fprx-10q_20160331.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

x

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

For the quarterly period ended March 31, 2016

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  x    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  x    No  ¨

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

 

Large accelerated filer

 

¨

  

Accelerated filer

 

x

 

 

 

 

Non-accelerated filer

 

¨  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

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

As of April 29, 2016, the number of outstanding shares of the registrant’s common stock was 28,200,759.

 

 

 

 

 

 


TABLE OF CONTENTS

 

PART I.

  

FINANCIAL INFORMATION

  

4

 

  

 

Item 1.

  

Financial Statements

  

4

 

  

 

  

 

Condensed Balance Sheets as of March 31, 2016 and December 31, 2015

  

4

 

  

 

  

 

Condensed Statements of Operations for the Three Months Ended March 31, 2016 and 2015

  

5

 

  

 

  

 

Condensed Statements of Comprehensive Loss for the Three Months Ended March 31, 2016 and 2015

  

6

 

  

 

  

 

Condensed Statements of Cash Flows for the Three Months Ended March 31, 2016 and 2015

  

7

 

  

 

  

 

Notes to Condensed Financial Statements

  

8

 

  

Item 2.

  

 

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

  

13

 

  

Item 3.

  

 

Quantitative and Qualitative Disclosures About Market Risk

  

22

 

  

Item 4.

  

 

Controls and Procedures

  

22

PART II.

  

 

OTHER INFORMATION

  

23

 

  

Item 1.

  

 

Legal Proceedings

  

23

 

  

Item 1A.

  

 

Risk Factors

  

23

 

  

Item 6.

  

 

Exhibits

  

46

 

  

 

  

 

Signatures

  

47

 

  

 

  

 

Exhibit Index

  

48

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 alone or in combination with other drugs;

 

·

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 maintain and establish collaborations;

 

·

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

 

·

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

 

·

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

 

·

the timing or likelihood of regulatory filings and approvals;

 

·

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,

 

 

2016

 

 

2015

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

133,011

 

 

$

149,971

 

Marketable securities

 

348,975

 

 

 

367,495

 

Receivables from collaborative partners

 

1,760

 

 

 

4,054

 

Income tax receivable

 

822

 

 

 

 

Prepaid and other current assets

 

6,009

 

 

 

6,761

 

Total current assets

 

490,577

 

 

 

528,281

 

Property and equipment, net

 

4,987

 

 

 

4,539

 

Deferred tax asset

 

13,302

 

 

 

15,071

 

Other long-term assets

 

390

 

 

 

394

 

Total assets

$

509,256

 

 

$

548,285

 

Liabilities and stockholders' equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

1,020

 

 

$

1,894

 

Accrued personnel-related expenses

 

3,848

 

 

 

6,878

 

Other accrued liabilities

 

4,340

 

 

 

5,882

 

Deferred revenue, current portion

 

16,214

 

 

 

17,509

 

Deferred rent, current portion

 

792

 

 

 

768

 

Income tax payable, current portion

 

23,573

 

 

 

46,437

 

Total current liabilities

 

49,787

 

 

 

79,368

 

Deferred revenue, long-term portion

 

27,915

 

 

 

31,268

 

Deferred rent, long-term portion

 

649

 

 

 

865

 

Income tax payable, long-term portion

 

2,547

 

 

 

3,283

 

Other long-term liabilities

 

221

 

 

 

295

 

Commitments

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

Common stock

 

27

 

 

 

26

 

Additional paid-in capital

 

380,391

 

 

 

372,605

 

Accumulated other comprehensive income (loss)

 

110

 

 

 

(74

)

Retained earnings

 

47,609

 

 

 

60,649

 

Total stockholders' equity

 

428,137

 

 

 

433,206

 

Total liabilities and stockholders' equity

$

509,256

 

 

$

548,285

 

 

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,

 

 

2016

 

 

2015

 

Collaboration revenue

$

6,520

 

 

$

4,287

 

Operating expenses:

 

 

 

 

 

 

 

Research and development

 

18,278

 

 

 

11,211

 

General and administrative

 

8,635

 

 

 

4,220

 

Total operating expenses

 

26,913

 

 

 

15,431

 

Loss from operations

 

(20,393

)

 

 

(11,144

)

Interest income

 

536

 

 

 

108

 

Loss before income tax

 

(19,857

)

 

 

(11,036

)

Income tax benefit

 

6,817

 

 

 

 

Net loss

$

(13,040

)

 

$

(11,036

)

Basic and diluted net loss per common share

$

(0.49

)

 

$

(0.44

)

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

 

26,351

 

 

 

25,072

 

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,

 

 

2016

 

 

2015

 

Net loss

$

(13,040

)

 

$

(11,036

)

Other comprehensive income:

 

 

 

 

 

 

 

Net unrealized gain on marketable securities, net of tax

 

184

 

 

 

30

 

Comprehensive loss

$

(12,856

)

 

$

(11,006

)

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,

 

 

2016

 

 

2015

 

 

 

 

Operating activities

 

 

 

 

 

 

 

Net loss

$

(13,040

)

 

$

(11,036

)

Adjustments to reconcile net loss to net cash used in

   operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

375

 

 

 

400

 

Stock-based compensation expense

 

7,401

 

 

 

991

 

Excess tax benefits from employee equity incentive plans

 

(1,233

)

 

 

 

Deferred income taxes

 

1,769

 

 

 

 

Amortization of premium on marketable securities

 

1,119

 

 

 

534

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Receivables from collaborative partners

 

2,294

 

 

 

277

 

Income tax receivable

 

(822

)

 

 

 

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

 

756

 

 

 

(689

)

Accounts payable

 

(874

)

 

 

(192

)

Accrued personnel-related expenses

 

(3,030

)

 

 

(1,950

)

Deferred revenue

 

(4,648

)

 

 

82

 

Deferred rent

 

(192

)

 

 

(50

)

Income tax payable

 

(22,367

)

 

 

 

Other accrued liabilities and other long-term liabilities

 

(1,616

)

 

 

1,081

 

Net cash used in operating activities

 

(34,108

)

 

 

(10,552

)

Investing activities

 

 

 

 

 

 

 

Purchases of marketable securities

 

(100,665

)

 

 

(93,876

)

Maturities of marketable securities

 

118,250

 

 

 

24,500

 

Purchases of property and equipment

 

(823

)

 

 

(436

)

Net cash provided by (used in) investing activities

 

16,762

 

 

 

(69,812

)

Financing activities

 

 

 

 

 

 

 

Proceeds from public offering of common stock, net

 

 

 

 

78,693

 

Proceeds from issuance of common stock under equity

   incentive plans

 

2,755

 

 

 

886

 

Repurchase of shares to satisfy tax withholding

 

(3,602

)

 

 

 

Excess tax benefits from employee equity incentive plans

 

1,233

 

 

 

 

Net cash provided by financing activities

 

386

 

 

 

79,579

 

Net decrease in cash and cash equivalents

 

(16,960

)

 

 

(785

)

Cash and cash equivalents at beginning of period

 

149,971

 

 

 

15,267

 

Cash and cash equivalents at end of period

$

133,011

 

 

$

14,482

 

 

 

 

 

 

 

 

 

Supplemental cash flow information

 

 

 

 

 

 

 

Cash paid for income taxes

$

14,701

 

 

$

 

 

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, 2016

 

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 novel protein therapeutics. Protein therapeutics are antibodies or drugs developed from extracellular proteins or protein fragments that block disease processes, including cancer and inflammatory diseases. 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, 2016 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, 2015 filed with the U.S. Securities and Exchange Commission.

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 reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements as well as reported amounts of revenue and expenses during the reporting period. 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, 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.

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 Level 3 securities as of March 31, 2016.

8


The following table summarizes, for assets recorded at fair value, the respective fair values and the classifications by level of input within the fair value hierarchy defined above (in thousands):

 

 

March 31, 2016

 

 

 

 

 

 

Basis of Fair Value

 

 

 

 

 

 

Measurements

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

126,007

 

 

$

126,007

 

 

$

 

 

$

 

U.S. Treasury securities

 

348,807

 

 

 

348,807

 

 

 

 

 

 

 

Total cash equivalents and marketable securities

$

474,814

 

 

$

474,814

 

 

$

 

 

$

 

 

 

 

December 31, 2015

 

 

 

 

 

 

Basis of Fair Value

 

 

 

 

 

 

Measurements

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

34,821

 

 

$

34,821

 

 

$

 

 

$

 

U.S. Treasury securities

 

477,125

 

 

 

477,125

 

 

 

 

 

 

 

Total cash equivalents and marketable securities

$

511,946

 

 

$

511,946

 

 

$

 

 

$

 

 

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 options to purchase shares of common stock and restricted stock awards, or RSAs, (in thousands) from the calculation of diluted net loss per share for all periods presented as the effect would have been antidilutive:

 

Three Months Ended

 

 

March 31,

 

 

2016

 

 

2015

 

Options to purchase common stock

 

2,918

 

 

 

2,667

 

RSAs

 

1,505

 

 

 

 

 

 

4,423

 

 

 

2,667

 

 

Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or 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 is 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) 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. We are currently evaluating the impact of our pending adoption of ASU 2014-09 on our financial statements.

In February 2016, FASB issued ASU 2016-02, Leases. ASU 2016-2 is aimed at making leasing activities more transparent and comparable, and requires 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 is effective for our interim and annual reporting periods during the year ending December 31, 2019, and all annual and interim reporting periods thereafter. Early adoption is permitted. We are currently evaluating the impact that the adoption of ASU 2016-02 will have on our consolidated financial statements and related disclosures.

9


In March 2016, FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. This standard makes several modifications to Topic 718 related to the accounting for forfeitures, employer tax withholding on share-based compensation and the financial statement presentation of excess tax benefits or deficiencies. ASU 2016-09 also clarifies the statement of cash flows presentation for certain components of share-based awards. The guidance will be effective for annual reporting periods beginning after December 15, 2016 and interim periods within those fiscal years with early adoption permitted. We are currently evaluating the impact that the adoption of ASU 2016-09 will have on our consolidated financial statements and related disclosures.

 

3.

Cash Equivalents and Marketable Securities

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

 

 

March 31, 2016

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Estimated

 

 

Cost Basis

 

 

Gains

 

 

Losses

 

 

Fair Value

 

Money market funds

$

126,007

 

 

$

 

 

$

 

 

$

126,007

 

U.S. Treasury securities

 

348,807

 

 

 

172

 

 

 

(4

)

 

 

348,975

 

 

 

474,814

 

 

 

172

 

 

 

(4

)

 

 

474,982

 

Less: cash equivalents

 

(126,007

)

 

 

 

 

 

 

 

 

(126,007

)

Total marketable securities

$

348,807

 

 

$

172

 

 

$

(4

)

 

$

348,975

 

 

 

 

December 31, 2015

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Estimated

 

 

Cost Basis

 

 

Gains

 

 

Losses

 

 

Fair Value

 

Money market funds

$

34,821

 

 

$

 

 

$

 

 

$

34,821

 

U.S. Treasury securities

 

477,239

 

 

 

13

 

 

 

(127

)

 

 

477,125

 

 

 

512,060

 

 

 

13

 

 

 

(127

)

 

 

511,946

 

Less: cash equivalents

 

(144,470

)

 

 

 

 

 

19

 

 

 

(144,451

)

Total marketable securities

$

367,590

 

 

$

13

 

 

$

(108

)

 

$

367,495

 

 

As of March 31, 2016, 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

$

348,807

 

 

$

348,975

 

Total marketable securities

$

348,807

 

 

$

348,975

 

 

We determined that the gross unrealized losses on our marketable securities as of March 31, 2016 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, 2016. There were no sales of available-for-sale securities in any of the periods presented.

10


4.

Equity Incentive Plans

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

 

 

Options Outstanding

 

 

 

 

 

 

Weighted

 

 

Weighted

 

 

 

 

 

 

Average

 

 

Average

 

 

Number of

 

 

Exercise Price

 

 

Remaining

 

 

Shares

 

 

Per Share

 

 

Term

 

Balance at December 31, 2015

 

3,028,714

 

 

$

12.62

 

 

 

 

 

Options granted

 

119,200

 

 

$

34.83

 

 

 

 

 

Options exercised

 

(382,185

)

 

$

8.16

 

 

 

 

 

Options forfeited

 

(71,329

)

 

$

14.14

 

 

 

 

 

Options expired

 

(27

)

 

$

14.93

 

 

 

 

 

Balance at March 31, 2016

 

2,694,373

 

 

$

14.19

 

 

 

 

 

Options exercisable

 

1,289,024

 

 

$

8.33

 

 

 

5.67

 

 

We have granted RSAs to certain of our employees. RSAs are share awards that entitle the holder to receive freely tradable shares of our common stock upon vesting and are unforfeitable once fully vested. We based the fair value of RSAs on the closing sales price of our common stock on the grant date.

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, 2015

 

1,574,870

 

$

19.71

 

RSAs granted

 

88,630

 

$

35.60

 

RSAs vested

 

(259,676

)

$

18.88

 

RSAs forfeited

 

(78,009

)

$

18.21

 

Unvested balance at March 31, 2016

 

1,325,815

 

$

21.02

 

 

 

 

 

 

 

 

 

As of March 31, 2016, there were 2,858,577 shares of common stock available for future issuance under our 2013 Omnibus Incentive Plan.

Stock-Based Compensation

We calculate employee stock-based compensation expense based on awards ultimately expected to vest reduced by estimated forfeitures. We estimate forfeitures at the time of grant and revise forfeitures, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Total stock-based compensation expense recognized was as follows (in thousands):

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2016

 

 

2015

 

Research and development

 

$

3,697

 

 

$

509

 

General and administrative

 

 

3,704

 

 

 

482

 

Total

 

$

7,401

 

 

$

991

 

 

We estimated the fair value of each stock option 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,

 

2016

 

2015

Expected term (years)

6.3

 

6.1

Expected volatility

74%

 

73%

Risk-free interest rate

1.5%

 

1.5-1.7%

Expected dividend yield

0%

 

0%

11


 

As of March 31, 2016, we had $14.6 million of total unrecognized compensation expense related to nonvested employee and director stock options that we expect to recognize over a weighted-average period of 2.7 years. Additionally, we had $19.3 million of total unrecognized compensation expense related to employee and director RSAs that we expect to recognize over a weighted-average period of 1.1 years.

5.

Collaborative Research and Development Agreements

GlaxoSmithKline

Respiratory Diseases Collaboration

In January 2016, we amended our research collaboration and license agreement, referred to as the respiratory diseases collaboration, with GlaxoSmithKline, or GSK, that we originally entered into in April 2012 to identify new therapeutic approaches to treat refractory asthma and chronic obstructive pulmonary disease function.  The amendment extended the research term by three months to July 2016 to allow for the conduct of additional activities to validate protein targets we discovered in our screens and increased the research funding that GSK is obligated to pay us under the collaboration by $0.7 million.  We are amortizing the additional research funding over the remaining research period.  Due to the amendment, we revised our estimate of our substantive performance period under this collaboration to extend through the end of this additional research term and began recognizing the remaining unamortized portion of the upfront payment over this revised period into July 2016.

FP-1039 License and Collaboration

In March 2016, GSK delivered to us written notice of termination of our license and collaboration agreement with Human Genome Sciences, Inc., which was acquired by GSK in 2012, or the FP-1039 license, for convenience.  Pursuant to the terms of the FP-1039 license, termination of the FP-1039 license will become effective on September 5, 2016, which is 180 days after GSK’s notice of termination. Pursuant to the terms of the FP-1039 license, in April 2016, 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.

6.

Employee Benefit Plans

We sponsor a 401(k) plan under which eligible employees may elect to contribute to the 401(k) plan, subject to certain limitations, up to the lesser of the statutory maximum or 100% of eligible compensation on a pre-tax basis. We pay the administrative costs for the plan.

Effective January 1, 2015, we elected to match employee contributions to the 401(k) plan, or the Company Match, as permitted by the plan. We make matching contributions every pay period in an amount equal to 50% of the amount contributed by the employee up to an annual maximum Company Match per employee equal to $6,000. We have recorded 401(k) plan Company Match expense of $245,000 and $179,000 for the three months ended March 31, 2016 and 2015, respectively.

7.

Income Taxes

We realized an income tax benefit of $6.8 million for the three months ended March 31, 2016 as compared to no tax expense for the three months ended March 31, 2015.  The income tax benefit represents our ability to recover taxes accrued in 2015 based on existing tax law that allows us to carryback our 2016 or 2017 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.  

At the end of December 2015, we recognized approximately $15.1 million of net deferred tax assets based on our review of the reversal pattern of these deferred tax assets that may result in future recovery of tax paid in 2015.  Based on our forecasted loss for 2016, we assessed the recoverability of deferred tax assets based on their reversal patterns.  We will periodically review our ability to realize our deferred tax assets and any adjustment to this recoverability will impact our annual effective tax rate. 

 

 

12


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, 2015, included in our Annual Report on Form 10-K, as filed with the U.S. Securities and Exchange Commission, or the SEC, on March 11, 2016.

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 product candidates in clinical development 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, for our clinical programs to allow us to select patients most likely to benefit from treatment.

 

 

·

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 FPA008 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 FPA008.

 

·

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, which is in Phase 1b clinical development to treat patients with malignant pleural mesothelioma.

We have a differentiated target discovery platform and library, which 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, 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 and are actively validating these and looking for additional targets. We have begun generating, and will continue to generate, therapeutic proteins, including antibodies or ligand traps containing or directed to the targets we identify. We plan to advance selected candidates into pre-clinical development and eventually into clinical development, with a goal of filing at least one Investigational New Drug, or IND, application for a new molecule per year for the foreseeable future, 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 license and collaboration agreement for FPA008, 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 fiscal quarters ended March 31, 2016 and 2015, we reported a net loss of $13.0 million and $11.0 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.

13


First Quarter 2016 and Other Recent Highlights

FPA008

In January 2016, the U.S. Food and Drug Administration, or the FDA, granted FPA008 Orphan Drug Designation for the treatment of PVNS.  Orphan Drug Designation is granted by the FDA Office of Orphan Drug Products to products that treat rare diseases. The FDA defines rare diseases as those affecting fewer than 200,000 people in the United States. Orphan Drug Designation provides certain benefits and incentives, including a period of marketing exclusivity for the first marketing application if regulatory approval is received for the designated indication, potential tax credits for certain activities and waiver of certain administrative fees.

In April 2016, we began screening patients in the Phase 2 portion of our clinical trial to evaluate FPA008 as a potential treatment for PVNS and expect to begin patient dosing imminently.

FPA144

In January 2016, we presented safety and tolerability data from 27 patients and pharmacokinetics, or PK, data from 23 patients from Part 1 of our Phase 1 trial at the American Society of Clinical Oncology's (ASCO) 2016 Gastrointestinal Cancers Symposium.  Updated data from this Phase 1 trial has been accepted for an oral presentation at the ASCO Annual Meeting in June 2016.

FP-1039

In January 2016, we announced that given the change in treatment paradigms for squamous non small cell lung cancer, or NSCLC, following approvals of immuno-oncology agents and the increasingly competitive landscape, we and GSK agreed to stop enrollment in the squamous NSCLC patient cohorts (Arms A and B) of our Phase 1b clinical trial of FP-1039 and to continue enrolling malignant pleural mesothelioma patients at the expansion dose of 15 mg/kg in Arm C of the trial. GSK will present mesothelioma data from this trial at the ASCO 2016 Annual Meeting in June 2016.

In March 2016, GSK delivered to us written notice of termination of the FP-1039 license and collaboration agreement, or the FP-1039 license, pursuant to which we exclusively licensed to GSK rights to develop and commercialize FP-1039 in the United States, for convenience.  Pursuant to the terms of the FP-1039 license, termination of the FP-1039 license will become effective on September 5, 2016, which is 180 days after GSK’s notice of termination.  Pursuant to the terms of the FP-1039 license, we elected to have GSK complete the conduct of the Phase 1b clinical trial at GSK’s expense.  

GSK Respiratory Diseases Collaboration

In April 2012, we entered into a research collaboration and license agreement, or the respiratory diseases collaboration, with GSK to identify new therapeutic approaches to treat refractory asthma and chronic obstructive pulmonary disease with a particular focus on identifying novel protein therapeutics and antibody targets. In January 2016, we amended the respiratory diseases collaboration to extend the research term to July 2016 to allow for the conduct of additional activities to validate protein targets we discovered in our screens and to increase the research funding that GSK is obligated to pay us under the respiratory diseases collaboration.

BMS Immuno-oncology Research Collaboration

In March 2014, we entered into a research collaboration and license agreement with BMS, or the immuno-oncology research collaboration, pursuant to which we and BMS are collaborating to carry out a research program to (i) discover novel interacting proteins in two undisclosed immune checkpoint pathways, which we refer to as the checkpoint pathways, using our target discovery platform; (ii) further the understanding of target biology with respect to targets in these checkpoint pathways; and (iii) discover and pre-clinically develop compounds suitable for development for human therapeutic uses against targets in these checkpoint pathways.  Based on data arising from our initial screens, in January 2016, we amended the immuno-oncology research collaboration to add an additional checkpoint pathway to the research program, for a total of three undisclosed immune checkpoint pathways.

 

14


Clinical Pipeline

The following table summarizes key information about our most advanced product candidates:

FPA008

FPA008 in Immuno-Oncology

We are conducting a Phase 1a/1b clinical trial with BMS to evaluate the safety, tolerability and preliminary efficacy of combining FPA008 with Opdivo® (nivolumab) as a potential treatment for a variety of cancers. The trial is currently expected to enroll approximately 280 patients. We are amending the trial protocol to add more patients to the current Phase 1a portion of the trial to enable us to study the highest dose of FPA008 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 will conduct these additional Phase 1a activities in parallel with our commencement of the Phase 1b portion of the trial, which we expect to begin in the second half of 2016.  In the Phase 1b portion, we plan to evaluate the safety, tolerability and preliminary efficacy of the selected dose of FPA008 in combination with Opdivo® in the following tumor settings:

 

·

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

 

·

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

 

·

second-line squamous cell carcinoma of the head and neck;

 

·

second-line pancreatic cancer;

 

·

third-line renal cancer;

 

·

third-line ovarian cancer; and

 

·

second-line glioblastoma multiforme (GBM).

FPA008 in PVNS

We are conducting a Phase 1/2 clinical trial of FPA008 as a potential treatment for PVNS. We advanced into the Phase 2 portion of this trial in April 2016.  During the Phase 2 expansion portion of the trial, we will evaluate tumor response rate and duration and measures of pain and joint function.

15


FPA144

We are conducting a two-part Phase 1 clinical trial of FPA144 as a treatment for gastric cancer. We are currently enrolling patients in Part 2 of the trial in which we are evaluating the safety, 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 a proprietary immunohistochemistry, or IHC, assay to identify patients that have tumors that overexpress FGFR2b protein. In Part 2 of the trial, we plan to enroll gastric cancer patients whose tumor samples have protein overexpression in four separate cohorts as follows:

 

·

up to 30 patients whose tumor samples have strong (3+) FGFR2b protein overexpression on at least 10% of their tumor membrane;

 

·

up to 30 patients whose tumor samples have moderate (2+) FGFR2b protein overexpression on at least 10% of their tumor membrane or strong (3+) FGFR2b protein overexpression on less than 10% of their tumor membrane;

 

·

up to 30 patients whose tumor samples have low (1+) FGFR2b protein overexpression on at least 10% of their tumor membrane or moderate (2+) FGFR2b protein overexpression on less than 10% of their tumor membrane; and

 

·

up to 30 patients with gastric cancer without FGFR2b protein overexpression to strengthen the hypothesis that patient selection based on FGFR2b expression is required.

We are currently in the process of amending the protocol for the trial to include a basket cohort in which we can study FPA144 in other populations of cancer patients whose tumors overexpress the FGFR2b protein. Enrollment of patients in this basket cohort will be contingent on pre-clinical data that support development in a particular tumor setting and our development and validation of a laboratory IHC assay for that particular tumor type.

In January 2016, we presented preliminary data from 27 patients and PK data from 23 patients from Part 1 of our Phase 1clinical trial at the ASCO 2016 Gastrointestinal Cancers Symposium.  Updated data from this Phase 1 trial has been accepted for an oral presentation at the ASCO Annual Meeting in June 2016.

FP-1039

GSK is currently conducting a Phase 1b clinical trial of FP-1039 that was designed as a three-arm, multicenter, non-randomized, parallel-group, uncontrolled, open-label Phase 1b clinical trial. This clinical trial was designed to evaluate the safety, tolerability, dosage, response rate and duration of response of FP-1039 in combination with chemotherapy in patients with squamous NSCLC (Arms A and B) and malignant pleural mesothelioma (Arm C).

In January 2016, we announced that given the change in treatment paradigms for squamous NSCLC following approvals of immuno-oncology agents and the increasingly competitive landscape, we and GSK agreed to stop enrollment in the squamous NSCLC patient cohorts (Arms A and B) and to continue enrolling malignant pleural mesothelioma patients at the expansion dose of 15 mg/kg in Arm C of the trial.

In March 2016, GSK delivered to us written notice of termination of the FP-1039 license agreement for convenience.  Pursuant to the terms of the FP-1039 license, termination of the FP-1039 license will become effective on September 5, 2016, which is 180 days after GSK’s notice of termination.  Pursuant to the terms of the FP-1039 license, GSK will continue to conduct and fund the trial until September 5, 2016.  Pursuant to the terms of the FP-1039 license, in April 2016, 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.  

GSK will present mesothelioma data from this trial at the ASCO 2016 Annual Meeting in June 2016. We will base decisions on any future development of FP-1039 in mesothelioma on overall safety as well as the quantity and durability of responses in this trial and other business considerations, such as drug supply and manufacturing.

Immuno-Oncology Drug Discovery and Preclinical Programs

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 which 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 of not only reducing tumor growth like traditional therapies, but potentially eliminating the cancer entirely in some patients.

16


We are applying all aspects of our biologics discovery platform to discover and validate targets that we believe could be useful in immuno-oncology and to generate therapeutic proteins, including antibodies and ligand traps, directed to these targets.  We have identified promising new antibody targets and ligand traps and are actively screening for and validating additional targets. We have begun generating, and will continue to generate, therapeutic proteins, including antibodies or ligand traps, directed to the targets we identify. We plan to advance selected candidates into pre-clinical development and eventually into clinical development, with a goal of filing at least one IND application for a new molecule per year for the foreseeable future, beginning in 2017.

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 immuno-oncology research collaboration and FPA008 license and collaboration with BMS, a research collaboration in respiratory diseases and an FP-1039 product collaboration and license agreement with GSK, and a fibrosis and CNS research collaboration with UCB Pharma S.A., or UCB.

Summary Revenue by Collaboration and License Agreements

The following is a comparison of collaboration and license revenue for the three months ended March 31, 2016 and 2015:

 

 

Three Months Ended

 

 

March 31,

 

(in millions)

2016

 

 

2015

 

R&D Funding

 

 

 

 

 

 

 

Respiratory Diseases Collaboration - GSK

$

0.9

 

 

$

0.9

 

Fibrosis and CNS Collaboration - UCB

 

0.1

 

 

 

0.1

 

Immuno-oncology Research Collaboration - BMS

 

0.6

 

 

 

0.7

 

FPA008 Collaboration - BMS

 

1.1

 

 

 

 

Ratable Revenue Recognition

 

 

 

 

 

 

 

Respiratory Diseases Collaboration - GSK

 

0.3

 

 

 

0.7

 

Fibrosis and CNS Collaboration - UCB

 

0.8

 

 

 

0.8

 

Immuno-oncology Research Collaboration - BMS

 

1.1

 

 

 

1.1

 

FPA008 Collaboration - BMS

 

1.4

 

 

 

 

Milestone and Contingent Payments

 

 

 

 

 

 

 

Fibrosis and CNS Collaboration - UCB

 

0.2

 

 

 

 

Total

$

6.5

 

 

$

4.3

 

 

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.

Research and Development

Research and development expenses consist of costs we incur in performing internal and collaborative research and development activities. Expenses incurred related to collaborative research and development agreements approximate the revenue recognized under these agreements. Research and development costs consist of salaries and benefits, including associated stock-based compensation, lab supplies and facility costs, as well as fees paid to other entities that conduct certain research and development activities, including manufacturing, on our behalf.

We are conducting research and development activities on several oncology and inflammatory disease targets and products.

We have a research and development team that designs, manages and evaluates the results of all of our research and development activities. We conduct nearly all of the core target discovery and early research and preclinical activities internally and rely on third parties, such as clinical research organizations, or CROs, and clinical manufacturing organizations, or CMOs, for the execution of certain of our research and development activities, such as toxicology studies, drug substance and drug product manufacturing and the conduct of clinical trials. We account for research and development costs on a program-by-program basis. In the early phases of research and discovery, our costs are often related to improving our discovery platform or preliminary screening activities and are not necessarily allocable to a specific program. We assign costs for such activities to a distinct non-program related project code. We allocate research and development management, overhead, common usage laboratory supplies and facility costs on a full-time equivalent basis.

17


The following is a comparison of research and development expenses for the three months ended March 31, 2016 and 2015:

 

 

Three Months Ended

 

 

March 31,

 

(in millions)

2016

 

 

2015

 

Development programs:

 

 

 

 

 

 

 

FPA008

$

3.5

 

 

$

3.1

 

FPA144

 

3.3

 

 

 

1.2

 

Subtotal development programs

 

6.8

 

 

 

4.3

 

Preclinical programs

 

2.2

 

 

 

 

Discovery collaborations

 

3.8

 

 

 

3.9

 

Early research and discovery

 

5.5

 

 

 

3.0

 

Total research and development expenses

$

18.3

 

 

$

11.2

 

 

We expect that most of the research and development expenses we incur will continue to relate to activities to support our FPA008 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 clinical development, in particular as we increase the number and size of our clinical trials and as we expand our internal immuno-oncology discovery and research efforts. We expect that our FPA008 and FPA144 development-related expenses will increase at a faster rate than our other internal program research and development expenses as we advance FPA008 into a Phase 2 clinical trial in PVNS and a Phase 1b clinical trial in multiple cancers in the second half of 2016, and as we advance FPA144 into part 2 of the Phase 1 trial. We expect our preclinical programs expenses to continue to increase as we initiate additional therapeutic molecule campaigns and advance our preclinical programs toward and into IND application-enabling studies.  We expect our discovery collaboration expenses to decline in 2016 as we complete the research obligations under our respiratory diseases collaboration with GSK and our fibrosis and CNS collaboration with UCB.

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.

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 in order 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 associated 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 as we expand our operations to support our increased research and development activities and due to increased stock-based compensation. Also, we expect our intellectual property-related legal expenses, including those related to preparing, filing, prosecuting and maintaining patent applications, 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.

18


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 Securities and Exchange Commission, or SEC, on March 11, 2016. There have been no significant or material changes in our critical accounting policies during the three months ended March 31, 2016 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, 2016 and 2015

 

 

Three Months Ended

 

 

March 31,

 

(in millions)

2016

 

 

2015

 

Collaboration and license revenue

$

6.5

 

 

$

4.3

 

Operating expenses:

 

 

 

 

 

 

 

Research and development

 

18.3

 

 

 

11.2

 

General and administrative

 

8.6

 

 

 

4.2

 

Total operating expenses

 

26.9

 

 

 

15.4

 

Interest income

 

0.5

 

 

 

0.1

 

Loss before income tax

 

(19.9

)

 

 

(11.0

)

Income tax benefit

 

6.8

 

 

 

 

Net loss

$

(13.0

)

 

$

(11.0

)

 

Collaboration and License Revenue

Collaboration and license revenue increased by $2.2 million, or 51.2%, to $6.5 million for the three months ended March 31, 2016 from $4.3 million for the three months ended March 31, 2015. This increase was primarily due to the recognition of $2.5 million of revenue from our FPA008 collaboration agreement with BMS that we entered into in October 2015 and $0.2 million of revenue recognized from optioning fees by UCB under our fibrosis and CNS collaboration, which was offset by a decrease of $0.4 million in revenue from our respiratory diseases collaboration with GSK.

Research and Development

Our research and development expenses increased by $7.1 million, or 63.4%, to $18.3 million for the three months ended March 31, 2016 from $11.2 million for the three months ended March 31, 2015. This increase was primarily due to an increase of $2.1 million related to advancing our FPA144 Phase 1 clinical trial, a $2.2 million increase in preclinical program expenses related to advancing our preclinical programs, and a $2.5 million increase in early research and discovery related to expanding our immuno-oncology efforts.

General and Administrative

Our general and administrative expenses increased by $4.4 million, or 104.8%, to $8.6 million for the three months ended March 31, 2016 from $4.2 million for the three months ended March 31, 2015, primarily due to a $3.7 million increase in cash and stock-based compensation costs, a $0.2 million increase in tax planning and consulting services, and a $0.1 million increase in recruiting costs related to the expansion of our operations.

19


Income Tax Benefit

We realized an income tax benefit of $6.8 million for the three months ended March 31, 2016 as compared to no tax expense for the three months ended March 31, 2015.  The income tax benefit represents our ability to recover taxes accrued in 2015 based on existing tax law that allows us to carryback our 2016 or 2017 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.  

At the end of December 2015, we recognized approximately $15.1 million of net deferred tax assets based on our review of the reversal pattern of these deferred tax assets that may result in future recovery of tax paid in 2015.  Based on our forecasted loss for 2016, we assessed the recoverability of deferred tax assets based on their reversal patterns.  We will periodically review our ability to realize our deferred tax assets and any adjustment to this recoverability will impact our annual effective tax rate. 

Liquidity and Capital Resources

As of March 31, 2016, we had $482.0 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 12 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 is uncertain at this time. Our rights to payment under our collaboration and license agreements are our only committed external source 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.

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 source 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, 2016 will be sufficient to fund our operating expenses and capital expenditure requirements for at least the next 12 months.

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Cash Flows

The following is a summary of cash flows for the three months ended March 31, 2016 and 2015:

 

 

Three Months Ended

 

 

March 31,

 

(in millions)

2016

 

 

2015

 

Net cash used in operating activities

$

(34.1

)

 

$

(10.6

)

Net cash provided by (used in) investing activities

 

16.8

 

 

 

(69.8

)

Net cash provided by financing activities

 

0.4

 

 

 

79.6

 

 

Net Cash Used in Operating Activities

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 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 used in operating activities was $10.6 million during the three months ended March 31, 2015. The net loss of $11.0 million was offset by non-cash charges of $0.4 million for depreciation and amortization, $1.0 million for stock-based compensation expense, and $0.5 million for amortization of premium on marketable securities. The net change in operating assets and liabilities was $1.4 million.

Net Cash Provided by (Used in) Investing Activities

Net cash provided by (used in) investing activities was $16.8 million and $(69.8) million during the three months ended March 31, 2016 and 2015, respectively.  Net cash provided by (used in) investing activities for the periods presented primarily relates to the purchases and maturities of marketable securities. Purchases of property and equipment were $0.8 million and $0.4 million during the three months ended March 31, 2016 and 2015, respectively. The property and equipment purchases consisted primarily of purchases of laboratory equipment to support our research and development activities.

Net Cash Provided by Financing Activities

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.

Net cash provided by financing activities was $79.6 million during the three months ended March 31, 2015, primarily related to the net proceeds of $78.7 million from our 2015 follow-on public offering. Additionally, we received $0.9 million from employee stock option exercises for the three months ended March 31, 2015.

Contractual Obligations and Contingent Liabilities

During the three months ended March 31, 2016, 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.

JOBS Act

In April 2012, the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, was enacted. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies.

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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, 2016, we had cash and cash equivalents and marketable securities of $482.0 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 eleven 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 have the ability to 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 Bristol-Myers Squibb Company, or BMS, from our license and collaboration agreement for FPA008, 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, 2016, we reported a net loss of $13.0 million.

Although we may from time to time report profitable results, such as during the fiscal years ended December 31, 2015 and December 31, 2011, 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 a number of 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 and ensure adequate and legally 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 and validate companion diagnostics on a timely basis;

 

·

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

 

·

establish, maintain and protect our intellectual property rights; and

 

·

attract, hire and retain qualified personnel.

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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 U.S. Food and Drug Administration, or 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 these 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 likely 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 as we 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 find 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 their respective agreements with us. 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 other than programs 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 will have a material adverse effect on our business, operating results and prospects.

24


Our forecast of the period of 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, defending and enforcing any 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 can generate a sufficient amount of revenue from our products, if ever, we expect to finance 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 result in dilution to our existing stockholders and/or increased fixed payment obligations. Furthermore, these securities may have rights senior to those of our common stock and could contain covenants that would 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 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. To date, we have three product candidates, FPA008, FPA144 and FP-1039, in clinical development. 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 clinical development. The outcome of target discovery and validation efforts and preclinical studies 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 identify and validate new targets and complete preclinical development 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.

25


If clinical trials of our product candidates fail to demonstrate safety and efficacy to the satisfaction of regulatory authorities or do not otherwise produce 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 clinical trials will begin as planned, will need to be 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 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 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 clinical trials 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 and investigators or failure to conduct the 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, manufacturing and delivery of the product candidates to the clinical sites;

 

·

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

 

·

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

 

·

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

 

·

withdrawal of clinical trial sites from our clinical trials as a result of changing standards of care or the ineligibility of a 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 inability of us or our partners to timely complete clinical development could result in additional costs to us or impair our ability to generate product revenue or development, regulatory, commercialization or sales milestone payments and royalties on product sales.

26


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;

 

·

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 1/2 clinical trial of FPA008 in patients with PVNS, which is a rare, locally aggressive CSF1-driven tumor of synovium for which there are no currently approved therapies.  Very little data regarding the incidence and prevalence of PVNS exists and the data that has been published suggest that the incidence of PVNS may be as low as 1.8 per 1,000,000.  We expect that the limited size of the PVNS patient population will limit patient enrollment rates.  Also, we know that Plexxikon Inc. has begun a Phase 3 clinical trial of its PLX3397 candidate in PVNS and Roche has clinically tested its RG7155 antibody in PVNS patients.  If Plexxikon 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 1/2 clinical trial of FPA008 in PVNS.  Also, although we believe selecting patients using companion diagnostics should increase the probability of success in our clinical trial of FPA144 in gastric cancer, this will limit 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.

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 a number of reasons, including because:

 

·

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 in the particular disease indications we are pursuing, which 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 the product candidates unmarketable;

 

·

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

 

·

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

 

·

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.

If any of these events occur, we may be forced 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.

27


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 those described below:

 

·

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 period of 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 more costly manufacturing alternatives.

Certain raw materials necessary for the manufacture of our products, such as growth media, resins and filters, are available 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 depend on third-party manufacturers for the manufacture of drug substance and drug product for clinical trials as well as on 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.

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.

BMS has the exclusive right to manufacture FPA008. Under our FPA008 collaboration agreement with BMS, BMS will supply us with FPA008, at its cost and expense, for our use in our conduct of the current combination trial and our Phase 1/2 clinical trial of FPA008 in patients with PVNS and will supply us with FPA008 for our conduct of our independent development activities with respect to FPA008 in exchange for a service fee. In the past we have and we may in the future engage third parties for the manufacture of bulk drug substance and drug product for our products for our clinical trials.

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 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 ourselves, 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 because of 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 us.

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 preclinical studies and 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 the course of a product candidate’s clinical development and may vary among jurisdictions. We have not obtained regulatory approval for any product candidate 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:

 

·

disagreement with the design or implementation of our clinical trials;

 

·

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

 

·

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

28


 

·

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

 

·

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;

 

·

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 product. Results of our trials could reveal a high and unacceptable severity and 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 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 such products, a number of 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;

 

·

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

 

·

the FDA may require the establishment or modification of a risk evaluation and mitigation strategy (REMS) or a comparable foreign regulatory authority may require the establishment or modification of a similar strategy that may, for instance, restrict distribution of our products 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 acceptance of the particular 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 our FPA144 therapeutic product candidate, 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 our FPA144 therapeutic product candidate. 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 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 to more accurately identify these gastric cancer patients, both during our clinical trials and in connection with the commercialization of FPA144.  

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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 a third party to perform these functions. We do not currently have any agreements in place with any third party to develop or commercialize a companion diagnostic for FPA144.

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 any third party that we engage to assist us are unable to successfully develop a companion diagnostic for FPA144, or experience delays in doing so:

 

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

 

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

 

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we may not realize the full commercial potential of FPA144 if, among other reasons, we are unable to appropriately identify patients with FGFR2b protein overexpression.

If any of these events were to occur, our business would be harmed, possibly materially.

Even if our product candidates receive regulatory approval, they may still face future development and regulatory difficulties.

Even if we obtain regulatory approval for a product candidate, it would be subject to ongoing requirements by the FDA and comparable foreign regulatory authorities governing the manufacture, quality control, further development, labeling, packaging, storage, distribution, safety surveillance, import, export, advertising, promotion, recordkeeping and reporting of safety and other post-market information. The FDA and comparable foreign regulatory authorities will continue to closely monitor the safety profile of any product even after approval. If the FDA or comparable foreign regulatory authorities become aware of new safety information after approval of any of our product candidates, they may require labeling changes or establishment of a REMS or similar strategy, impose significant restrictions on a product’s indicated uses or marketing, or impose ongoing requirements for potentially costly post-approval studies or post-market surveillance.

In addition, manufacturers of drug products and their facilities are subject to continual review and periodic inspections by the FDA and other regulatory authorities for compliance with current Good Manufacturing Practices, or cGMP, regulations and standards. If we or a regulatory agency discover previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured, a regulatory agency may impose restrictions on that product, the manufacturing facility or us, including requiring recall or withdrawal of the product from the market or suspension of manufacturing. If we, our product candidates or the manufacturing facilities for our product candidates fail to comply with applicable regulatory requirements, a regulatory agency may:

 

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issue warning letters or untitled letters;

 

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mandate modifications to promotional materials or require us to provide corrective information to healthcare practitioners;

 

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require us to enter into a consent decree, which can include imposition of various fines, reimbursements for inspection costs, required due dates for specific actions and penalties for noncompliance;

 

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seek an injunction or other court actions to impose civil or criminal penalties or monetary fines;

 

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suspend or withdraw regulatory approval;

 

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suspend any ongoing clinical studies;

 

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refuse to approve pending applications or supplements to applications filed by us;

 

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suspend or impose restrictions on operations, including costly new manufacturing requirements; or

 

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seize or detain products, refuse to permit the import or export of products, or require us to initiate a product recall.

The occurrence of any event or penalty described above may inhibit our ability to commercialize our products and generate revenue.

Advertising and promotion of any product candidate that obtains approval in the United States will be heavily scrutinized by the FDA, the Department of Justice, the Department of Health and Human Services’ Office of Inspector General, state attorneys general, members of Congress and the public. Violations, including promotion of our products for unapproved (or off-label) uses, are subject to enforcement letters, inquiries and investigations and civil and criminal sanctions by the government. Additionally, comparable foreign regulatory authorities will heavily scrutinize advertising and promotion of any product candidate that obtains approval outside of the United States.

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In the United States, engaging in the impermissible promotion of our products for off-label uses can also subject us to false claims litigation under federal and state statutes, which can lead to civil and criminal penalties and fines and agreements that materially restrict the manner in which a company promotes or distributes drug products. These false claims statutes include the federal False Claims Act, which allows any individual to bring a lawsuit against a pharmaceutical company on behalf of the federal government alleging submission of false or fraudulent claims or causing another entity or individual to present such false or fraudulent claims for payment by a federal program such as Medicare or Medicaid. If the government prevails in the lawsuit, the individual will share in any fines or settlement funds. Since 2004, these False Claims Act lawsuits against pharmaceutical companies have increased significantly in volume and breadth, leading to several substantial civil and criminal settlements regarding certain sales practices promoting off-label drug uses involving fines in excess of $1.0 billion. This growth in litigation has increased the risk that a pharmaceutical company will have to defend a false claim action, pay settlement fines or restitution, agree to comply with burdensome reporting and compliance obligations and be excluded from Medicare, Medicaid and other federal and state healthcare programs. If we do not lawfully promote our approved products, we may become subject to such litigation and, if we do not successfully defend against such actions, those actions may have a material adverse effect on our business, financial condition and results of operations.

The FDA’s policies may change and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of our product candidates. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may lose any marketing approval that we may have obtained, which would adversely affect our business, prospects and ability to achieve or sustain profitability.

Our failure to obtain regulatory approval in international jurisdictions would prevent us from marketing our product candidates outside the United States.

In order to market and sell our products in other jurisdictions, we must obtain separate marketing approvals and comply with numerous and varying regulatory requirements. The approval procedure varies among countries and can involve additional testing. The time required to obtain approval may differ substantially from that required to obtain FDA approval. The regulatory approval process outside the United States generally includes all of the risks associated with obtaining FDA approval. In addition, in many countries outside the United States, we must secure product reimbursement approvals before regulatory authorities will approve the product for sale in that country. Obtaining foreign regulatory approvals and compliance with foreign regulatory requirements could result in significant delays, difficulties and costs for us and could delay or prevent the introduction of our products in certain countries. We may not obtain foreign regulatory approvals on a timely basis, if at all. Further, clinical trials conducted in one country may not be accepted by regulatory authorities in other countries, and regulatory approval in one country or by one regulatory authority outside the United States does not ensure approval by regulatory authorities in any other country or jurisdiction or by the FDA, while a failure or delay in obtaining regulatory approval for any of our product candidates in one country may have a negative effect on the regulatory approval process in others and may significantly diminish the commercial prospects of that product candidate, and our business prospects could decline. Also, regulatory approval for any of our product candidates may be withdrawn. If we fail to comply with the regulatory requirements in international markets and receive applicable marketing approvals, our target market will be reduced, our ability to realize the full market potential of our product candidates will be harmed and our business will be adversely affected.

We face substantial competition, which may result in others discovering, developing or commercializing products before or more successfully than us.

The biotechnology industry is intensely competitive and subject to rapid and significant technological change. We face competition with respect to our current product candidates and will face competition with respect to any future product candidates from major pharmaceutical companies, specialty pharmaceutical companies and biotechnology companies worldwide. Many of our competitors have significantly greater financial, technical and human resources. Smaller and early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies.

Our competitors may obtain regulatory approval of their products more rapidly than we may or may obtain patent protection or other intellectual property rights that limit our ability to develop or commercialize our product candidates. Our competitors may also develop drugs that are more effective, more convenient, more widely used and less costly or have a better safety profile than our products and these competitors may also be more successful than us in manufacturing and marketing their products.

Our competitors will also compete with us in recruiting and retaining qualified scientific, management and commercial personnel, establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies complementary to, or necessary for, our programs.