fprx-10q_20160930.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

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

For the quarterly period ended September 30, 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      No  

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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

 

 

 

 

 

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  

As of October 31, 2016, the number of outstanding shares of the registrant’s common stock was 28,441,594.

 

 

 

 

 

 


TABLE OF CONTENTS

 

PART I.

  

FINANCIAL INFORMATION

  

4

 

  

 

Item 1.

  

Financial Statements

  

4

 

  

 

  

 

Condensed Balance Sheets as of September 30, 2016 and December 31, 2015

  

4

 

  

 

  

 

Condensed Statements of Operations for the Three and Nine Months Ended September 30, 2016 and 2015

  

5

 

  

 

  

 

Condensed Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2016 and 2015

  

6

 

  

 

  

 

Condensed Statements of Cash Flows for the Nine Months Ended September 30, 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;

 

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

 

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

 

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

 

our ability to establish and maintain collaborations and necessary licenses;

 

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

 

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

 

developments relating to our competitors and our industry; and

 

our expectations regarding licensing, acquisitions and strategic operations.

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

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

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

 

 

 

3


PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

FIVE PRIME THERAPEUTICS, INC.

Condensed Balance Sheets

(In thousands)

 

 

September 30,

 

 

December 31,

 

 

2016

 

 

2015

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

56,375

 

 

$

149,971

 

Marketable securities

 

384,323

 

 

 

367,495

 

Receivables from collaborative partners

 

2,307

 

 

 

4,054

 

Income tax receivable

 

3,193

 

 

 

 

Prepaid and other current assets

 

7,769

 

 

 

6,761

 

Total current assets

 

453,967

 

 

 

528,281

 

Property and equipment, net

 

5,418

 

 

 

4,539

 

Deferred tax asset

 

5,327

 

 

 

15,071

 

Other long-term assets

 

414

 

 

 

394

 

Total assets

$

465,126

 

 

$

548,285

 

Liabilities and stockholders' equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

528

 

 

$

1,894

 

Accrued personnel-related expenses

 

5,931

 

 

 

6,878

 

Other accrued liabilities

 

9,810

 

 

 

5,882

 

Deferred revenue, current portion

 

15,014

 

 

 

17,509

 

Deferred rent, current portion

 

841

 

 

 

768

 

Income tax payable, current portion

 

7,013

 

 

 

46,437

 

Total current liabilities

 

39,137

 

 

 

79,368

 

Deferred revenue, long-term portion

 

21,209

 

 

 

31,268

 

Deferred rent, long-term portion

 

216

 

 

 

865

 

Income tax payable, long-term portion

 

515

 

 

 

3,283

 

Other long-term liabilities

 

74

 

 

 

295

 

Commitments

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

Common stock

 

27

 

 

 

26

 

Additional paid-in capital

 

388,752

 

 

 

372,605

 

Accumulated other comprehensive income (loss)

 

138

 

 

 

(74

)

Retained earnings

 

15,058

 

 

 

60,649

 

Total stockholders' equity

 

403,975

 

 

 

433,206

 

Total liabilities and stockholders' equity

$

465,126

 

 

$

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

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Collaboration revenue

$

6,680

 

 

$

5,858

 

 

$

22,429

 

 

$

16,460

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

23,890

 

 

 

24,720

 

 

 

64,923

 

 

 

49,241

 

General and administrative

 

9,146

 

 

 

5,213

 

 

 

25,309

 

 

 

14,029

 

Total operating expenses

 

33,036

 

 

 

29,933

 

 

 

90,232

 

 

 

63,270

 

Loss from operations

 

(26,356

)

 

 

(24,075

)

 

 

(67,803

)

 

 

(46,810

)

Interest and other income, net

 

639

 

 

 

104

 

 

 

1,821

 

 

 

329

 

Loss before income tax

 

(25,717

)

 

 

(23,971

)

 

 

(65,982

)

 

 

(46,481

)

Income tax benefit

 

6,303

 

 

 

 

 

 

20,391

 

 

 

 

Net loss

$

(19,414

)

 

$

(23,971

)

 

$

(45,591

)

 

$

(46,481

)

Basic and diluted net loss per common share

$

(0.72

)

 

$

(0.93

)

 

$

(1.70

)

 

$

(1.82

)

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

 

27,139

 

 

 

25,825

 

 

 

26,794

 

 

 

25,532

 

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

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Net loss

$

(19,414

)

 

$

(23,971

)

 

$

(45,591

)

 

$

(46,481

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

(81

)

 

 

(35

)

 

 

212

 

 

 

36

 

Comprehensive loss

$

(19,495

)

 

$

(24,006

)

 

$

(45,379

)

 

$

(46,445

)

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)

 

 

Nine Months Ended

 

 

September 30,

 

 

2016

 

 

2015

 

Operating activities

 

 

 

 

 

 

 

Net loss

$

(45,591

)

 

$

(46,481

)

Adjustments to reconcile net loss to net cash used in

   operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

1,233

 

 

 

1,275

 

Stock-based compensation expense

 

22,838

 

 

 

5,056

 

Excess tax benefits from employee equity incentive plans

 

(662

)

 

 

 

Deferred income taxes

 

9,744

 

 

 

 

Amortization of premium on marketable securities

 

3,339

 

 

 

1,491

 

Loss on disposal of property and equipment

 

9

 

 

 

3

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Receivables from collaborative partners

 

1,747

 

 

 

(1,256

)

Income tax receivable

 

(3,193

)

 

 

 

 

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

 

(1,028

)

 

 

(3,490

)

Accounts payable

 

(1,366

)

 

 

469

 

Accrued personnel-related expenses

 

(947

)

 

 

(338

)

Deferred revenue

 

(12,554

)

 

 

(3,274

)

Deferred rent

 

(576

)

 

 

(346

)

Income tax payable

 

(41,530

)

 

 

 

Other accrued liabilities and other long-term liabilities

 

3,707

 

 

 

2,401

 

Net cash used in operating activities

 

(64,830

)

 

 

(44,490

)

Investing activities

 

 

 

 

 

 

 

Purchases of marketable securities

 

(410,955

)

 

 

(135,376

)

Maturities of marketable securities

 

391,000

 

 

 

121,250

 

Purchases of property and equipment

 

(2,121

)

 

 

(1,514

)

Net cash used in investing activities

 

(22,076

)

 

 

(15,640

)

Financing activities

 

 

 

 

 

 

 

Proceeds from public offering of common stock, net

 

 

 

 

78,693

 

Proceeds from issuance of common stock under equity

   incentive plans

 

6,702

 

 

 

3,126

 

Repurchase of shares to satisfy tax withholding

 

(14,054

)

 

 

 

Excess tax benefits from employee equity incentive plans

 

662

 

 

 

 

Net cash (used in) provided by financing activities

 

(6,690

)

 

 

81,819

 

Net (decrease) increase in cash and cash equivalents

 

(93,596

)

 

 

21,689

 

Cash and cash equivalents at beginning of period

 

149,971

 

 

 

15,267

 

Cash and cash equivalents at end of period

$

56,375

 

 

$

36,956

 

 

 

 

 

 

 

 

 

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

September 30, 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 innovative protein therapeutics to improve the lives of patients with serious diseases. 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 September 30, 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 assets or liabilities measured using Level 3 inputs as of September 30, 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):

 

 

September 30, 2016

 

 

 

 

 

 

Basis of Fair Value

 

 

 

 

 

 

Measurements

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

54,324

 

 

$

54,324

 

 

$

 

 

$

 

U.S. Treasury securities

 

384,323

 

 

 

384,323

 

 

 

 

 

 

 

Total cash equivalents and marketable securities

$

438,647

 

 

$

438,647

 

 

$

 

 

$

 

 

 

 

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, from the calculation of diluted net loss per share for all periods presented as the effect would have been antidilutive (in thousands):

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Options to purchase common stock

 

3,100

 

 

 

2,833

 

 

 

2,815

 

 

 

2,670

 

RSAs

 

1,250

 

 

 

666

 

 

 

1,358

 

 

 

256

 

 

 

4,350

 

 

 

3,499

 

 

 

4,173

 

 

 

2,926

 

 

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. In March, April, and May 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations, ASU 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing, and ASU 2016-12, Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients to provide supplemental adoption guidance and clarification to ASU 2014-09. The effective date for these new standards is the same as the effective date and transition requirements for ASU 2014-09. We expect to adopt ASU 2014-09 in the first quarter of fiscal 2018 using the modified retrospective method.  We are in the process of analyzing each of our collaboration agreements to determine the impact that the standards will have on our financial position and results of operations and expect to complete our assessment by the end of the fourth quarter of 2017.  

9


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 evaluating the impact that the adoption of ASU 2016-02 will have on our consolidated financial statements and related disclosures.

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 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):

 

 

September 30, 2016

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Estimated

 

 

Cost Basis

 

 

Gains

 

 

Losses

 

 

Fair Value

 

Money market funds

$

54,324

 

 

$

 

 

$

 

 

$

54,324

 

U.S. Treasury securities

 

384,111

 

 

 

227

 

 

 

(15

)

 

 

384,323

 

 

 

438,435

 

 

 

227

 

 

 

(15

)

 

 

438,647

 

Less: cash equivalents

 

(54,324

)

 

 

 

 

 

 

 

 

(54,324

)

Total marketable securities

$

384,111

 

 

$

227

 

 

$

(15

)

 

$

384,323

 

 

 

 

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 September 30, 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

$

384,111

 

 

$

384,323

 

Total marketable securities

$

384,111

 

 

$

384,323

 

 

We determined that the gross unrealized losses on our marketable securities as of September 30, 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 September 30, 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

 

1,333,000

 

 

$

43.58

 

 

 

 

 

Options exercised

 

(769,984

)

 

$

7.68

 

 

 

 

 

Options forfeited

 

(116,045

)

 

$

19.09

 

 

 

 

 

Options expired

 

(127

)

 

$

18.33

 

 

 

 

 

Balance at September 30, 2016

 

3,475,558

 

 

$

25.37

 

 

 

 

 

Options exercisable

 

1,230,889

 

 

$

11.16

 

 

 

6.30

 

 

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

 

381,730

 

$

42.46

 

RSAs vested

 

(800,554

)

$

19.04

 

RSAs forfeited

 

(114,021

)

$

19.50

 

Unvested balance at September 30, 2016

 

1,042,025

 

$

28.59

 

 

 

 

 

 

 

 

As of September 30, 2016, there were 1,432,505 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

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Research and development

$

4,500

 

 

$

1,537

 

 

$

12,643

 

 

$

2,642

 

General and administrative

 

3,811

 

 

 

1,316

 

 

 

10,195

 

 

 

2,414

 

Total

$

8,311

 

 

$

2,853

 

 

$

22,838

 

 

$

5,056

 

 

11


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

 

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

 

2016

 

2015

 

2016

 

2015

Expected term (years)

6.0-6.3

 

6.0-6.1

 

5.5-6.3

 

5.5-6.1

Expected volatility

70%

 

71%

 

70-74%

 

71-73%

Risk-free interest rate

1.3%

 

1.5-1.9%

 

1.3-1.5%

 

1.4-1.9%

Expected dividend yield

0%

 

0%

 

0%

 

0%

 

As of September 30, 2016, we had $40.1 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 3.1 years.  Additionally, we had $20.5 million of total unrecognized compensation expense related to employee and director RSAs that we expect to recognize over a weighted-average period of 1.4 years.

5.

Income Taxes

We realized an income tax benefit of $6.3 million and $20.4 million, respectively, for the three and nine months ended September 30, 2016 as compared to no tax expense for the three and nine months ended September 30, 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.  

As of the year ended December 31, 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.

 

 

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

 

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

 

FP-1039 is a fusion protein that “traps” and neutralizes cancer-promoting fibroblast growth factors, or FGFs, involved in cancer cell proliferation and new blood vessel formation, 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 generate and preclinically test protein therapeutics, including antibodies and ligand traps, containing or directed to the targets we identify. We plan to advance selected therapeutic candidates into clinical development, with a goal of filing at least one Investigational New Drug, or IND, application for a new molecule 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 and expand our clinical development activities, in particular as we advance into later stages of 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 cabiralizumab, and the fiscal year ended December 31, 2011, due primarily to the $50.0 million upfront payment we received from Human Genome Sciences, Inc. from our license and collaboration agreement for FP-1039. For the nine-month periods ended September 30, 2016 and 2015, we reported a net loss of $45.6 million and $46.5 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


Third Quarter 2016 and Other Recent Highlights

Cabiralizumab

In October 2016, we initiated the Phase 1b portion of our clinical trial evaluating cabiralizumab in combination with Opdivo in multiple tumor types.

FPA144

In June 2016, the U.S. Food and Drug Administration, or the FDA, granted Orphan Drug Designation to FPA144 for the treatment of gastric cancer, including cancer of the gastroesophageal junction in patients whose tumors overexpress FGFR2b.  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.

Clinical Pipeline

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

Cabiralizumab (FPA008)

Cabiralizumab in Immuno-Oncology

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

 

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).

14


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

Cabiralizumab in PVNS

In January 2016, the FDA granted cabiralizumab Orphan Drug Designation for the treatment of PVNS.  

We are conducting a Phase 2 clinical trial of cabiralizumab as a potential treatment for PVNS. During the Phase 2 expansion portion of the trial, we are evaluating tumor response rate and duration and measures of pain and joint function in PVNS patients.

FPA144

We are conducting a two-part Phase 1 clinical trial of FPA144 as a treatment for gastric cancer patients. We are currently enrolling patients in Part 2 of the trial in which we are evaluating the safety, pharmacokinetics, or PK, and efficacy of FPA144 in metastatic gastric cancer patients, with the aim of exploring the correlation between efficacy and FGFR2b overexpression.  We are conducting tumor testing for FGFR2b overexpression centrally using a proprietary immunohistochemistry, or IHC, assay to identify gastric cancer patients that have tumors that overexpress FGFR2b protein. Part 2 of the trial is designed to enroll gastric cancer patients whose tumor samples have high, moderate, low or no protein overexpression in four separate cohorts. Enrollment in the cohorts of patients with high or no overexpression began in November 2015.  In the third quarter of 2016, we opened enrollment in the cohorts of patients with moderate or low overexpression.  

We also have opened for enrollment an additional cohort in this Phase 1 clinical trial to test FPA144 as a treatment for bladder cancer patients whose tumors overexpress the FGFR2b protein. We expect dosing of patients in this bladder cancer cohort could begin by the end of 2016 or beginning of 2017.

FP-1039

GSK is currently conducting a Phase 1b clinical trial of FP-1039 to evaluate the safety, tolerability, dosage, response rate and duration of response of FP-1039 in combination with chemotherapy in patients with malignant pleural mesothelioma.

GSK initiated the Phase1b clinical trial under a license and collaboration agreement, or the FP-1039 license, that we entered into with Human Genome Sciences in March 2011.

In March 2016, GSK delivered to us written notice of termination of the FP-1039 license for convenience.  Pursuant to the terms of the FP-1039 license, termination of the FP-1039 license became effective on September 5, 2016, which was 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 of FP-1039 that GSK is currently conducting, at GSK’s expense.  

In June 2016, GSK determined not to recruit new malignant pleural mesothelioma patients into the Phase1b clinical trial beyond the 25 patients that had enrolled at the 15 mg/kg dose level because of potential FP-1039/GSK3052230 clinical supply limitations.  GSK continues to dose malignant pleural mesothelioma patients that had enrolled before 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 the ongoing Phase 1b clinical 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 that apply the “brakes” to immune cells and prevent the immune cells from killing the tumor cells. One of the most exciting recent discoveries in cancer therapy has been the identification of ways to release these “brakes” and allow the immune cells to once again kill tumor cells. This new approach has the potential of not only reducing tumor growth like traditional therapies, but potentially eliminating the cancer entirely in some patients.

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 antibody targets and ligand traps for use in immuno-oncology and are actively screening for and validating additional targets. We generate and pre-clinically test protein therapeutics, including antibodies and ligand traps, directed to the targets we identify. We currently have three preclinical programs in which we have selected lead candidates and begun IND-enabling activities.  We plan to advance selected therapeutic candidates 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.

15


Financial Overview

Collaboration and License Revenue

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

Summary Revenue by Collaboration and License Agreements

The following is a comparison of collaboration and license revenue for the three and nine months ended September 30, 2016 and 2015:

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

(in millions)

2016

 

 

2015

 

 

2016

 

 

2015

 

R&D Funding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cabiralizumab Collaboration - BMS

$

1.8

 

 

$

1.0

 

 

$

4.6

 

 

$

1.2

 

Immuno-oncology Research Collaboration - BMS

 

1.0

 

 

 

0.6

 

 

 

2.4

 

 

 

2.0

 

Respiratory Diseases Collaboration - GSK

 

0.1

 

 

 

1.0

 

 

 

2.4

 

 

 

3.1

 

Fibrosis and CNS Collaboration - UCB

 

 

 

 

0.2

 

 

 

0.1

 

 

 

0.6

 

Ratable Revenue Recognition

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cabiralizumab Collaboration - BMS

 

1.5

 

 

 

 

 

 

4.4

 

 

 

 

Immuno-oncology Research Collaboration - BMS

 

1.1

 

 

 

1.2

 

 

 

3.3

 

 

 

3.4

 

Respiratory Diseases Collaboration - GSK

 

0.1

 

 

 

0.7

 

 

 

0.8

 

 

 

2.0

 

Fibrosis and CNS Collaboration - UCB

 

0.8

 

 

 

0.8

 

 

 

2.3

 

 

 

2.3

 

Milestone and Contingent Payments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Respiratory Diseases Collaboration - GSK

 

0.3

 

 

 

0.3

 

 

 

1.8

 

 

 

0.3

 

Fibrosis and CNS Collaboration - UCB

 

 

 

 

0.1

 

 

 

0.2

 

 

 

0.1

 

Other License Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

bluebird bio License Agreement

 

 

 

 

 

 

 

0.1

 

 

 

1.5

 

Total

$

6.7

 

 

$

5.9

 

 

$

22.4

 

 

$

16.5

 

 

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

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 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 most of our core target discovery and early research and early preclinical activities internally and rely more heavily on third parties, such as clinical research organizations, or CROs, and clinical manufacturing organizations, or CMOs, for the execution of our IND-enabling and development activities, such as GLP 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 conducting target screening, evaluation and validation activities and conducting research activities with respect to selected targets and target pathways 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.

16


The following is a comparison of research and development expenses for the three and nine months ended September 30, 2016 and 2015:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

(in millions)

2016

 

 

2015

 

 

2016

 

 

2015

 

Development programs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cabiralizumab

$

5.6

 

 

$

5.5

 

 

$

13.0

 

 

$

12.9

 

FPA144

 

4.0

 

 

 

2.0

 

 

 

13.0

 

 

 

4.4

 

FP-1039

 

0.1

 

 

 

0.1

 

 

 

0.2

 

 

 

0.2

 

Subtotal development programs

 

9.7

 

 

 

7.6

 

 

 

26.2

 

 

 

17.5

 

Preclinical programs

 

5.4

 

 

 

10.0

 

 

 

12.6

 

 

 

11.3

 

Discovery collaborations

 

1.7

 

 

 

3.9

 

 

 

7.4

 

 

 

11.5

 

Early research and discovery

 

7.1

 

 

 

3.2

 

 

 

18.7

 

 

 

8.9

 

Total research and development expenses

$

23.9

 

 

$

24.7

 

 

$

64.9

 

 

$

49.2

 

 

We expect that most of the research and development expenses we incur will continue to relate to activities to support our cabiralizumab and FPA144 development programs and our immuno-oncology preclinical, research and discovery efforts. We expect our research and development expenses to increase as we advance our development programs further and advance additional drug candidates into preclinical and clinical development, in particular as we increase the number and size of our clinical trials and as we expand our internal immuno-oncology preclinical, research and discovery efforts. We expect that our cabiralizumab and FPA144 development-related expenses will increase at a faster rate than our other internal program research and development expenses as we advance cabiralizumab through the Phase 2 clinical trial in PVNS and the Phase 1a/1b clinical trial in multiple cancers, and as we advance FPA144 into additional cohorts in part 2 of the Phase 1 trial. We expect our preclinical program expenses to continue to increase as we initiate additional therapeutic molecule campaigns and advance our preclinical programs toward and into IND-enabling studies.  We expect our discovery collaboration expenses to decline in 2016 due to the completion of the research terms of our respiratory diseases collaboration with GSK and our fibrosis and CNS collaboration with UCB in July 2016 and March 2016, respectively.

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 and prosecuting patent applications and maintaining patents, to increase as our intellectual property portfolio expands.

Interest Income

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

17


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 nine months ended September 30, 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 September 30, 2016 and 2015

 

 

Three Months Ended

 

 

September 30,

 

(in millions)

2016

 

 

2015

 

Collaboration and license revenue

$

6.7

 

 

$

5.9

 

Operating expenses:

 

 

 

 

 

 

 

Research and development

 

23.9

 

 

 

24.7

 

General and administrative

 

9.1

 

 

 

5.2

 

Total operating expenses

 

33.0