

Net loss

$

(33,443

)

 

$

(13,040

)

Basic and diluted net loss per common share

$

(1.21

)

 

$

(0.49

)

Weighted-average shares used to compute basic and diluted net loss per common share

 

27,657

 

 

 

26,351

 

The accompanying notes are an integral part of these unaudited condensed financial statements.

 

 

 

5


 

FIVE PRIME THERAPEUTICS, INC.

Condensed Statements of Comprehensive Loss

(In thousands)

 

 

Three Months Ended

 

 

March 31,

 

 

2017

 

 

2016

 

Net loss

$

(33,443

)

 

$

(13,040

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

Net unrealized gain (loss) on marketable securities, net of tax

 

(205

)

 

 

184

 

Comprehensive loss

$

(33,648

)

 

$

(12,856

)

The accompanying notes are an integral part of these unaudited condensed financial statements.

 

 

 

6


 

FIVE PRIME THERAPEUTICS, INC.

Condensed Statements of Cash Flows

(In thousands)

 

 

Three Months Ended

 

 

March 31,

 

 

2017

 

 

2016

 

Operating activities

 

 

 

 

 

 

 

Net loss

$

(33,443

)

 

$

(13,040

)

Adjustments to reconcile net loss to net cash used in

   operating activities:

 

 

 

 

 

 

 

    Depreciation and amortization

 

515

 

 

 

375

 

    Stock-based compensation expense

 

9,887

 

 

 

7,401

 

    Excess tax benefits from employee equity incentive plans

 

 

 

 

(1,233

)

    Deferred income taxes

 

 

 

 

1,769

 

    Amortization of premium on marketable securities

 

708

 

 

 

1,119

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

    Receivables from collaborative partners

 

(1,950

)

 

 

2,294

 

    Income tax receivable

 

(7

)

 

 

(822

)

    Prepaid, other current assets, and other long-term assets

 

1,453

 

 

 

756

 

    Accounts payable

 

473

 

 

 

(874

)

    Accrued personnel-related expenses

 

(4,279

)

 

 

(3,030

)

    Deferred revenue

 

(3,183

)

 

 

(4,648

)

    Deferred rent

 

(216

)

 

 

(192

)

    Income tax payable

 

 

 

 

(22,367

)

    Other accrued liabilities and other long-term liabilities

 

2,113

 

 

 

(1,616

)

Net cash used in operating activities

 

(27,929

)

 

 

(34,108

)

Investing activities

 

 

 

 

 

 

 

Purchases of marketable securities

 

(125,701

)

 

 

(100,665

)

Maturities of marketable securities

 

205,750

 

 

 

118,250

 

Purchases of property and equipment

 

(1,824

)

 

 

(823

)

Net cash provided by investing activities

 

78,225

 

 

 

16,762

 

Financing activities

 

 

 

 

 

 

 

Proceeds from issuance of common stock under equity

   incentive plans

 

1,048

 

 

 

2,755

 

Repurchase of shares to satisfy tax withholding

 

(11,813

)

 

 

(3,602

)

Excess tax benefits from employee equity incentive plans

 

 

 

 

1,233

 

Net cash (used in) provided by financing activities

 

(10,765

)

 

 

386

 

Net increase (decrease) in cash and cash equivalents

 

39,531

 

 

 

(16,960

)

Cash and cash equivalents at beginning of period

 

7,653

 

 

 

149,971

 

Cash and cash equivalents at end of period

$

47,184

 

 

$

133,011

 

 

 

 

 

 

 

 

 

Supplemental cash flow information

 

 

 

 

 

 

 

Cash paid for income taxes

$

 

 

$

14,701

 

 

 

 

 

 

 

 

 

Supplemental schedule of noncash investing and financing activities

 

 

 

 

 

 

 

Unpaid property and equipment purchases included in accrued

   and other long-term liabilities

$

1,548

 

 

$

 

 

The accompanying notes are an integral part of these unaudited condensed financial statements.

 

 

 

7


 

FIVE PRIME THERAPEUTICS, INC.

Notes to Condensed Financial Statements

March 31, 2017

 

1.

Description of Business

Five Prime Therapeutics, Inc. (we, us, our, or the Company) is a clinical-stage biotechnology company focused on discovering and developing innovative protein therapeutics. We were incorporated in December 2001 in Delaware. Our operations are based in South San Francisco, California and we operate in one segment.

Unaudited Interim Financial Information

The accompanying financial information as of March 31, 2017 is unaudited. The Condensed Financial Statements included in this report reflect all adjustments (consisting only of normal recurring adjustments) that our management considers necessary for the fair statement of the results of operations for the interim periods covered and of the financial condition of the Company at the date of the interim balance sheet. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP, for interim financial information. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. The results for interim periods are not necessarily indicative of the results for the entire year or any other interim period. The accompanying Condensed Financial Statements and related financial information should be read in conjunction with the audited financial statements and the related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 filed with the U.S. Securities and Exchange Commission.

We have reclassified certain prior period expense amounts from general and administrative expense to research and development expense within our condensed statement of operations to conform to our current period presentation. These reclassifications did not affect total operating expense, loss from operations, or net loss reported in the three months ended March 31, 2016.

2.

Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates.

Fair Value of Financial Instruments

We determine the fair value of financial and nonfinancial assets and liabilities using the fair value hierarchy, which describes three levels of inputs that may be used to measure fair value, as follows:

Level 1—Quoted prices in active markets for identical assets or liabilities;

Level 2—Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

We determine the fair value of Level 1 assets using quoted prices in active markets for identical assets. We review trading activity and pricing for Level 2 investments as of each measurement date. Level 2 inputs, which are obtained from various third-party data providers, represent quoted prices for similar assets in active markets and were derived from observable market data, or, if not directly observable, were derived from or corroborated by other observable market data. There were no transfers between Level 1 and Level 2 securities in the periods presented.

In certain cases where there is limited activity or less transparency around inputs to valuation, we classify securities as Level 3 within the valuation hierarchy. We do not have any assets or liabilities measured using Level 3 inputs as of March 31, 2017.

8


 

The following table summarizes our financial instruments that were measured at fair value on a recurring basis by level of input within the fair value hierarchy defined above (in thousands):

 

 

March 31, 2017

 

 

 

 

 

 

Basis of Fair Value

 

 

 

 

 

 

Measurements

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

37,412

 

 

$

37,412

 

 

$

 

 

$

 

U.S. Treasury securities

 

333,133

 

 

 

333,133

 

 

 

 

 

 

 

Certificate of deposit

 

1,543

 

 

 

 

 

 

1,543

 

 

 

 

Total cash equivalents and marketable securities

$

372,088

 

 

$

370,545

 

 

$

1,543

 

 

$

 

 

 

 

December 31, 2016

 

 

 

 

 

 

Basis of Fair Value

 

 

 

 

 

 

Measurements

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

432

 

 

$

432

 

 

$

 

 

$

 

U.S. Treasury securities

 

414,095

 

 

 

414,095

 

 

 

 

 

 

 

Certificate of deposit

 

1,543

 

 

 

 

 

 

1,543

 

 

 

 

Total cash equivalents and marketable securities

$

416,070

 

 

$

414,527

 

 

$

1,543

 

 

$

 

 

Net Loss Per Share of Common Stock

We compute basic net loss per common share by dividing net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period.

We excluded the following securities from the calculation of diluted net loss per share as the effect would have been antidilutive (in thousands):

 

 

Three Months Ended

 

 

March 31,

 

 

2017

 

 

2016

 

Options to purchase common stock

 

3,711

 

 

 

2,918

 

Restricted Stock Awards (RSAs)

 

1,047

 

 

 

1,505

 

 

 

4,758

 

 

 

4,423

 

 

Accounting Pronouncements Adopted in 2017

In March 2016, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2016-09, Improvements to Employee Share-Based Payment Accounting, to simplify certain aspects of the accounting for share-based payment transactions to employees. The new standard requires excess tax benefits and tax deficiencies to be recorded in the statements of income as a component of the provision for income taxes when stock awards vest or are settled. In addition, it eliminates the requirement to reclassify cash flows related to excess tax benefits from operating activities to financing activities on the consolidated statements of cash flows. The standard also provides an accounting policy election to account for forfeitures as they occur, allowing us to withhold more of an employee’s vesting shares for tax withholding purposes without triggering liability accounting, and clarifies that all cash payments made to tax authorities on an employee’s behalf for withheld shares should be presented as a financing activity on our cash flows statement. We adopted ASU 2016-09 as of January 1, 2017. Starting in the first quarter of 2017, excess tax benefits or deficiencies from share-based award activity are reflected in the consolidated statements of income as a component of the provision for income taxes, whereas they previously were recognized in equity. Prior periods have not been adjusted. In addition, we adopted the aspects of the standard affecting the cash flow presentation prospectively. The cash flow related to excess tax benefits will be included within the operating activities. The presentation requirements for cash flows related to employee taxes paid for withheld shares has no impact on our consolidated statements of cash flows since such cash flows have historically been presented as a financing activity. Finally, we elected to account for forfeitures as they occur, rather than estimate expected forfeitures, on a modified retrospective basis. Our adoption of ASU 2016-09 resulted in a $337,000 decrease to retained earnings as of January 1, 2017 to record the additional stock

9


 

compensation expense due to the elimination of the estimated forfeiture rate and a $3.1 million increase to deferred tax assets which is fully offset by a valuation allowance because we determined that it is more likely than not that the deferred tax asset will not be fully realized.

Accounting Pronouncements Not Yet Adopted

In May 2014, FASB issued ASU 2014-09, Revenue from Contracts with Customers: Topic 606, to supersede nearly all existing revenue recognition guidance under GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than are required under existing GAAP, including identifying performance obligations in a contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 will become effective for us in our first quarter of fiscal 2018 using either of two methods: (i) retrospective application of ASU 2014-09 to each prior reporting period presented with the option to elect certain practical expedients as defined within ASU 2014-09; or (ii) modified retrospective application of ASU 2014-09 with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application and providing certain additional disclosures as defined per ASU 2014-09. In March, April, May and December 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations, ASU 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing, ASU 2016-12, Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients to provide supplemental adoption guidance and clarification to ASU 2014-09 and ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. respectively. The effective date for these new standards is the same as the effective date and transition requirements for ASU 2014-09. We expect to adopt ASU 2014-09 in the first quarter of 2018 using the modified retrospective method.

Our adoption of ASU 2014-09 may have a material effect on our financial statements. To date, we have derived our revenues from license and collaboration agreements. The consideration we are eligible to receive under these agreements includes upfront payments, research and development funding, milestone payments and royalties. Each license and collaboration agreement is unique and will need to be assessed separately under the five-step process set forth in under the new standard. We have started our preliminary assessment of our active license and collaboration agreements. We expect that our evaluation of the accounting for license and collaboration agreements under the new revenue standard could identify material changes from the current accounting treatment. ASU 2014-09 differs from the current accounting standard in many respects, such as in the accounting for variable consideration, including milestone payments. Under our current accounting policy, we recognize milestone revenue using the milestone method specified in ASC 605-28, which generally results in the recognition of the milestone payment as revenue in the period that the milestone is achieved. However, under the new accounting standard, it is possible to start to recognize milestone revenue before the milestone is achieved, subject to management’s assessment of whether it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. In addition, the current accounting standards include a presumption that revenue from up-front non-refundable fees would be recognized ratably over the performance period, unless another attribution method was determined to more closely approximate the delivery of the goods or services to the customer. The new accounting standard does not have a presumption that entities would default to a ratable attribution approach and will require entities to determine an appropriate attribution method using either output or input methods. As such, the amount and timing of revenue recognition for our license and collaboration agreements may change under the new revenue standard.

In February 2016, FASB issued ASU 2016-02, Leases. ASU 2016-02, which amends existing guidance to require substantially all leases be recognized by lessees on their balance sheet as a right-of-use asset and corresponding lease liability, including leases currently accounted for as operating leases. ASU 2016-02 will become effective for our interim and annual reporting periods during the year ending December 31, 2019 and will apply to all annual and interim reporting periods thereafter. Early adoption is permitted. Under the new standard, we expect to record a right-to-use lease asset and a lease liability on our balance sheet. Under the new standard, we expect to recognize expense on our statement of operations in a manner similar to the current accounting standard.

 

10


 

3.

Cash Equivalents and Marketable Securities

The following is a summary of our cash equivalents and marketable securities (in thousands):

 

 

March 31, 2017

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Estimated

 

 

Cost Basis

 

 

Gains

 

 

Losses

 

 

Fair Value

 

Money market funds

$

37,412

 

 

$

 

 

$

 

 

$

37,412

 

U.S. Treasury securities

 

333,378

 

 

 

 

 

 

(245

)

 

 

333,133

 

 

 

370,790

 

 

 

 

 

 

(245

)

 

 

370,545

 

Less: cash equivalents

 

(37,412

)

 

 

 

 

 

 

 

 

(37,412

)

Total marketable securities

$

333,378

 

 

$

 

 

$

(245

)

 

$

333,133

 

 

 

 

December 31, 2016

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Estimated

 

 

Cost Basis

 

 

Gains

 

 

Losses

 

 

Fair Value

 

Money market funds

$

432

 

 

$

 

 

$

 

 

$

432

 

U.S. Treasury securities

 

414,134

 

 

 

54

 

 

 

(93

)

 

 

414,095

 

 

 

414,566

 

 

 

54

 

 

 

(93

)

 

 

414,527

 

Less: cash equivalents

 

(432

)

 

 

 

 

 

 

 

 

(432

)

Total marketable securities

$

414,134

 

 

$

54

 

 

$

(93

)

 

$

414,095

 

 

As of March 31, 2017, the amortized cost and estimated fair value of our available-for-sale securities by contractual maturity are shown below (in thousands):

 

 

Amortized

 

 

Estimated

 

 

Cost

 

 

Fair Value

 

Debt securities maturing:

 

 

 

 

 

 

 

In one year or less

$

317,381

 

 

$

317,152

 

In one to two years

 

15,997

 

 

 

15,981

 

Total marketable securities

$

333,378

 

 

$

333,133

 

 

We determined that the gross unrealized losses on our marketable securities as of March 31, 2017 were temporary in nature.  We currently do not intend to sell these securities prior to maturity and do not consider these investments to be other-than-temporarily impaired at March 31, 2017. There were no sales of available-for-sale securities in any of the periods presented.

4.

Equity Incentive Plans

The following table summarizes option activity under our equity incentive plans and related information:

 

 

Options Outstanding

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

Weighted

 

 

Average

 

 

 

 

 

 

Average

 

 

Remaining

 

 

Number of

 

 

Exercise Price

 

 

Contractual

 

 

Shares

 

 

Per Share

 

 

Term (years)

 

Balance at December 31, 2016

 

3,454,339

 

 

$

26.80

 

 

 

 

 

Options granted

 

532,550

 

 

$

45.17

 

 

 

 

 

Options exercised

 

(83,343

)

 

$

12.56

 

 

 

 

 

Options forfeited

 

(37,221

)

 

$

42.57

 

 

 

 

 

Options expired

 

(56

)

 

$

43.71

 

 

 

 

 

Balance at March 31, 2017

 

3,866,269

 

 

$

29.49

 

 

 

 

 

Options exercisable

 

1,415,416

 

 

$

15.76

 

 

 

6.70

 

11


 

 

We have granted RSAs to certain of our employees, some of which are subject to performance conditions. RSAs are share awards that entitle the holder to receive freely tradable shares of our common stock upon vesting and are not forfeitable once fully vested. We based the fair value of RSAs on the closing sale price of our common stock on the grant date. For awards subject to performance conditions, we recognize stock-based compensation expense using the accelerated attribution recognition method when it is probable that the performance condition will be achieved.

The following table summarizes RSA activity under our 2013 Omnibus Incentive Plan and related information:

 

RSAs Outstanding

 

 

 

 

 

Weighted-Average

 

 

Number

 

Grant-Date

 

 

of Shares

 

Fair Value

 

Unvested balance at December 31, 2016

 

1,040,929

 

$

28.84

 

RSAs granted

 

410,955

 

$

45.23

 

RSAs vested

 

(567,154

)

$

19.25

 

RSAs forfeited

 

(10,500

)

$

44.83

 

Unvested balance at March 31, 2017

 

874,230

 

$

42.57

 

 

 

 

 

 

 

 

As of March 31, 2017, there were 1,586,938 shares of common stock available for future issuance under our 2013 Omnibus Incentive Plan.

Stock-Based Compensation

Total stock-based compensation expense recognized was as follows (in thousands):

 

 

Three Months Ended

 

 

March 31,

 

 

2017

 

 

2016

 

Research and development

$

5,286

 

 

$

4,275

 

General and administrative

 

4,601

 

 

 

3,126

 

Total

$

9,887

 

 

$

7,401

 

 

We estimated the fair value of stock options using the Black-Scholes option-pricing model based on the date of grant of such stock option with the following assumptions:

 

 

Three Months Ended

 

March 31,

 

2017

 

2016

Expected term (years)

6.0-6.3

 

6.3

Expected volatility

68%

 

74%

Risk-free interest rate

2.1%

 

1.5%

Expected dividend yield

0%

 

0%

12


 

 

As of March 31, 2017, we had $53.6 million of total unrecognized compensation expense related to unvested employee and director stock options that we expect to recognize over a weighted-average period of 2.9 years.  Additionally, we had $30.5 million of total unrecognized compensation expense related to employee and director RSAs that we expect to recognize over a weighted-average period of 2.4 years.

5.

Income Taxes

We recorded no income tax benefit for the three months ended March 31, 2017. We realized an income tax benefit of $6.8 million for the three months ended March 31, 2016.  This income tax benefit represented our ability to recover taxes accrued in 2015 based on existing tax law that allows us to carryback our 2016 tax losses and/or credits to recover prior taxes.  The income tax benefit was based on the annual effective tax rate method and considered our forecasted 2016 pre-tax losses reduced by non-deductible stock based compensation expenses and other immaterial non-deductible permanent items. In addition, as a result of the forecasted loss, the income tax benefit was decreased by a valuation allowance recorded against certain deferred tax assets due to the uncertainty surrounding the realization of such assets in the future.  

After the carryback of our full year 2016 net operating losses to 2015, we maximized our ability to obtain a refund of prior income taxes paid. 

 

13


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following management’s discussion and analysis of our financial condition and results of operations in conjunction with our unaudited condensed financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our audited financial statements and related notes thereto for the year ended December 31, 2016, included in our Annual Report on Form 10-K, as filed with the U.S. Securities and Exchange Commission, or the SEC, on February 24, 2017.

Overview

We are a clinical-stage biotechnology company focused on discovering and developing innovative protein therapeutics to improve the lives of patients with serious diseases. We currently have three clinical-stage product candidates covering multiple potential indications. Each of our product candidates has an innovative mechanism of action and addresses patient populations for which better therapies are still needed. We have an emphasis in immuno-oncology, an area in which we have clinical and discovery programs and product and discovery collaborations. In addition, we plan to use companion diagnostics where appropriate to allow us to select patients most likely to benefit from treatment. Our most advanced product candidates are identified below.

 

Cabiralizumab (FPA008) is an antibody that inhibits colony stimulating factor-1, or CSF1, receptor, or CSF1R, that we are studying in clinical trials as a monotherapy in pigmented villonodular synovitis, or PVNS, and in multiple cancers in combination with Bristol-Myers Squibb Company’s PD-1 immune checkpoint inhibitor, Opdivo® (nivolumab). In October 2015, we entered into a license and collaboration agreement, or the cabiralizumab collaboration agreement, with Bristol-Myers Squibb Company, or BMS, pursuant to which we granted BMS an exclusive worldwide license for the development and commercialization of cabiralizumab.

 

FPA144 is an antibody that inhibits fibroblast growth factor receptor 2b, or FGFR2b, that we are initially developing to treat patients with gastric (stomach) cancer and is in a Phase 1 clinical trial.

 

FP-1039 is a fusion protein that “traps” and neutralizes cancer-promoting fibroblast growth factors, or FGFs, involved in cancer cell proliferation and new blood vessel formation that is in Phase 1b clinical development to treat patients with malignant pleural mesothelioma.

We have a differentiated target discovery platform and library of more than 5,700 human transmembrane and extracellular soluble proteins that we believe encompasses substantially all of the body’s medically important targets for protein therapeutics. We have identified approximately 700 of these proteins, which we refer to as the immunome, that we believe modulate immune cell interactions and may be important in understanding and treating cancer patients using immuno-oncology therapeutics. Our target discovery platform and capabilities uniquely position us to explore pathways in cancer and inflammation and their intersection in immuno-oncology, an area of oncology with significant therapeutic potential and the focus of our research activities. We are applying all aspects of our biologics discovery platform, including cell-based screening, immunome-by-immunome screening, in vivo screening, receptor-ligand matching technologies and bioinformatics, in our immuno-oncology research program. We have identified several targets that we believe could be useful in immuno-oncology that we are actively validating, and we are also looking for additional targets. We generate and preclinically test therapeutic proteins, including antibodies and ligand traps containing or directed to the targets we identify. We plan to advance selected therapeutic candidates into clinical development, with a goal of filing at least one Investigational New Drug, or IND, application for a new molecule each year beginning in 2017.

We have no products approved for commercial sale and have not generated any revenue from product sales to date. We continue to incur significant research and development and other expenses related to our ongoing operations and we expect that our expenses will increase as we advance our product candidates into later stages of clinical development and increase the number of product candidates in clinical development. We have incurred losses in each period since our inception in 2002, with the exception of the fiscal year ended December 31, 2015, due primarily to the $350.0 million upfront payment we received from BMS from our cabiralizumab collaboration agreement, and the fiscal year ended December 31, 2011, due primarily to the $50.0 million upfront payment we received from GlaxoSmithKline, or GSK, from our license and collaboration agreement for FP-1039. For the three months ended March 31, 2017 and 2016, we reported a net loss of $33.4 million and $13.0 million, respectively.

Our management’s discussion and analysis of our financial condition and results of operations are based upon our unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q, which we prepared in accordance with GAAP for interim periods and with Regulation S-X promulgated under the Securities and Exchange Act of 1934, as amended, or the Exchange Act.

14


 

First Quarter 2017 and Other Recent Highlights

Cabiralizumab

In April 2017, we completed enrollment in the initially-planned 30-patient cohort of the Phase 2 portion of our clinical trial evaluating cabiralizumab as a monotherapy to potentially treat patients with PVNS.

Clinical Pipeline

The following table shows the stage of development of our most advanced product candidates:

Cabiralizumab (FPA008)

Cabiralizumab in Immuno-Oncology

We are conducting a Phase 1a/1b clinical trial with BMS to evaluate the safety, tolerability and preliminary efficacy of combining cabiralizumab with Opdivo as a potential treatment for a variety of cancers. We currently expect to enroll approximately 280 patients in the overall trial. In October 2016, we initiated the Phase 1b portion of the trial to evaluate the safety, tolerability and preliminary efficacy of the selected dose of cabiralizumab in combination with Opdivo in the following tumor settings:

 

non-small cell lung cancer, or NSCLC (anti PD-1 therapy naïve);

 

anti PD-1 therapy resistant NSCLC (either de novo or acquired resistance);

 

squamous cell carcinoma of the head and neck;

 

pancreatic cancer;

 

renal cancer;

 

ovarian cancer; and

 

glioblastoma multiforme, or GBM.

We expect to complete enrollment in the Phase 1b portion of the trial in the second half of 2017.

15


 

We continue to enroll patients in the expansion of the Phase 1a portion of the trial to enable us to study the highest dose of cabiralizumab as monotherapy and as combination therapy with Opdivo in patients with certain tumor types beyond those addressed in the Phase 1b cohorts, including in patients whose tumors are refractory to PD-1 checkpoint inhibitors. We are conducting these additional Phase 1a activities in parallel with our conduct of the Phase 1b portion of the trial.  

Cabiralizumab in PVNS

We are conducting a Phase 2 clinical trial of cabiralizumab as a potential treatment for diffuse PVNS. During the Phase 2 expansion portion of the trial, we are evaluating tumor response rate and duration and measures of pain and joint function in PVNS patients. We completed patient enrollment in the Phase 2 portion of the trial in April 2017. We plan to seek guidance from regulatory authorities to advance cabiralizumab to a pivotal trial in diffuse PVNS patients in 2018.

FPA144

We are conducting a Phase 1 clinical trial of FPA144 as a treatment for gastric cancer patients. We are currently enrolling patients in the expansion portion of the trial in which we are evaluating the safety, pharmacokinetics, or PK, and efficacy of FPA144 in metastatic gastric cancer patients, with the aim of exploring the correlation between efficacy and FGFR2b overexpression. We are conducting tumor testing for FGFR2b overexpression centrally using an immunohistochemistry, or IHC, assay to identify gastric cancer patients that have tumors that overexpress FGFR2b protein.  

We also have opened for enrollment a cohort in this Phase 1 clinical trial to test FPA144 as a treatment for bladder cancer patients whose tumors overexpress the FGFR2b protein.

Because the observed incidence of gastric cancer is higher in Asian populations than in other populations, we plan to initiate a Phase 1 clinical trial in Japan in the third quarter of 2017.

During 2017, we plan to seek guidance from regulatory authorities on our plans to advance FPA144 in combination with standard of care chemotherapy to a pivotal trial in front-line gastric cancer patients whose tumors overexpress FGFR2b. We also plan to continue evaluating whether FPA144 may have use as a treatment for other types of cancer.

In conjunction with developing FPA144 as a therapeutic for gastric cancer, we are developing an IHC assay in collaboration with a diagnostic development company to use as a companion diagnostic to identify gastric cancer patients whose tumors overexpress FGFR2b. We plan to develop the companion diagnostic in parallel with our clinical development of FPA144 and to pursue regulatory approval of the companion diagnostic concurrently with regulatory approval of FPA144. In addition, we are investigating whether FGFR2b overexpression due to FGFR2 gene amplification can be detected in circulating tumor DNA, which is DNA shed from tumors that circulates in blood plasma outside of cells, to determine whether we can consider developing a blood-based (liquid biopsy) assay as a companion diagnostic to identify gastric cancer patients whose tumors overexpress FGFR2b.

FP-1039

In March 2011, we licensed to Human Genome Sciences, Inc., or HGS, rights to develop and commercialize FP-1039 in the United States, the European Union and Canada. In August 2012, GSK acquired HGS and HGS is now a wholly owned subsidiary of GSK. HGS/GSK terminated its license to FP-1039 for convenience effective September 5, 2016.

Prior to GSK’s termination of the FP-1039 license, GSK had initiated a Phase 1b clinical trial of FP-1039 to evaluate the safety, tolerability, dosage, response rate and duration of response of FP-1039 in combination with front-line pemetrexed and cisplatin in malignant pleural mesothelioma, or MPM, patients. In June 2016, GSK completed enrollment of MPM patients at an expansion dose of 15 mg/kg in the Phase 1b clinical trial and GSK is currently dosing and following patients that remain on the study. Pursuant to the terms of the FP-1039 license, we elected to have GSK complete the conduct of the Phase 1b clinical trial of FP-1039 that GSK is currently conducting, at GSK’s expense.  

Together with GSK, we plan to present updated response rate, duration of response and progression-free survival data from the Phase 1b clinical trial at a scientific or medical conference in the second half of 2017.

We will make decisions regarding any future development of FP-1039 in mesothelioma based on overall safety as well as the quantity and durability of responses in the ongoing Phase 1b clinical trial and other business considerations, such as drug supply and manufacturing.

 

16


 

Preclinical Programs

We are currently conducting IND-enabling activities in each of our FPA150, FPA154 and FPT155 programs. We plan to file INDs for each of FPA150 and FPA154 in the fourth quarter of 2017 and for FPT155 in 2018.

Immuno-Oncology Drug Discovery

We are currently focusing our internal research efforts in the area of immuno-oncology. Cancers grow and spread because tumor cells have developed ways to evade elimination by the immune system. For example, cancer cells make proteins that apply the “brakes” to immune cells and prevent the immune cells from killing the tumor cells. One of the most exciting recent discoveries in cancer therapy has been the identification of ways to release these “brakes” and allow the immune cells to once again kill tumor cells. This new approach has the potential to not only reduce tumor growth like traditional therapies, but potentially to eliminate the cancer entirely in some patients. In addition to releasing the “brakes” on immune cells, other recent discoveries in cancer therapy have focused on identifying ways to “press on the gas” to amplify the anti-tumor immune response. This second approach targets stimulatory pathways on immune cells. Agents that agonize stimulatory pathways can help immune cells overcome inhibitory signals in the tumor microenvironment, resulting in killing of tumor cells.

While checkpoint inhibitor therapies have been validated in the clinic with agents targeting the PD-1/PD-L1 and CTLA-4 pathways to release the “brakes,” a significant proportion of patients do not respond to these treatments. New targets for immuno-oncology are needed to address those patients who do not respond to or cannot tolerate traditional therapies or agents currently in development. We are applying all aspects of our biologics discovery platform to identify protein partners for molecules known to be involved in the anti-tumor immune response.  We believe we have identified promising new antibody targets and ligand traps and are actively screening for and validating additional targets.

Financial Overview

Collaboration and License Revenue

We have not generated any revenue from product sales. We have derived our revenue to date from upfront payments, research and development funding and milestone payments under collaboration and license agreements with our collaboration partners and licensees. We currently have an active immuno-oncology research collaboration and cabiralizumab license and collaboration agreement with BMS.  We completed the research term of our research collaboration in respiratory diseases with GSK and our fibrosis and CNS research collaboration with UCB Pharma S.A., or UCB, in July 2016 and March 2016, respectively.

Summary Revenue by Collaboration and License Agreements

The following is a comparison of collaboration and license revenue for the three months ended March 31, 2017 and 2016:

 

 

Three Months Ended

 

 

March 31,

 

(in millions)

2017

 

 

2016

 

R&D Funding

 

 

 

 

 

 

 

Cabiralizumab Collaboration - BMS

$

5.7

 

 

$

1.1

 

Immuno-oncology Research Collaboration - BMS

 

0.8

 

 

 

0.6

 

Respiratory Diseases Collaboration - GSK

 

 

 

 

0.9

 

Fibrosis and CNS Collaboration - UCB

 

 

 

 

0.1

 

Ratable Revenue Recognition

 

 

 

 

 

 

 

Cabiralizumab Collaboration - BMS

 

1.5

 

 

 

1.4

 

Immuno-oncology Research Collaboration - BMS

 

1.1

 

 

 

1.1

 

Respiratory Diseases Collaboration - GSK

 

 

 

 

0.3

 

Fibrosis and CNS Collaboration - UCB

 

0.8

 

 

 

0.8

 

Milestone and Contingent Payments

 

 

 

 

 

 

 

Fibrosis and CNS Collaboration - UCB

 

0.2

 

 

 

0.2

 

Total

$

10.1

 

 

$

6.5

 

 

We expect that any revenue we generate will fluctuate from period to period as a result of the timing and amount of milestones and other payments from our existing collaborations and licenses or entry into any new collaborations and licenses.

17


 

Research and Development

Research and development expenses consist of costs we incur for our own and for sponsored and collaborative research and development activities. Expenses we incur related to collaborative research and development agreements approximate the revenue we recognize under these agreements. We expense research and development costs as we incur them. Research and development costs consist of salaries and benefits, including associated stock-based compensation, laboratory supplies and facility costs, as well as fees we pay to other entities that conduct certain research and development activities on our behalf. We estimate preclinical study and clinical trial expenses based on the services performed pursuant to contracts with research institutions and contract research organizations, or CROs, and clinical manufacturing organizations, or CMOs, that conduct and manage preclinical studies and clinical trials on our behalf based on actual time and expenses incurred by them. Further, we accrue expenses related to clinical trials based on the level of patient enrollment and activity contemplated by the applicable agreement. We monitor patient enrollment levels and related activity to the extent reasonably possible and adjust estimates accordingly. If we do not identify costs that we have begun to incur or if we underestimate or overestimate the level of services performed or the costs of these services, our actual expenses could differ from our estimates. To date, we have not experienced significant changes in our estimates of preclinical studies and clinical trial accruals.

We expense payments for the acquisition and development of technology as research and development costs if, at the time of payment, the technology: is under development; is not approved by the U.S. Food and Drug Administration or other regulatory agencies for marketing; has not reached technical feasibility; or otherwise has no foreseeable alternative future use.

The following is a comparison of research and development expenses for the three months ended March 31, 2017 and 2016:

 

 

 

Three Months Ended

 

 

March 31,

 

(in millions)

2017

 

 

2016

 

Development programs:

 

 

 

 

 

 

 

Cabiralizumab

$

10.1

 

 

$

3.5

 

FPA144

 

7.4

 

 

 

3.5

 

FP-1039

 

0.1

 

 

 

 

Subtotal development programs

 

17.6

 

 

 

7.0

 

Preclinical programs

 

7.4

 

 

 

2.3

 

Discovery collaborations

 

1.4

 

 

 

4.0

 

Early research and discovery

 

7.4

 

 

 

5.6

 

Total research and development expenses

$

33.8

 

 

$

18.9

 

 

We expect that most of the research and development expenses we incur will continue to relate to activities to support our cabiralizumab and FPA144 development programs and our immuno-oncology preclinical, research and discovery efforts. We expect our research and development expenses to increase as we advance our development programs further and advance additional drug candidates into preclinical and clinical development, in particular as we increase the number and size of our clinical trials and as we expand our internal immuno-oncology preclinical, research and discovery efforts. We expect that our cabiralizumab and FPA144 development-related expenses will increase at a faster rate than our other internal program research and development expenses as we advance cabiralizumab through the Phase 2 clinical trial in PVNS and the Phase 1a/1b clinical trial in multiple cancers and prepare for a pivotal trial of cabiralizumab in PVNS, and as we advance FPA144 in the ongoing Phase 1 trial, initiate our Phase 1 clinical trial in gastric cancer patients in Japan and prepare for a pivotal trial to evaluate FPA144 in combination with standard of care chemotherapy as a potential treatment for front-line gastric cancer patients whose tumors overexpress FGFR2b. We expect our preclinical program expenses to continue to increase as we initiate additional therapeutic molecule campaigns and advance our preclinical programs toward and into IND-enabling studies.

The process of conducting preclinical studies and clinical trials necessary to obtain regulatory approval is costly and time-consuming. We or our partners may never succeed in achieving marketing approval for any of our drug candidates. Numerous factors may affect the probability of success for each drug candidate, including preclinical data, clinical data, competition, manufacturing capability and commercial viability.

18


 

The successful development of our drug candidates is highly uncertain and may not result in approved products. Completion dates and completion costs can vary significantly for each drug candidate and are difficult to predict for each product. Given the uncertainty associated with clinical trial enrollments and the risks inherent in the development process, we are unable to determine the duration and completion costs of the current or future clinical trials of our drug candidates or if, or to what extent, we will generate revenues from the commercialization and sale of any of our drug candidates. We anticipate we will make determinations as to which programs to pursue and how much funding to direct to each program on an ongoing basis in response to the outcome of research, nonclinical and clinical activities of each drug candidate, as well as ongoing assessments as to each drug candidate’s commercial potential. We will need to raise additional capital or may seek additional product collaborations in the future to complete the development and commercialization of our drug candidates.

General and Administrative

General and administrative expenses consist primarily of salaries and related benefits, including stock-based compensation, related to our executive, finance, legal, business development, human resource and support functions. Other general and administrative expenses include allocated facility-related costs not otherwise included in research and development expenses, travel expenses and professional fees for auditing, tax and legal services, including intellectual property-related legal services.

We expect our general and administrative expenses to increase due to expanded operations to support our increased research and development activities, increased stock-based compensation, and increased facility costs as a result of relocating to a larger facility. Also, we expect our intellectual property-related legal expenses, including those related to preparing, filing and prosecuting patent applications and maintaining patents, to increase as our intellectual property portfolio expands.

Interest Income

Interest income consists of interest income earned on our cash and cash equivalents and marketable securities.

Critical Accounting Policies and Estimates

We based our management’s discussion and analysis of financial condition and results of operations upon our unaudited condensed financial statements, which we prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We evaluate our critical accounting policies and estimates on an on-going basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions. Our significant accounting policies are more fully described in Note 2 of the accompanying unaudited condensed financial statements and in Note 1 to our audited financial statements contained in our Annual Report on Form 10-K, or our Annual Report, as filed with the SEC on February 24, 2017. There have been no significant or material changes in our critical accounting policies during the three months ended March 31, 2017 as compared to those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Use of Estimates” in our Annual Report.

Results of Operations

Comparison for the Three Months Ended March 31, 2017 and 2016

 

 

Three Months Ended

 

 

March 31,

 

(in millions)

2017

 

 

2016

 

Collaboration and license revenue

$

10.1

 

 

$

6.5

 

Operating expenses:

 

 

 

 

 

 

 

Research and development

 

33.8

 

 

 

18.9

 

General and administrative

 

10.5

 

 

 

8.0

 

Total operating expenses

 

44.3

 

 

 

26.9

 

Interest and other income, net

 

0.7

 

 

 

0.5

 

Loss before income tax

 

(33.4

)

 

 

(19.9

)

Income tax benefit

 

 

 

 

6.8

 

Net loss

$

(33.4

)

 

$

(13.0

)

 

19


 

Collaboration and License Revenue

Collaboration and license revenue increased by $3.6 million, or 55.4%, to $10.1 million for the three months ended March 31, 2017 from $6.5 million for the three months ended March 31, 2016. This increase was primarily due to an increase of $4.7 million of revenue from our cabiralizumab collaboration agreement with BMS that we entered into in October 2015, which was offset by a decrease of $1.2 million of revenue recognized under the respiratory diseases collaboration with GSK, the research term of which ended in July 2016.  

Research and Development

Our research and development expenses increased by $14.9 million, or 78.8%, to $33.8 million for the three months ended March 31, 2017 from $18.9 million for the three months ended March 31, 2016. This increase was primarily due to an increase of $6.6 million to advance cabiralizumab in our Phase 2 clinical trial in PVNS and our Phase 1a/1b clinical trial in immuno-oncology, a $5.1 million increase to further advance our preclinical programs and a $3.9 million increase to advance our FPA144 Phase 1 clinical trial.

General and Administrative

Our general and administrative expenses increased by $2.5 million, or 31.3%, to $10.5 million for the three months ended March 31, 2017 from $8.0 million for the three months ended March 31, 2016, primarily due to a $2.2 million increase in payroll and stock-based compensation costs.

Income Tax Benefit

After the carryback of our full year 2016 net operating losses to 2015, we maximized our ability to obtain a refund of prior income taxes paid. Accordingly, we did not record an income tax benefit for the three months ended March 31, 2017. We realized an income tax benefit of $6.8 million for the three months ended March 31, 2016. The income tax benefit represented our ability to recover taxes accrued in 2015 based on existing tax law that allowed us to carry back our 2016 tax losses and/or credits to recover prior taxes.  The income tax benefit is based on the annual effective tax rate method and considers our forecasted 2016 pre-tax losses reduced by non-deductible stock-based compensation expenses and other immaterial non-deductible permanent items. In addition, as a result of the forecasted loss, the income tax benefit was decreased by a valuation allowance recorded against certain deferred tax assets due to the uncertainty surrounding the realization of such assets in the future.  

Liquidity and Capital Resources

As of March 31, 2017, we had $380.3 million in cash and cash equivalents and marketable securities invested in a U.S. Treasury money market fund and U.S. Treasury securities with maturities of 13 months or less.

In addition to our existing cash and cash equivalents, we are eligible to receive research and development funding and to earn milestone and other contingent payments for the achievement of defined collaboration objectives and certain nonclinical, clinical, regulatory and sales-based events and royalty payments under our collaboration and license agreements. Our ability to earn these milestone and contingent payments and the timing of achieving these milestones is primarily dependent upon the outcome of our collaborators’ and licensees’ research and development activities and remain uncertain. Our rights to payment under our collaboration and license agreements are our only committed external sources of funds.

Funding Requirements

Our primary uses of capital are, and we expect will continue to be, compensation and related expenses, third party clinical and preclinical research and development services, including clinical trial, manufacturing, laboratory and related supplies, legal, patent and other regulatory expenses and general overhead costs. We believe our use of CROs and contract manufacturers provides us with flexibility in managing our spending and limits our cost commitments at any point in time.

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Because our product candidates are in various stages of clinical and preclinical development and the outcome of these efforts is uncertain, we cannot estimate the actual amounts necessary to successfully complete the development and commercialization of our product candidates or whether or when we may achieve profitability. Until such time, if ever, that we can generate substantial product revenues, we expect to finance our cash needs through collaboration arrangements and, if necessary, equity or debt financings. Except for any obligations of our collaborators to reimburse us for research and development expenses or to make milestone or royalty payments under our agreements with them, we will not have any committed external sources of liquidity. To the extent that we raise additional capital through the future sale of equity or debt, the ownership interests of our stockholders will be diluted and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our existing stockholders. If we raise additional funds through collaboration arrangements in the future, we may have to relinquish valuable rights to our technologies, future revenue streams or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

Based on our research and development plans and our timing expectations related to the progress of our programs, we expect that our existing cash and cash equivalents and marketable securities as of March 31, 2017 will be sufficient to fund our operating expenses and capital expenditure requirements for at least the next 12 months.

Cash Flows

The following is a summary of cash flows for the three months ended March 31, 2017 and 2016:

 

 

Three Months Ended

 

 

March 31,

 

(in millions)

2017

 

 

2016

 

Net cash used in operating activities

$

(27.9

)

 

$

(34.1

)

Net cash provided by investing activities

 

78.2

 

 

 

16.8

 

Net cash (used in) provided by financing activities

 

(10.8

)

 

 

0.4

 

Net Cash Used in Operating Activities

Net cash used in operating activities was $27.9 million during the three months ended March 31, 2017 and consisted of our net loss of $33.4 million, which was offset by $11.1 million in net non-cash charges, and $5.6 million from changes in operating assets and liabilities.  Net non-cash charges included $0.5 million of depreciation and amortization expenses, $9.9 million for stock-based compensation expense and $0.7 million for amortization of premium on marketable securities.  

Net cash used in operating activities was $34.1 million during the three months ended March 31, 2016 and consisted of our net loss of $13.0 million, which was offset by $9.4 million in net non-cash charges, and $30.5 million from changes in operating assets and liabilities.  Net non-cash charges included $0.4 million of depreciation and amortization expenses, $7.4 million for stock-based compensation expense, and $1.1 million for amortization of premium on marketable securities.  The decrease in operating assets and liabilities was primarily due to a $22.4 million reduction in income tax payable which resulted primarily from a $14.7 million income tax payment during the quarter and the $6.8 million tax benefit from the carryback of the first quarter of 2016 net operating loss.

Net Cash Provided by Investing Activities

Net cash provided by investing activities was $78.2 million and $16.8 million during the three months ended March 31, 2017 and 2016, respectively.  Net cash provided by investing activities for the periods presented primarily relates to the purchases and maturities of marketable securities. Payments for the purchases of property and equipment were $1.8 million and $0.8 million during the three months ended March 31, 2017 and 2016, respectively. The property and equipment purchases consisted primarily of purchases of laboratory equipment to support our research and development activities.

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Net Cash (Used in) Provided by Financing Activities

Net cash used in financing activities was $10.8 million during the three months ended March 31, 2017, primarily related to $11.8 million paid to satisfy tax withholding obligations from the net share issuance of restricted stock awards offset by $1.0 million received from employee stock option exercises.

Net cash provided by financing activities was $0.4 million during the three months ended March 31, 2016, primarily related to $2.8 million received from employee stock option exercises and $1.2 million from excess tax benefits from employee equity incentive plans offset by $3.6 million paid to satisfy tax withholding obligations from the net share issuance of restricted stock awards.

Contractual Obligations and Contingent Liabilities

During the three months ended March 31, 2017, there were no material changes to our contractual obligations and commitments described under Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report.    

Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under SEC rules.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

The market risk inherent in our financial instruments and in our financial position reflects the potential losses arising from adverse changes in interest rates and concentration of credit risk. As of March 31, 2017, we had cash and cash equivalents and marketable securities of $380.3 million, consisting of bank deposits, interest-bearing money market accounts and U.S. Treasury securities. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates. Our cash equivalents and marketable securities have an average maturity of approximately five months and the longest maturity is thirteen months.  Due to the short-term maturities of our cash equivalents and marketable securities and the low risk profile of our marketable securities, an immediate 100 basis point change in interest rates would not have a material effect on the fair market value of our cash equivalents and marketable securities. We can hold our marketable securities until maturity, and we therefore do not expect a change in market interest rates to affect our operating results or cash flows to any significant degree.

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures. Management, including our President and Chief Executive Officer and Senior Vice President and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), as of the end of the period covered by this report. Based upon the evaluation, our President and Chief Executive Officer and Senior Vice President and Chief Financial Officer concluded that the disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is (i) recorded, processed, summarized and reported as and when required and (ii) accumulated and communicated to our management, including our President and Chief Executive Officer and Senior Vice President and Chief Financial Officer, as appropriate to allow timely discussion regarding required disclosure.

Changes in internal control over financial reporting. There have been no significant changes in our internal control over financial reporting during our most recent fiscal quarter that materially affected or are reasonably likely to materially affect our internal control over financial reporting.

 

 

 

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are not currently subject to any material legal proceedings.

Item 1A. Risk Factors

This Quarterly Report on Form 10-Q contains forward-looking information based on our current expectations. Because our business is subject to many risks and our actual results may differ materially from any forward-looking statements made by or on behalf of us, this section includes a discussion of important factors that could affect our business, operating results, financial condition and the trading price of our common stock. You should carefully consider these risk factors, together with all of the other information included in this Quarterly Report on Form 10-Q as well as our other publicly available filings with the SEC.

Risks Related to Our Financial Position and Capital Needs

We expect to incur net losses for the foreseeable future.

We are a clinical-stage biotechnology company with a limited operating history. Investment in biopharmaceutical product development is highly speculative because it entails substantial upfront capital expenditures and significant risk that any potential product candidate will fail to demonstrate adequate effect or an acceptable safety profile, gain regulatory approval and become commercially viable. We have no products approved for commercial sale and have not generated any revenue from product sales to date and we continue to incur significant research and development and other expenses related to our ongoing operations. As a result, we are not profitable and have incurred losses in each period since our inception in 2001, with the exception of the fiscal year ended December 31, 2015, due primarily to the $350.0 million upfront payment we received from BMS from our license and collaboration agreement for cabiralizumab, and the fiscal year ended December 31, 2011, due primarily to the $50.0 million upfront payment we received from GSK from our license and collaboration agreement for FP-1039. For the fiscal quarter ended March 31, 2017, we reported a net loss of $33.4 million.

Although we may from time to time report profitable results, we generally expect to continue to incur significant expenses and increasing operating losses for the foreseeable future. The net losses we incur may fluctuate significantly from quarter to quarter. We expect our operating expenses to increase as we continue our research and development of, and seek regulatory approvals for, our product candidates. We may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. The size of our future net losses will depend, in part, on the rate of future growth of our expenses and our ability to generate revenues. Our prior losses and expected future losses have had and will continue to have an adverse effect on our stockholders’ equity and working capital.

We currently have no source of product revenue and may never become consistently profitable.

To date, we have not generated any revenue from commercialization of our product candidates. Our ability to generate product revenue and ultimately become profitable depends upon our ability, alone or with our partners, to successfully commercialize products, including any of our current product candidates or other product candidates that we may develop, in-license or acquire in the future. We do not anticipate generating revenue from the sale of products for the foreseeable future. Our ability to generate future product revenue from our current or future product candidates also depends on additional factors, including our or our partners’ ability to:

 

successfully complete research and clinical development of current and future product candidates;

 

establish and maintain supply and manufacturing relationships with third parties to ensure adequate, timely and compliant manufacturing of bulk drug substances and drug products to maintain that supply;

 

launch and commercialize future product candidates for which we obtain marketing approval, if any, and if launched independently, successfully establish a sales force, marketing and distribution infrastructure;

 

obtain coverage and adequate product reimbursement from third-party payors, including government payors;

 

successfully develop, validate and obtain any necessary regulatory approvals of companion diagnostics to our product candidates on a timely basis;

 

achieve market acceptance for our or our partners’ products, if any;

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acquire rights to and otherwise establish, maintain and protect intellectual property necessary to develop and commercialize our product candidates; and

 

attract, hire and retain qualified personnel.

In addition, because of the numerous risks and uncertainties associated with pharmaceutical product development, including that our product candidates may not advance through development or achieve the endpoints of applicable clinical trials, we are unable to predict the timing or amount of increased expenses, or if or when we will achieve or maintain profitability. In addition, our expenses could increase beyond expectations if we decide to or are required by the  FDA or foreign regulatory authorities to perform studies or trials in addition to those that we currently anticipate. Even if we complete the development and regulatory processes described above, we anticipate incurring significant costs associated with launching and commercializing our products.

Even if we generate revenue from the sale of any of our products that may be approved, we may not become profitable and may need to obtain additional funding to continue operations. If we fail to become profitable or do not sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce our operations.

We will require additional capital to finance our operations, which may not be available to us on acceptable terms or at all. As a result, we may not complete the development and commercialization of our product candidates or develop new product candidates.

As a research and development company, our operations have consumed substantial amounts of cash since inception. Although we have sufficient cash and cash equivalents to fund our projected operating expenses and capital expenditure requirements for at least the next 12 months, we expect our research and development expenses to increase substantially in connection with our ongoing activities, particularly as we advance our product candidates further into clinical development, advance additional product candidates into clinical trials and increase the number and size of our clinical trials. In addition, circumstances may cause us to consume capital more rapidly than we currently anticipate. For example, as we move our product candidates through preclinical studies and into clinical development, we may have adverse results requiring us to acquire or develop new product candidates, or our product collaboration partners may not elect to pursue the development and commercialization of any of our product candidates that are subject to our respective agreements with them. Any of these events may increase our development costs more than we expect. We may need to raise additional funds or otherwise obtain funding through product collaborations if we choose to initiate additional clinical trials for product candidates beyond the programs we have currently partnered. In any event, we will require additional capital to obtain regulatory approval for, and to commercialize, future product candidates.

If we need to secure additional financing, such additional fundraising efforts may divert our management from our day-to-day activities, which may adversely affect our ability to develop and commercialize future product candidates. In addition, we cannot guarantee that future financing will be available in sufficient amounts or on terms acceptable to us, if at all. If we do not raise additional capital when required or on acceptable terms, we may need to:

 

significantly delay, scale back or discontinue the development or commercialization of any product candidates or cease operations altogether;

 

seek strategic alliances for research and development programs at an earlier stage than we would otherwise desire or on terms less favorable than might otherwise be available; or

 

relinquish or license on unfavorable terms our rights to technologies or any future product candidates that we otherwise would seek to develop or commercialize ourselves.

If we need to conduct additional fundraising activities and we do not raise additional capital in sufficient amounts or on terms acceptable to us, we may be prevented from pursuing development and commercialization efforts, which could have a material adverse effect on our business, operating results and prospects.

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Our forecast of the time through which our financial resources will adequately support our operations could vary as a result of a number of factors, including the factors discussed elsewhere in this “Risk Factors” section. Our future funding requirements, both short and long-term, will depend on many factors, including:

 

the initiation, progress, timing, costs and results of preclinical and clinical studies for our product candidates and future product candidates we may develop;

 

the outcome, timing and cost of seeking and obtaining regulatory approvals from the FDA and comparable foreign regulatory authorities, including the potential for such authorities to require that we perform more studies than those that we currently expect;

 

the cost to establish, maintain, expand and defend the scope of our intellectual property portfolio, including the amount and timing of any payments we may be required to make, or that we may receive, in connection with licensing, preparing, filing, prosecuting, maintaining, defending and enforcing any of our patents or other intellectual property rights;

 

the effect of competing technological and market developments;

 

market acceptance of any approved product candidates;

 

the costs of acquiring, licensing or investing in additional businesses, products, product candidates and technologies;

 

the cost and timing of selecting, auditing and potentially validating a manufacturing site for commercial-scale manufacturing; and

 

the cost of establishing sales, marketing and distribution capabilities for our product candidates for which we may receive regulatory approval and that we determine to commercialize ourselves or in collaboration with our partners.

If a lack of available capital means that we cannot expand our operations or otherwise capitalize on our business opportunities, our business, financial condition and results of operations could be materially adversely affected.

Raising additional capital may cause dilution to our existing stockholders, restrict our operations or require us to relinquish rights to our technologies.

Until we generate sufficient product revenue, if ever, we expect to finance our future cash needs through public or private equity or debt offerings. Additional capital may not be available on reasonable terms, if at all. Raising additional funds through the issuance of additional debt or equity securities could dilute our existing stockholders or increase fixed payment obligations. Furthermore, these securities may have rights senior to those of our common stock and could contain covenants that restrict our operations and potentially impair our competitiveness, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. Any of these events could significantly harm our business, financial condition and prospects.

Risks Related to Our Business and Industry

We may not advance additional product candidates into clinical development or identify or validate additional drug targets. If we do not advance additional product candidates into clinical development or identify or validate additional drug targets, or if we experience significant delays in doing any of the foregoing, our business will be materially harmed.

We have invested a significant portion of our efforts and financial resources in the identification and validation of new targets for protein therapeutics and the identification and preclinical development of product candidates to these targets. We have three clinical-stage product candidates, cabiralizumab, FPA144 and FP-1039, and three pre-clinical programs in IND-enabling studies, FPA150, FPA154 and FPT155. Our ability to generate product revenues, which we do not expect will occur for many years, if ever, will depend heavily on our ability to identify and validate new targets and identify and advance preclinical product candidates into and through clinical development. The outcome of preclinical studies of our product candidates may not predict the success of clinical trials. Moreover, preclinical data are often susceptible to varying interpretations and analyses and many companies that have believed their product candidates performed satisfactorily in preclinical studies have nonetheless failed in clinical development. Our inability to successfully complete preclinical development of our product candidates could result in additional costs to us or impair our ability to generate product revenues or development, regulatory, commercialization and sales milestone payments and royalties on product sales.

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If clinical trials of our product candidates fail to demonstrate safety and efficacy to the satisfaction of regulatory authorities or do not otherwise produce meaningfully positive results, we may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of our product candidates.

Before obtaining marketing approval from regulatory authorities for the sale of future product candidates, we or our partners must conduct extensive clinical trials to demonstrate the safety and efficacy of the product candidates in humans. Clinical testing is expensive and difficult to design and implement, can take many years to complete and is uncertain as to outcome. A failure of one or more clinical trials can occur at any stage of testing. The outcome of preclinical studies and early clinical trials may not predict the success of later clinical trials and interim results of a clinical trial do not necessarily predict final results. A number of companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in advanced clinical trials due to lack of efficacy or unacceptable safety profiles, notwithstanding promising results in earlier trials. Despite the results reported from our clinical trials and preclinical studies for our product candidates, we do not know whether the clinical trials we or our partners may conduct will demonstrate adequate efficacy and safety to result in regulatory approval to market any of our product candidates in any particular jurisdiction or jurisdictions. If later-stage clinical trials do not produce favorable results, our or our partners’ ability to achieve regulatory approval for any of our product candidates may be adversely impacted.

Delays in clinical testing will delay the commercialization of our product candidates, potentially increase our costs and harm our business.

We do not know whether any of our clinical trials will begin as planned, will need to be amended or restructured or will be completed on schedule, or at all. Our product development costs will increase if we experience delays in clinical testing. Significant clinical trial delays also could shorten any periods during which we may have the exclusive right to commercialize our product candidates or could allow our competitors to bring products to market before we do, which would impair our ability to successfully commercialize our product candidates and may harm our business, results of operations and prospects. Events which may result in a delay or unsuccessful completion of clinical development include:

 

delays in reaching an agreement with or failure in obtaining authorization from the FDA or other regulatory authorities and institutional review boards, or IRBs;

 

imposition of a clinical hold following an inspection of our manufacturing or clinical trial operations or trial sites by the FDA or other regulatory authorities, or a decision by the FDA, other regulatory authorities, IRBs or us, or recommendation by a data safety monitoring board, to suspend or terminate a clinical trial at any time for safety issues or for any other reason;

 

delays in reaching agreement on acceptable terms with prospective CROs and clinical trial sites;

 

deviations from the trial protocol by clinical trial sites or investigators or failure to conduct a clinical trial in accordance with regulatory requirements;

 

failure of third parties, such as CROs, to satisfy their contractual duties or meet expected deadlines;

 

delays in the testing, validation, and manufacturing of product candidates and in the delivery of these product candidates to clinical trial sites;

 

for clinical trials in selected patient populations, delays in identification and auditing of central or other laboratories or the transfer and validation of assays or tests used to identify selected patients;

 

delays in having patients complete participation in a clinical trial or return for post-treatment follow-up;

 

delays caused by patients dropping out of a clinical trial due to side effects, disease progression or other reasons;

 

withdrawal of clinical trial sites from our clinical trials as a result of changing standards of care or the ineligibility of a clinical trial site to participate in our clinical trials; or

 

changes in government regulations or administrative actions or lack of adequate funding to continue the clinical trials.

Any of our or our partners’ inabilities to timely complete clinical development could result in additional costs to us or impair our ability to generate product revenue or to achieve development, regulatory, commercialization or sales milestones.

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If we or our partners are unable to timely enroll patients in clinical trials, we will be unable to complete these trials on a timely basis.

The timely completion of clinical trials largely depends on the rate of patient enrollment. Many factors affect the rate of patient enrollment, including:

 

the size and nature of the patient population;

 

the number and location of clinical sites;

 

competition with other companies for clinical sites or patients;

 

the eligibility and exclusion criteria for the trial;

 

the design of the clinical trial;

 

inability to obtain and maintain patient consents;

 

the availability of supplies of drug product for clinical use;

 

risk that enrolled subjects will drop out before completion; and

 

competing clinical trials and clinicians’ and patients’ perceptions as to the potential advantages of the drug being studied in relation to other available therapies, including any new drugs that may be approved for the indications we are investigating.

For example, we are conducting a Phase 2 clinical trial of cabiralizumab in patients with diffuse PVNS. Very little data regarding the incidence and prevalence of diffuse PVNS exist, but data we have gathered suggest that the prevalence of diffuse PVNS in the United States may be approximately 25,000 patients. We expect that the limited size of the diffuse PVNS patient population will limit patient enrollment rates. Also, we know that Daiichi Sankyo Co., Ltd./Plexxikon Inc. has recently conducted a Phase 3 clinical trial (ENLIVEN) of pexidartinib (PLX3397) in PVNS, Novartis AG is enrolling patients in its Phase 2 clinical trial of its MCS110 CSF1 monoclonal antibody in PVNS, and F. Hoffmann-La Roche AG, or Roche, has clinically tested its RG7155 antibody in PVNS patients. If Novartis AG or Roche continue the clinical development of their products in PVNS, we would potentially compete with them for the enrollment in this rare patient population, which may adversely impact the rate of patient enrollment in and the timely completion of our Phase 2 clinical trial of cabiralizumab in PVNS. If Daiichi Sankyo should gain approval in any region where we are conducting clinical trials of cabiralizumab in PVNS, it may impact our ability to enroll and timely complete those trials.

Additionally, although we believe selecting patients who overexpress FGFR2b using a companion diagnostic should increase the probability of success in our clinical trial of FPA144 in gastric cancer, this selection criteria limits the number of patients eligible for enrollment.

There is significant competition for recruiting patients in the clinical trials we and our partners are conducting and plan to conduct, and we or our partners may be unable to timely enroll the patients necessary to complete clinical trials on a timely basis or at all.

We may not successfully identify, test, develop or commercialize potential product candidates, which may force us to abandon our development efforts for a program or programs.

The success of our business depends primarily upon our ability to identify and validate new protein therapeutic targets, including through the use of our discovery platform, and identify, test, develop and commercialize protein therapeutics, which we may develop ourselves or in-license from others. Our research efforts may initially show promise in discovering potential new protein therapeutic targets or candidates, yet fail to yield product candidates for clinical development for numerous reasons, including:

 

our research methodology, including our screening technology, may not successfully identify medically relevant protein therapeutic targets or potential product candidates;

 

we tend to identify and select from our discovery platform novel, untested targets that may be challenging to validate because of the novelty of the target or that we may fail to validate at all after further research work;

 

we may need to rely on third parties to generate antibody candidates for our product candidate programs;

 

we may encounter product manufacturing difficulties that limit yield or produce undesirable characteristics that increase the cost of goods, cause delays or make our product candidates unmarketable;

 

our product candidates may cause adverse effects in patients or subjects, even after successful initial toxicology studies, which may make our product candidates unmarketable;

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our product candidates may not demonstrate a meaningful benefit to patients or subjects; or

 

our collaboration partners may change their development profiles or plans for potential product candidates or abandon a therapeutic area or the development of a partnered product.

The occurrence of any of these events may force us to abandon our development efforts for a program or programs, which would have a material adverse effect on our business, operating results and prospects and could potentially cause us to cease operations. Research programs to identify new product targets and candidates require substantial technical, financial and human resources. We may focus our efforts and resources on potential discovery efforts, programs or product candidates that ultimately prove to be unsuccessful.

We are subject to a multitude of manufacturing risks, any of which could substantially increase our costs and limit supply of our products.

The process of manufacturing our products is complex and subject to several risks, including the following:

 

The process of manufacturing biologics is susceptible to product loss due to contamination, equipment failure or improper installation or operation of equipment, or vendor or operator error. Even minor deviations from normal manufacturing processes could result in reduced production yields, product defects and other supply disruptions. If microbial, viral or other contaminations are discovered in our products or in the manufacturing facilities in which our products are made, such manufacturing facilities may need to be closed for an extended time to investigate and remedy the contamination.

 

The manufacturing facilities in which our products are made could be adversely affected by equipment failures, labor and raw material shortages, natural disasters, power failures and numerous other factors.

 

Any adverse developments affecting manufacturing operations for our products may result in shipment delays, inventory shortages, lot failures, product withdrawals or recalls, or other interruptions in the supply of our products. We may also have to take inventory write-offs and incur other charges and expenses for products that fail to meet specifications, or because we must undertake costly remediation efforts or seek costlier manufacturing alternatives.

Certain raw materials necessary for the manufacture of our products, such as growth media, resins and filters, are sourced from a single supplier. We do not have agreements in place that guarantee our supply or the price of these raw materials. Any significant delay in the acquisition or decrease in the availability of these raw materials could considerably delay the manufacture of our product candidates, which could adversely impact the timing of any planned trials or the regulatory approval of that product candidate.

We have process development and small-scale manufacturing capabilities. We do not have and we do not currently plan to acquire or develop the facilities or capabilities to manufacture bulk drug substance or filled drug product for use in human clinical trials or commercialization. In the past we have and we expect in the future to engage third-party manufacturers for the manufacture of bulk drug substance and drug product for our products for our clinical trials and additional third parties for our supply chain.  Any problems we experience with any of these third parties could delay the manufacturing of our product candidates, which could harm our results of operations.  

For example, BMS has the exclusive right to manufacture cabiralizumab. Under our cabiralizumab collaboration agreement with BMS, BMS will supply us with cabiralizumab, at its cost and expense, for our use in the conduct of our clinical trial evaluating cabiralizumab in combination with Opdivo in multiple tumor types and our Phase 2 clinical trial of cabiralizumab in patients with PVNS and will supply us with cabiralizumab, in exchange for a service fee, for our conduct of our independent development activities with respect to cabiralizumab.

We have not contracted with alternate suppliers in the event the current organizations we utilize are unable to scale production or if we otherwise experience any problems with them. If we are unable to arrange for alternative third-party manufacturing sources, or are unable to do so on commercially reasonable terms or in a timely manner, we may be delayed in the development of our product candidates.

Our reliance on third-party manufacturers subjects us to risks to which we would not be subject if we manufactured product candidates or products internally, including failure of the third party to abide by regulatory and quality assurance requirements, the possibility of breach of the manufacturing agreement by the third party due to factors beyond our control (including the third party’s failure to manufacture our product candidates or any products we may eventually commercialize in accordance with our specifications) and the possibility of termination or nonrenewal of the agreement by the third party, based on its own business priorities, at a time that is costly or damaging to our business.

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The regulatory approval processes of the FDA and comparable foreign regulatory authorities are lengthy, time-consuming and inherently unpredictable. Our inability to obtain regulatory approval for our product candidates would substantially harm our business.

The time required to obtain approval by the FDA and comparable foreign regulatory authorities is unpredictable but typically takes many years following the commencement of clinical trials and depends upon numerous factors, including the substantial discretion of the regulatory authorities. In addition, approval policies, regulations, or the type and amount of clinical data necessary to gain approval may change during a product candidate’s clinical development and may vary among jurisdictions. We have not obtained regulatory approval for any of our product candidates and it is possible that none of our existing product candidates or any future product candidates will ever obtain regulatory approval.

Our product candidates could fail to receive regulatory approval from the FDA or a comparable foreign regulatory authority for many reasons, including:

 

the FDA’s or such comparable regulatory authority’s disagreement with the design or implementation of our clinical trials;

 

our failure to demonstrate that a product candidate is safe and effective for its proposed indication;

 

the failure of our clinical trials to meet the level of statistical significance required for approval;

 

our failure to demonstrate that a product candidate’s clinical and other benefits outweigh its safety risks;

 

the FDA’s or such comparable regulatory authority’s disagreement with our interpretation of data from preclinical studies or clinical trials;

 

the insufficiency of data collected from clinical trials of our product candidates to support the submission and filing of a Biologic License Application or other submission or to obtain regulatory approval;

 

our failure to obtain approval of the manufacturing processes or facilities of third-party manufacturers with whom we contract for clinical and commercial supplies; or

 

changes in the approval policies or regulations that render our preclinical and clinical data insufficient for approval.

The FDA or a comparable foreign regulatory authority may require more information to support approval, including additional preclinical or clinical data, which may delay or prevent approval and our commercialization plans, or we may decide to abandon the development program. If we were to obtain approval, regulatory authorities may approve any of our product candidates for fewer or more limited indications than we request, may grant approval contingent on the performance of costly post-marketing clinical trials, or may approve a product candidate with a label that does not include the labeling claims necessary or desirable for the successful commercialization of that product candidate.

Our product candidates may cause undesirable side effects or have other properties that could delay or prevent their regulatory approval, limit the commercial profile of an approved label, or result in significant negative consequences following any marketing approval.

Undesirable side effects caused by our product candidates could cause us or regulatory authorities to interrupt, delay or halt clinical trials and could result in a more restrictive label or the delay or denial of regulatory approval by the FDA or other comparable foreign regulatory authority or otherwise limit the commercial potential of any such products. Results of our clinical trials could reveal a high and unacceptable severity or prevalence of side effects or unexpected characteristics. In such an event, we could suspend or terminate our trials or the FDA or comparable foreign regulatory authorities could order us to cease clinical trials or deny approval of our product candidates for any or all targeted indications. Drug-related side effects could affect patient recruitment or the ability of enrolled subjects to complete the trial or could result in potential product liability claims. Any of these occurrences may harm our business, financial condition and prospects significantly.

Additionally, if one or more of our product candidates receives marketing approval, and we or others later identify undesirable side effects caused by any such product candidate, numerous potentially significant negative consequences could result, including:

 

we may suspend marketing of, or withdraw or recall, such product;

 

regulatory authorities may withdraw approvals of such product;

 

regulatory authorities may require additional warnings on the label for such product;

 

the FDA or other regulatory bodies may issue safety alerts, Dear Healthcare Provider letters, press releases or other communications containing warnings about such product;

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the FDA may require the establishment or modification of a risk evaluation and mitigation strategy, or REMS, or a comparable foreign regulatory authority may require the establishment or modification of a similar strategy that may, for instance, restrict distribution of such product and impose burdensome implementation requirements on us;

 

regulatory authorities may require that we conduct post-marketing studies;

 

we could be sued and held liable for harm caused to subjects or patients; and

 

our reputation may suffer.

Any of these events could prevent us from achieving or maintaining market approval or acceptance for a product candidate or otherwise materially harm the commercial prospects for such product candidate, if approved, and could significantly harm our business, results of operations and prospects.

If we are unable to successfully develop a companion diagnostic for FPA144, or experience significant delays in doing so, we may not achieve marketing approval or realize the full commercial potential of FPA144.

We plan to develop a companion diagnostic for FPA144. We expect that the FDA and comparable foreign regulatory authorities may require the development and regulatory approval of a companion diagnostic as a condition to approving FPA144 for use in patients that overexpress the FGFR2b protein. We are initially seeking to develop FPA144 to treat a subset of gastric (stomach) cancer patients whose tumors overexpress the FGFR2b protein, as determined by an IHC diagnostic test. We plan to develop a companion diagnostic with a third-party collaborator to help us more accurately identify these gastric cancer patients, both during our clinical trials and commercialization of FPA144.

We do not have experience or capabilities in developing or commercializing diagnostics and will be dependent in large part on the sustained cooperation and effort of our third-party collaborator to perform these functions.

Companion diagnostics are subject to regulation by the FDA and comparable foreign regulatory authorities as medical devices and may require separate regulatory approval prior to commercialization.

If we or our third-party collaborator are unable to successfully develop a companion diagnostic for FPA144 or experience delays in doing so:

 

the development of FPA144 may be adversely affected because we may be unable to appropriately select patients for enrollment in our clinical trials;

 

FPA144 may not receive marketing approval if its safe and effective use depends on use of a companion diagnostic; or