Form 8-K SEATTLE GENETICS INC For: Jan 31
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): January 31, 2018
Seattle Genetics, Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 0-32405 | 91-1874389 | ||
| (State or other jurisdiction of incorporation) |
(Commission File No.) |
(IRS Employer Identification No.) |
21823 30th Drive SE, Bothell, Washington 98021
(Address of principal executive offices)
Registrant’s telephone number, including area code: (425) 527-4000
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
| ☐ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
| ☐ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
| ☒ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
| ☐ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter). Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
In this report, “Seattle Genetics,” “the Company,” “we,” “us” and “our” refer to Seattle Genetics, Inc., a Delaware corporation, and its subsidiaries on a consolidated basis.
| Item 8.01. | Other Events. |
As announced in our Current Report on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on January 31, 2018, we and our wholly owned subsidiary, Valley Acquisition Sub, Inc. (“Purchaser”), entered into an Agreement and Plan of Merger dated January 30, 2018 (the “Merger Agreement”) with Cascadian Therapeutics, Inc., a Delaware corporation (“Cascadian”). Pursuant to the Merger Agreement, we will commence an offer (the “Tender Offer”) to acquire all of the outstanding shares of common stock, par value $0.0001 per share, of Cascadian at a price of $10.00 per share, payble net to the holder in cash (the “Offer Price”), without interest, less any applicable withholding taxes. As soon as practicable following the consummation of the Tender Offer, and subject to the satisfaction or waiver of certain conditions set forth in the Merger Agreement, Purchaser will merge with and into Cascadian (the “Merger”) pursuant to the provisions of Section 251(h) of the Delaware General Corporation Law, with no stockholder vote required to consummate the Merger, and Cascadian will survive as our subsidiary. We refer to the proposed Tender Offer and Merger together as the “Acquisition.”
In connection with the proposed Acquisition, we are filing information for the purpose of supplementing and updating the risk factor disclosure contained in our prior public filings, including those discussed under the heading “Item 1A. Risk Factors” in our Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, filed with the SEC on November 6, 2017. We are also updating certain aspects of the description of our business from that described under the heading, “Item 1. Business” in our Annual Report on Form 10-K for the year ended December 31, 2016, filed with the SEC on February 21, 2017. The updated disclosures are filed herewith as Exhibit 99.1 and are incorporated herein by reference.
Also in connection with the proposed Acquisition, certain information about Cascadian, including a description of its business and risk factors are filed herewith as Exhibit 99.3 and are incorporated herein by reference. Included in Exhibit 99.3 are the audited consolidated financial statements of Cascadian as of December 31, 2016 and 2015, and for each of the three years in the period ended December 31, 2016 and the notes related thereto, as well as the unaudited consolidated financial statements of Cascadian as of September 30, 2017 and December 31, 2016 and for the three and nine months ended September 30, 2017 and 2016, and the notes related thereto.
| Item 9.01. | Financial Statements and Exhibits. |
Forward-Looking Statements
This report and the documents incorporated herein by reference contain forward-looking statements, including, but not limited to, statements related to the proposed Acquisition and the anticipated timing and benefits thereof; our expected financing for the proposed Acquisition; our and Cascadian’s strategy, plans, objectives, expectations (financial or otherwise) and intentions; commercialization plans, development programs, clinical plans and anticipated product portfolio; and other statements that are not historical facts. In some cases, you can identify forward-looking statements by terminology such as “may,” “might,” “will,” “should,” “expect,” “plan,” “anticipate,” “project,” “believe,” “estimate,” “predict,” “potential,” “intend” or “continue,” the negative of terms like these or other comparable terminology, and other words or terms of similar meaning in connection with any discussion of future operating or financial performance. These forward-looking statements are based on our and Cascadian’s current expectations and inherently involve significant risks and uncertainties. Actual results and the timing of events could differ materially from those anticipated in such forward-looking statements as a result of these risks and uncertainties, which include, without limitation, risks related to our ability to complete the proposed Acquisition on the proposed terms and schedule, including risks and uncertainties related to the satisfaction of closing conditions related to the proposed Acquisition; the possibility that competing offers for Cascadian will be made; risks associated with business combination transactions, such as the risk that the acquired Cascadian business will not be integrated successfully or that such integration may be more difficult, time-consuming or costly than expected; our ability to obtain the expected financing to consummate the proposed Acquisition; risks related to future opportunities and plans for the combined company, including uncertainty of the expected future regulatory filings, financial performance and results of the combined company following completion of the proposed Acquisition; the possibility that if we do not achieve the perceived benefits of the proposed Acquisition as rapidly or to the extent anticipated by financial analysts or investors, the market price of our common stock could decline; and other risks and uncertainties affecting Seattle Genetics and Cascadian, including those described under the caption “Risk Factors” included in Exhibit 99.1 hereto and under the caption “Risk Factors” in Exhibit 99.3 hereto. Each of Seattle Genetics and Cascadian disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Additional Information
The tender offer described in this communication has not yet commenced, and this communication is neither an offer to purchase nor a solicitation of an offer to sell any Shares or any other securities. On the commencement date of the tender offer, a tender offer statement on Schedule TO, including an offer to purchase, a letter of transmittal and related documents, will be filed with the United States Securities and Exchange Commission (the “SEC”) and Cascadian Therapeutics will file a Solicitation/Recommendation Statement on Schedule 14D-9 relating to the tender offer with the SEC. The offer to purchase Shares will only be made pursuant to the offer to purchase, the letter of transmittal and related documents filed with such Schedule TO. INVESTORS AND SECURITY HOLDERS ARE URGED TO READ BOTH THE TENDER OFFER STATEMENT AND THE SOLICITATION/RECOMMENDATION STATEMENT REGARDING THE TENDER OFFER, AS THEY MAY BE AMENDED FROM TIME TO TIME, WHEN THEY BECOME AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION. The tender offer statement will be filed with the SEC by Purchaser and Seattle Genetics, and the solicitation/recommendation statement will be filed with the SEC by Cascadian Therapeutics. Investors and security holders may obtain a free copy of these statements (when available) and other documents filed with the SEC at the website maintained by the SEC at www.sec.gov or by directing such requests to the Information Agent for the tender offer, which will be named in the tender offer statement.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| Date: January 31, 2018 | SEATTLE GENETICS, INC. | |||||
| By: | /s/ Clay B. Siegall | |||||
| Clay B. Siegall | ||||||
| President and Chief Executive Officer | ||||||
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-212688, 333-204331, 333-197992, 333-188446, 333-176144, 333-168672, 333-148188, 333-56670 and Form S-3 (No. 333-206846) of our report dated March 9, 2017, with respect to the consolidated financial statements of Cascadian Therapeutics, Inc. as of December 31, 2016 and 2015 and for each of the three years ended December 31, 2016, incorporated by reference in this Current Report on Form 8-K of Seattle Genetics, Inc. dated January 31, 2018.
/s/ Ernst & Young LLP
Seattle, Washington
January 31, 2018
Exhibit 99.1
Throughout the information in this Exhibit 99.1, unless the context specifies or implies otherwise, the terms “Seattle Genetics,” “the
Company,” “we,” “us” and “our” refer to Seattle Genetics, Inc., a Delaware corporation, and its subsidiaries on a consolidated basis. Seattle Genetics®,
and ADCETRIS® are our registered trademarks in the United States. All other trademarks or trade names referred to in this Current Report on Form 8-K are the property of their respective owners.
COMPANY OVERVIEW
Our Business
Seattle Genetics is a biotechnology company focused on the development and commercialization of targeted therapies for the treatment of cancer. Our marketed product ADCETRIS, or brentuximab vedotin, is approved by the United States Food and Drug Administration, or FDA, and the European Commission for four indications, encompassing several settings for the treatment of relapsed Hodgkin lymphoma, for relapsed systemic anaplastic large cell lymphoma, or sALCL, and for certain types of cutaneous T-cell lymphoma, or CTCL. ADCETRIS is commercially available in 70 countries, including in the United States, Canada, members of the European Union and Japan. We are collaborating with Takeda Pharmaceutical Company Limited, or Takeda, to develop and commercialize ADCETRIS on a global basis. Under this collaboration, Seattle Genetics has retained commercial rights for ADCETRIS in the United States and its territories and in Canada, and Takeda has commercial rights in the rest of the world. Beyond our current labeled indications, we have a broad development strategy for ADCETRIS as described under “—Our Clinical Development Status and Plan” below.
Our clinical-stage pipeline includes two antibody-drug conjugates, or ADCs, for solid tumors with potential accelerated approval pathways. In collaboration with Astellas Pharma, Inc., or Astellas, we are developing enfortumab vedotin, formerly known as ASG-22ME. In collaboration with Genmab A/S, or Genmab, we are developing tisotumab vedotin. Our earlier-stage clinical pipeline includes five other ADC programs consisting of ladiratuzumab vedotin, or SGN-LIV1A, denintuzumab mafodotin, or SGN-CD19A, SGN-CD19B, SGN-CD123A, and SGN-CD352A, as well as two immuno-oncology agents, SEA-CD40, which is based on our sugar-engineered antibody, or SEA, technology, and SGN-2FF, which is a novel small molecule. In addition, we have multiple preclinical and research-stage programs that employ our proprietary technologies, including SGN-CD48A.
We have collaborations for our ADC technology with a number of biotechnology and pharmaceutical companies, including AbbVie Biotechnology Ltd., or AbbVie; Bayer Pharma AG, or Bayer; Celldex Therapeutics, Inc., or Celldex; Genentech, Inc., a member of the Roche Group, or Genentech; GlaxoSmithKline LLC, or GSK; Pfizer, Inc., or Pfizer; and PSMA Development Company LLC, a subsidiary of Progenics Pharmaceuticals Inc., or Progenics. In addition, we have a collaboration with Unum Therapeutics, Inc., or Unum, to develop and commercialize novel antibody-coupled T-cell receptor, or ACTR, therapies incorporating our antibodies for the treatment of cancer.
Our Clinical Development Status and Plan
ADCETRIS (brentuximab vedotin)
In collaboration with our partners, we are pursuing a broad development strategy for ADCETRIS that includes clinical trials of ADCETRIS evaluating its therapeutic potential in newly diagnosed patients with Hodgkin lymphoma or mature T-cell lymphoma, or MTCL, also known as peripheral T-Cell lymphoma, or PTCL, including sALCL. We are also evaluating ADCETRIS in combination with a checkpoint inhibitor, or CPI. These ongoing clinical trials include:
Phase 3 Frontline Hodgkin Lymphoma (ECHELON-1). In June 2017, we and Takeda announced positive top line data from the ECHELON-1 trial, a randomized, open-label, phase 3 trial investigating ADCETRIS plus AVD (adriamycin, vinblastine, dacarbazine) versus ABVD (adriamycin, bleomycin, vinblastine, dacarbazine) as frontline combination therapy in 1,334 patients with previously untreated advanced classical Hodgkin lymphoma. Additional data were reported at the 59th American Society of Hematology (ASH) annual meeting. The ECHELON-1 trial met its primary endpoint, demonstrating that treatment with ADCETRIS plus AVD resulted in a statistically significant improvement in modified progression-free survival, or PFS, versus the control arm as assessed by an independent review facility (hazard ratio=0.770; p-value=0.035). The two-year modified PFS rate per independent review for patients in the ADCETRIS plus AVD arm was 82.1 percent compared to 77.2 percent in the control arm. Per investigator assessment, the two-year modified PFS rate for patients in the ADCETRIS plus AVD arm was 81.0 percent compared to 74.4 percent in the control arm. All secondary endpoints trended in favor of the ADCETRIS plus AVD arm, including interim analysis of overall survival (hazard ratio=0.72; p-value=0.19), the key secondary endpoint. The safety profile of ADCETRIS plus AVD in the ECHELON-1 trial was generally consistent with that known for
the single-agent components of the regimen. The most common clinically relevant adverse events of any grade that occurred in at least 15 percent of patients in the ADCETRIS plus AVD and ABVD arms were: neutropenia (58 and 45 percent, respectively), constipation (42 and 37 percent, respectively), vomiting (33 and 28 percent, respectively), fatigue (both 32 percent), peripheral sensory neuropathy (29 and 17 percent, respectively), diarrhea (27 and 18 percent, respectively), pyrexia (27 and 22 percent, respectively), peripheral neuropathy (26 and 13 percent, respectively), abdominal pain (21 and 10 percent, respectively) and stomatitis (21 and 16 percent, respectively). In both the ADCETRIS plus AVD and ABVD arms, the most common Grade 3 or 4 events were neutropenia, febrile neutropenia and neutrophil count decrease. Febrile neutropenia was reduced through the use of prophylactic growth factors (G-CSF) in a subset of patients. In the ADCETRIS plus AVD arm of the study, the rate of febrile neutropenia without the use of G-CSF was 21 percent and with the use of G-CSF was reduced to 11 percent. G-CSF primary prophylaxis with ADCETRIS plus AVD resulted in an overall comparable safety profile to ABVD, decreasing the incidence of febrile neutropenia, neutropenia and serious adverse events. Primary prophylaxis with G-CSF was used in a subset of patients enrolled in the study. In the ADCETRIS plus AVD arm, peripheral neuropathy events were observed in 67 percent of patients compared to 43 percent on the ABVD arm. In the ADCETRIS plus AVD arm, the majority of peripheral neuropathy events were Grade 1 or 2. Grade ³3 events were reported in 11 percent of patients and Grade 4 events were reported in less than 1 percent of patients. In the ABVD arm, Grade ³3 events were reported in 2 percent of patients and there were no Grade 4 events. Two-thirds of the patients with peripheral neuropathy in the ADCETRIS plus AVD arm reported resolution or improvement at last follow-up. Pulmonary toxicity, defined as events related to interstitial lung disease, was reported in 2 percent of patients in the ADCETRIS plus AVD arm versus 7 percent of patients in the ABVD arm; Grade ³3 events were reported in less than 1 percent versus 3 percent, in the ADCETRIS plus AVD arm and the ABVD arm, respectively. 9 on study deaths occurred in the ADCETRIS plus AVD arm, of which 7 were due to neutropenia or associated complications (all occurred in patients who had not received primary prophylaxis with G-CSF with the exception of 1 patient who entered the trial with pre-existing neutropenia). The remaining 2 deaths were due to myocardial infarction. In the ABVD arm, there were 13 on study deaths, of which 11 were due to or associated with pulmonary-related toxicity, 1 was due to cardiopulmonary failure and 1 death had unknown cause. ECHELON-1 is being conducted under a Special Protocol Assessment, or SPA, agreement with the FDA and pursuant to scientific advice from the European Medicines Agency, or EMA. A SPA is an agreement with the FDA regarding the design of the clinical trial, including size and clinical endpoints, to support an efficacy claim in a new drug application or a Biologics License Application, or BLA, submission to the FDA if the trial achieves its primary endpoints.
In September 2017, the FDA granted Breakthrough Therapy Designation to ADCETRIS in combination with chemotherapy for the frontline treatment of patients with advanced classical Hodgkin lymphoma. In November 2017, we submitted a supplemental BLA, or sBLA, to the FDA seeking approval of ADCETRIS as part of a frontline combination chemotherapy regimen in patients with previously untreated advanced classical Hodgkin lymphoma. In December 2017, the FDA granted Priority Review for the sBLA, and the Prescription Drug User Fee Act, or PDUFA, target action date is May 1, 2018.
Phase 3 Frontline Mature T-Cell Lymphoma (ECHELON-2). We and Takeda have completed patient enrollment of 452 patients in a global randomized, double-blind, placebo-controlled multi-center phase 3 clinical trial known as ECHELON-2. This trial is evaluating ADCETRIS in combination with CHP (cyclophosphamide, doxorubicin and prednisone) versus CHOP (cyclophosphamide, doxorubicin, vincristine and prednisone) for the treatment of newly diagnosed CD30-expressing MTCL patients, including patients with sALCL and other types of peripheral T-cell lymphomas. The primary endpoint of the trial is PFS per independent review facility assessment. Secondary endpoints include overall survival, complete remission rate and safety. Based on reviews of pooled, blinded data, we have observed a lower rate of reported PFS events than anticipated in the ECHELON-2 trial. We plan to discuss with the FDA the potential to unblind the trial prior to achieving the target number of PFS events specified in our SPA agreement. We cannot predict the outcome of those discussions or whether we would be able to reach agreement with the FDA. See “Risk Factors—Risks Related to Our Business—Our near-term prospects are substantially dependent on ADCETRIS. If we and/or Takeda are unable to effectively commercialize ADCETRIS for the treatment of patients in its approved indications and to continue to expand its labeled indications of use, our ability to generate significant revenue and our prospects for profitability will be adversely affected” and “—Clinical trials are expensive and time consuming, may take longer than we expect or may not be completed at all, and their outcome is uncertain.” Based on the length of follow-up and the slow rate at which PFS events are occurring, we believe the primary endpoint data will be mature and expect to report top-line data in 2018. A companion diagnostic test is being used in this trial to assess CD30-expression. We expect that concurrent approval of a CD30 companion diagnostic will be required for any approval of ADCETRIS in the frontline MTCL indication. We are developing a companion diagnostic under a collaboration agreement with Ventana Medical Systems, or Ventana, and Takeda. The ECHELON-2 trial is being conducted under a SPA agreement with the FDA and also received scientific advice from the EMA. We are required to conduct this trial as part of our ADCETRIS post-marketing requirement for the relapsed sALCL indication, and the trial is designed to be confirmatory in the United States and Canada.
Data from a phase 1 trial that evaluated ADCETRIS plus chemotherapy for frontline sALCL, which was subsequently amended to include patients with any CD30-expressing MTCL, supported our decision to initiate the ECHELON-2 trial. Among the 26 patients who received the combination regimen of ADCETRIS plus CHP, 88 percent achieved a complete remission. At the December 2017 ASH annual meeting, follow-up data were reported showing that the estimated five-year PFS rate was 52 percent, with no patients receiving a consolidative stem cell transplant in first remission. The estimated five-year overall survival rate was 80 percent. There were no progression events or deaths in the trial since the three-year follow up. 73 percent of patients (19 of 26) experienced peripheral neuropathy, the majority of which was Grade 1 or 2. 95 percent of these patients had complete resolution or some improvement of their symptoms at last follow-up with a median time to resolution of 4.2 months and a median time to improvement of symptoms of 2.6 months.
Phase 3 Relapsed/Refractory Hodgkin Lymphoma (CHECKMATE 812). We and Bristol Myers Squibb Company, or BMS, are conducting a pivotal phase 3 clinical trial, or the CHECKMATE 812 trial, to evaluate the combination of BMS’s immunotherapy nivolumab (Opdivo) with ADCETRIS for the treatment of relapsed or refractory, or transplant-ineligible, advanced classical Hodgkin lymphoma. Nivolumab is a programmed death-1, or PD-1, immune checkpoint inhibitor that is designed to harness the body’s own immune system to help restore antitumor immune response. The primary endpoint for the CHECKMATE 812 trial is PFS and targeted enrollment is 340 patients.
The CHECKMATE 812 trial is supported by interim data from a phase 1/2 trial in second-line Hodgkin lymphoma, which is one of three trials being conducted under a clinical trial collaboration agreement between us and BMS to evaluate the investigational combination of ADCETRIS and nivolumab.
Updated interim data from the phase 1/2 trial evaluating the combination of ADCETRIS and nivolumab for patients with second line Hodgkin lymphoma were presented at the 2017 ASH annual meeting. Data were reported from 62 patients with relapsed or refractory Hodgkin lymphoma who received the combination regimen of ADCETRIS plus nivolumab after failure of frontline therapy. After completion of the fourth cycle of treatment, patients were eligible to undergo an ASCT. Of 60 response-evaluable patients, 83 percent had an objective response, including 62 percent with a complete response. The estimated six-month PFS rate was 89 percent. The most common adverse events of any grade occurring prior to ASCT or subsequent salvage therapy in at least 20 percent of patients were nausea, fatigue, infusion-related reaction, or IRR, pruritus, diarrhea, headache, cough, vomiting, dyspnea, nasal congestion, pyrexia and rash. IRRs were observed in 44 percent of patients, of which the majority (41 percent) were Grade 1 or 2. No patients discontinued treatment due to an IRR.
The third ongoing trial under our clinical collaboration with BMS is evaluating the combination of ADCETRIS and nivolumab in patients with relapsed or refractory B-cell and T-cell non-Hodgkin lymphomas, including DLBCL and rare B-cell lymphomas, including gray zone and mediastinal B-cell lymphomas.
Frontline Therapy for Hodgkin Lymphoma Patients Age 60 and Over. In October 2012, we initiated a phase 2 clinical trial evaluating ADCETRIS monotherapy as a frontline therapy for patients age 60 or older with newly diagnosed Hodgkin lymphoma. The trial was subsequently amended to include the administration of ADCETRIS in combination with bendamustine or dacarbazine. In 2015, the bendamustine arm was closed because the tolerability of the combination did not meet study goals for this fragile patient population. Subsequently, the study was further expanded to evaluate the combination of ADCETRIS and nivolumab. ADCETRIS monotherapy is included in National Comprehensive Cancer Network, or NCCN, guidelines for older patients with relapsed or refractory Hodgkin lymphoma as a palliative therapy option.
Investigator-Sponsored Trials. In addition to our corporate-sponsored trials, as of December 31, 2017, there were more than 40 reported investigator-sponsored trials of ADCETRIS in the United States. In addition, we and Takeda are reviewing proposals from multiple clinical investigators and cooperative groups in the United States, Canada and Europe about potential investigator-sponsored trials of ADCETRIS. The investigator-sponsored trials to date include the use of ADCETRIS in a number of malignant hematologic indications such as CTCL, DLBCL, untreated limited stage Hodgkin lymphoma, salvage therapy for patients with Hodgkin lymphoma prior to auto-HSCT and graft versus host disease. There are also numerous other investigator-sponsored trials for the use of ADCETRIS in other CD30-expressing and select CD30-undetectable settings, and in solid tumors such as mesothelioma and testicular germ cell tumors. Several investigator-sponsored trials are currently evaluating ADCETRIS with immuno-oncology compounds in Hodgkin lymphoma, and we expect additional investigator-sponsored trials might evaluate ADCETRIS in novel combination regimens.
Enfortumab Vedotin (ASG-22ME)
Enfortumab vedotin is an ADC composed of an anti-Nectin-4 monoclonal antibody linked to a potent auristatin compound using our proprietary ADC technology. Nectin-4 is a novel target expressed in multiple cancers including urothelial cancers, such as bladder cancer, as well as ovarian and lung cancers. We are developing enfortumab vedotin as a potential treatment for solid tumors under our co-development collaboration with Astellas, and we share all costs and, if commercialized, profits for the product candidate with Astellas on a 50:50 basis.
In October 2017, we and Astellas initiated a pivotal, single-arm phase 2 clinical trial of single-agent enfortumab vedotin for locally advanced or metastatic urothelial cancer patients who have been previously treated with CPI therapy. The primary endpoint of the trial is confirmed objective response rate per independent review. The trial will also assess overall survival, PFS, safety and tolerability. The study is designed to enroll approximately 120 patients at multiple centers globally.
Data from a phase 1 trial that evaluated enfortumab vedotin in solid tumors, primarily urothelial cancer, supported our decision to initiate the pivotal phase 2 trial. In June 2017, we and Astellas reported updated data from the phase 1, open-label, dose-escalation, multi-center clinical trial of enfortumab vedotin at the American Society of Clinical Oncology, or ASCO, annual meeting. Of the 71 patients with metastatic urothelial cancer evaluated for response, 41 percent had an objective response, including 4 percent who achieved a complete response. The preliminary estimate of median duration of response for all patients was 24 weeks. In 30 patients treated at the recommended phase 2 dose of 1.25 mg/kg, 53 percent had an objective response, including three percent who achieved a complete response. Of the 32 patients previously treated with CPIs and evaluated for response, 44 percent had an objective response, including 3 percent with complete response. Among the 17 CPI-treated patients treated at the recommended phase 2 dose, 47 percent achieved a partial response. The most common treatment-related adverse events of any grade occurring in 10 percent or more of patients were nausea (36 percent), pruritus (31 percent), fatigue (30 percent) and diarrhea (28 percent).
As part of our effort to evaluate enfortumab vedotin in earlier lines of therapy, we and Astellas initiated in November 2017 a phase 1b trial evaluating the safety and tolerability of enfortumab vedotin in combination with pembrolizumab for first- or second-line treatment of patients with locally advanced or metastatic urothelial cancer. The single arm multi-center trial is designed to enroll up to 85 patients who are ineligible for first-line cisplatin-based chemotherapy or have progressed following treatment with a regimen containing platinum-based chemotherapy. The primary objective of the trial is to assess the safety and tolerability of enfortumab vedotin in combination with CPI therapy.
Tisotumab Vedotin
Tisotumab vedotin is an ADC composed of a human antibody that binds to tissue factor linked to a potent auristatin compound using our proprietary ADC technology. Tissue factor is expressed on many solid tumors, including cervical, ovarian, prostate and bladder. In August 2017, we exercised our option to co-develop tisotumab vedotin with Genmab, sharing all future costs and, if commercialized, profits for the product candidate with Genmab on a 50:50 basis.
In the first half of 2018, we and Genmab plan to initiate a pivotal phase 2 clinical trial of tisotumab vedotin in patients with recurrent and/or metastatic cervical cancer. The single-arm trial is expected to enroll approximately 100 patients who have relapsed or progressed on or after platinum-containing chemotherapy and who have received or are ineligible for bevacizumab (Avastin). The primary endpoint of the study will be overall response rate as assessed by independent review. The planned trial will also assess duration of response and safety.
Data from a phase 1/2 trial that evaluated tisotumab vedotin in solid tumors, including cervical cancer, supported our decision to initiate the pivotal phase 2 trial. In September 2017, we and Genmab reported data from part 2 of the phase 1/2 trial at the European Society for Medical Oncology, or ESMO, Congress. In an expansion cohort of 34 patients with relapsed, recurrent and/or metastatic cervical cancer, 32 percent achieved a response. Median duration of confirmed responses was 8.3 months. The most common adverse events of any grade were conjunctivitis (50 percent), epistaxis, fatigue and alopecia (47 percent each) and nausea (44 percent).
Beyond recurrent and/or metastatic cervical cancer, we believe there may be opportunities for tisotumab vedotin in earlier lines of cervical cancer and in other solid tumors that express tissue factor. In 2018, we and Genmab also plan to initiate at least two additional clinical trials of tisotumab vedotin. One trial will evaluate tisotumab vedotin as part of a combination regimen for first-line cervical cancer. The second trial will evaluate tisotumab vedotin in other types of solid tumors.
Ladiratuzumab Vedotin (SGN-LIV1A)
Ladiratuzumab vedotin is an ADC composed of an anti-LIV-1 monoclonal antibody linked to a potent auristatin compound using our proprietary ADC technology, and is being developed as a potential treatment of metastatic breast cancer.
In October 2013 we initiated a phase 1, open-label, dose-escalation clinical trial to evaluate the safety and antitumor activity of ladiratuzumab vedotin in patients with LIV-1-positive metastatic breast cancer. At the December 2017 San Antonio Breast Cancer Symposium annual meeting, updated interim data were reported showing that among the 60 efficacy-evaluable patients with metastatic triple negative breast cancer, 25 percent achieved partial response. At the recommended dose, 29 percent of patients achieved a partial response. The median PFS and median duration of response for patients treated across all dose levels were 11 weeks and 13.3 weeks, respectively. In 19 patients treated at the recommended dose, the median PFS was 12.1 weeks and the median duration of response was 17.4 weeks. Of the 81 patients treated in the study, peripheral neuropathy events occurred in 20 percent and were generally low grade (Grades 1/2) and manageable. Grades 3/4 adverse events included neutropenia and anemia. Enrollment continues for patients with metastatic triple negative breast cancer at the recommended dose of 2.5 mg/kg, with a maximum dose of 200 mg per cycle.
Ladiratuzumab vedotin is also being evaluated in several other settings for metastatic breast cancer. In mid-2018, we plan to initiate a phase 1b/2 clinical trial in combination with pembrolizumab (Keytruda) in patients with locally advanced or metastatic triple negative breast cancer. This single arm, open label multicenter study will be conducted under a collaboration agreement with Merck and is anticipated to enroll up to 72 patients.
Ladiratuzumab vedotin is also being evaluated in the I-SPY 2 trial, a phase 2 trial being conducted by a consortium that includes major cancer research centers and receives support from multiple industry partners. In this trial, ladiratuzumab vedotin followed by standard chemotherapy as a neo-adjuvant treatment (prior to surgery) is being evaluated for women with newly diagnosed, locally advanced Stage 2 or 3 HER2-negative breast cancer. This trial is anticipated to enroll up to 75 patients in the ladiratuzumab vedotin treatment arm.
Under a clinical collaboration agreement with Genentech, ladiratuzumab vedotin will be evaluated in combination with atezolizumab (Tecentriq) as part of the MORPHEUS trial. The planned phase 1b/2 MORPHEUS trial will evaluate the combination as second-line therapy in patients with metastatic triple negative breast cancer who have not been previously treated with immunotherapy. This multi-arm study is anticipated to enroll up to 45 patients in the ladiratuzumab vedotin arm.
Our Patents and Proprietary Technology
Our owned and licensed patents and patent applications are directed to ADCETRIS, our product candidates, monoclonal antibodies, our ADC and SEA technologies and other antibody-based and/or enabling technologies. We commonly seek patent claims directed to compositions of matter, including antibodies, ADCs, and drug-linkers containing highly potent cell-killing agents, as well as methods of using such compositions. When appropriate, we also seek claims to related technologies, such as methods of using certain sugar analogs utilized in our SEA technology. For ADCETRIS and each of our product candidates, we have filed or expect to file multiple patent applications. We maintain patents and prosecute applications worldwide for technologies that we have out-licensed, such as our ADC technology. Similarly, for partnered products and product candidates, such as ADCETRIS, enfortumab vedotin and tisotumab vedotin, we seek to work closely with our development partners to coordinate patent efforts, including patent application filings, prosecution, term extension, defense and enforcement. As ADCETRIS and our development product candidates advance through research and development, we seek to diligently identify and protect new inventions, such as combination therapies, improvements to methods of manufacturing, and methods of treatment. We also work closely with our scientific personnel to identify and protect new inventions that could eventually add to our development pipeline.
We have the following patents relating to ADCETRIS and our pipeline:
| • | For ADCETRIS and our related ADC technology, we own ten patents in the United States and Europe that will expire between 2020 and 2031. |
| • | For enfortumab vedotin and our related ADC technology, we own, co-own or have licensed rights to ten patents in the United States and Europe that will expire between 2022 and 2031. Of these patents, we own or co-own eight patents and have licensed rights to two patents. |
| • | For tisotumab vedotin and our related ADC technology, we own, co-own or have licensed rights to ten patents in the United States and Europe that will expire between 2022 and 2032. Of these patents, we own or co-own five patents and have licensed rights to five patents. |
| • | For ladiratuzumab vedotin and our related ADC technology, we own, co-own or have licensed rights to nine patents in the United States and Europe that will expire between 2020 and 2032. Of these patents, we own or co-own rights to seven patents and have licensed rights to two patents. |
| • | For denintuzumab mafodotin and our related ADC technology, we own or co-own eleven patents in the United States and Europe that will expire between 2024 and 2029. |
| • | For SEA-CD40 and our related SEA technology, we own, co-own or have licensed rights to twelve patents in the United States and Europe that will expire between 2019 and 2030. Of these patents, we own or co-own nine patents and have licensed rights to three patents. |
The actual protection afforded by a patent, which can vary from country to country, depends on the type of patent, the scope of its coverage as determined by the patent office or courts in the country, and the availability of legal remedies in the country. This list above does not identify all patents that may be related to ADCETRIS and our product candidates. For example, in addition to the listed patents, we have patents on platform technologies (that relate to certain general classes of products or methods), as well as patents that relate to methods of using, manufacturing or administering a product or product candidate, that may confer additional patent protection. We also have pending patent applications that may give rise to new patents related to one or more of these agents.
The information in the above list is based on our current assessment of patents that we own or control or have exclusively licensed. The information is subject to revision, for example, in the event of changes in the law or legal rulings affecting our patents or if we become aware of new information. Significant legal issues remain unresolved as to the extent and scope of available patent protection for biotechnology products and processes in the U.S. and other important markets outside the U.S. We expect that litigation will likely be necessary to determine the term, validity, enforceability, and/or scope of certain of our patents and other proprietary rights. An adverse decision or ruling with respect to one or more of our patents could result in the loss of patent protection for a product and, in turn, the introduction of competitor products or follow-on biologics to the market earlier than anticipated, and could force us to either obtain third-party licenses at a material cost or cease using a technology or commercializing a product.
Patents expire, on a country by country basis, at various times depending on various factors, including the filing date of the corresponding patent application(s), the availability of patent term extension and supplemental protection certificates and requirements for terminal disclaimers. Although we believe our owned and licensed patents and patent applications provide us with a competitive advantage, the patent positions of biotechnology and pharmaceutical companies can be uncertain and involve complex legal and factual questions. We and our corporate collaborators may not be able to develop patentable products or processes or obtain patents from pending patent applications. Even if patent claims are allowed, the claims may not issue. In the event of issuance, the patents may not be sufficient to protect the proprietary technology owned by or licensed to us or our corporate collaborators. Our or our collaborators’ current patents, or patents that issue on pending applications, may be challenged, invalidated, infringed or circumvented. In addition, changes to patent laws in the United States or in other countries may limit our ability to defend or enforce our patents, or may apply retroactively to affect the term and/or scope of our patents. Our patents have been and may in the future be challenged by third parties in post-issuance administrative proceedings or in litigation as invalid, not infringed or unenforceable under U.S. or foreign laws, or they may be infringed by third parties. As a result, we are or may be from time to time involved in the defense and enforcement of our patent or other intellectual property rights in a court of law and administrative tribunals, such as in U.S. Patent and Trademark Office inter partes review or reexamination proceedings, foreign opposition proceedings or related legal and administrative proceedings in the United States and elsewhere. The costs of defending our patents or enforcing our proprietary rights in post-issuance administrative proceedings or litigation may be substantial and the outcome can be uncertain. An adverse outcome may allow third parties to use our proprietary technologies without a license from us or our collaborators. Our and our collaborators’ patents may also be circumvented, which may allow third parties to use similar technologies without a license from us or our collaborators.
Our commercial success depends significantly on our ability to operate without infringing patents and proprietary rights of third parties. Organizations such as pharmaceutical and biotechnology companies, universities and research institutions may have filed patent applications or may have been granted patents that cover technologies similar to the technologies owned or licensed to us or to our collaborators. In addition, we are monitoring the progress of multiple pending patent applications of other organizations that, if granted, may require us to license or challenge their validity or enforceability in order to continue commercializing ADCETRIS or to commercialize our product candidates. Our challenges to patents of other organizations may not be successful, which may affect our ability to commercialize ADCETRIS or our product candidates. We cannot determine with certainty whether patents or patent applications of other parties may materially affect our or our collaborators’ ability to make, use or sell ADCETRIS or any other products or product candidates.
We require our scientific personnel to maintain laboratory notebooks and other research records in accordance with our policies, which are designed to strengthen and support our intellectual property protection. In addition to our patented intellectual property, we also rely on trade secrets and other proprietary information, especially when we do not believe that patent protection is appropriate or can be obtained. Our policy is to require each of our employees, consultants and advisors to execute a proprietary information and inventions assignment agreement before beginning their employment, consulting or advisory relationship with us. These agreements provide that the individual must keep confidential and not disclose to other parties any confidential information developed or learned by the individual during the course of their relationship with us except in limited circumstances. These agreements also provide that we will own all inventions conceived or reduced to practice by the individual in the course of rendering services to us. Our agreements with collaborators require them to have a similar policy and agreements with their employees, consultants and advisors. Our policy and agreements and those of our collaborators may not sufficiently protect our confidential information, or third parties may independently develop equivalent information.
RISK FACTORS
You should carefully consider the following risk factors, in addition to the other information contained in our most recent annual report on Form 10-K and in our most recent quarterly report on Form 10-Q, including our consolidated financial statements and related notes. If any of the events described in the following risk factors occurs, our business, operating results and financial condition could be seriously harmed.
Risks Related to the Acquisition of Cascadian Therapeutics, Inc.
The completion of our proposed acquisition of Cascadian Therapeutics, Inc., or Cascadian, which we refer to as the Acquisition, is subject to conditions and if these conditions are not satisfied or waived, the Acquisition will not be completed. Failure to consummate the Acquisition could negatively impact our stock price and our future business and financial results.
The obligations of us and Purchaser to complete the Tender Offer are subject to customary closing conditions, including (i) there being validly tendered and not validly withdrawn prior to the expiration date of the Tender Offer, at least a majority of the outstanding shares of Cascadian common stock on a fully-diluted basis, (ii) the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 as amended, or the HSR Act, (iii) the absence of any legal restraint or prohibition that prevents or prohibits the consummation of the Tender Offer or the Merger, (iv) the accuracy of Cascadian’s representations and warranties under the Merger Agreement subject to the materiality standards set forth in the Merger Agreement, (v) the performance by Cascadian of its obligations under the Merger Agreement in all material respects and (vi) since the date of the Merger Agreement, that there will not have occurred (and be continuing) a Company Material Adverse Effect. Completion of the Merger is conditioned on the absence of any legal restraint or prohibition that prevents or prohibits the consummation of the Merger and that Purchaser (or we on Purchaser’s behalf) have accepted for payment and paid for all shares of Cascadian common stock validly tendered (and not validly withdrawn) pursuant to the Tender Offer. Neither the Tender Offer nor the Merger is subject to a financing condition. We and Cascadian may terminate the Merger Agreement upon mutual consent, and either we or Cascadian may, subject to certain exceptions set forth in the Merger Agreement, terminate the Merger Agreement if the Tender Offer has not been consummated on or before June 30, 2018, the date agreed by us and Cascadian to be the last permissible date of acceptance of the Tender Offer.
The failure of one or more of the required conditions to be satisfied could delay the completion of the Acquisition for a significant period of time or prevent it from occurring, and we cannot otherwise guarantee that we will be able to complete the Acquisition. If the Acquisition is not completed for any reason, our ongoing business may be adversely affected and, without realizing any of the benefits of having completed the Acquisition, we will be subject to a number of risks, including the following:
| • | the price of our common stock may reflect a market assumption that the Acquisition will occur, meaning that a failure to complete the Acquisition could result in a decline in the price of our common stock; |
| • | time and resources, financial and other, committed by our management to matters relating to the Acquisition could otherwise have been devoted to pursuing other potentially beneficial opportunities for our company; |
| • | we may experience negative reactions from the financial markets or from our customers or employees; and |
| • | we will be required to pay our respective costs relating to the Acquisition, including legal, accounting, financial advisory, financing and printing fees, whether or not the Acquisition is completed, subject to our rights to receive certain payments in the event the Merger Agreement is terminated under certain circumstances. |
We also could be subject to litigation related to any failure to complete the Acquisition or to perform our obligations under the Merger Agreement, or related to any enforcement proceeding commenced against us. If the Acquisition is not consummated, these risks may materialize and may adversely affect our business, financial results and stock price.
Obtaining required regulatory approvals may prevent or delay consummation of the Tender Offer or reduce the anticipated benefits of the Acquisition or may require changes to the structure or terms of the Acquisition.
Consummation of the Tender Offer is conditioned upon, among other things, the expiration or termination of the waiting period (and any extensions thereof) applicable to the Tender Offer under the HSR Act. At any time before or after the Tender Offer is consummated, governmental authorities, including the Department of Justice, the Federal Trade Commission or U.S. state Attorneys General, could take action under the antitrust laws in opposition to the Acquisition, including seeking to enjoin completion of the Acquisition, imposing additional requirements, limitations or costs on the Acquisition, condition completion of the Acquisition upon the divestiture of assets of Seattle Genetics, Cascadian, our or its subsidiaries or impose restrictions on our post-acquisition operations. If any such requirements, limitations or costs are imposed and the Acquisition is completed,
then these could negatively affect our results of operations and financial condition following completion of the Acquisition. Any such requirements or restrictions may delay or prevent consummation of the Tender Offer or may reduce the anticipated benefits of the Acquisition, which could also have an adverse effect on our business, financial condition and results of operations. No assurance can be given that the required regulatory approvals will be obtained or that the required conditions to closing will be satisfied, and, even if all such approvals are obtained and the conditions are satisfied, no assurance can be given as to the terms, conditions and timing of the approvals.
Cascadian will be subject to business uncertainties and contractual restrictions while the Acquisition is pending.
Uncertainty about the effect of the Acquisition on employees and counterparties may have an adverse effect on Cascadian. These uncertainties may impair Cascadian’s ability to retain and motivate key personnel and could cause entities dealing with Cascadian to defer entering into contracts with Cascadian or making other decisions concerning Cascadian or seek to change existing business relationships with Cascadian. If the Acquisition is completed, such changes could negatively affect our results of operations and financing condition and adversely affect our ability to realize benefits from the Acquisition. In addition, if key employees of Cascadian or the Company depart because of uncertainty about their future roles or otherwise, our business could be harmed. These risks may be exacerbated by delays or other adverse developments with respect to the completion of the Acquisition.
We and Cascadian will incur substantial direct and indirect costs as a result of the Acquisition.
We and Cascadian will incur substantial expenses in connection with and as a result of completing the Acquisition and, over a period of time following the completion of the Acquisition, we expect to incur substantial additional expenses in connection with coordinating the businesses, operations, policies and procedures of the combined company. While we have assumed that a certain level of transaction expenses will be incurred, factors beyond our control could affect the total amount or the timing of these expenses. Many of the expenses that will be incurred, by their nature, are difficult to estimate accurately.
Combining the two companies may be more difficult, costly or time consuming than we anticipate and we may not realize the intended benefits of the acquired business of Cascadian.
Cascadian has operated, and until the completion of the Acquisition, will continue to operate independently of us, with its own business, corporate culture, location, employees and systems. The success of the Acquisition, including anticipated benefits, will depend, in part, on our ability to successfully combine and integrate our business with the business of Cascadian. As a result of the Acquisition, we will operate our existing business, along with the business of Cascadian, as one combined organization utilizing common information and communication systems, operating procedures, financial controls and human resources practices. There may be substantial difficulties, costs and delays involved in the integration of our business with Cascadian, including as a result of challenges relating to the diversion of management’s attention from our ongoing business, the possibility of faulty assumptions underlying expectations regarding the integration process, retaining and attracting business and operational relationships, eliminating duplicative operations and inconsistent standards and procedures and increased or unforeseen liabilities or costs relating to the Acquisition or the Cascadian business. If we experience difficulties with the integration process, the anticipated benefits of the Acquisition may not be realized fully or at all, or may take longer to realize than expected, which could materially and adversely affect our business, financial condition and results of operations.
If goodwill or other intangible assets that we record in connection with the Acquisition become impaired, our financial position in future periods could be negatively impacted.
In connection with the accounting for the Acquisition, it is expected that we will record a significant amount of intangible assets and may also record goodwill. Under GAAP, we must assess, at least annually and potentially more frequently, whether the value of goodwill and other indefinite-lived intangible assets has been impaired. Amortizing intangible assets will be assessed for impairment in the event of an impairment indicator. Events giving rise to impairment are an inherent risk in the pharmaceutical industry and cannot be predicted. Our results of operations and financial position in future periods could be negatively impacted should future impairments of intangible assets or goodwill occur.
Our and Cascadian’s actual financial positions and results of operations may differ materially from the unaudited pro forma financial information that we filed as exhibit 99.2 to our current report on Form 8-K, filed with the SEC on January 31, 2018, or the January Form 8-K.
The pro forma financial information that we filed as exhibit 99.2 to the January Form 8-K is presented for illustrative purposes only and may not be an indication of what our financial position or results of operations would have been had the transactions been completed on the dates indicated. The pro forma financial information has been derived from our and Cascadian’s historical financial statements and certain adjustments and assumptions have been made regarding the combined company after
giving effect to the indicated transactions. The assets and liabilities of Cascadian have been measured at fair value based on various preliminary estimates using assumptions that our management believes are reasonable utilizing information currently available. The process for estimating the fair value of acquired assets and assumed liabilities requires the use of judgment in determining the appropriate assumptions and estimates. These estimates may be revised as additional information becomes available and as additional analyses are performed. In particular, the pro forma financial information that we filed as exhibit 99.2 to the January Form 8-K assumes that we utilize a senior secured bridge loan facility, or the Bridge Facility, to finance a portion of the costs of the Acquisition; however, we intend to use the net proceeds from our recently-announced proposed public offering of our common stock to fund a portion of the costs of the Acquisition in lieu of any borrowing pursuant to the Bridge Facility. Accordingly, the pro forma financial information does not reflect the actual financing of the Acquisition if our recently-announced proposed public offering of our common stock is consummated. Differences between preliminary estimates in the pro forma financial information and the final acquisition accounting, as well as between the assumed and actual financing sources and terms, will occur and could have a material impact on the pro forma financial information and the combined company’s financial position and future results of operations.
Other assumptions used in preparing the pro forma financial information may not prove to be accurate, and other factors may affect our financial condition or results of operations following the closing of the Acquisition and related transactions. Any potential decline in our financial condition or results of operations may cause significant variations in the price of our common stock.
Cascadian has a limited operating history and no history of commercializing drug products, and risks and uncertainties related to its business may cause the combined company to underperform relative to expectations.
Cascadian is a clinical-stage biopharmaceutical company with a limited operating history and does not have any products approved for commercial sale, which makes it difficult to evaluate the success of its current business and assess the combined company’s future viability. In addition, Cascadian has incurred significant research and development and other expenses related to its ongoing operations resulting in net losses in every year since its inception other than the year ended December 31, 2008. We anticipate that Cascadian will continue to incur net losses in the future as a result of continued expenditures related to the development and commercialization of its lead product candidate and additional research and development expenditures related to the development and regulatory approval of its other existing and future product candidates. Because Cascadian does not generate any revenue from product sales, following the consummation of the Acquisition, we expect to invest significant time, resources and capital to support the expenditures and on-going operations of the acquired Cascadian business. Such investments would reduce our cash available for our existing operations and other uses and divert significant attention of management that may otherwise be focused on development of our existing business. If we are unable to obtain regulatory approval for Cascadian’s product candidates and effectively commercialize its product candidates, we may not realize any benefit from the Acquisition, resulting in possible impairments or other charges or losses which may materially and adversely affect our results of operations and financial condition. Additionally, the business operations of Cascadian differ from our business operations, and the combined business will have a different business mix than our business prior to the Acquisition, presenting different operational risks and challenges. We expect to rely on the experience and expertise of Cascadian’s existing management team and other key personnel in the development and commercialization of Cascadian’s product candidates. If we were to lose the services of a significant portion or key individuals of this team, such development and commercialization and our financial results could be adversely affected.
The Cascadian business may also face additional risks, including risks relating to (i) the ability to advance the development of tucatinib and Cascadian’s other product candidates through regulatory approval, (ii) competition with companies with more experience and resources in the oncology space and with companies developing other novel targeted therapies for cancers and (iii) maintaining and obtaining intellectual property protection for Cascadian’s product candidates.
Moreover, Cascadian relies on agreements with third parties for its product candidate technology development, manufacture, packaging, supply, and clinical trials. The termination of any of these agreements by the third parties would have an adverse impact on the combined company’s ability to develop and manufacture Cascadian’s product candidates. For example, Cascadian has entered into an exclusive license agreement with Array BioPharma, Inc. for its tucatinib technology. If Array BioPharma were to terminate the license agreement or if the combined company is unable to maintain the exclusivity of that license agreement, the combined company may be unable to continue to develop tucatinib. Additionally, an adverse result in potential future disputes with Cascadian’s licensors and partners, including Array BioPharma, may require the combined company to enter into additional licenses or to incur additional costs in litigation or settlement. Finally, continued development and commercialization of Cascadian’s product candidates may require the combined company to secure licenses to additional technologies, which it may not be able to do on commercially reasonable terms, if at all.
Any or all of the risks described in herein or in exhibit 99.3 that we filed with the January Form 8-K could materially harm the Cascadian business, which may materially and adversely affect our business, results of operation and financial condition.
Risks Related to Our Business
Our near-term prospects are substantially dependent on ADCETRIS. If we and/or Takeda are unable to effectively commercialize ADCETRIS for the treatment of patients in its approved indications and to continue to expand its labeled indications of use, our ability to generate significant revenue and our prospects for profitability will be adversely affected.
ADCETRIS is now approved by the FDA and the European Commission for four indications, encompassing several settings for the treatment of relapsed Hodgkin lymphoma, for relapsed sALCL, and for certain types of CTCL. ADCETRIS is our only product approved for marketing and our ability to generate revenue from product sales and our prospects for profitability are substantially dependent on our continued ability to effectively commercialize ADCETRIS for the treatment of patients in its approved indications and our ability to continue to expand its labeled indications of use. We may not be able to fully realize the commercial potential of ADCETRIS for a number of reasons, including:
| • | we and/or Takeda may not be able to obtain and maintain regulatory approvals to market ADCETRIS for any additional indications in our respective territories, including for frontline Hodgkin lymphoma or frontline MTCL, or to otherwise continue to expand its labeled indications of use; |
| • | we and/or Takeda may fail to obtain regulatory approvals for ADCETRIS in the ECHELON-1 treatment setting in our respective territories, notwithstanding the positive data we reported from the ECHELON-1 trial, and even if approved, we and/or Takeda may fail to commercialize ADCETRIS in the ECHELON-1 treatment setting, which would limit our sales of, and the commercial potential of, ADCETRIS; |
| • | negative or inconclusive results in, or delays in, our ECHELON-2 trial, which would negatively impact, or preclude altogether, our and Takeda’s ability to obtain regulatory approvals and commercialize ADCETRIS in the frontline MTCL indication in our respective territories and which would also limit our sales of, and the commercial potential of, ADCETRIS; |
| • | results from the ECHELON-1 trial or the ECHELON-2 trial, either of which could be considered confirmatory by the FDA for the relapsed sALCL indication, may fail to sufficiently confirm the clinical benefit of ADCETRIS in relapsed sALCL, which could result in the withdrawal of approval of ADCETRIS in the relapsed sALCL indication and negatively impact our potential future product sales for the relapsed sALCL indication; |
| • | new competitive therapies, including immuno-oncology agents such as PD-1 inhibitors (e.g., nivolumab and pembrolizumab), have been approved by regulatory authorities or may be submitted in the near term to regulatory authorities for approval in ADCETRIS’ labeled indications, and these competitive products could negatively impact our commercial sales of ADCETRIS; |
| • | our commercial sales of ADCETRIS could be lower than our projections due to a lower market penetration rate, increased competition by alternative products or biosimilars, or a shorter duration of therapy in patients in ADCETRIS’ approved indications; |
| • | we may be unable to effectively commercialize ADCETRIS in any new indications for which we receive marketing approval, including in the primary cutaneous anaplastic large cell lymphoma, or pcALCL, or CD30-expressing mycosis fungoides, or MF, indication that was approved in November 2017; |
| • | there may be additional changes to the label for ADCETRIS, including ADCETRIS’ boxed warning, that further restrict how we market and sell ADCETRIS, including as a result of data collected from our required post-approval study, or as the result of adverse events observed in that study or in other studies, including investigator-sponsored studies and in the post-approval confirmatory studies that Takeda is required to conduct as a condition to the conditional marketing authorization of ADCETRIS granted by the European Commission; |
| • | we may not be able to establish or demonstrate in the medical community the safety, efficacy, or value of ADCETRIS and its potential advantages compared to existing and future therapeutics in the frontline Hodgkin lymphoma setting and other settings; |
| • | physicians may be reluctant to prescribe ADCETRIS due to side effects associated with its use or until results from our required post-approval study are available or other long term efficacy and safety data exist; |
| • | the estimated incidence rate of new patients in ADCETRIS’ approved indications may be lower than our projections; |
| • | there may be adverse results or events reported in any of the clinical trials that we and/or Takeda are conducting or may in the future conduct for ADCETRIS; |
| • | we may be unable to continue to effectively market, sell and distribute ADCETRIS; |
| • | ADCETRIS may be impacted by adverse reimbursement and coverage policies from government and private payers such as Medicare, Medicaid, insurance companies, health maintenance organizations and other plan administrators, or may be subject to pricing pressures enacted by industry organizations or state and federal governments, including as a result of increased scrutiny over pharmaceutical pricing or otherwise; |
| • | the relative price of ADCETRIS may be higher than alternative treatment options, and therefore its reimbursement may be limited by private and governmental insurers; |
| • | there may be changed or increased regulatory restrictions; |
| • | we may not have adequate financial or other resources to effectively commercialize ADCETRIS; and |
| • | we may not be able to obtain adequate commercial supplies of ADCETRIS to meet demand or at an acceptable cost. |
In 2009, we entered into an agreement with Takeda to develop and commercialize ADCETRIS, under which we have commercial rights in the United States and its territories and Canada, and Takeda has commercial rights in the rest of the world. The success of this collaboration and the activities of Takeda will significantly impact the commercialization of ADCETRIS in countries other than the United States and in Canada. In October 2012, Takeda announced that it had received conditional marketing authorization for ADCETRIS from the European Commission for patients with relapsed Hodgkin lymphoma or relapsed sALCL, and has since obtained marketing approvals for ADCETRIS in many other countries. Conditional marketing authorization by the European Commission includes obligations to provide additional clinical data at a later stage to confirm the positive benefit-risk balance. In July 2016, Takeda announced that it had received marketing authorization for ADCETRIS from the European Commission for the treatment of adult patients with CD30-positive Hodgkin lymphoma at increased risk of relapse or progression following autologous stem cell transplant, and in January 2018, Takeda announced that it had received marketing authorization for ADCETRIS from the European Commission for the treatment of adult patients with CD30-positive CTCL after at least one prior systemic therapy. We cannot control the amount and timing of resources that Takeda dedicates to the commercialization of ADCETRIS, or to its marketing and distribution, and our ability to generate revenues from ADCETRIS product sales by Takeda depends on Takeda’s ability to achieve market acceptance of, and to otherwise effectively market, ADCETRIS for its approved indications in Takeda’s territory.
While ADCETRIS product sales have grown over time, and our future plans assume that sales of ADCETRIS will increase, we cannot assure you that, even with the recent expansion to the prescribing label for ADCETRIS in the United States, which now includes the treatment of adult patients with pcALCL or CD30-expressing MF who have received prior systemic therapy, ADCETRIS sales will continue to grow or that we can maintain sales of ADCETRIS at or near current levels. We believe that the level of our ongoing ADCETRIS sales in the United States is largely attributable to the incidence flow of patients eligible for treatment with ADCETRIS. We also believe that the incidence rate of new patients in ADCETRIS’ approved indications is relatively low, particularly when compared to many other oncology indications. In addition, we expect only modest sales growth in the near term as a result of the November 2017 FDA approval of ADCETRIS for the treatment of adult patients with pcALCL or CD30-expressing MF who have received prior systemic therapy, subject to our ability to effectively commercialize ADCETRIS in this indication. For these and other reasons, we expect that our ability to accelerate ADCETRIS sales growth, if at all, will depend primarily on our ability to continue to expand ADCETRIS’ labeled indications of use, particularly with respect to the frontline Hodgkin lymphoma and frontline MTCL indications. Accordingly, we are exploring the use of ADCETRIS as a single agent and in combination therapy regimens earlier in the treatment of Hodgkin lymphoma and MTCL, including sALCL, and in a range of CD30-expressing hematologic lymphomas. This will continue to require additional time and investment in clinical trials, and there can be no assurance that we and/or Takeda will obtain and maintain the necessary regulatory approvals to market ADCETRIS for any additional indications.
In particular, although we reported positive top line data in the ECHELON-1 trial in June 2017, there can be no assurance that either we or Takeda will ultimately obtain regulatory approvals of ADCETRIS in the ECHELON-1 treatment setting in our respective territories, which would limit our sales of, and the commercial potential of, ADCETRIS. Likewise, we may fail to commercialize ADCETRIS in pcALCL or CD30-expressing MF patients or in the ECHELON-1 treatment setting if our sBLA that we submitted in November 2017 is approved by the FDA, either of which would limit our sales of, and the commercial potential of, ADCETRIS. In addition, negative or inconclusive results in our ECHELON-2 trial would negatively impact, or preclude altogether, our and Takeda’s ability to obtain regulatory approvals in the frontline MTCL indication in our respective territories, which would also limit our sales of, and the commercial potential of, ADCETRIS. Moreover, the SPA agreement for the ECHELON-2 trial requires that the trial continue until a specified number of PFS events designated for the trial occurs. Based on reviews of pooled, blinded data, we have observed a lower rate of reported PFS events in the ECHELON-2 trial than anticipated. We plan to discuss with the FDA the potential to unblind the trial prior to achieving the target number of PFS events specified in the SPA agreement. We cannot predict the outcome of those discussions or whether we would be able to
reach agreement with the FDA. If we are unable to reach agreement with the FDA and determine to unblind the trial prior to achieving the target number of PFS events as specified in the SPA agreement, the FDA could treat the SPA agreement for ECHELON-2 trial as rescinded. In that event, we would no longer have commitments from the FDA regarding the appropriate design, size and endpoints of the study for regulatory approval, making our ability to obtain regulatory approval of ADCETRIS in the ECHELON-2 treatment setting more uncertain. In addition, earlier unblinding in the ECHELON-2 trial could also negatively impact the likelihood of achieving positive results in the trial sufficient to support regulatory approval. Alternatively, if we are unable to reach agreement with the FDA, we could determine to continue the ECHELON-2 trial until the target number of PFS events specified in the SPA agreement is achieved, which could result in a substantial delay in our ability to conduct the final data analysis from the ECHELON-2 trial.
We and Takeda have formed a collaboration with Ventana under which Ventana is working to develop, manufacture and commercialize a companion diagnostic test with the goal of identifying patients who might respond to treatment with ADCETRIS based on CD30 expression levels in their tissue specimens. The FDA and similar regulatory authorities outside the United States regulate companion diagnostics. Companion diagnostics require separate or coordinated regulatory approval prior to commercialization of the related therapeutic product. In this regard, we expect that concurrent approval of a CD30 companion diagnostic will be required for any approval of ADCETRIS in the frontline MTCL indication. However, Ventana may not be able to successfully develop and obtain regulatory approval for a companion diagnostic to support regulatory approval of ADCETRIS in the frontline MTCL indication in a timely manner or at all. If Ventana is unable to successfully develop a companion diagnostic, or experiences delays in doing so, the development of ADCETRIS in the frontline MTCL indication may be adversely affected, we may fail to receive regulatory approval for ADCETRIS in the frontline MTCL indication and we may not realize the full commercial potential of ADCETRIS. Further, if a companion diagnostic requirement were included in the ADCETRIS label, such a requirement may limit our ability to commercialize ADCETRIS in the applicable setting due to potential label requirements, prescriber practices, constraints on availability of the diagnostic, or other factors.
Even if we and Takeda receive the required regulatory approvals to market ADCETRIS for any additional indications or in additional jurisdictions, we and Takeda may not be able to effectively commercialize ADCETRIS, including for the reasons set forth above. Our ability to grow ADCETRIS product sales in future periods is also dependent on price increases and we periodically increase the price of ADCETRIS. Price increases on ADCETRIS and negative publicity regarding drug pricing and price increases generally, whether on ADCETRIS or products distributed by other pharmaceutical companies, could negatively affect market acceptance of, and sales of, ADCETRIS. In any event, we cannot assure you that price increases we have taken or may take in the future will not in the future negatively affect ADCETRIS sales.
Reports of adverse events or safety concerns involving ADCETRIS or our product candidates could delay or prevent us from obtaining or maintaining regulatory approvals, or could negatively impact sales of ADCETRIS or the prospects for our product candidates.
Reports of adverse events or safety concerns involving ADCETRIS could interrupt, delay or halt clinical trials of ADCETRIS, including the ongoing FDA-required ADCETRIS post-approval confirmatory study as well as the post-approval confirmatory studies that Takeda is required to conduct as a condition to the conditional marketing authorization of ADCETRIS by the European Commission. For example, during 2013 concerns regarding pancreatitis caused an investigator conducting an independent study involving ADCETRIS to temporarily halt enrollment in the trial and to amend the eligibility criteria and monitoring for the trial. Subsequently, we have revised our prescribing information to add pancreatitis as a known adverse event. In addition, reports of adverse events or safety concerns involving ADCETRIS could result in regulatory authorities limiting, denying or withdrawing approval of ADCETRIS for any or all indications, including the use of ADCETRIS for the treatment of patients in its approved indications. For example, there was an increased incidence of febrile neutropenia and peripheral neuropathy in the ADCETRIS plus AVD arm of the ECHELON-1 trial, which could limit, narrow or preclude any approval by the FDA, or could limit prescribing of ADCETRIS in the ECHELON-1 treatment setting if approved by the FDA, both of which could negatively impact sales of ADCETRIS or adversely affect ADCETRIS’ acceptance in the market. There are no assurances that patients receiving ADCETRIS will not experience serious adverse events in the future. Further, there are no assurances that patients receiving ADCETRIS with co-morbid diseases not previously studied, such as autoimmune diseases, will not experience new or different serious adverse events in the future.
Adverse events may negatively impact the sales of ADCETRIS. We may be required to further update the ADCETRIS prescribing information, including boxed warnings, based on reports of adverse events or safety concerns or implement a Risk Evaluation and Mitigation Strategy, or REMS, which could adversely affect ADCETRIS’ acceptance in the market, make competition easier or make it more difficult or expensive for us to distribute ADCETRIS. For example, the prescribing information for ADCETRIS includes pancreatitis, impaired hepatic function, impaired renal function, pulmonary toxicity, and gastrointestinal complications as known adverse events as well as a boxed warning related to the risk that JC virus infection resulting in progressive multifocal leukoencephalopathy, or PML, and death can occur in patients receiving ADCETRIS. Further, based on the identification of future adverse events, we may be required to further revise the prescribing information, including ADCETRIS’ boxed warning, which could negatively impact sales of ADCETRIS or adversely affect ADCETRIS’ acceptance in the market.
Likewise, reports of adverse events or safety concerns involving ADCETRIS or our product candidates could interrupt, delay or halt clinical trials of such product candidates, or could result in our inability to obtain regulatory approvals for any of our product candidates. For example, in June 2017, we discontinued the phase 3 CASCADE clinical trial of SGN-CD33A based on unexpected adverse events following a higher rate of deaths in the SGN-CD33A containing arm versus the control arm of this trial, and the Investigational New Drug application, or IND, for SGN-CD33A was subsequently placed on hold by the FDA. At this time, we have no plans to initiate additional clinical trials of SGN-CD33A. In the future, we may determine to discontinue our SGN-CD33A program altogether, in which case we will not receive any return on our investment in SGN-CD33A. In addition, we are planning or conducting pivotal trials for enfortumab vedotin and tisotumab vedotin based on only limited phase 1 clinical data. There may be important facts about the safety, efficacy, and risk versus benefit of these product candidates that are not known to us at this time which may negatively impact our ability to develop and commercialize these product candidates. In addition, in response to safety events observed in our ongoing clinical trials of enfortumab vedotin and tisotumab vedotin, including patient deaths, we have in the past, and may in the future, institute additional precautionary safety measures such as dosing caps and delays, enhanced monitoring for side effects, and modified patient inclusion and exclusion criteria. Additional and/or unexpected safety events could be observed in these pivotal or other later stage trials that could delay or prevent us from advancing the clinical development of either enfortumab vedotin or tisotumab vedotin and may adversely affect our business, results of operations and prospects.
Concerns regarding the safety of ADCETRIS or our product candidates as a result of undesirable side effects identified during clinical testing or otherwise could cause the FDA to order us to cease further development or commercialization of ADCETRIS or the applicable product candidate. Undesirable side effects caused by ADCETRIS or our product candidates could also result in denial of regulatory approval by the FDA or other regulatory authorities for any or all targeted indications, the requirement of additional trials or the inclusion of unfavorable information in our product labeling, and in turn delay or prevent us from commercializing ADCETRIS or the applicable product candidate. In addition, actual or potential drug-related side effects could affect patient recruitment or the ability of enrolled patients to complete a trial for ADCETRIS or our product candidates or result in potential product liability claims. Any of these events could prevent us from developing or commercializing ADCETRIS or the particular product candidate, and could significantly harm our business, results of operations and prospects.
Even though we and Takeda have obtained regulatory approvals to market ADCETRIS, we and Takeda are subject to extensive ongoing regulatory obligations and review, including post-approval requirements that could result in the withdrawal of ADCETRIS from certain geographic markets in certain indications if such requirements are not met.
ADCETRIS is approved for treating patients in the relapsed sALCL indication under accelerated approval regulations in the U.S., approved with conditions in relapsed Hodgkin lymphoma and sALCL in Canada, and approved under conditional marketing authorization in relapsed Hodgkin lymphoma and sALCL in Europe, in each case under regulations which allow for approval of products for cancer or other serious or life threatening illnesses based on a surrogate endpoint or on a clinical endpoint other than survival or irreversible morbidity. Under these types of approvals, we are subject to certain post-approval requirements, including the requirement to conduct clinical trials to confirm clinical benefit. In the U.S., either the ECHELON-1 trial or the ECHELON-2 trial results may be sufficient to confirm the clinical benefit of ADCETRIS in relapsed sALCL and thereby convert the relapsed sALCL accelerated approval to regular approval. In Canada, the ECHELON-1 results may be sufficient to confirm the clinical benefit of ADCETRIS in relapsed Hodgkin lymphoma, and the ECHELON-2 results may be sufficient to confirm the clinical benefit of ADCETRIS in relapsed sALCL. In Europe, there are other post approval requirements to convert the conditional marketing authorization for ADCETRIS in relapsed Hodgkin lymphoma and relapsed sALCL into a standard marketing authorization. Our failure to complete a required post-approval study, including the ECHELON-2 trial, or to confirm a clinical benefit could result in the withdrawal of approval of ADCETRIS in the indications for which approval is conditional which would seriously harm our business. Similarly, Takeda’s failure to provide these additional clinical data from confirmatory studies could result in the European Commission withdrawing approval of ADCETRIS in the European Union for certain indications, which would negatively impact anticipated royalty revenue from ADCETRIS sales by Takeda in the European Union and could adversely affect our results of operations.
In addition, we are subject to extensive ongoing obligations and continued regulatory review from applicable regulatory agencies with respect to any product for which we have obtained regulatory approval, including ADCETRIS in each of its approved indications, such as continued adverse event reporting requirements and the requirement to have some of our promotional materials pre-cleared by the FDA. There may also be additional post-marketing obligations, all of which may result in significant expense and limit our ability to commercialize ADCETRIS in the United States, Canada or potentially other jurisdictions.
We and the manufacturers of ADCETRIS are also required to comply with current Good Manufacturing Practices, or cGMP, regulations, which include requirements relating to quality control and quality assurance as well as the corresponding maintenance of records and documentation. Further, regulatory agencies must approve these manufacturing facilities before they can be used to manufacture ADCETRIS, and these facilities are subject to ongoing regulatory inspections. In addition, regulatory agencies subject an approved product, its manufacturer and the manufacturer’s facilities to continual review and inspections, including periodic unannounced inspections. The subsequent discovery of previously unknown problems with ADCETRIS, including adverse events of unanticipated severity or frequency, or problems with the facilities where ADCETRIS is manufactured, may result in restrictions on the marketing of ADCETRIS, up to and including withdrawal of ADCETRIS from the market. If our manufacturing facilities or those of our suppliers fail to comply with applicable regulatory requirements, such noncompliance could result in regulatory action and additional costs to us.
Failure to comply with applicable FDA and other regulatory requirements may subject us to administrative or judicially imposed sanctions, including:
| • | issuance of Form FDA 483 notices or Warning Letters by the FDA or other regulatory agencies; |
| • | imposition of fines and other civil penalties; |
| • | criminal prosecutions; |
| • | injunctions, suspensions or revocations of regulatory approvals; |
| • | suspension of any ongoing clinical trials; |
| • | total or partial suspension of manufacturing; |
| • | delays in commercialization; |
| • | refusal by the FDA to approve pending applications or supplements to approved applications submitted by us; |
| • | refusals to permit drugs to be imported into or exported from the United States; |
| • | restrictions on operations, including costly new manufacturing requirements; and |
| • | product recalls or seizures. |
The policies of the FDA and other regulatory agencies may change and additional government regulations may be enacted that could prevent or delay regulatory approval of ADCETRIS in any additional indications or further restrict or regulate post-approval activities. We cannot predict the likelihood, nature or extent of adverse government regulation that may arise from future legislation or administrative action, either in the United States or abroad. If we are not able to maintain regulatory compliance, we or Takeda might not be permitted to market ADCETRIS and our business would suffer.
If we or our collaborators are not able to obtain or maintain required regulatory approvals, we or our collaborators will not be able to successfully commercialize ADCETRIS or our product candidates.
The research, testing, manufacturing, labeling, approval, selling, marketing and distribution of drug products are subject to extensive regulation by the FDA and other regulatory authorities in the United States and other countries, which regulations differ from country to country. Neither we nor our collaborators are permitted to market our product candidates in the United States or foreign countries until we obtain marketing approval from the FDA or other foreign regulatory authorities, and we or our collaborators may never receive regulatory approval for the commercial sale of any of our product candidates. In addition, part of our strategy is to continue to explore the use of ADCETRIS earlier in the treatment of Hodgkin lymphoma and MTCL and in other CD30-expressing lymphomas, and we are currently conducting multiple clinical trials for ADCETRIS. However, we and/or Takeda may be unable to obtain or maintain any regulatory approvals for the commercial sale of ADCETRIS for any additional indications. Obtaining marketing approval is a lengthy, expensive and uncertain process and approval is never assured, and we have only limited experience in preparing and submitting the applications necessary to gain regulatory approvals. Further, the FDA and other foreign regulatory agencies have substantial discretion in the approval process, and determining when or whether regulatory approval will be obtained for any product candidate we develop, including any regulatory approvals for the potential commercial sale of ADCETRIS in additional indications or in any additional territories. In this regard, even if we believe the data collected from clinical trials of ADCETRIS and our product candidates are promising, such data may not be sufficient to support approval by the FDA or any other foreign regulatory authority. In addition, the FDA or their advisors may disagree with our interpretations of data from preclinical studies and clinical trials. For example, based on the positive data we reported from the ECHELON-1 trial, we have submitted an sBLA to the FDA for approval of ADCETRIS as part of a frontline combination chemotherapy regimen in patients with previously untreated advanced classical Hodgkin lymphoma. However, even though our sBLA was accepted by the FDA for Priority Review, the FDA may disagree with our
interpretations of the data from the ECHELON-1 trial and/or may otherwise determine not to approve our sBLA submission in a timely manner or at all. Moreover, even though our ECHELON-1 and ECHELON-2 trials are being conducted under SPA agreements with the FDA, this is not a guarantee or indication of approval, and we cannot be certain that the design of, or data collected from, any of our current or potential future clinical trials that were or are being conducted under SPA agreements with the FDA will be sufficient to support FDA approval. Further, a SPA agreement is not binding on the FDA if public health concerns unrecognized at the time the SPA agreement is entered into become evident, other new scientific concerns regarding product safety or efficacy arise, new drugs are approved in the same indication, or if we have failed to comply with the agreed upon trial protocols, including as a result of completing a clinical trial with fewer events than planned. In addition, a SPA agreement may be changed by us or the FDA on written agreement of both parties, and the FDA retains significant latitude and discretion in interpreting the terms of a SPA agreement and the data and results from the applicable clinical trial. For example, even though we believe that the data from the ECHELON-1 trial are supportive of approval of ADCETRIS in the ECHELON-1 treatment setting, our SPA agreement with the FDA covering the ECHELON-1 trial is not a guarantee or indication of approval of ADCETRIS in the ECHELON-1 treatment setting or in any other indications. Regulatory agencies also may approve a product candidate for fewer indications than requested or may grant approval subject to the performance of post-approval studies or REMS for a product candidate. Similarly, regulatory agencies may not approve the labeling claims that are necessary or desirable for the successful commercialization of ADCETRIS in additional indications, including any indications in the ECHELON-1 treatment setting. For example, there was an increased incidence of febrile neutropenia and peripheral neuropathy in the ADCETRIS plus AVD arm of the ECHELON-1 trial, which could limit, narrow or preclude any approval by the FDA, or could limit prescribing of ADCETRIS in the ECHELON-1 treatment setting if approved by the FDA, both of which could negatively impact sales of ADCETRIS or adversely affect ADCETRIS’ acceptance in the market.
In addition, changes in regulatory requirements and guidance may occur and we may need to amend clinical trial protocols and/or related SPA agreements to reflect these changes. Amendments may require us to resubmit our clinical trial protocols to institutional review boards, or IRBs, for reexamination, which may impact the costs, timing or successful completion of a clinical trial. In addition, as part of the U.S. Prescription Drug User Fee Act, or PDUFA, the FDA has a goal to review and act on a percentage of all regulatory submissions in a given time frame. In this regard, the sBLA that we submitted to the FDA in November 2017 to seek approval of ADCETRIS as part of a frontline combination chemotherapy regimen in patients with previously untreated advanced classical Hodgkin lymphoma was accepted for filing and designated for priority review with a PDUFA targeted action date of May 1, 2018. However, the FDA does not always meet its PDUFA targeted action dates and if the FDA were to fail to meet the PDUFA targeted action date for our November 2017 sBLA submission or fail to meet future PDUFA targeted action dates established for ADCETRIS or any of our product candidates, if any, the commercialization of the affected product candidate or of ADCETRIS in any additional indications could be delayed or impaired. Due to these and other factors, ADCETRIS and our product candidates could take a significantly longer time to gain regulatory approvals than we expect or may never gain new regulatory approvals, which could delay or eliminate any potential product revenue from sales of our product candidates or of ADCETRIS in any additional indications, which could significantly delay or prevent us from achieving profitability.
The successful commercialization of ADCETRIS and our product candidates will depend in part on the extent to which governmental authorities and health insurers establish adequate coverage and reimbursement levels and pricing policies.
Successful sales of ADCETRIS and any future products will depend, in part, on the extent to which coverage and reimbursement for our products will be available from government and health administration authorities, private health insurers and other third-party payors. To manage healthcare costs, many governments and third-party payors increasingly scrutinize the pricing of new products and require greater levels of evidence of favorable clinical outcomes and cost-effectiveness before extending coverage. In light of such challenges to prices, we cannot be sure that we will achieve and continue to have coverage available for ADCETRIS and any other product candidate that we commercialize and, if available, that the reimbursement rates will be adequate. If we are unable to obtain adequate levels of coverage and reimbursement for our product candidates, their marketability will be negatively and materially impacted. For example, even if we are able to obtain approval of our sBLA submission to the FDA to expand the labeled indications of use for ADCETRIS to the frontline advanced Hodgkin lymphoma setting based on our ECHELON-1 trial data, we cannot be certain that third-party payors will provide reimbursement for ADCETRIS in that indication based on the relative price or perceived benefit of ADCETRIS as compared to alternative treatment options, which may materially harm our ability to maintain or increase sales of ADCETRIS or may otherwise negatively affect future ADCETRIS sales.
Moreover, eligibility for coverage and reimbursement does not imply that a drug will be paid for in all cases or at a rate that covers our costs, including research, development, manufacture, sale and distribution. In addition, obtaining and maintaining adequate coverage and reimbursement status is time-consuming and costly. Third-party payors may deny coverage and reimbursement status altogether of a given drug product, or cover the product but may also establish prices at levels that are too low to enable us to realize an appropriate return on our investment in product development. Further, one payor’s determination to provide coverage for a product does not assure that other payors will also provide coverage for the product. Because the rules and regulations regarding coverage and reimbursement change frequently, in some cases at short notice, even when there is favorable coverage and reimbursement, future changes may occur that adversely impact the favorable status.
The unavailability or inadequacy of third-party coverage and reimbursement could have a material adverse effect on the market acceptance of ADCETRIS and any of our future products and the future revenues we may expect to receive from those products. In addition, we are unable to predict what additional legislation or regulation relating to the healthcare industry or third-party coverage and reimbursement may be enacted in the future, or what effect such legislation or regulation would have on our business. Continuing negative publicity regarding pharmaceutical pricing practices and ongoing presidential and congressional focus on this issue create significant uncertainty regarding regulation of the healthcare industry and third-party coverage and reimbursement. If healthcare policies or reforms intended to curb healthcare costs are adopted or if we experience negative publicity with respect to pricing of ADCETRIS or the pricing of pharmaceutical products generally, the prices that we charge for ADCETRIS and any future approved products may be limited, our commercial opportunity may be limited and/or our revenues from sales of ADCETRIS and any future approved products may be negatively impacted.
We do not have sole control of the development and commercialization of enfortumab vedotin and tisotumab vedotin, and we have limited data on the safety and efficacy of these drug candidates
We and our collaborators, Astellas and Genmab respectively, have elected to pursue accelerated development and approval pathways for enfortumab vedotin and tisotumab vedotin. We have initiated a pivotal clinical trial for enfortumab vedotin and intend to initiate a pivotal clinical trial for tisotumab vedotin, in each case based on only limited phase 1 clinical data. There may be important facts about the safety, efficacy, and risk versus benefit of these product candidates that are not known to us at this time which may negatively impact our ability to develop and commercialize these product candidates. In response to safety events observed in our ongoing clinical trials of enfortumab vedotin and tisotumab vedotin, including patient deaths, we have in the past, and may in the future, institute additional precautionary safety measures such as dosing caps and delays, enhanced monitoring for side effects, and modified patient inclusion and exclusion criteria. In addition, enfortumab vedotin and tisotumab vedotin may fail to demonstrate sufficient efficacy in our pivotal trials despite the results observed in previous trials. Additional and/or unexpected safety events or our failure to generate additional efficacy data in our clinical trials that support registration could significantly impact the value of enfortumab vedotin and tisotumab vedotin to our business. Moreover, because control of development and commercialization is shared with our collaborators, we do not have sole discretion and control over the development and commercialization of these product candidates.
Healthcare law and policy changes may have a material adverse effect on us
In March 2010, the Patient Protection and Affordable Care Act of 2010, as amended by the Health Care and Education Reconciliation Act of 2010, or collectively PPACA, became law in the United States. PPACA substantially changed the way healthcare is financed by both governmental and private insurers and significantly affects the pharmaceutical industry. The provisions of PPACA of greatest importance to the pharmaceutical industry include increased Medicaid rebates, expanded Medicaid eligibility, extension of Public Health Service eligibility, annual fees payable by manufacturers and importers of branded prescription drugs, annual reporting of financial relationships with physicians and teaching hospitals, and a new Patient-Centered Outcomes Research Institute. Many of these provisions have had the effect of reducing the revenue generated by our sales of ADCETRIS and will have the effect of reducing any revenue generated by sales of any future commercial products we may have.
Certain provisions of the PPACA have been subject to judicial and Congressional challenges, as well as efforts by the Trump administration to repeal or replace certain aspects of the PPACA. For example, on January 20, 2017, President Trump signed an Executive Order directing federal agencies with authorities and responsibilities under the PPACA to waive, defer, grant exemptions from, or delay the implementation of any provision of the PPACA that would impose a fiscal or regulatory burden on states, individuals, healthcare providers, health insurers, or manufacturers of pharmaceuticals or medical devices. In Congress, the U.S. House of Representatives passed PPACA replacement legislation known as the American Health Care Act of 2017 in May 2017, which was not introduced in the Senate. More recently, the Senate Republicans have proposed multiple bills to repeal or repeal and replace portions of the PPACA. Although none of these measures have been enacted, Congress may consider other legislation to repeal or replace certain elements of the PPACA. While Congress has not passed repeal or replace legislation, the tax reform legislation signed into law on December 22, 2017 includes a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment imposed by the ACA on certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate.” On October 12, 2017, President Trump signed another Executive Order directing certain federal agencies to propose regulations or guidelines to permit small businesses to form association health plans, expand the availability of short-term, limited duration insurance, and expand the use of health reimbursement arrangements, which may circumvent some of the requirements for health insurance mandated by the PPACA. In addition, citing legal guidance from the U.S. Department of Justice, the U.S. Department of Health and Human Services, has concluded that cost-sharing reduction, or CSR, payments to insurance companies required under the
PPACA have not received necessary appropriations from Congress and announced that it will discontinue these payments immediately until such appropriations are made. The loss of the CSR payments is expected to increase premiums on certain policies issued by qualified health plans under the PPACA. While Congress is considering legislation to appropriate funds for CSR payments the future of that legislation is uncertain. We continue to evaluate the effect that the PPCCA and its possible repeal and replacement has on our business.
In addition, we anticipate that the PPACA, as well as other healthcare reform measures that may be adopted in the future, may result in more rigorous coverage criteria and an additional downward pressure on the price that we receive for ADCETRIS or any future approved product, which may harm our business. For example, increased discounts, rebates or chargebacks may be mandated by governmental or private insurers or fee caps and pricing pressures could be enacted by industry organizations or state and federal governments, any of which could significantly affect the revenue generated by sales of our products, including ADCETRIS. In addition, drug-pricing by pharmaceutical companies has come under increased scrutiny. Specifically, there have been several recent U.S. Congressional inquiries and proposed federal and state legislation designed to, among other things, bring more transparency to drug pricing by requiring drug companies to notify insurers and government regulators of price increases and to provide an explanation as to the reasons for the increase, reduce the out-of-pocket cost of prescription drugs, review the relationship between pricing and manufacturer patient programs and reform government program reimbursement methodologies for drugs. We expect further federal and state legislation and healthcare reforms to continue to be proposed to control increasing healthcare costs and to control the rising cost of prescription drugs. These proposals, if implemented, could limit the price for ADCETRIS or any future approved products. Commercial opportunity could be negatively impacted by legislative action that controls pricing, mandates price negotiations, or increases government discounts and rebates.
Also, price increases on ADCETRIS and negative publicity regarding drug pricing and price increases generally, whether on ADCETRIS or products distributed by other pharmaceutical companies, could negatively affect market acceptance of, and sales of, ADCETRIS. In addition, although ADCETRIS is approved in the European Union, Japan and other countries outside of the United States, government austerity measures or further healthcare reform measures and pricing pressures in other countries could adversely affect demand and pricing for ADCETRIS, which would negatively impact anticipated royalty revenue from ADCETRIS sales by Takeda.
Other legislative changes have also been proposed and adopted since PPACA was enacted. The Budget Control Act of 2011, among other things, created the Joint Select Committee on Deficit Reduction to recommend to Congress proposals in spending reductions. The Joint Select Committee did not achieve a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, triggering the legislation’s automatic reduction to several government programs. This includes a 2% reduction in Medicare provider payments paid under Medicare Part B to physicians for physician-administered drugs, such as certain oral oncology drugs, which went into effect in April 2013 and, following passage of the Bipartisan Budget Act of 2015, will remain in effect through 2025 unless additional congressional action is taken. The American Taxpayer Relief Act of 2012, among other things, reduced Medicare payments to several providers and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. In addition, legislation has been proposed to shorten the period of biologic data and market exclusivity granted by the FDA. If such legislation is enacted, we may face competition from biosimilars of ADCETRIS or any future approved products earlier than otherwise would have occurred. Increased competition may negatively impact coverage and pricing of ADCETRIS, which could negatively affect our financial condition or results of operations.
We expect to experience pricing pressures in connection with the sale of ADCETRIS due to the trend toward managed healthcare, and additional legislative proposals. For example, the PPACA increased the mandated Medicaid rebate from 15.1% to 23.1%, expanded the rebate to Medicaid managed care utilization and increased the types of entities eligible for the federal 340B drug discount program. On January 30, 2017, the White House Office of Management and Budget withdrew the draft August 2015 Omnibus Guidance document that was issued by the Department of Health and Human Services Health Resources and Services Administration, or HRSA, that addressed a broad range of topics including, among other items, the definition of a patient’s eligibility for 340B drug pricing. However, as concerns continue to grow over the need for tighter oversight, there remains the possibility that HRSA or other agency under the Department of Health and Human Services, or HHS, will propose a similar regulation or that Congress will explore changes to the 340B program through legislation. For example, the Centers for Medicare & Medicaid Services has issued a proposed rule that would revise the Medicare hospital outpatient prospective payment system, including a new reimbursement methodology for drugs purchased under the 340B program for Medicare patients. In addition, HHS has currently set July 1, 2018 for implementation of the final rule setting forth the calculation of the ceiling price and application of civil monetary penalties under the 340B program. A significant portion of ADCETRIS purchases are eligible for 340B drug pricing, and therefore an expansion of the 340B program or reduction in 340B pricing, whether in the form of the final rule or otherwise, would likely have a negative impact on our net sales of ADCETRIS.
We cannot predict what healthcare reform initiatives may be adopted in the future. However, we anticipate that Congress, state legislatures, and third-party payors may continue to review and assess alternative healthcare delivery and payment systems and may in the future propose and adopt legislation or policy changes or implementations effecting additional fundamental changes in the healthcare delivery system. We also expect ongoing initiatives to increase pressure on drug pricing. We cannot assure you as to the ultimate content, timing, or effect of changes, nor is it possible at this time to estimate the impact of any such potential legislation; however, such changes or the ultimate impact of changes could negatively affect our revenue or sales of ADCETRIS or any potential future approved products.
Enhanced governmental and private scrutiny over, or investigations or litigation involving, pharmaceutical manufacturer donations to patient assistance programs offered by charitable foundations may require us to modify our programs and could negatively impact our business practices, harm our reputation, divert the attention of management and increase our expenses.
To help patients afford our products, we have a patient assistance program and also occasionally make donations to independent charitable foundations that help financially needy patients. These types of programs designed to assist patients in affording pharmaceuticals have become the subject of scrutiny. In recent years, some pharmaceutical manufacturers were named in class action lawsuits challenging the legality of their patient assistance programs and support of independent charitable patient support foundations under a variety of federal and state laws. At least one insurer also has directed its network pharmacies to no longer accept manufacturer co-payment coupons for certain specialty drugs the insurer identified. Our patient assistance program and support of independent charitable foundations could become the target of similar litigation.
In addition, there has been regulatory review and enhanced government scrutiny of donations by pharmaceutical companies to patient assistance programs operated by charitable foundations. For example, the Office of Inspector General of the U.S. Department of Health & Human Services, or OIG, has established specific guidelines permitting pharmaceutical manufacturers to make donations to charitable organizations who provide co-pay assistance to Medicare patients, provided that such organizations are bona fide charities, are entirely independent of and not controlled by the manufacturer, provide aid to applicants on a first-come basis according to consistent financial criteria, and do not link aid to use of a donor’s product. If we or our vendors or donation recipients are deemed to fail to comply with laws or regulations in the operation of these programs, we could be subject to damages, fines, penalties or other criminal, civil or administrative sanctions or enforcement actions. Further, numerous organizations, including pharmaceutical manufacturers, have received subpoenas from the OIG and other enforcement authorities seeking information related to their patient assistance programs and support. We cannot ensure that our compliance controls, policies and procedures will be sufficient to protect against acts of our employees, business partners or vendors that may violate the laws or regulations of the jurisdictions in which we operate. Regardless of whether we have complied with the law, a government investigation could negatively impact our business practices, harm our reputation, divert the attention of management and increase our expenses.
Clinical trials are expensive and time consuming, may take longer than we expect or may not be completed at all, and their outcome is uncertain.
We are currently conducting multiple clinical trials for ADCETRIS and our product candidates and we plan to commence additional trials of ADCETRIS and our product candidates in the future. We are also conducting a pivotal phase 2 trial of enfortumab vedotin with Astellas for locally advanced or metastatic urothelial cancer patients who have been previously treated with checkpoint inhibitor therapy, and are planning to conduct a pivotal phase 2 trial of tisotumab vedotin with Genmab in patients with recurrent and/or metastatic cervical cancer, in each case based on only limited phase 1 clinical data. Neither enfortumab vedotin nor tisotumab vedotin have previously been evaluated in later stage clinical trials and we cannot be certain that the design of, or data collected from, these trials will be adequate to demonstrate the safety and efficacy of enfortumab vedotin or tisotumab vedotin, or will otherwise be sufficient to support FDA or any foreign regulatory approvals.
Each of our clinical trials requires the investment of substantial expense and time and the timing of the commencement, continuation and completion of these clinical trials may be subject to significant delays relating to various causes, including scheduling conflicts with participating clinicians and clinical institutions, difficulties in identifying and enrolling patients who meet trial eligibility criteria, failure of patients to complete the clinical trial, delays in accumulating the required number of clinical events for data analyses, delay or failure to obtain IRB approval to conduct a clinical trial at a prospective site, and shortages of available drug supply. For example, the SPA agreement for the ECHELON-2 trial requires that the trial continue until a specified number of PFS events designated for the trial occurs. Based on reviews of pooled, blinded data, we have observed a lower rate of reported PFS events than anticipated. We plan to discuss with the FDA the potential to unblind the trial prior to achieving the target number of PFS events specified in the SPA agreement. We cannot predict the outcome of those discussions or whether we would be able to reach agreement with the FDA. If we are unable to reach agreement with the FDA and determine to unblind the trial prior to achieving the target number of PFS events as specified in the SPA agreement, the FDA could treat the SPA agreement for ECHELON-2 trial as rescinded. In that event, we would no longer have commitments
from the FDA regarding the appropriate design, size and endpoints of the study for regulatory approval, making our ability to obtain regulatory approval of ADCETRIS in the ECHELON-2 treatment setting more uncertain. In addition, earlier unblinding in the ECHELON-2 trial could also negatively impact the likelihood of achieving positive results in the trial sufficient to support regulatory approval. Alternatively, if we are unable to reach agreement with the FDA, we could determine to continue the ECHELON-2 trial until the target number of PFS events specified in the SPA agreement is achieved, which could result in a substantial delay in our ability to conduct the final data analysis from the ECHELON-2 trial.
Additionally, patient enrollment is a function of many factors, including the size of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the trial, the existence of competing clinical trials, perceived side effects and the availability of alternative or new treatments. Many of our future and ongoing clinical trials are being or will be coordinated or conducted with Takeda, Astellas, Genmab and other collaborators, which may delay the commencement or affect the continuation or completion of these trials. From time to time, we have experienced enrollment-related delays in clinical trials and we will likely continue to experience similar delays in our current and future trials. We depend on medical institutions and clinical research organizations, or CROs, to conduct some of our clinical trials in compliance with Good Clinical Practice, or GCP, and to the extent they fail to enroll patients for our clinical trials, fail to conduct our trials in accordance with GCP, or are delayed for a significant time in achieving full enrollment, we may be affected by increased costs, program delays or both, which may harm our business. In addition, we conduct clinical trials in foreign countries which may subject us to further delays and expenses as a result of increased drug shipment costs, additional regulatory requirements and the engagement of foreign CROs, as well as expose us to risks associated with less experienced clinical investigators who are unknown to the FDA, different standards of medical care, and foreign currency transactions insofar as changes in the relative value of the U.S. dollar to the foreign currency where the trial is being conducted may impact our actual costs.
Clinical trials must be conducted in accordance with FDA or other applicable foreign government guidelines and are subject to oversight by the FDA, other foreign governmental agencies, the data safety monitoring boards for such trials and the IRBs or Ethics Committees for the institutions in which such trials are being conducted. In addition, clinical trials must be conducted with supplies of ADCETRIS or our product candidates produced under cGMP and other requirements in foreign countries, and may require large numbers of test patients. We or our collaborators, the FDA, other foreign governmental agencies or the applicable data safety monitoring boards, IRBs and Ethics Committees could delay, suspend, halt or modify our clinical trials of ADCETRIS or any of our product candidates, and we, our collaborators and/or the FDA could terminate or modify any related SPA agreements, for numerous reasons, including:
| • | ADCETRIS or the applicable product candidate may have unforeseen safety issues or adverse side effects, including fatalities, or a determination may be made that a clinical trial presents unacceptable health risks; |
| • | deficiencies in the conduct of the clinical trial, including failure to conduct the clinical trial in accordance with regulatory requirements, GCP or clinical protocols; |
| • | problems, errors or other deficiencies with respect to data collection, data processing and analysis; |
| • | deficiencies in the clinical trial operations or trial sites resulting in the imposition of a clinical hold; |
| • | the time required to determine whether ADCETRIS or the applicable product candidate is effective may be longer than expected; |
| • | fatalities or other adverse events arising during a clinical trial due to medical problems that may not be related to clinical trial treatments; |
| • | ADCETRIS or the applicable product candidate may not appear to be more effective than current therapies; |
| • | the quality or stability of ADCETRIS or the applicable product candidate may fall below acceptable standards; |
| • | our inability and the inability of our collaborators to produce or obtain sufficient quantities of ADCETRIS or the applicable product candidate to complete the trials; |
| • | our inability and the inability of our collaborators to reach agreement on acceptable terms with prospective CROs and trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites; |
| • | our inability and the inability of our collaborators to obtain IRB or Ethics Committee approval to conduct a clinical trial at a prospective site; |
| • | changes in governmental regulations or administrative actions that adversely affect our ability and the ability of our collaborators to continue to conduct or to complete clinical trials; |
| • | lack of adequate funding to continue the clinical trial, including the incurrence of unforeseen costs due to enrollment delays, requirements to conduct additional trials and studies and increased expenses associated with the services of our CROs and other third parties; |
| • | our inability and the inability of our collaborators to recruit and enroll patients to participate in clinical trials for reasons including competition from other clinical trial programs for the same or similar indications; |
| • | our inability and the inability of our collaborators to retain patients who have initiated a clinical trial but may be prone to withdraw due to side effects from the therapy, lack of efficacy or personal issues, or who are lost to further follow-up; or |
| • | our inability and the inability of our collaborators to ensure adequate statistical power to detect statistically significant treatment effects, whether through our inability to enroll or retain patients in trials or because the specified number of events designated for a completed trial have not occurred. |
In addition, we or our collaborators may experience significant setbacks in advanced clinical trials, even after promising results in earlier trials, including unexpected adverse events that may occur when our product candidates are combined with other therapies. For example, in June 2017, we suspended patient enrollment and treatment in all SGN-CD33A trials and discontinued the phase 3 CASCADE clinical trial of SGN-CD33A in frontline older acute myeloid leukemia, or AML, patients, following a higher rate of deaths in the SGN-CD33A containing arm versus the control arm of this trial, and the IND for SGN-CD33A was subsequently placed on hold by the FDA. At this time, we have no plans to initiate additional clinical trials of SGN-CD33A. In the future, we may determine to discontinue our SGN-CD33A program altogether, in which case we will not receive any return on our investment in SGN-CD33A.
Negative or inconclusive clinical trial results could adversely affect our ability and the ability of our collaborators to obtain regulatory approvals of our product candidates or to market ADCETRIS and/or expand ADCETRIS into additional indications. In particular, negative or inconclusive results in our ECHELON-2 trial would negatively impact or preclude altogether, our and Takeda’s ability to obtain regulatory approvals in the frontline MTCL indication in our respective territories, which would limit our sales of, and the commercial potential of, ADCETRIS. In addition, clinical trial results are frequently susceptible to varying interpretations that may delay, limit or prevent regulatory approvals. For example, although we reported positive top line data in our ECHELON-1 trial, regulatory agencies, including the FDA, or their advisors, may disagree with our interpretations of data from the ECHELON-1 trial and may not approve the expansion of ADCETRIS’ labeled indications of use based on the results of the ECHELON-1 trial or any other of our clinical trials. Adverse medical events during a clinical trial, including patient fatalities, could cause a trial to be redone or terminated, require us to cease development of a product candidate or the further development or commercialization of ADCETRIS, result in our failure to expand ADCETRIS into additional indications, adversely affect our ability to market ADCETRIS, and may result in other negative consequences to us, including the inclusion of unfavorable information in our product labeling. Further, some of our clinical trials are overseen by an IDMC, and an IDMC may determine to delay or suspend one or more of these trials due to safety or futility findings based on events occurring during a clinical trial. In addition, we may be required to implement additional risk mitigation measures that could require us to suspend our clinical trials if certain safety events occur.
We depend on collaborative relationships with other companies to assist in the research and development of ADCETRIS and for the development and commercialization of product candidates utilizing or incorporating our technologies. If we are not able to locate suitable collaborators or if our collaborators do not perform as expected, this may negatively affect our ability to commercialize ADCETRIS, develop other product candidates and/or generate revenues through technology licensing, or may otherwise negatively affect our business.
We have established collaborations with third parties to develop and market ADCETRIS and some of our current and future product candidates. For example, we entered into a collaboration agreement with Takeda in December 2009 that granted Takeda rights to develop and commercialize ADCETRIS outside of the United States and Canada. In addition, we have entered into 50/50 co-development collaborations with Astellas for the development of enfortumab vedotin, and with Genmab for the development of tisotumab vedotin. We are also collaborating with BMS with respect to the CHECKMATE 812 pivotal phase 3 clinical trial evaluating the combination of Opdivo (nivolumab) with ADCETRIS for the treatment of relapsed or refractory, or transplant-ineligible, advanced classical Hodgkin lymphoma. In addition, we have ADC collaborations with AbbVie, Bayer, Celldex, Genentech, GSK, Pfizer and Progenics, and we have entered into a collaboration agreement with Unum to develop and commercialize novel ACTR therapies incorporating our antibodies for the treatment of cancer. Our dependence on collaborative arrangements to assist in the development and commercialization of ADCETRIS and for the development and commercialization of product candidates utilizing or incorporating our technologies subjects us to a number of risks, including:
| • | we are not able to control the amount and timing of resources that our collaborators devote to the development or commercialization of products and product candidates utilizing or incorporating our technologies, or to their marketing and distribution; |
| • | disputes may arise between us and our collaborators that result in the delay or termination of the research, development or commercialization of the applicable products and product candidates or that result in costly litigation or arbitration that diverts management’s attention and resources; |
| • | with respect to collaborations under which we have an active role, such as our ADCETRIS collaboration and our 50/50 co-development agreements with Astellas and Genmab, we may have differing opinions or priorities than our collaborators, or we may encounter challenges in joint decision making, which may result in the delay or termination of the research, development or commercialization of the applicable products and product candidates, including ADCETRIS, enfortumab vedotin and tisotumab vedotin; |
| • | our current and potential future collaborators may delay clinical trials, provide insufficient funding for a clinical trial program, stop a clinical trial or abandon a product candidate, repeat or conduct new clinical trials or require a new formulation of a product candidate for clinical testing; |
| • | significant delays in the development of product candidates by current and potential collaborators could allow competitors to bring products to market before product candidates utilizing or incorporating our technologies are approved and impair the ability of current and potential future collaborators to effectively commercialize these product candidates; |
| • | our relationships with our collaborators may divert significant time and effort of our scientific staff and management team and require the effective allocation of our resources to multiple internal collaborative projects; |
| • | our current and potential future collaborators may not be successful in their efforts to obtain regulatory approvals in a timely manner, or at all; |
| • | our current and potential future collaborators may receive regulatory sanctions relating to other aspects of their business that could adversely affect the development, approval or commercialization of the applicable products or product candidates; |
| • | our current and potential future collaborators may not properly maintain or defend our intellectual property rights or may use our proprietary information in such a way as to invite litigation that could jeopardize or invalidate our proprietary information or expose us to potential litigation; |
| • | business combinations or significant changes in a collaborator’s business strategy may adversely affect such party’s willingness or ability to complete its obligations under any arrangement; |
| • | a collaborator could independently move forward with competing products, therapeutic approaches or technologies to develop treatments for the diseases targeted by us or our collaborators that are developed by such collaborator either independently or in collaboration with others, including our competitors; |
| • | our current and potential collaborators may experience financial difficulties; and |
| • | our collaborations may be terminated, breached or allowed to expire, or our collaborators may reduce the scope of our agreements with them, which could have a material adverse effect on our financial position by reducing or eliminating the potential for us to receive technology access and license fees, milestones and royalties, and/or reimbursement of development costs, and which could require us to devote additional efforts and to incur the additional costs associated with pursuing internal development and commercialization of the applicable products and product candidates. |
If our collaborative arrangements are not successful as a result of any of the above factors, or any other factors, then our ability to advance the development and commercialization of the applicable products and product candidates and to otherwise generate revenue from these arrangements and to become profitable will be adversely affected, and our business and business prospects may be materially harmed. In particular, if Takeda were to terminate the ADCETRIS collaboration, which it may do for any reason upon prior written notice to us, we would not receive milestone payments, co-funded development payments or royalties for the sale of ADCETRIS outside the United States and Canada. As a result of such termination, we may have to engage another collaborator to complete the ADCETRIS development process and to commercialize ADCETRIS outside the United States and Canada, or to complete the development process and undertake commercializing ADCETRIS outside the United States and Canada ourselves, either of which could significantly delay the continued development and commercialization of ADCETRIS and increase our costs. Similarly, both Astellas and Genmab have the right to opt-out of their co-development obligations relating to enfortumab vedotin and tisotumab vedotin, respectively. If either Astellas or Genmab were to opt-out of
their co-development collaborations with us, this would significantly delay the development of the impacted product candidate and increase our costs. Any of these events could significantly harm our financial position, adversely affect our stock price and require us to incur all the costs of developing and commercializing ADCETRIS, enfortumab vedotin or tisotumab vedotin, which are now being co-funded by our collaboration partners. In the future, we may not be able to locate third-party collaborators to develop and market products and product candidates utilizing or incorporating our technologies, and we may lack the capital and resources necessary to develop and market these products and product candidates alone.
We face intense competition and rapid technological change, which may result in others discovering, developing or commercializing competing products before or more successfully than we do.
The biotechnology and biopharmaceutical industries are characterized by rapidly advancing technologies, intense competition and a strong emphasis on proprietary products. Many third parties compete with us in developing various approaches to treating cancer. They include pharmaceutical companies, biotechnology companies, academic institutions and other research organizations.
Many of our competitors have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approval and marketing than we do. In addition, many of these competitors are active in seeking patent protection and licensing arrangements in anticipation of collecting royalties for use of technology that they have developed. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. These third parties compete with us in recruiting and retaining qualified scientific and management personnel, as well as in acquiring technologies complementary to our programs.
With respect to ADCETRIS, there are several other FDA-approved drugs for its approved indications. Bristol-Myers Squibb’s nivolumab (Opdivo) and Merck’s pembrolizumab (Keytruda) are approved for the treatment of certain patients with relapsed or refractory classical Hodgkin lymphoma, and Celgene’s romidepsin (Istodax) and Spectrum Pharmaceuticals’ pralatrexate (Folotyn) and belinostat (Beleodaq) are approved for relapsed or refractory sALCL among other T-cell lymphomas. The competition ADCETRIS faces from these and other therapies is intensifying. Additionally, Merck is conducting a phase 3 clinical trial in relapsed or refractory classical Hodgkin lymphoma comparing pembrolizumab (Keytruda) with ADCETRIS. If this clinical trial demonstrates that pembrolizumab is more effective than ADCETRIS in that treatment setting, our sales of ADCETRIS would be negatively impacted. We are also aware of multiple investigational agents that are currently being studied, including Roche’s atezolizumab, Pfizer’s avelumab, and Kyowa’s mogamulizumab, which, if successful, may compete with ADCETRIS in the future. Data have also been presented on several developing technologies, including bispecific antibodies and CAR modified T-cell therapies that may compete with ADCETRIS in the future. Further, there are many competing approaches used in the treatment of patients in ADCETRIS’ four approved indications, including autologous hematopoietic stem cell transplant, allogeneic stem cell transplant, combination chemotherapy, clinical trials with experimental agents and single-agent regimens.
With respect to enfortumab vedotin, treatment in second line metastatic urothelial cancer is limited to CPI monotherapy or generic chemotherapy. There are other investigational agents that, if approved, could be competitive with enfortumab vedotin, including Immunomedics’ sacituzumab govitecan and Lilly’s ramucirumab.
With respect to tisotumab vedotin, we are aware of other companies that currently have products in development for the treatment of late-stage cervical cancer which could be competitive with tisotumab vedotin, including Agenus, Astrazeneca, Bristol-Myers Squibb, Immunomedics, Innovent Biologics, Merck, and Roche. In addition, several CPIs that are FDA-approved in other treatment settings are being explored for the treatment of late-stage cervical cancer in ongoing phase 2 clinical trials.
Many other pharmaceutical and biotechnology companies are developing and/or marketing therapies for the same types of cancer that our product candidates are designed and being developed to treat. For example, we believe that companies including AbbVie, ADC Therapeutics, Affimed, Agios, Amgen, Astellas, Bayer, Biogen, Bristol-Myers Squibb, Celgene, Eisai, Genentech, GSK, Gilead, ImmunoGen, Immunomedics, Infinity, Karyopharm, MedImmune, MEI Pharma, Merck, Novartis, Pfizer, Sanofi-Aventis, Spectrum Pharmaceuticals, Takeda, Teva, and Xencor are developing and/or marketing products or technologies that may compete with ours. In addition, our ADC collaborators may develop compounds utilizing our technology that may compete with product candidates that we are developing.
We are aware of other companies that have technologies that may be competitive with ours, including Astellas, AstraZeneca, Bristol-Myers Squibb, ImmunoGen, Immunomedics, MedImmune, Mersana and Pfizer, all of which have ADC technology. ImmunoGen has several ADCs in development that may compete with our product candidates. ImmunoGen has also established partnerships with other pharmaceutical and biotechnology companies to allow those other companies to utilize
ImmunoGen’s technology, including Sanofi-Aventis, Genentech, Novartis, Takeda and Lilly. We are also aware of a number of companies developing monoclonal antibodies directed at the same antigen targets or for the treatment of the same diseases as our product candidates. For example, we believe Amgen and Xencor have anti-CD19 programs that may be competitive with our product candidates.
In addition, in the United States, the Biologics Price Competition and Innovation Act of 2009 created an abbreviated approval pathway for biological products that are demonstrated to be “highly similar” or “biosimilar” to or “interchangeable” with an FDA-approved biological product. This pathway allows competitors to reference the FDA’s prior approvals regarding innovative biological products and data submitted with a BLA to obtain approval of a biosimilar application 12 years after the time of approval of the innovative biological product. The 12-year exclusivity period runs from the initial approval of the innovator product and not from approval of a new indication. In addition, the 12-year exclusivity period does not prevent another company from independently developing a product that is highly similar to the innovative product, generating all the data necessary for a full BLA and seeking approval. Exclusivity only assures that another company cannot rely on the FDA’s prior approvals in approving a BLA for an innovator’s biological product to support the biosimilar product’s approval. Further, under the FDA’s current interpretation, it is possible that a biosimilar applicant could obtain approval for one or more of the indications approved for the innovator product by extrapolating clinical data from one indication to support approval for other indications. The FDA approved the first biosimilar product in the United States in May 2015. In the European Union, the European Commission has granted marketing authorizations for several biosimilars pursuant to a set of general and product class-specific guidelines for biosimilar approvals issued since 2005. We are aware of many pharmaceutical and biotechnology and other companies that are actively engaged in research and development of biosimilars or interchangeable products.
It is possible that our competitors will succeed in developing technologies that are more effective than ADCETRIS, enfortumab vedotin, tisotumab vedotin or our other product candidates or that would render our technology obsolete or noncompetitive, or will succeed in developing biosimilar or interchangeable products for ADCETRIS, enfortumab vedotin, tisotumab vedotin or our other product candidates. We anticipate that we will continue to face increasing competition in the future as new companies enter our market and scientific developments surrounding biosimilars and other cancer therapies continue to accelerate. We cannot predict to what extent the entry of biosimilars or other competing products will impact potential future sales of ADCETRIS, enfortumab vedotin, tisotumab vedotin or our other product candidates.
Our operating results are difficult to predict and may fluctuate. If our operating results are below the expectations of securities analysts or investors, the trading price of our stock could decline.
Our operating results are difficult to predict and may fluctuate significantly from quarter to quarter and year to year. In addition, although we provide sales guidance for ADCETRIS from time to time, you should not rely on ADCETRIS sales results in any period as being indicative of future performance. Such guidance is based on assumptions that may be incorrect or that may change from quarter to quarter. Sales of ADCETRIS have, on occasion, been below the expectations of securities analysts and investors and have been below prior period sales, and sales of ADCETRIS in the future may also be below prior period sales, our own guidance and/or the expectations of securities analysts and investors. To the extent that we do not meet our guidance or the expectations of analysts or investors, our stock price may be adversely impacted, perhaps significantly. We believe that our quarterly and annual results of operations may be affected by a variety of factors, including:
| • | customer ordering patterns for ADCETRIS, which may vary significantly from period to period; |
| • | the overall level of demand for ADCETRIS, including the impact of any competitive or biosimilar products and the duration of therapy for patients receiving ADCETRIS; |
| • | the extent to which coverage and reimbursement for ADCETRIS is available from government and health administration authorities, private health insurers, managed care programs and other third-party payers; |
| • | changes in the amount of deductions from gross sales, including government-mandated rebates, chargebacks and discounts that can vary because of changes to the government discount percentage, including increases in the government discount percentage resulting from price increases we have taken or may take in the future, or due to different levels of utilization by entities entitled to government rebates and discounts and changes in patient demographics; |
| • | increases in the scope of eligibility for customers to purchase ADCETRIS at the discounted government price or to obtain government-mandated rebates on purchases of ADCETRIS; |
| • | changes in our cost of sales; |
| • | the incidence rate of new patients in ADCETRIS’ approved indications; |
| • | the timing, cost and level of investment in our sales and marketing efforts to support ADCETRIS sales; |
| • | the timing, cost and level of investment in our research and development and other activities involving ADCETRIS, enfortumab vedotin, tisotumab vedotin and our product candidates by us or our collaborators; |
| • | changes in the price of the common stock of Immunomedics that affect the valuation of the Immunomedics common stock that we hold; and |
| • | expenditures we will or may incur to develop and/or commercialize any additional products, product candidates, or technologies that we may develop, in-license, or acquire. |
In addition, we have entered into licensing and collaboration agreements with other companies that include development funding and milestone payments to us, and we expect that amounts earned from our collaboration agreements will continue to be an important source of our revenues. Accordingly, our revenues will also depend on development funding and the achievement of development and clinical milestones under our existing collaboration and license agreements, including, in particular, our ADCETRIS collaboration with Takeda, as well as entering into potential new collaboration and license agreements. These upfront and milestone payments may vary significantly from quarter to quarter and any such variance could cause a significant fluctuation in our operating results from one quarter to the next.
Further, changes in our operations, such as increased development, manufacturing and clinical trial expenses in connection with our expanding pipeline programs, or our undertaking of additional programs, business activities, the anticipated completion of the Acquisition and the integration of Cascadian’s business into our existing operations, or entry into strategic transactions, including potential future acquisitions of products, technologies or businesses may also cause significant fluctuations in our expenses. In addition, we measure compensation cost for stock-based awards made to employees at the grant date of the award, based on the fair value of the award, and recognize the cost as an expense over the employee’s requisite service period. As the variables that we use as a basis for valuing these awards change over time, including our underlying stock price, the magnitude of the expense that we must recognize may vary significantly. Additionally, we have implemented long-term incentive plans for our employees, and the incentives provided under these plans are contingent upon the achievement of certain regulatory milestones. Costs of performance-based compensation under our long-term incentive plans are not recorded as an expense until the achievement of the applicable milestones is deemed probable of being met, which may result in large fluctuations to the expense we must recognize in any particular period.
Additionally, as of December 31, 2017, we held 11.7 million shares of Immunomedics common stock. Beginning on January 1, 2018, we adopted ASU 2016-01 “Financial Instruments: Overall,” and as a result, we will record changes in the fair value of equity securities, including the Immunomedics common stock, in net income or loss, which is expected to increase the volatility of net income or loss to the extent that we continue to hold Immunomedics common stock or other equity securities.
For these and other reasons, it is difficult for us to accurately forecast future sales of ADCETRIS, collaboration and license agreement revenues, royalty revenues, operating expenses or future profits or losses. As a result, our operating results in future periods could be below our guidance or the expectations of securities analysts or investors, which could cause the trading price of our common stock to decline, perhaps substantially.
We have a history of net losses. We expect to continue to incur net losses and may not achieve future profitability for some time, if at all.
We have incurred substantial net losses in each of our years of operation. We have incurred these losses principally from costs incurred in our research and development programs and from our selling, general and administrative expenses. We expect to continue to spend substantial amounts on research and development, including amounts for conducting required post-approval and other clinical trials of, and seeking additional regulatory approvals for, ADCETRIS as well as commercializing ADCETRIS for the treatment of patients in its four approved indications. In addition, we expect to make substantial expenditures to further develop and potentially commercialize enfortumab vedotin, tisotumab vedotin and our product candidates. Accordingly, we expect to continue to incur net losses and may not achieve profitability in the future for some time, if at all. Although we recognize revenue from ADCETRIS product sales and we continue to earn amounts under our collaboration agreements, our revenue and profit potential is unproven and our limited commercialization history makes our future operating results difficult to predict. Even if we do achieve profitability in the future, we may not be able to sustain or increase profitability on a quarterly or annual basis. If we are unable to achieve and sustain profitability, the market value of our common stock will likely decline.
We have engaged in, and may in the future engage in strategic transactions that increase our capital requirements, dilute our stockholders, cause us to incur debt or assume contingent liabilities and subject us to other risks.
We actively evaluate various strategic transactions on an ongoing basis, including licensing or otherwise acquiring complementary products, technologies or businesses. Any potential acquisitions or in-licensing transactions, including the Acquisition, may entail numerous risks, including but not limited to:
| • | risks associated with satisfying the closing conditions relating to such transactions and realizing their anticipated benefits; |
| • | increased operating expenses and cash requirements; |
| • | difficulty integrating acquired technologies, products, operations, and personnel with our existing business; |
| • | diversion of management’s attention in connection with both negotiating the acquisition or license and integrating the business, technology or product; |
| • | retention of key employees; |
| • | uncertainties in our ability to maintain key business relationships of any acquired entities; |
| • | strain on managerial and operational resources; |
| • | difficulty implementing and maintaining effective internal control over financial reporting at businesses that we acquire, particularly if they are not located near our existing operations; |
| • | exposure to unforeseen liabilities of acquired companies or companies in which we invest; and |
| • | potential costly and time-consuming litigation, including stockholder lawsuits. |
As a result of these or other problems and risks, businesses, technologies or products we acquire or invest in or obtain licenses to may not produce the revenues, earnings or business synergies that we anticipated, acquired or licensed technologies may not result in regulatory approvals, and acquired or licensed products may not perform as expected. As a result, we may incur higher costs and realize lower revenues than we had anticipated. We cannot assure you that any acquisitions or investments we have made or may make in the future, including the Acquisition, will be completed or that, if completed, the acquired business, licenses, investments, products, or technologies will generate sufficient revenue to offset the negative costs or other negative effects on our business. Failure to manage effectively our growth through acquisition or in-licensing transactions could adversely affect our growth prospects, business, results of operations, financial condition, and cash flow.
In addition, we may spend significant amounts, issue dilutive securities, assume or incur significant debt obligations, incur large one-time expenses and acquire intangible assets in connection with acquisitions and in-licensing transactions that could result in significant future amortization expense and write-offs. Moreover, we may not be able to locate suitable acquisition opportunities and this inability could impair our ability to grow or obtain access to technology or products that may be important to the development of our business. Other pharmaceutical companies, many of which may have substantially greater financial, marketing and sales resources, compete with us for these opportunities. Even if appropriate opportunities are available, we may not be able to successfully identify them or we may not have the financial resources necessary to pursue them, and if pursued, we may be unable to structure and execute transactions in the anticipated timeframe, or at all.
Even if we are able to successfully identify and acquire complementary products, technologies or businesses, we cannot assure you that we will be able to successfully manage the risks associated with integrating acquired products, technologies or businesses or the risks arising from anticipated and unanticipated problems in connection with an acquisition or in-licensing transaction. Further, while we seek to mitigate risks and liabilities of potential acquisitions and in-licensing transactions through, among other things, due diligence, there may be risks and liabilities that such due diligence efforts fail to discover, that are not disclosed to us, or that we inadequately assess. Any failure in identifying and managing these risks and uncertainties effectively would have a material adverse effect on our business. Additionally, we may not realize the anticipated benefits of such transactions, including the possibility that expected synergies and accretion will not be realized or will not be realized within the expected time frame.
Our current product candidates are in various stages of development, and it is possible that none of our product candidates will ever become commercial products.
Our clinical-stage product candidates include seven ADC programs, which consist of enfortumab vedotin, tisotumab vedotin, ladiratuzumab vedotin, or SGN-LIV1A, denintuzumab mafodotin, or SGN-CD19A, SGN-CD19B, SGN-CD123A, and SGN-CD352A, as well as two immuno-oncology agents, SEA-CD40, which is based on our sugar-engineered antibody, or SEA, technology, and SGN-2FF, which is a novel small molecule. Other than enfortumab vedotin and tisotumab vedotin, which are in or expected to enter pivotal trials based on only limited phase 1 clinical data, our current product candidates are in relatively early stages of development. All of our product candidates will require significant further development, financial resources and personnel to obtain regulatory approval and develop into commercially viable products, if at all.
If a product candidate fails at any stage of development or we or our collaborators otherwise determine to discontinue development of that product candidate, we will not have the anticipated revenues from that product candidate to fund our operations, and we may not receive any return on our investment in that product candidate. Moreover, we still have only limited data from our early trials of our product candidates. In this regard, preclinical studies and any encouraging or positive preliminary and interim data from our clinical trials of our product candidates may not be predictive of the results of ongoing or later clinical trials. Even if we or our collaborators are able to complete our planned clinical trials of our product candidates according to our current development timeline, the encouraging or positive results from clinical trials of our product candidates in earlier stage trials may not be replicated in subsequent clinical trial results. As a result, we and our collaborators may conduct lengthy and expensive clinical trials of our product candidates only to learn that a product candidate is not an effective treatment or is not superior to existing approved therapies, or has an unacceptable safety profile, which could prevent or significantly delay regulatory approval for such product candidate or could cause us to discontinue the development of such product candidate. Also, later-stage clinical trials could differ in significant ways from earlier stage clinical trials, which could cause the outcome of the later-stage trials to differ from earlier stage clinical trials. For example, we are conducting a pivotal phase 2 trial of enfortumab vedotin with Astellas for locally advanced or metastatic urothelial cancer patients who have been previously treated with checkpoint inhibitor therapy, and are planning to conduct a pivotal phase 2 trial of tisotumab vedotin with Genmab in patients with recurrent and/or metastatic cervical cancer, in each case based on only limited phase 1 clinical data. Neither enfortumab vedotin nor tisotumab vedotin have previously been evaluated in later stage clinical trials and we cannot be certain that the design of, or data collected from, these trials will be adequate to demonstrate the safety and efficacy of enfortumab vedotin or tisotumab vedotin, or will otherwise be sufficient to support FDA or any foreign regulatory approvals. Differences in earlier and later stage clinical trials may include changes to inclusion and exclusion criteria, efficacy endpoints and statistical design. Many companies in the pharmaceutical and biotechnology industries, including us, have suffered significant setbacks in late-stage clinical trials after achieving encouraging or positive results in early-stage development. We cannot be certain that we will not face similar setbacks in our ongoing or planned clinical trials, including in the ongoing and planned pivotal phase 2 trials for enfortumab vedotin and tisotumab vedotin. We have not yet completed any late-stage clinical trials for our current product candidates, and if we or our collaborators fail to produce positive results in our ongoing or planned clinical trials of any of our product candidates, the development timeline and regulatory approval and commercialization prospects for our product candidates, and, correspondingly, our business and financial prospects, would be materially adversely affected.
Due to the uncertain and time-consuming clinical development and regulatory approval process, we may not successfully develop any of our product candidates and it is possible that none of our current product candidates will ever become commercial products. In addition, we expect that much of our effort and many of our expenditures over the next few years will be devoted to the additional clinical development of and commercialization activities associated with ADCETRIS, which may restrict or delay our ability to develop our clinical and preclinical product candidates.
To date, we have depended on a small number of collaborators for a substantial portion of our revenue. The loss of any one of these collaborators or changes in their product development or business strategy could result in a material decline in our revenue.
We have collaborations with a limited number of companies. To date, a substantial portion of our revenue has resulted from payments made under agreements with our corporate collaborators, and although ADCETRIS sales currently comprise a greater proportion of our revenue, we expect that a portion of our revenue will continue to come from corporate collaborations. Even though we market ADCETRIS in the United States and Canada, our revenues still depend in part on Takeda’s ability and willingness to market ADCETRIS outside of the United States and Canada. The loss of our collaborators, especially Takeda, changes in product development or business strategies of our collaborators, or the failure of our collaborators to perform their obligations under their agreements with us for any reason, including paying license or technology fees, milestone payments, royalties or reimbursements, could have a material adverse effect on our financial performance. Payments under our existing and potential future collaboration agreements are also subject to significant fluctuations in both timing and amount, which could cause our revenue to fall below the expectations of securities analysts and investors and cause a decrease in our stock price.
We are dependent upon a small number of distributors for a significant portion of our net sales, and the loss of, or significant reduction or cancellation in sales to, any one of these distributors could adversely affect our operations and financial condition.
In the United States and Canada, we sell ADCETRIS through a limited number of pharmaceutical distributors. Customers order ADCETRIS through these distributors. We generally receive orders from distributors and ship product directly to the customer. We do not promote ADCETRIS to these distributors and they do not set or determine demand for ADCETRIS; however, our ability to effectively commercialize ADCETRIS will depend, in part, on the performance of these distributors. Although we believe we can find alternative distributors on relatively short notice, the loss of a major distributor could materially and adversely affect our results of operations and financial condition.
We currently rely on third-party manufacturers and other third parties for production of our drug products and our dependence on these manufacturers may impair the continued development and commercialization of ADCETRIS and our product candidates.
Although we recently acquired a biologics manufacturing facility located in Bothell, Washington, we rely and expect to continue to rely on corporate collaborators and contract manufacturing organizations to supply drug product or intermediates for commercial supply and our IND-enabling studies and clinical trials. For the monoclonal antibody used in ADCETRIS, we have contracted with AbbVie for clinical and commercial supplies. For the drug linker used in ADCETRIS, we have contracted with Sigma Aldrich Fine Chemicals, or SAFC, for clinical and commercial supplies. We have multiple contract manufacturers for conjugating the drug linker to the antibody and producing the ADCETRIS product. For our ADC product candidates, multiple contract manufacturers, including AbbVie and SAFC, perform antibody and drug-linker manufacturing and several other contract manufacturers perform conjugation of the drug-linker to the antibody and fill/finish of the drug product. In addition, we rely on other third parties to perform additional steps in the manufacturing process, including shipping and storage of ADCETRIS and our product candidates. For the foreseeable future, we expect to continue to rely on contract manufacturers and other third parties to produce, vial and store sufficient quantities of ADCETRIS for use in our clinical trials and for commercial sale. If our contract manufacturers or other third parties fail to deliver ADCETRIS for clinical use or sale on a timely basis, with sufficient quality, and at commercially reasonable prices, and we fail to find replacement manufacturers or to develop our own manufacturing capabilities, we may be required to delay or suspend clinical trials or otherwise discontinue development, production and sale of ADCETRIS. Moreover, contract manufacturers have a limited number of facilities in which ADCETRIS can be produced and any interruption of the operation of those facilities due to events such as equipment malfunction or failure or damage to the facility by natural disasters or as the result of regulatory actions could result in the cancellation of shipments, loss of product in the manufacturing process, a shortfall in ADCETRIS supply, or the inability to sell our products in the U.S. or abroad. In addition, we have committed to provide Takeda with their needs of certain parts of the ADCETRIS supply chain for a limited period of time, which may require us to arrange for additional manufacturing supply. Moreover, we depend on outside vendors for the supply of raw materials used to produce ADCETRIS. If the third-party suppliers were to cease production or otherwise fail to supply us with quality raw materials and we were unable to contract on acceptable terms for these raw materials with alternative suppliers, our ability to have ADCETRIS manufactured to meet commercial and clinical requirements would be adversely affected.
We are planning to use our own manufacturing facility to support our growing pipeline. As an organization, we have no prior experience operating a manufacturing facility.
In October 2017, we acquired a biologics manufacturing facility located in Bothell, Washington, which facility we intend to use to support our clinical supply needs. Under the terms of this acquisition, we are required to operate the facility and produce certain clinical drug product components for BMS under a transitional services agreement for a period of time. As an organization, we have no prior experience manufacturing for ourselves or other parties, and operating this facility requires us to comply with complex regulations and to continue to hire and retain experienced scientific, quality control, quality assurance and manufacturing personnel. We could encounter challenges in operating the manufacturing facility in compliance with cGMP, regulatory or other applicable requirements, resulting in potential negative consequences, including regulatory actions, which could undermine our ability to utilize this facility for our own manufacturing needs and/or result in a breach of our contractual manufacturing obligations to BMS. Any of these risks, if actualized, could materially and adversely affect our business and financial position. In addition, despite the acquisition of this facility, we nonetheless expect to continue to rely on corporate collaborators and contract manufacturing organizations to supply drug product and intermediates for commercial supply and our IND-enabling studies and clinical trials. Our continuing dependence on these manufacturers may impair the continued development and commercialization of ADCETRIS and our product candidates.
We are subject to various state and federal laws and regulations, including healthcare laws and regulations, that may impact our business and could subject us to significant fines and penalties or other negative consequences.
Our operations may be directly or indirectly subject to various state and federal healthcare laws, including, without limitation, the federal Anti-Kickback Statute, federal civil and criminal false claims laws, HIPAA/HITECH, the federal civil monetary penalties statute, and the federal transparency requirements under the PPACA. These laws may impact, among other things, the sales, marketing and education programs for ADCETRIS.
The federal Anti-Kickback Statute prohibits persons and entities from knowingly and willingly soliciting, offering, receiving or providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual, or the furnishing
or arranging for a good or service, for which payment may be made under a federal healthcare program such as the Medicare and Medicaid programs. Several courts have interpreted the statute’s intent requirement to mean that if any one purpose of an arrangement involving remuneration is to induce referrals of federal healthcare covered business, the statute has been violated. Additionally, PPACA amended the intent requirement of the federal Anti-Kickback Statute such that a person or entity no longer needs to have actual knowledge of the statute or specific intent to violate it. The Anti-Kickback Statute is broad and prohibits many arrangements and practices that are lawful in businesses outside of the healthcare industry. Penalties for violations of the federal Anti-Kickback Statute include criminal penalties and civil sanctions such as fines, imprisonment and possible exclusion from Medicare, Medicaid and other federal healthcare programs.
The federal civil and criminal false claims laws, including the civil False Claims Act, prohibit, among other things, persons or entities from knowingly presenting, or causing to be presented, a false claim to, or the knowing use of false statements to obtain payment from or approval by the federal government, including the Medicare and Medicaid programs, or knowingly making, using, or causing to be made or used a false record or statement material to a false or fraudulent claim or to avoid, decrease, or conceal an obligation to pay money to the federal government. PPACA provides that the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the civil False Claims Act. Suits filed under the civil False Claims Act, known as “qui tam” actions, can be brought by any individual on behalf of the government and such individuals, commonly known as “whistleblowers,” may share in any amounts paid by the entity to the government in fines or settlement. Many pharmaceutical and other healthcare companies have recently been investigated or subject to lawsuits by whistleblowers and have reached substantial financial settlements with the federal government under the False Claims Act for a variety of alleged improper marketing or other activities, including providing free product to customers with the expectation that the customers would bill federal programs for the product; providing consulting fees, grants, free travel, and other benefits to physicians to induce them to prescribe the company’s products; and inflating prices reported to private price publication services, which are used to set drug reimbursement rates under government healthcare programs.
The federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, created additional federal criminal statutes that prohibit, among other things, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, knowingly and willfully embezzling or stealing from a healthcare benefit program, willfully obstructing a criminal investigation of a healthcare offense, and knowingly and willfully falsifying, concealing, or covering up a material fact or making any materially false, fictitious, or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items, or services. Similar to the Anti-Kickback Statute, PPACA amended the intent requirement of the criminal healthcare fraud statutes such that a person or entity no longer needs to have actual knowledge of the statute or intent to violate it.
HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, and its implementing regulations, governs certain types of individuals and entities with respect to the conduct of certain electronic healthcare transactions and imposes certain obligations with respect to the security and privacy of protected health information.
The federal civil monetary penalties statute imposes penalties against any person or entity that, among other things, is determined to have presented or caused to be presented a claim to a federal health program that the person knows or should know is for an item or service that was not provided as claimed or is false or fraudulent.
The federal transparency requirements under PPACA, the Physician Payments Sunshine Act, require certain manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid, or the Children’s Health Insurance Program to annually report to the U.S. Department of Health and Human Services’ Centers for Medicare & Medicaid Services information related to payments and other transfers of value to physicians and teaching hospitals, and physician ownership and investment interests.
There are foreign and state law equivalents of these laws and regulations, such as anti-kickback, false claims, and data privacy and security laws, to which we are currently and/or may in the future, be subject. We may also be subject to state laws that require manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures. Many of these state laws differ from each other in significant ways, thus complicating compliance efforts.
The FDA and other governmental authorities also actively investigate allegations of off-label promotion activities in order to enforce regulations prohibiting these types of activities. In recent years, private whistleblowers have also pursued False Claims Act cases against a number of pharmaceutical companies for causing false claims to be submitted as a result of off-label promotion. If we are found to have promoted an approved product, including ADCETRIS, for off-label uses we may be subject to significant liability, including civil and administrative financial penalties and other remedies as well as criminal financial penalties and other sanctions. Even when a company is not determined to have engaged in off-label promotion, the allegation
from government authorities or market participants that a company has engaged in such activities could have a significant impact on the company’s sales, business and financial condition. The U.S. government has also required companies to enter into complex corporate integrity agreements and/or non-prosecution agreements that impose significant reporting and other burdens on the affected companies.
We are also subject to numerous other laws and regulations that are not specific to the healthcare industry. For instance, the U.S. Foreign Corrupt Practices Act, or FCPA, prohibits companies and individuals from engaging in specified activities to obtain or retain business or to influence a person working in an official capacity. Under the FCPA, it is illegal to pay, offer to pay, or authorize the payment of anything of value to any foreign government official, governmental staff members, political party or political candidate in an attempt to obtain or retain business or to otherwise influence a person working in an official capacity. The FCPA also requires public companies to make and keep books and records that accurately and fairly reflect the transactions of the corporation and to devise and maintain an adequate system of internal accounting controls.
The number and complexity of both U.S. federal and state laws continue to increase. In addition to enforcement by governmental agencies, we also expect a continuation of the trend of private plaintiff lawsuits against pharmaceutical manufacturers under the whistleblower provisions of the False Claims Act and state equivalents or other laws and regulations such as securities rules and the evolution of new theories of liability under those statutes. Government agencies will likely continue to intervene in such private whistleblower lawsuits and such intervention typically raises the company’s cost significantly. For example, federal enforcement agencies have recently scrutinized product and patient assistance programs, including manufacturer reimbursement support services as well as relationships with specialty pharmacies. Several investigations have resulted in government enforcement authorities intervening in related whistleblower lawsuits and obtaining significant civil and criminal settlements.
In order to comply with these laws, we have implemented a compliance program to actively identify, prevent and mitigate risk through the implementation of compliance policies and systems and by promoting a culture of compliance. Although we take our obligation to maintain our compliance with these various laws and regulations seriously and our compliance program is designed to prevent the violation of these laws and regulations, we cannot guarantee that our compliance program will be sufficient or effective, that our employees will comply with our policies and that our employees will notify us of any violation of our policies, that we will have the ability to take appropriate and timely corrective action in response to any such violation, or that we will make decisions and take actions that will necessarily limit or avoid liability for whistleblower claims that individuals, such as employees or former employees, may bring against us or that governmental authorities may prosecute against us based on information provided by individuals. If we are found to be in violation of any of the laws and regulations described above or other applicable state and federal healthcare laws, we may be subject to penalties, including civil and criminal penalties, damages, fines, disgorgement, contractual damages, reputational harm, imprisonment, diminished profits and future earnings, exclusion from government healthcare reimbursement programs, additional reporting requirements and oversight if we become subject to a corporate integrity agreement or similar agreement to resolve allegations of non-compliance with these laws, and/or the curtailment or restructuring of our operations, any of which could have a material adverse effect on our business, results of operations and growth prospects. Any action against us for violation of these laws or regulations, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. Moreover, achieving and sustaining compliance with applicable federal, state and foreign healthcare laws is costly and time-consuming for our management.
As we expand our operations internationally, we are subject to an increased risk of conducting activities in a manner that violates applicable anti-bribery or anti-corruption laws. We are also subject to foreign laws and regulations covering data privacy and the protection of health-related and other personal information. These laws and regulations could create liability for us or increase our cost of doing business, any of which could have a material adverse effect on our business, results of operations and growth prospects.
We are expanding our operations internationally, and we currently have subsidiaries in the U.K., Switzerland and Canada. Though we are at an early stage with our international expansion, our business activities outside of the United States are subject to the FCPA, which is described above, and similar anti-bribery or anti-corruption laws, regulations or rules of other countries in which we currently and may in the future operate, including the U.K. Bribery Act. The U.K. Bribery Act prohibits giving, offering, or promising bribes to any person, including non-U.K. government officials and private persons, as well as requesting, agreeing to receive, or accepting bribes from any person. In addition, under the U.K. Bribery Act, companies which carry on a business or part of a business in the U.K. may be held liable for bribes given, offered or promised to any person, including non-U.K. government officials and private persons, by employees and persons associated with such company in order to obtain or retain business or a business advantage for such company. In the course of expanding our operations internationally, we will need to establish and expand business relationships with various third parties, such as independent contractors, distributors, vendors, advocacy groups and physicians, and we will interact more frequently with foreign officials, including regulatory authorities and physicians employed by state-run healthcare institutions who may be deemed to be foreign officials under the
FCPA, U.K. Bribery Act or similar laws of other countries that may govern our activities. Any interactions with any such parties or individuals where compensation is provided that are found to be in violation of such laws could result in substantial fines and penalties and could materially harm our business. Furthermore, any finding of a violation under one country’s laws may increase the likelihood that we will be prosecuted and be found to have violated another country’s laws. If our business practices outside the United States are found to be in violation of the FCPA, U.K. Bribery Act or other similar laws, we may be subject to significant civil and criminal penalties which could have a material adverse effect on our business, results of operations and growth prospects. We are also subject to foreign laws and regulations covering data privacy and the protection of health-related and other personal information. In this regard, European Union, or EU, member states and other foreign jurisdictions, including Switzerland, have adopted data protection laws and regulations which impose significant compliance obligations. Failure to comply with these laws could lead to government enforcement actions and significant penalties against us, which could have a material adverse effect on our business, results of operations and growth prospects. In December 2015, a proposal for an EU General Data Protection Regulation, intended to replace the current EU Data Protection Directive, was agreed between the European Parliament, the Council of the European Union and the European Commission. The EU General Data Protection Regulation, which was officially adopted in April 2016 and will be applicable in May 2018, will introduce new data protection requirements in the EU, as well as substantial fines for breaches of the data protection rules. The EU General Data Protection Regulation will increase our responsibility and liability in relation to personal data that we process, including in clinical trials, and we may be required to put in place additional mechanisms to ensure compliance with the new EU data protection rules, which could divert management’s attention and increase our cost of doing business.
Any failures or further setbacks in our ADC development program would negatively affect our business and financial position.
ADCETRIS and our enfortumab vedotin, tisotumab vedotin, ladiratuzumab vedotin, denintuzumab mafodotin, SGN-CD19B, SGN-CD123A, and SGN-CD352A product candidates are all based on our ADC technology, which utilizes proprietary stable linkers and potent cell-killing synthetic agents. Our ADC technology is also the basis of our collaborations with AbbVie, Astellas, Bayer, Celldex, Genentech, GSK, Pfizer, and Progenics, and our collaboration agreements with Takeda, Astellas, and Genmab. Although ADCETRIS has received marketing approval in the United States, Canada, the European Union, Japan and other countries, ADCETRIS is our first and only ADC product that has been approved for commercial sale in any jurisdiction. In addition, certain of our ADC product candidates include additional proprietary technologies that have not yet been proven in late stage clinical development. Any failures or further setbacks in our ADC development program or with respect to our additional proprietary technologies, including adverse effects resulting from the use of this technology in human clinical trials and/or the imposition of additional clinical holds on our trials of any of our other product candidates, could have a detrimental impact on the continued commercialization of ADCETRIS in its current or any potential future approved indications and on our internal product candidate pipeline, as well as our ability to maintain and/or enter into new corporate collaborations regarding our ADC technology, which would negatively affect our business and financial position.
We have been named a defendant in a purported securities class action lawsuit and a stockholder derivative lawsuit. These, and potential similar or related lawsuits, could result in substantial damages and may divert management’s time and attention from our business.
On January 10, 2017, a purported securities class action lawsuit was commenced in the United States District Court for the Western District of Washington, naming as defendants us and certain of our officers. The lawsuit alleges material misrepresentations and omissions in public statements regarding our business, operational and compliance policies, violations by all named defendants of Section 10(b) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and Rule 10b-5 thereunder, as well as violations of Section 20(a) of the Exchange Act. The complaint seeks compensatory damages of an undisclosed amount. The plaintiff alleges, among other things, that we made false and/or misleading statements and/or failed to disclose that SGN-CD33A presents a significant risk of fatal hepatotoxicity and that we had therefore overstated the viability of SGN-CD33A as a treatment for AML. We filed a motion to dismiss this complaint on July 28, 2017. On October 18, 2017, the Court granted our motion to dismiss with leave for plaintiff to file a second consolidated amended complaint. Plaintiff filed a second consolidated amended complaint on November 17, 2017 and we filed a motion to dismiss this new complaint on January 5, 2018. It is possible that additional suits will be filed, or allegations received from stockholders, with respect to these same matters and also naming us and/or our officers and directors as defendants.
On March 29, 2017, a stockholder derivative lawsuit was filed in Washington Superior Court for the County of Snohomish. The complaint names as defendants certain of our current and former executives and members of our board of directors. We are named as a nominal defendant. The complaint generally makes the same allegations as the securities class action, claiming that the individual defendants breached their duties to us. The complaint seeks unspecified damages, disgorgement of compensation, corporate governance changes, and attorneys’ fees and costs. Because the complaint is derivative in nature, it does not seek monetary damages from us. On June 8, 2017, the Snohomish County Superior Court entered an order staying this derivative action until resolution of the motion to dismiss the class action suit above. On October
18, 2017, in light of the granting of our motion to dismiss the first class action complaint, the parties in the derivative action filed a joint status report with the Snohomish County Superior Court stipulating to continue to stay the derivative action pending a ruling on a motion to dismiss the second consolidated amended class action complaint.
These lawsuits and any other related lawsuits are subject to inherent uncertainties, and the actual costs to be incurred relating to the lawsuits will depend upon many unknown factors. The outcome of these lawsuits is necessarily uncertain, and we could be forced to expend significant resources in the defense of these lawsuits, and we may not prevail. Monitoring and defending against legal actions is time-consuming for our management and detracts from our ability to fully focus our internal resources on our business activities, which could result in delays of our clinical trials or our development and commercialization efforts. In addition, we may incur substantial legal fees and costs in connection with these lawsuits. We are also generally obligated, to the extent permitted by law, to indemnify our current and former directors and officers who are named as defendants in these and similar lawsuits. We are not currently able to estimate the possible cost to us from these matters, as these lawsuits are currently at an early stage and we cannot be certain how long it may take to resolve these matters or the possible amount of any damages that we may be required to pay. We have not established any reserves for any potential liability relating to these lawsuits. It is possible that we could, in the future, incur judgments or enter into settlements of claims for monetary damages. Decisions adverse to our interests in these lawsuits could result in the payment of substantial damages, or possibly fines, and could have a material adverse effect on our cash flow, results of operations and financial position. In addition, the uncertainty of the currently pending litigation could lead to increased volatility in our stock price.
We may need to raise significant amounts of additional capital that may not be available to us.
We expect to make additional capital outlays and to increase operating expenditures over the next several years as we hire additional employees, support our preclinical development, manufacturing and clinical trial activities for ADCETRIS and our other pipeline programs, and expand internationally, as well as commercialize ADCETRIS and position ADCETRIS for potential additional regulatory approvals. Our commitment of resources to the continuing development, regulatory and commercialization activities for ADCETRIS, and the research, continued development and manufacturing of our product candidates will likely require us to raise substantial amounts of additional capital. Further, we actively evaluate various strategic transactions on an ongoing basis, including licensing or otherwise acquiring complementary products, technologies or businesses, and we may require significant additional capital in order to complete or otherwise provide funding for any additional acquisitions. We may seek additional funding through some or all of the following methods: corporate collaborations, licensing arrangements and public or private debt or equity financings. We do not know whether additional capital will be available when needed, or that, if available, we will obtain financing on terms favorable to us or our stockholders. If we are unable to raise additional funds when we need them, we may be required to delay, reduce the scope of, or eliminate one or more of our development programs, which may adversely affect our business and operations. Our future capital requirements will depend upon a number of factors, including:
| • | the level of sales and market acceptance of ADCETRIS; |
| • | the rate of progress and cost of the confirmatory post-approval study that we are required to conduct as a condition to the FDA’s accelerated approval of ADCETRIS in the relapsed sALCL indication; |
| • | the time and costs involved in obtaining regulatory approvals of ADCETRIS in additional indications, if any; |
| • | the size, complexity, timing, progress and number of our clinical programs and our collaborations; |
| • | the timing, receipt and amount of milestone-based payments or other revenue from our collaborations or license arrangements, including royalty revenue generated from commercial sales of ADCETRIS by Takeda; |
| • | the cost of establishing and maintaining clinical and commercial supplies of ADCETRIS; |
| • | the costs associated with acquisitions or licenses of additional technologies, products, or companies, including the Acquisition, as well as licenses we may need to commercialize our products; |
| • | the terms and timing of any future collaborative, licensing and other arrangements that we may establish; |
| • | expenses associated with the pending and potential additional related purported securities class action or derivative lawsuits, as well as any other potential litigation; |
| • | the potential costs associated with international, state and federal taxes; and |
| • | competing technological and market developments. |
In addition, changes in our spending rate may occur that would consume available capital resources sooner, such as increased development, manufacturing and clinical trial expenses in connection with our expanding pipeline programs, or our
undertaking of additional programs, business activities or entry into strategic transactions, including potential acquisitions of products, technologies or businesses. To the extent that we raise additional capital by issuing equity securities, our stockholders may experience substantial dilution. To the extent that we raise additional funds through collaboration and licensing arrangements, we may be required to relinquish some rights to our technologies or product candidates, or grant licenses on terms that are not favorable to us.
During the past several years, domestic and international financial markets have experienced extreme disruption from time to time, including, among other things, high volatility and significant declines in stock prices and severely diminished liquidity and credit availability for both borrowers and investors. Such adverse capital and credit market conditions could make it more difficult to obtain additional capital on favorable terms, or at all, which could have a material adverse effect on our business and growth prospects.
We rely on license agreements for certain aspects of ADCETRIS, our product candidates and technologies such as our ADC technology. Failure to maintain these license agreements or to secure any required new licenses could prevent us from continuing to develop and commercialize ADCETRIS and our product candidates.
We have entered into agreements with third-party commercial and academic institutions to license technology for use in ADCETRIS and our ADC technology. Currently, we have license agreements with BMS and the University of Miami, among others. In addition to royalty provisions, some of these license agreements contain diligence and milestone-based termination provisions, in which case our failure to meet any agreed upon royalty or diligence requirements or milestones may allow the licensor to terminate the agreement. Many of our license agreements grant us exclusive licenses to the underlying technologies. If our licensors terminate our license agreements or if we are unable to maintain the exclusivity of our exclusive license agreements, we may be unable to continue to develop and commercialize ADCETRIS or our product candidates. Further, we have had in the past, and may in the future have, disputes with our licensors, which may impact our ability to develop and commercialize ADCETRIS or our product candidates or require us to enter into additional licenses. An adverse result in potential future disputes with our licensors may impact our ability to develop and commercialize ADCETRIS and our product candidates, or may require us to enter into additional licenses or to incur additional costs in litigation or settlement. In addition, continued development and commercialization of ADCETRIS and our product candidates will likely require us to secure licenses to additional technologies. We may not be able to secure these licenses on commercially reasonable terms, if at all.
If we are unable to enforce our intellectual property rights or if we fail to sustain and further build our intellectual property rights, we may not be able to successfully commercialize ADCETRIS or future products and competitors may be able to develop competing therapies.
Our success depends, in part, on obtaining and maintaining patent protection and successfully enforcing these patents and defending them against third-party challenges in the United States and other countries. We own multiple U.S. and foreign patents and pending patent applications for our technologies. We also have rights to issued U.S. patents, patent applications, and their foreign counterparts, relating to our monoclonal antibody, linker and drug-based technologies. Our rights to these patents and patent applications are derived in part from worldwide licenses from third parties. In addition, we have licensed certain of our U.S. and foreign patents and patent applications to third parties.
The standards that the U.S. Patent and Trademark Office, or USPTO, and foreign patent offices use to grant patents are not always applied predictably or uniformly and can change. Consequently, our pending patent applications may not be allowed and, if allowed, may not contain the type and extent of patent claims that will be adequate to conduct our business as planned. Additionally, any issued patents we currently own or obtain in the future may have a shorter patent term than expected or may not contain claims that will permit us to stop competitors from using our technology or similar technology or from copying our products. Similarly, the standards that courts use to interpret patents are not always applied predictably or uniformly and may evolve, particularly as new technologies develop. In addition, changes to patent laws in the United States or other countries may be applied retroactively to affect the validity, enforceability, or term of our patent. For example, the U.S. Supreme Court has modified some legal standards applied by the USPTO in examination of U.S. patent applications, which may decrease the likelihood that we will be able to obtain patents and may increase the likelihood of challenges to patents we obtain or license. In addition, changes to the U.S. patent system have come into force under the Leahy-Smith America Invents Act, or the America Invents Act, including changes from a “first-to-invent” system to a “first to file” system, changes to examination of U.S. patent applications and changes to the processes for challenging issued patents. These changes include provisions that affect the way patent applications are being filed, prosecuted and litigated. For example, the America Invents Act enacted proceedings involving post-issuance patent review procedures, such as inter partes review, or IPR, and post-grant review and covered business methods. These proceedings are conducted before the Patent Trial and Appeal Board, or PTAB, of the USPTO. Each proceeding has different eligibility criteria and different patentability challenges that can be raised. In this regard, the IPR process permits any person (except a party who has been litigating the patent for more than a year) to challenge the validity of some patents on the grounds that it was anticipated or made obvious by prior art. As a result, non-practicing entities associated
with hedge funds, pharmaceutical companies who may be our competitors and others have challenged certain valuable pharmaceutical U.S. patents based on prior art through the IPR process. A decision in such a proceeding adverse to our interests could result in the loss of valuable patent rights which would have a material adverse effect on our business, financial condition, results of operations and growth prospects. In any event, the America Invents Act and any other potential future changes to the U.S. patent system could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
We rely on trade secrets and other proprietary information where we believe patent protection is not appropriate or obtainable. However, trade secrets and other proprietary information are difficult to protect. We have taken measures to protect our unpatented trade secrets and know-how, including the use of confidentiality and assignment of inventions agreements with our employees, consultants and certain contractors. It is possible, however, that these persons may breach the agreements or that our competitors may independently develop or otherwise discover our trade secrets or other proprietary information. Our research collaborators may publish confidential data or other restricted information to which we have rights. If we cannot maintain the confidentiality of our technology and other confidential information in connection with our collaborations, then our ability to receive patent protection or protect our proprietary information may be impaired.
We may incur substantial costs and lose important rights or may not be able to continue to commercialize ADCETRIS or to commercialize any of our product candidates that may be approved for commercial sale as a result of litigation or other proceedings relating to patent and other intellectual property rights, and we may be required to obtain patent and other intellectual property rights from others.
We may face potential lawsuits by companies, academic institutions or others alleging infringement of their intellectual property. Because patent applications can take a few years to publish, there may be currently pending applications of which we are unaware that may later result in issued patents that adversely affect the continued commercialization of ADCETRIS or future commercialization of our product candidates in development. In addition, we are monitoring the progress of multiple pending patent applications of other organizations that, if granted, may require us to license or challenge their enforceability in order to continue commercializing ADCETRIS or to commercialize our product candidates that may be approved for commercial sale. Our challenges to patents of other organizations may not be successful, which may affect our ability to commercialize ADCETRIS or our product candidates. As a result of the patent infringement lawsuits that have been filed or may be filed against us in the future by third parties alleging infringement by us of patent or other intellectual property rights, we may be required to pay substantial damages, including lost profits, royalties, treble damages, attorneys’ fees and costs, for past infringement if it is ultimately determined that our products infringe a third party’s intellectual property rights. Even if infringement claims against us are without merit, the results may be unpredictable. In addition, defending lawsuits takes significant time, may be expensive and may divert management’s attention from other business concerns. Further, we may be stopped from developing, manufacturing or selling our products until we obtain a license from the owner of the relevant technology or other intellectual property rights, or be forced to undertake costly design-arounds, if feasible. If such a license is available at all, it may require us to pay substantial royalties or other fees.
We are or may be from time to time involved in the defense and enforcement of our patent or other intellectual property rights in a court of law, USPTO interference, IPR, post-grant review or reexamination proceeding, foreign opposition proceeding or related legal and administrative proceeding in the United States and elsewhere. In addition, if we choose to go to court to stop a third party from infringing our patents, that third party has the right to ask the court to rule that these patents are invalid, not infringed and/or should not be enforced. Under the America Invents Act, a third party may also have the option to challenge the validity of certain patents at the PTAB, whether they are accused of infringing our patents or not, and certain entities associated with hedge funds, pharmaceutical companies and other entities have challenged valuable pharmaceutical patents through the IPR process. These lawsuits and administrative proceedings are expensive and consume time and other resources, and we may not be successful in these proceedings or in stopping infringement. In addition, there is a risk that a court will decide that these patents are not valid or not infringed or otherwise not enforceable, or that the PTAB will decide that certain patents are not valid, and that we do not have the right to stop a third party from using the patented subject matter. Successful challenges to our patent or other intellectual property rights through these proceedings could result in a loss of rights in the relevant jurisdiction and may allow third parties to use our proprietary technologies without a license from us or our collaborators, which may also result in loss of future royalty payments. Furthermore, if such challenges to our rights are not resolved promptly in our favor, our existing business relationships may be jeopardized and we could be delayed or prevented from entering into new collaborations or from commercializing potential products, which could adversely affect our business and results of operations. In addition, we may challenge the patent or other intellectual property rights of third parties and if we are unsuccessful in actions we bring against the rights of such parties, through litigation or otherwise, and it is determined that we infringe the intellectual property rights of such parties, we may be prevented from commercializing potential products in the relevant jurisdiction, or may be required to obtain licenses to those rights or develop or obtain alternative technologies, any of which could harm our business.
If we lose our key personnel or are unable to attract and retain additional qualified personnel, our future growth and ability to compete would suffer.
We are highly dependent on the efforts and abilities of the principal members of our senior management. Additionally, we have scientific personnel with significant and unique expertise in monoclonal antibodies, ADCs and related technologies. The loss of the services of any one of the principal members of our managerial or scientific staff may prevent us from achieving our business objectives.
In addition, the competition for qualified personnel in the biotechnology field is intense, and our future success depends upon our ability to attract, retain and motivate highly skilled scientific, technical and managerial employees. In order to continue to commercialize ADCETRIS and advance our pipeline, we have been required to expand our workforce, particularly in the areas of manufacturing, clinical trials management, regulatory affairs, business development, sales and marketing. We continue to face intense competition for qualified individuals from numerous pharmaceutical and biotechnology companies, as well as academic and other research institutions. To the extent we are not able to retain these individuals on favorable terms or attract any additional personnel that may be required, our business may be harmed. For example, we may not be successful in attracting or retaining key personnel necessary to support our strategy to develop and commercialize ADCETRIS in earlier lines of therapy, including potentially in the ECHELON-1 treatment setting.
If we are unable to manage our growth, our business, financial condition, results of operations and prospects may be adversely affected.
We have experienced and expect to continue to experience significant growth in the number of our employees and in the scope of our operations, including in connection with our recent acquisition of, and planned operation of, a manufacturing facility. This growth places significant demands on our management, operational and financial resources, and our current and planned personnel, systems, procedures and controls may not be adequate to support our growth. To effectively manage our growth, we must continue to improve existing, and implement new, operational and financial systems, procedures and controls and must expand, train and manage our growing employee base, and there can be no assurance that we will effectively manage our growth without experiencing operating inefficiencies or control deficiencies. We expect that we may need to increase our management personnel to oversee our expanding operations, and recruiting and retaining qualified individuals is difficult. In addition, the physical expansion of our operations may lead to significant costs and may divert our management and capital resources. If we are unable to manage our growth effectively, or are unsuccessful in recruiting qualified management personnel, our business, financial condition, results of operations and prospects may be adversely affected.
Product liability and product recalls could harm our business, and we may not be able to obtain adequate insurance to protect us against product liability losses.
The current and future use of ADCETRIS by us and our corporate collaborators in clinical trials and the sale of ADCETRIS, expose us to product liability claims. These claims have and may in the future be made directly by patients or healthcare providers or indirectly by pharmaceutical companies, our corporate collaborators or others selling such products. Additionally, in connection with our acquisition of the manufacturing facility from BMS, we have agreed to enter into certain transitional services agreements under which we expect to manufacture certain clinical drug product components for BMS for a period of time. As a result, it is possible that we may be named as a defendant in product liability suits that may allege that drug products we manufacture for BMS have resulted in injury to patients. We may experience substantial financial losses in the future due to product liability claims. We have obtained product liability coverage, including coverage for human clinical trials and product sold commercially. However, such insurance is subject to coverage limits and exclusions, as well as significant deductibles. However, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against all losses. If a successful product liability claim or series of claims is brought against us for uninsured liabilities or in excess of insured amounts, our assets may not be sufficient to cover such claims and our business operations could be impaired.
Product recalls may be issued at our discretion, or at the discretion of government agencies and other entities that have regulatory authority for pharmaceutical sales. Any recall of ADCETRIS could materially adversely affect our business by rendering us unable to sell ADCETRIS for some time and by adversely affecting our reputation.
Risks associated with operating in foreign countries could materially adversely affect our business.
We are expanding our operations internationally, and we currently have subsidiaries in the U.K., Switzerland and Canada. Consequently, we are, and will continue to be, subject to risks related to operating in foreign countries. Risks associated with conducting operations in foreign countries include:
| • | diverse regulatory, financial and legal requirements, and any future changes to such requirements, in one or more countries where we are located or do business; |
| • | adverse tax consequences, including changes in applicable tax laws and regulations; |
| • | applicable trade laws, tariffs, export quotas, custom duties or other trade restrictions and any changes to them; |
| • | economic weakness, including inflation, or political or economic instability in particular foreign economies and markets; |
| • | compliance with tax, employment, immigration and labor laws for employees living or traveling abroad; |
| • | foreign currency fluctuations, which could result in increased operating expenses or reduced revenues, and other obligations incident to doing business or operating in another country; |
| • | liabilities for activities of, or related to, our international operations; |
| • | workforce uncertainty in countries where labor unrest is more common than in the United States; and |
| • | laws and regulations relating to data security and the unauthorized use of, or access to, commercial and personal information. |
For example, since a significant proportion of the regulatory framework in the U.K. is derived from European Union directives and regulations, Brexit could materially change the regulatory regime applicable to our operations and those of our collaborators, including with respect to marketing authorizations for ADCETRIS and our product candidates. We may also face new regulatory costs and challenges as result of Brexit that could have a material adverse effect on our operations. Depending on the terms of Brexit, the U.K. could lose the benefits of global trade agreements negotiated by the European Union on behalf of its members, which may result in increased trade barriers which could make our doing business in Europe more difficult. In addition, currency exchange rates for the British Pound and the Euro with respect to each other and the U.S. dollar have already been affected by Brexit. Should this foreign exchange volatility continue, it could cause volatility in our quarterly financial results. In any event, we cannot predict to what extent these changes will impact our business or results of operations, or our ability to conduct operations in Europe.
These and other risks described elsewhere in these risk factors associated with expanding our international operations could materially adversely affect our business.
Our operations involve hazardous materials and are subject to environmental, health and safety controls and regulations.
We are subject to environmental, health and safety laws and regulations, including those governing the use of hazardous materials, and we spend considerable time complying with such laws and regulations. Our business activities involve the controlled use of hazardous materials and although we take precautions to prevent accidental contamination or injury from these materials, we cannot completely eliminate the risk of using these materials. In addition, with respect to our recently-acquired manufacturing facility, we may incur substantial costs to comply with environmental laws and regulations and may become subject to the risk of accidental contamination or injury from the use of hazardous materials in our manufacturing process. It is also possible that our recently-acquired manufacturing facility may expose us to environmental liabilities associated with historical site conditions that we are not currently aware of and did not cause. In this regard, some environmental laws impose liability for contamination on current owners and operators of affected sites, regardless of fault. In the event of an accident or environmental discharge, or new or previously unknown contamination is discovered or new cleanup obligations are otherwise imposed in connection with any of our currently or previously owned or operated facilities, we may be held liable for any resulting damages, which may materially harm our business, financial condition and results of operations.
If any of our facilities are damaged or our clinical, research and development or other business processes are interrupted, our business could be seriously harmed.
We conduct most of our business in a limited number of facilities in a single geographical location in Bothell, Washington. Damage or extended periods of interruption to our corporate, development or research facilities due to fire, natural disaster, power loss, communications failure, unauthorized entry or other events could cause us to cease or delay development of some or all of our product candidates or interrupt the sales process for ADCETRIS. Although we maintain property damage and business interruption insurance coverage on these facilities, our insurance might not cover all losses under such circumstances and our business may be seriously harmed by such delays and interruption.
If we experience a significant disruption in our information technology systems or breaches of data security, our business could be adversely affected.
We rely on information technology systems to keep financial records, capture laboratory data, maintain clinical trial data and corporate records, communicate with staff and external parties and operate other critical functions. Our information technology systems are potentially vulnerable to disruption due to breakdown, malicious intrusion and computer viruses or other disruptive events including but not limited to natural disaster. If we were to experience a prolonged system disruption in our information technology systems or those of certain of our vendors, it could delay or negatively impact the development and commercialization of ADCETRIS and our product candidates, which could adversely impact our business. Although we maintain offsite back-ups of our data, if operations at our facilities were disrupted, it may cause a material disruption in our business if we are not capable of restoring function on an acceptable timeframe. In addition, our information technology systems are potentially vulnerable to data security breaches—whether by employees or others—which may expose sensitive data to unauthorized persons. Such data security breaches could lead to the loss of trade secrets or other intellectual property, or could lead to the public exposure of personal information (including sensitive personal information) of our employees, customers and others, any of which could have a material adverse effect on our business, financial condition and results of operations. Moreover, a security breach or privacy violation that leads to disclosure or modification of, personally identifiable information, could harm our reputation, compel us to comply with federal and/or state breach notification laws and foreign law equivalents, subject us to mandatory corrective action, require us to verify the correctness of database contents and otherwise subject us to liability under laws and regulations that protect personal data, which could disrupt our business, result in increased costs or loss of revenue, and/or result in significant legal and financial exposure. In addition, a data security breach could result in loss of clinical trial data or damage to the integrity of that data. If we are unable to prevent such security breaches or privacy violations or implement satisfactory remedial measures, our operations could be disrupted, and we may suffer loss of reputation, financial loss and other negative consequences because of lost or misappropriated information. In addition, these breaches and other inappropriate access can be difficult to detect, and any delay in identifying them may lead to increased harm of the type described above.
Increasing use of social media could give rise to liability.
We are increasingly relying on social media tools as a means of communications. To the extent that we continue to use these tools as a means to communicate about ADCETRIS and our product candidates or about the diseases that ADCETRIS and our product candidates are intended to treat, there are significant uncertainties as to either the rules that apply to such communications, or as to the interpretations that health authorities will apply to the rules that exist. As a result, despite our efforts to comply with applicable rules, there is a significant risk that our use of social media for such purposes may cause us to nonetheless be found in violation of them. Such uses of social media could have a material adverse effect on our business, financial condition and results of operations.
Legislative actions and new accounting pronouncements are likely to impact our future financial position or results of operations.
Future changes in financial accounting standards may cause adverse, unexpected revenue fluctuations and affect our financial position or results of operations. New pronouncements and varying interpretations of pronouncements have occurred with frequency in the past and are expected to occur again in the future and as a result we may be required to make changes in our accounting policies. Those changes could adversely affect our reported revenues and expenses, future profitability or financial position. Compliance with new regulations regarding corporate governance and public disclosure may result in additional expenses.
For example, in May 2014, the Financial Accounting Standards Board, or FASB, issued an Accounting Standards Update entitled “ASU 2014-09, Revenue from Contracts with Customers” which replaced previous revenue recognition guidance under U.S. GAAP when it became effective for us on January 1, 2018. We do not expect that the new standard will generally change the way in which we recognize product revenue from sales of ADCETRIS. However, we expect that sales-based royalties and commercial sales-based milestones will be recorded in the period of the related sale based on estimates, rather than recording them as reported by the customer. In addition, the achievement of development milestones under our collaborations will be recorded in the period their achievement becomes probable, which may result in their recognition earlier than under current accounting principles. Additionally, on January 1, 2018, we adopted ASU 2016-01 “Financial Instruments: Overall,” and as a result, we will record changes in the fair value of equity securities, including our investment in Immunomedics common stock, in net income or loss, which is expected to increase the volatility of net income or loss to the extent that we continue to hold Immunomedics common stock or other equity securities. In any event, the application of existing or future financial accounting standards, particularly those relating to the way we account for revenues and costs, could have a significant impact on our reported results. In addition, compliance with new regulations regarding corporate governance and public disclosure may result in additional expenses. As a result, we intend to invest all reasonably necessary resources to comply with evolving standards, and this investment may result in increased general and administrative expenses and a diversion of management time and attention from science and business activities to compliance activities.
Risks Related to Our Common Stock
Our stock price is volatile and our shares may suffer a decline in value.
The market price of our stock has in the past been, and is likely to continue in the future to be, very volatile. During the year ended December 31, 2017, our closing stock price fluctuated between $45.92 and $68.91 per share. As a result of fluctuations in the price of our common stock, you may be unable to sell your shares at or above the price you paid for them. The market price of our common stock may be subject to substantial volatility in response to many risk factors listed in this section, and others beyond our control, including:
| • | the level of ADCETRIS sales in the United States, Canada, the European Union, Japan and other countries in which Takeda has received approval by relevant regulatory authorities; |
| • | announcements regarding the results of discovery efforts and preclinical, clinical and commercial activities by us, or those of our competitors; |
| • | announcements of FDA or foreign regulatory approval or non-approval of ADCETRIS, or specific label indications for or restrictions, warnings or limitations in its use, or delays in the regulatory review or approval process, including in connection with our sBLA submission to the FDA to seek approval of ADCETRIS in the ECHELON-1 treatment setting; |
| • | announcements regarding the results of the clinical trials we, Takeda and/or BMS are conducting or may in the future conduct for ADCETRIS, including the ECHELON-2 trial and the CHECKMATE 812 trial; |
| • | announcements regarding the results of the clinical trials we and our collaborators are conducting for enfortumab vedotin and tisotumab vedotin; |
| • | announcements regarding, or negative publicity concerning, adverse events or safety concerns associated with the use of ADCETRIS or our product candidates; |
| • | issuance of new or changed analysts’ reports and recommendations regarding us or our competitors; |
| • | termination of or changes in our existing collaborations or licensing arrangements, especially our ADCETRIS collaboration with Takeda, our enfortumab vedotin co-development collaboration with Astellas, and our tisotumab vedotin co-development collaboration with Genmab, or establishment of new collaborations or licensing arrangements; |
| • | our entry into additional material strategic transactions including licensing or acquisition of products, businesses or technologies; |
| • | actions taken by regulatory authorities with respect to our product candidates, our clinical trials or our regulatory filings; |
| • | our raising of additional capital and the terms upon which we may raise any additional capital; |
| • | market conditions for equity investments in general, or the biotechnology or pharmaceutical industries in particular; |
| • | developments or disputes concerning our proprietary rights; |
| • | developments regarding the pending and potential additional related purported securities class action lawsuits, as well as any other potential litigation; |
| • | share price and volume fluctuations attributable to inconsistent trading volume levels of our shares; |
| • | changes in government regulations; and |
| • | economic or other external factors. |
The stock markets in general, and the markets for biotechnology and pharmaceutical stocks in particular, have historically experienced significant volatility that has often been unrelated or disproportionate to the operating performance of particular companies. For example, negative publicity regarding drug pricing and price increases by pharmaceutical companies has negatively impacted, and may continue to negatively impact, the markets for biotechnology and pharmaceutical stocks. Likewise, as a result of Brexit and/or significant changes in U.S. social, political, regulatory and economic conditions or in laws and policies governing foreign trade and health care spending and delivery, including the possible repeal and/or replacement of all or portions of PPACA or greater restrictions on free trade stemming from Trump Administration policies, the financial markets could experience significant volatility that could also negatively impact the markets for biotechnology and pharmaceutical stocks. These broad market fluctuations have adversely affected and may in the future adversely affect the trading price of our common stock.
In the past, class action or derivative litigation has often been instituted against companies whose securities have experienced periods of volatility in market price. In this regard, we have become, and may in the future again become, subject to claims and litigation alleging violations of the securities laws or other related claims, which could harm our business and require us to incur significant costs. The pending purported securities class action lawsuit and any additional lawsuits brought against us could result in substantial costs, which would hurt our financial condition and results of operations and divert management’s attention and resources, which could result in delays of our clinical trials or our development and commercialization efforts.
Substantial future sales of shares of our common stock or equity-related securities could cause the market price of our common stock to decline.
Sales of a substantial number of shares of our common stock into the public market, including sales by members of our management or board of directors or entities affiliated with such members, could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock and could impair our ability to raise capital through the sale of additional equity or equity-related securities. We are unable to predict the effect that such sales may have on the prevailing market price of our common stock. As of December 31, 2017, we had 144,395,049 shares of common stock outstanding, all of which shares are eligible for sale in the public market, subject in some cases to the volume limitations and manner of sale and other requirements under Rule 144. In addition, we may issue a substantial number of shares of our common stock or equity-related securities, including convertible debt, to meet our capital needs, including in connection with funding potential future acquisition or licensing opportunities, capital expenditures or product development costs, which issuances could be substantially dilutive and could adversely affect the market price of our common stock. Likewise, future issuances by us of our common stock upon the exercise, conversion or settlement of equity-based awards or other equity-related securities would dilute existing stockholders’ ownership interest in our company and any sales in the public market of these shares, or the perception that these sales might occur, could also adversely affect the market price of our common stock.
Moreover, we have in the past and may in the future grant rights to some of our stockholders that require us to register the resale of our common stock or other securities on behalf of these stockholders and/or facilitate public offerings of our securities held by these stockholders, including in connection with potential future acquisition or capital-raising transactions. For example, in connection with our September 2015 public offering of common stock, we entered into a registration rights agreement with entities affiliated with Baker Bros. Advisors LP, or the Baker Entities, that together, based on information available to us, collectively beneficially owned approximately 32.0 % of our common stock as of January 26, 2018. Under the registration rights agreement, if at any time and from time to time the Baker Entities demand that we register their shares of our common stock for resale under the Securities Act of 1933, as amended, or the Securities Act, we would be obligated to effect such registration. On October 12, 2016, pursuant to the registration rights agreement, we registered for resale, from time to time, up to 44,059,594 shares of our common stock held by the Baker Entities. Our registration obligations under the registration rights agreement cover all shares now held or hereafter acquired by the Baker Entities, will continue in effect for up to ten years, and include our obligation to facilitate certain underwritten public offerings of our common stock by the Baker Entities in the future. If the Baker Entities, by its exercise of these registration and/or underwriting rights in the future, or otherwise, sell a large number of our shares, or the market perceives that the Baker Entities intend to sell a large number of our shares, including in connection with our October 2016 registration of shares held by the Baker Entities for resale, this could adversely affect the market price of our common stock. We have also filed registration statements to register the sale of our common stock reserved for issuance under our equity incentive and employee stock purchase plans. Accordingly, these shares will be able to be freely sold in the public market upon issuance as permitted by any applicable vesting requirements.
Our existing stockholders have significant control of our management and affairs.
Our executive officers and directors and holders of greater than five percent of our outstanding voting stock, together with entities that may be deemed affiliates of, or related to, such persons or entities, beneficially owned approximately 67.4% of our voting power as of January 26, 2018. As a result, these stockholders, acting together, are able to control our management and affairs and matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as mergers, consolidations or the sale of substantially all of our assets. Consequently, this concentration of ownership may have the effect of delaying, deferring or preventing a change in control, including a merger, consolidation, takeover or other business combination involving us or discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control, which might affect the market price of our common stock.
The recently passed comprehensive tax reform bill could adversely affect our business and financial condition.
On December 22, 2017, President Trump signed into law new legislation that significantly revises the Internal Revenue Code of 1986, as amended. The newly enacted federal income tax law, among other things, contains significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction for interest expense to 30% of adjusted earnings (except for certain small businesses), limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating loss carrybacks, one time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits (including reducing the business tax credit for certain clinical testing expenses incurred in the testing of certain drugs for rare diseases or conditions). Notwithstanding the reduction in the corporate income tax rate, the overall impact of the new federal tax law is uncertain and our business and financial condition could be adversely affected. In addition, it is uncertain if and to what extent various states will conform to the newly enacted federal tax law. The impact of this tax reform on holders of our common stock is also uncertain and could be adverse. We urge our stockholders to consult with their legal and tax advisors with respect to this legislation and the potential tax consequences of investing in or holding our common stock.
Anti-takeover provisions could make it more difficult for a third party to acquire us.
Our Board of Directors has the authority to issue up to 5,000,000 shares of preferred stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the stockholders, which authority could be used to adopt a “poison pill” that could act to prevent a change of control of Seattle Genetics that has not been approved by our Board of Directors. The rights of the holders of common stock may be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock may have the effect of delaying, deferring or preventing a change of control of Seattle Genetics without further action by the stockholders and may adversely affect the voting and other rights of the holders of common stock. Further, certain provisions of our charter documents, including provisions eliminating the ability of stockholders to take action by written consent and limiting the ability of stockholders to raise matters at a meeting of stockholders without giving advance notice, may have the effect of delaying or preventing changes in control or management of Seattle Genetics, which could have an adverse effect on the market price of our stock. In addition, our charter documents provide for a classified board, which may make it more difficult for a third party to gain control of our Board of Directors. Similarly, state anti-takeover laws in Delaware and Washington related to corporate takeovers may prevent or delay a change of control of Seattle Genetics.
Exhibit 99.2
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following unaudited pro forma combined financial information is presented to illustrate the estimated effects of the following transactions (together, the “Transactions”): (i) the proposed acquisition by Seattle Genetics, Inc. (the “Company”) of Cascadian Therapeutics, Inc. (“Cascadian”) pursuant to an all cash tender offer for all outstanding shares of Cascadian’s common stock on a fully diluted basis for $10.00 per share (the “Offer Price”), for a total purchase price of approximately $614.1 million, which was announced on January 31, 2018 (the “Acquisition”) as if the Acquisition had been completed, and (ii) the assumed funding of $400 million aggregate principal amount of loans under a 364-day senior secured bridge loan facility (the “Bridge Facility”) and the utilization of the Bridge Facility to fund a portion of the Acquisition.
The historical pro forma combined balance sheet information as of September 30, 2017 is based upon and derived from the historical financial information of the Company and Cascadian and gives effect to the Transactions as if such transactions had occurred on September 30, 2017. The unaudited pro forma combined statements of operations for the year ended December 31, 2016 and the nine months ended September 30, 2017 are also based upon and derived from the historical financial information of the Company and Cascadian and give effect to the Transactions as if they occurred on January 1, 2016. The historical consolidated financial information reflects adjustments that are (i) directly attributable to the Transactions, (ii) factually supportable, and (iii) with respect to the unaudited pro forma combined statements of operations, are expected to have a continuing impact on the results of operations. The pro forma adjustments are preliminary and are based upon available information and certain assumptions, as described in the accompanying notes to the unaudited pro forma combined financial information, that the Company management believes are reasonable under the circumstances and which are described in the accompanying notes to the unaudited pro forma combined financial information. Actual results and valuations may differ materially from the assumptions within the accompanying unaudited pro forma combined financial information.
The Acquisition will be accounted for as a business combination using the acquisition method of accounting under the provisions of Accounting Standards Codification (“ASC”) 805, “Business Combinations,” (“ASC 805”). Under ASC 805, assets acquired and liabilities assumed are generally recorded at their acquisition date fair value. The fair value of identifiable tangible and intangible assets acquired and liabilities assumed from the Acquisition are based on preliminary estimates of fair value utilizing currently available information. Any excess of the purchase price over the fair value of identified assets acquired and liabilities assumed is recognized as goodwill. Significant judgment is required in determining the estimated fair values of the net assets acquired, including in-process research and development intangible assets and certain other assets and liabilities. Such a valuation requires estimates and assumptions including, but not limited to, estimating future cash flows and direct costs in addition to developing the appropriate discount rates and current market profit margins. After the closing of the Acquisition, we will complete the valuations necessary to finalize the required purchase price allocation based upon the fair market values as of the actual closing date of the Acquisition, at which time the final allocation of the purchase price will be determined. The pro forma financial information contained in this current report on Form 8-K to which this unaudited pro forma combined financial information is attached as Exhibit 99.2 (the “Company 8-K”) is also based upon certain assumptions with respect to the funding of the Acquisition. In this regard, on January 31, 2018, the Company announced it has commenced an underwritten public offering of $550 million of shares of its common stock (the “Offering”). If completed, the Company intends to use the net proceeds of the Offering to fund a portion of the Acquisition in lieu of any borrowing pursuant to the Bridge Facility. The Offering is subject to market and other conditions, and there can be no assurance as to whether or when the Offering may be completed, or as to the actual size or terms of the Offering. Accordingly, for purposes of preparation of this unaudited pro forma combined financial information, the Company has assumed that the funding of a portion of the Acquisition will consist of $400 million aggregate principal amount of loans under the Bridge Facility and that the Offering will not be completed. Further, if the net proceeds to the Company from the Offering or another financing are less than $400 million, the Company intends to use the proceeds from the Bridge Facility to finance the portion of the costs of the Acquisition that is not financed by the Offering or such other financing. In addition, whether the anticipated funding sources will be available will be subject to market and other conditions. As a result of the foregoing factors, the actual sources of funding and the terms on which it is obtained may not be the same as those reflected in the pro forma financial information. Differences between preliminary estimates in the pro forma financial information and the final acquisition accounting, as well as between the assumed and actual sources of funding and terms, will occur and could have a material impact on the pro forma financial information. In this regard, changes in the assumptions described above with respect to the sources of funding would result in changes to various components of the unaudited pro forma condensed combined balance sheet, including cash and
1
cash equivalents, short-term investments, short-term debt, common stock and additional paid-in capital, and various components of the unaudited pro forma combined statements of operations, including interest expense, net loss per share and weighted-average shares used in computing net loss per share.
The unaudited pro forma combined financial information has been prepared by the Company management in accordance with SEC Regulation S-X Article 11 and is not necessarily indicative of the combined financial position or results of operations that would have been realized had the transactions been completed as of the dates indicated, nor is it meant to be indicative of any anticipated combined financial position or future results of operations that the Company will experience after the Transactions are completed. In addition, the accompanying unaudited pro forma combined statement of operations do not include any pro forma adjustments to reflect expected cost savings or restructuring actions which may be achievable or the impact of any non-recurring expenses and one-time transaction related costs that may be incurred as a result of the Transactions.
Certain financial information of Cascadian, as presented in its consolidated financial statements, has been reclassified to conform to the historical presentation in the Company’s consolidated financial statements for purposes of preparation of the unaudited pro forma combined financial information.
The unaudited pro forma combined financial statements, including the notes thereto, should be read in conjunction with the historical consolidated financial statements of the Company included in its Annual Report on Form 10-K for the year ended December 31, 2016 and in its Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, as well as the historical consolidated financial statements of Cascadian included in Exhibit 99.3 to the Company 8-K.
2
Unaudited Pro Forma Combined Balance Sheet
As of September 30, 2017
(In thousands)
| Seattle Genetics, Inc. |
Cascadian Therapeutics, Inc., as adjusted |
Pro Forma Adjustments |
Notes | Seattle Genetics, Inc. Unaudited Pro Forma Combined |
||||||||||||||||
| ASSETS |
||||||||||||||||||||
| Current assets: |
||||||||||||||||||||
| Cash and cash equivalents |
$ | 128,140 | $ | 12,739 | $ | 400,000 | 5 | (A) | ||||||||||||
| (8,000 | ) | 5 | (A) | |||||||||||||||||
| 200,000 | 5 | (B) | ||||||||||||||||||
| (614,070 | ) | 5 | (D) | |||||||||||||||||
| (16,000 | ) | 5 | (E) | 102,809 | ||||||||||||||||
| Short-term investments |
322,258 | 89,259 | (200,000 | ) | 5 | (B) | 211,517 | |||||||||||||
| Accounts receivable, net |
90,432 | — | — | 90,432 | ||||||||||||||||
| Inventories |
60,837 | — | — | 60,837 | ||||||||||||||||
| Prepaid expenses and other current assets (1) |
18,905 | 1,555 | — | 20,460 | ||||||||||||||||
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|
|
|
|
|
|
|
|
|||||||||||||
| Total current assets |
620,572 | 103,553 | (238,070 | ) | 486,055 | |||||||||||||||
| Non-current assets: |
||||||||||||||||||||
| Property and equipment, net |
82,769 | 1,395 | — | 84,164 | ||||||||||||||||
| Long-term investments |
19,967 | 10,981 | — | 30,948 | ||||||||||||||||
| Indefinite-lived intangible assets |
— | — | 300,000 | 5 | (D) | 300,000 | ||||||||||||||
| Goodwill |
— | 16,659 | 258,454 | 5 | (D) | 275,113 | ||||||||||||||
| Other non-current assets |
129,775 | 799 | — | 130,574 | ||||||||||||||||
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|
|
|
|
|
|
|
|
|||||||||||||
| Total assets |
$ | 853,083 | $ | 133,387 | $ | 320,384 | $ | 1,306,854 | ||||||||||||
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|
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| LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||||||||||||||
| Current liabilities: |
||||||||||||||||||||
| Accounts payable and accrued liabilities (1) |
$ | 119,978 | $ | 8,733 | $ | — | $ | 128,711 | ||||||||||||
| Current portion of deferred revenue |
32,811 | — | — | 32,811 | ||||||||||||||||
| Short-term debt |
— | — | 400,000 | 5 | (A) | |||||||||||||||
| (8,000 | ) | 5 | (A) | 392,000 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total current liabilities |
152,789 | 8,733 | 392,000 | 553,522 | ||||||||||||||||
| Long-term liabilities: |
||||||||||||||||||||
| Deferred revenue, less current portion |
37,901 | — | — | 37,901 | ||||||||||||||||
| Deferred tax liability |
— | — | 63,000 | 5 | (D) | 63,000 | ||||||||||||||
| Deferred rent and other long-term liabilities (1) |
2,685 | 38 | — | 2,723 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total long-term liabilities |
40,586 | 38 | 63,000 | 103,624 | ||||||||||||||||
| Stockholders’ equity: |
||||||||||||||||||||
| Common stock |
144 | 353,852 | (353,852 | ) | 5 | (C) | 144 | |||||||||||||
| Additional paid-in capital |
1,774,936 | 388,362 | (388,362 | ) | 5 | (C) | 1,774,936 | |||||||||||||
| Accumulated other comprehensive income (loss) |
17,997 | (5,092 | ) | 5,092 | 5 | (C) | 17,997 | |||||||||||||
| Accumulated deficit |
(1,133,369 | ) | (612,506 | ) | 612,506 | 5 | (C) | |||||||||||||
| (10,000 | ) | 5 | (E) | (1,143,369 | ) | |||||||||||||||
|
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|
|
|
|
|
|
|
|||||||||||||
| Total stockholders’ equity |
659,708 | 124,616 | (134,616 | ) | 649,708 | |||||||||||||||
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|
|
|
|
|
|
|
|||||||||||||
| Total liabilities and stockholders equity |
$ | 853,083 | $ | 133,387 | $ | 320,384 | $ | 1,306,854 | ||||||||||||
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|
|
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(1) Certain reclassifications have been made to the historical Cascadian Balance Sheet at September 30, 2017 to conform to the Pro Forma presentation of the Company.
See the accompanying notes to the unaudited pro forma combined financial information, which are an integral part of these pro forma financial statements.
3
Unaudited Pro Forma Combined Statement of Operations
For the Year Ended December 31, 2016
(In thousands, except for share data)
| Seattle Genetics, Inc. |
Cascadian Therapeutics, Inc. |
Pro Forma Adjustments |
Notes | Seattle Genetics, Inc. Unaudited Pro Forma Combined |
||||||||||||||||
| Revenues: |
||||||||||||||||||||
| Net product sales |
$ | 265,766 | $ | — | $ | — | $ | 265,766 | ||||||||||||
| Collaboration and license agreement revenues |
84,926 | — | — | 84,926 | ||||||||||||||||
| Royalty revenues |
67,455 | — | — | 67,455 | ||||||||||||||||
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|
|
|
|
|
|
|
|||||||||||||
| Total revenues |
418,147 | — | — | 418,147 | ||||||||||||||||
| Costs and expenses: |
||||||||||||||||||||
| Cost of sales |
28,168 | — | — | 28,168 | ||||||||||||||||
| Cost of royalty revenues |
14,149 | — | — | 14,149 | ||||||||||||||||
| Research and development |
379,308 | 27,467 | — | 406,775 | ||||||||||||||||
| Selling, general and administrative |
139,247 | 17,630 | — | 156,877 | ||||||||||||||||
| Intangible asset impairment |
— | 19,738 | — | 19,738 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total costs and expenses |
560,872 | 64,835 | — | 625,707 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| Loss from operations |
(142,725 | ) | (64,835 | ) | — | (207,560 | ) | |||||||||||||
| Investment and other income, net |
2,614 | 222 | — | 2,836 | ||||||||||||||||
| Income tax benefit |
— | 6,908 | — | 6,908 | ||||||||||||||||
| Interest expense |
— | — | (41,245 | ) | 6(A) | (41,245 | ) | |||||||||||||
|
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|
|
|
|
|
|
|
|
|
|||||||||||
| Net loss |
$ | (140,111 | ) | $ | (57,705 | ) | $ | (41,245 | ) | $ | (239,061 | ) | ||||||||
|
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|
|
|
|
|
|
|
|||||||||||||
| Deemed dividend |
— | (2,588 | ) | — | $ | (2,588 | ) | |||||||||||||
|
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|
|
|
|
|
|
|
|||||||||||||
| Net loss attributable to common stockholders |
$ | (140,111 | ) | $ | (60,293 | ) | $ | (41,245 | ) | $ | (241,649 | ) | ||||||||
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|
|
|
|
|
|||||||||||||
| Net loss per share: |
||||||||||||||||||||
| Basic |
$ | (1.00 | ) | $ | (1.72 | ) | ||||||||||||||
| Diluted |
$ | (1.00 | ) | $ | (1.72 | ) | ||||||||||||||
| Weighted-average shares used in computing net loss per share: |
|
|||||||||||||||||||
| Basic |
140,746 | 140,746 | ||||||||||||||||||
| Diluted |
140,746 | 140,746 | ||||||||||||||||||
See the accompanying notes to the unaudited pro forma combined financial information, which are an integral part of these pro forma financial statements.
4
Unaudited Pro Forma Combined Statement of Operations
For the Nine Months Ended September 30, 2017
(In thousands, except for share data)
| Seattle Genetics, Inc. |
Cascadian Therapeutics, Inc. |
Pro Forma Adjustments |
Notes | Seattle Genetics, Inc. Unaudited Pro Forma Combined |
|
|||||||||||||||||||
| Revenues: |
||||||||||||||||||||||||
| Net product sales |
$ | 223,841 | $ | — | $ | — | $ | 223,841 | ||||||||||||||||
| Collaboration and license agreement revenues |
82,779 | — | — | 82,779 | ||||||||||||||||||||
| Royalty revenues |
46,025 | — | — | 46,025 | ||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total revenues |
352,645 | — | — | 352,645 | ||||||||||||||||||||
| Costs and expenses: |
||||||||||||||||||||||||
| Cost of sales |
24,555 | — | — | 24,555 | ||||||||||||||||||||
| Cost of royalty revenues |
13,900 | — | — | 13,900 | ||||||||||||||||||||
| Research and development |
346,196 | 31,011 | — | 377,207 | ||||||||||||||||||||
| Selling, general and administrative |
118,783 | 9,930 | — | 128,713 | ||||||||||||||||||||
| Intangible asset impairment |
— | — | — | — | ||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total costs and expenses |
503,434 | 40,941 | — | 544,375 | ||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Loss from operations |
(150,789 | ) | (40,941 | ) | — | (191,730 | ) | |||||||||||||||||
| Investment and other income, net |
84,460 | 769 | — | 85,229 | ||||||||||||||||||||
| Income tax (benefit) provision |
— | — | — | — | ||||||||||||||||||||
| Interest expense |
— | — | (27,184 | ) | 6 | (A) | (27,184 | ) | ||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Net loss |
$ | (66,329 | ) | $ | (40,172 | ) | $ | (27,184 | ) | $ | (133,685 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Deemed dividend |
— | (982 | ) | — | $ | (982 | ) | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Net loss attributable to common stockholders |
$ | (66,329 | ) | $ | (41,154 | ) | $ | (27,184 | ) | $ | (134,667 | ) | ||||||||||||
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|
|
|
|
|
|
|
|
|
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| Net loss per share: |
||||||||||||||||||||||||
| Basic |
$ | (0.46 | ) | $ | (0.94 | ) | ||||||||||||||||||
| Diluted |
$ | (0.46 | ) | $ | (0.94 | ) | ||||||||||||||||||
| Weighted-average shares used in computing net loss per share: |
|
|||||||||||||||||||||||
| Basic |
142,876 | 142,876 | ||||||||||||||||||||||
| Diluted |
142,876 | 142,876 | ||||||||||||||||||||||
See the accompanying notes to the unaudited pro forma combined financial information, which are an integral part of these pro forma financial statements.
5
| 1. | Description of transactions |
The Acquisition: On January 30, 2018, Cascadian Therapeutics, Inc. (“Cascadian”), a Delaware corporation, Seattle Genetics, Inc. (the “Company”) and Valley Acquisition Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of the Company (“Purchaser”), entered into a definitive Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which (i) Purchaser will commence an offer (the “Offer”) to acquire all of the outstanding shares of common stock, par value $0.0001 per share, of Cascadian at a price of $10.00 per share in cash, payable net to the holder in cash (the “Offer Price”), without interest, less any applicable withholding taxes and (ii) as soon as practicable following the consummation of the Offer, and subject to the satisfaction or waiver of certain conditions set forth in the Merger Agreement, Purchaser will merge with and into Cascadian (the “Merger”) pursuant to the provisions of Section 251(h) of the Delaware General Corporation Law (the “DGCL”), and Cascadian will survive as the Company’s subsidiary. At the effective time of the Merger, any shares of Cascadian common stock not purchased pursuant to the Offer, other than shares owned by stockholders who are entitled to demand and properly demand appraisal rights in accordance with Section 262 of the DGCL and who have otherwise complied with all applicable provisions of Section 262 of the DGCL, and shares owned by the Company, Purchaser or any other direct or indirect wholly owned subsidiary of the Company and shares owned by Cascadian or any direct or indirect wholly owned subsidiary of Cascadian, and in each case not held on behalf of third parties, will be automatically converted into the right to receive cash in an amount equal to the Offer Price, payable net to the holder in cash, without interest, subject to any withholding of taxes. The proposed Offer and Merger are referred to together as the “Acquisition.” The obligations of the Company and Purchaser to complete the Offer are subject to customary closing conditions, including (i) there being validly tendered and not validly withdrawn prior to the expiration date of the Offer, at least a majority of the outstanding shares of Cascadian common stock on a fully-diluted basis, (ii) the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 as amended, or the HSR Act, (iii) the absence of any legal restraint or prohibition that prevents or prohibits the consummation of the Offer, (iv) the accuracy of Cascadian’s representations and warranties under the Merger Agreement subject to the materiality standards set forth in the Merger Agreement, (v) the performance by Cascadian of its obligations under the Merger Agreement in all material respects and (vi) since the date of the Merger Agreement, that there will not have occurred (and be continuing) a Company Material Adverse Effect (as defined in the Merger Agreement). Completion of the Merger is conditioned on the absence of any legal restraint or prohibition that prevents or prohibits the consummation of the Merger and that Purchaser (or the Company on Purchaser’s behalf) have accepted for payment and paid for all shares of Cascadian common stock validly tendered (and not validly withdrawn) pursuant to the Offer.
The Bridge Facility: In connection with the Acquisition, the Company entered into a commitment letter (the “Commitment Letter”), dated as of January 30, 2018, with Barclays Bank PLC and JPMorgan Chase Bank, N.A. (together, the “Commitment Parties”), pursuant to which, subject to the terms and conditions set forth therein, the Commitment Parties committed to provide a 364-day senior secured bridge loan facility (the “Bridge Facility”) in an aggregate principal amount of up to the lesser of (x) $400,000,000 and (y) 1.3333 multiplied by the “minimum liquidity amount,” as set forth in the Commitment Letter, to fund part of the consideration for the Acquisition and fees and expenses related thereto. Pursuant to the Commitment Letter, the Bridge Facility will be subject to certain customary reductions in amounts upon any public or private issuance or sale by the Company of its shares, equity interests, bank facilities or debt securities prior to the consummation of the Acquisition. The funding of the Bridge Facility is contingent on the satisfaction of customary conditions, including (i) the execution and delivery of definitive documentation with respect to the Bridge Facility in accordance with the terms set forth in the Commitment Letter and (ii) the consummation of the Acquisition in accordance with the Merger Agreement.
On January 31, 2018, the Company announced it has commenced an underwritten public offering of $550 million of shares of its common stock (the “Offering”). If completed, the Company intends to use the net proceeds of the Offering to fund a portion of the Acquisition in lieu of any borrowing pursuant to the Bridge Facility. The Offering is subject to market and other conditions, and there can be no assurance as to whether or when the Offering may be completed, or as to the actual size or terms of the Offering. Accordingly, for purposes of preparation of this unaudited pro forma combined financial information, the Company has assumed that the funding of a portion of the Acquisition will consist of $400 million aggregate principal amount of loans under the Bridge Facility and that the Offering will not be completed. Further, if the net proceeds to the Company from the Offering or another financing are less than $400 million, the Company intends to use the proceeds from the Bridge Facility to finance the portion of the costs of the Acquisition that is not financed by the Offering or such other financing.
| 2. | Basis of presentation |
The historical consolidated financial information of the Company has been adjusted in the accompanying unaudited pro forma combined financial information to give effect to pro forma events that are (i) directly attributable to the Transactions, (ii) factually supportable, and (iii) with respect to the unaudited pro forma combined statements of operations, are expected to have a continuing impact on the results of operations.
6
The Acquisition will be accounted for as a business combination using the acquisition method of accounting under the provisions ASC 805. The unaudited pro forma combined financial information was prepared using the acquisition method of accounting, which requires, among other things, that assets acquired and liabilities assumed in a business combination be recognized at their fair values as of the acquisition date. The adjustments to reflect the acquisition method of accounting are preliminary and are based upon available information and certain assumptions which management believes are reasonable under the circumstances.
The acquisition method of accounting uses the fair value concepts defined in ASC 820, “Fair Value Measurement,” (“ASC 820”) as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” This is an exit price concept for the valuation of an asset or liability. Market participants are assumed to be buyers or sellers in the most advantageous market for the asset or liability. Fair value measurement for an asset assumes the highest and best use by these market participants. Fair value measurements can be highly subjective and it is possible the application of reasonable judgment could develop different assumptions resulting in a range of alternative estimates using the same facts and circumstances.
| 3. | Preliminary Purchase Price Allocation |
The preliminary determination of the fair value of the acquired net assets, assuming the Acquisition had closed on September 30, 2017, is as follows (in thousands, except share and per share data):
| Amount | Note Reference |
|||||||
| Cash consideration to basic shares outstanding ($10.00 per share) |
$ | 506,185 | ||||||
| Cash considerations to preferred shares |
72,490 | |||||||
| Cash consideration to options |
11,145 | |||||||
| Cash consideration to restricted stock units |
24,250 | |||||||
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|
|
|||||||
| Total cash consideration transferred |
614,070 | |||||||
|
|
|
|||||||
| Recognized amounts of identifiable assets acquired and liabilities assumed |
||||||||
| Net book value of assets acquired as of September 30, 2017 |
124,616 | |||||||
| Less transaction costs expected to be assumed by Cascadian |
(6,000 | ) | 5 | (E) | ||||
| Adjusted net book value of of assets acquired |
118,616 | |||||||
| Indefinite-lived intangible assets (IPR&D) |
300,000 | |||||||
| Deferred tax impact of fair value adjustments |
(63,000 | ) | ||||||
|
|
|
|||||||
| Adjustment to goodwill |
$ | 258,454 | ||||||
|
|
|
|||||||
Cash and cash equivalents, investments, and other tangible assets and liabilities: The carrying amounts of tangible assets and liabilities were assumed to approximate current fair value.
Deferred tax assets and liabilities: Deferred tax assets and liabilities arise from acquisition accounting adjustments where book values of certain assets and liabilities differ from their tax bases. Deferred tax assets and liabilities are recorded at the currently enacted rates which will be in effect at the time when the temporary differences are expected to reverse in the country where the underlying assets and liabilities are located. Cascadian has significant deferred tax assets, primarily related to tax benefits from losses carried forward and tax credits, which have historically been fully offset by valuation allowances. Due to the anticipated requirement to continue to maintain full valuation allowances after the merger, as well as potential limitations on the use of Cascadian NOLs based on IRS Sections 382 limitations, no value has been ascribed to the net deferred tax assets in the preliminary purchase accounting analysis.
Intangible Assets –In-process research and development: In-process research and development represents incomplete research and development projects at Cascadian. Management estimated that $300 million of the acquisition consideration represents the fair value of acquired in-process research and development. The fair value of in-process research and development was determined using the income approach, including the application of probability factors related to the likelihood of success of the respective products reaching final development and commercialization. It also took into consideration information and certain program-related documents and forecasts prepared by management. The fair value of in-process research and development will be capitalized as of the acquisition date and subsequently accounted for as an indefinite-lived intangible asset until completion or
7
abandonment of the associated research and development efforts. Accordingly, during the development period after the completion of the acquisition, these assets will not be amortized into earnings; instead, these assets will be subject to periodic impairment testing. Upon successful completion of the development process for an acquired in-process research and development project, determination as to the useful life of the asset will be made. The asset would then be considered a finite-lived intangible asset and amortization of the asset into earnings would begin over the estimated useful life of the asset.
The final determination of the fair value of the identifiable net assets acquired may change significantly from these preliminary estimates. The actual acquisition accounting of the merger will be based on the fair value of the acquisition consideration and the fair values of Cascadian’s assets and liabilities as of the closing date.
Goodwill: Goodwill represents the excess of the preliminary estimated acquisition consideration over the preliminary fair value of the underlying net tangible and intangible assets. Among the factors that contributed to a purchase price in excess of the fair value of the net tangible and intangible assets were the acquired workforce of experienced personnel, intellectual property, skill sets, operations, and organizational cultures that can be leveraged to enable us to build a successful combined enterprise. In accordance with ASC Topic 350, Intangibles—Goodwill and Other, goodwill will not be amortized, but instead will be tested for impairment at least annually and whenever events or circumstances have occurred that may indicate a possible impairment. In the event management determines that the value of goodwill has become impaired, the combined company will incur an accounting charge for the amount of the impairment during the period in which the determination is made.
| 4. | Accounting policies |
Following the Acquisition, the Company will conduct a review of accounting policies of Cascadian in an effort to determine if differences in accounting policies require restatement or reclassification of results of operations or reclassification of assets or liabilities to conform to the Company’s accounting policies and classifications. As a result of that review, the Company may identify differences among the accounting policies of the Company and Cascadian that, when conformed, could have a material impact on this unaudited pro forma combined financial information. During the preparation of this unaudited pro forma combined financial information, the Company was not aware of any material differences between accounting policies of the Company and Cascadian, except for certain reclassifications necessary to conform to the Company’s financial presentation, and accordingly, this unaudited pro forma combined financial information does not assume any material differences in accounting policies among the Company and Cascadian.
| 5. | Unaudited Pro Forma Combined Balance Sheet Adjustments |
| A. | Represents the estimated net proceeds of $400 million from the Bridge Facility (in thousands, except share data) offset by a $6.0 million estimated commitment fee and a $2.0 million estimated funding fee: |
| Summary Terms | ||
| Description of Bridge Facility |
Up to $400 million aggregate principal amount under a 364-day senior secured bridge loan facility | |
| LIBOR Floor |
1.00% | |
| Fees |
• Commitment fee: 1.50%
• Funding fee: 1.25% with 75 bps rebate if taken out within 60 days, 50 bps rebate if taken out within 61-90 days and no rebate thereafter | |
| B. | Represents the liquidation of the Company’s investments to provide cash for the acquisition. |
| C. | Represents the elimination of Cascadian’s historical common stock, additional paid-in capital, accumulated other comprehensive income, preferred stock and retained earnings. |
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| D. | Represents the purchase price allocation of the acquisition of Cascadian, based on the relative fair values of the acquired assets. See Note 3 above. |
| E. | No transaction-related transaction costs have been expensed in the Company’s or Cascadian’s historical statements of operations and therefore an adjustment is not required to the unaudited pro forma combined statements of operations. The unaudited pro forma combined balance sheet reflects $16.0 million of future estimated acquisition-related transaction costs for the Company and Cascadian, as a $16.0 million reduction of cash with a corresponding decrease of $10.0 million to accumulated deficit for the Company transaction costs and a reduction of $6.0 million of assumed net assets for Cascadian transaction costs. Such costs have not been reflected in the pro forma statements of operations as they are nonrecurring. |
| 6. | Unaudited Pro Forma Combined Statement of Operations |
| A. | Based on the Commitment Letter, the interest rate on the Bridge Facility is assumed to be equal to the LIBOR rate, plus an applicable margin of 6.0% per annum, increasing 50 bps every three months (subject to a 1.00% LIBOR floor). This adjustment also includes the amortization of original issue discount (“OID”) and deferred financing costs. Deferred financing costs include bank fees, financial advisory, legal, and other professional fees. These costs are deferred and recognized over the one-year term of the debt agreement using the straight-line method. |
The interest rate used for purposes of preparing the accompanying unaudited pro forma combined statement of operations for the year ended December 31, 2016 was 8.31%, which was derived by utilizing the 6.0% per annum applicable margin plus the 1.56% monthly LIBOR rate as of January 24, 2018 as well as 0.75% attributable to the average of the quarterly 50 bps increases noted above. In addition, interest expense includes $8.0 million ($6.0 million estimated commitment fee and a $2.0 million estimated funding fee) of OID and deferred financing costs.
The interest rate used for purposes of preparing the accompanying unaudited pro forma combined statement of operations for the nine months ended September 30, 2017 was 9.06%, which was derived by utilizing the 6.0% per annum applicable margin plus the 1.56% monthly LIBOR rate as of January 24, 2018 as well as the full 1.50% increase during the subsequent three quarters noted above.
This rate may be considerably different from the actual interest rates incurred based fluctuations in the LIBOR rate.
A 0.125% change in interest rate would result in a $500,000 increase or decrease in interest expense for the year ended December 31, 2016 and a $375,000 increase or decrease for the nine months ended September 30, 2017.
| 7. | Unaudited Pro Forma Adjustments for Equity Offering |
| A. | If the Offering is completed, the Company intends to use the net proceeds of the Offering to fund a portion of the Acquisition in lieu of any borrowing pursuant to the Bridge Facility. Therefore, changes to the sources of funding would result in changes to various components of the unaudited pro forma combined balance sheet and unaudited pro forma combined statements of operations as follows: |
The short term debt adjustment of $400 million would not be incurred and would not be reflected on the unaudited pro forma balance sheet in cash or in short-term debt. Interest expense presented in the unaudited pro forma combined statement of operations of $27.2 million for the nine months ended September 30, 2017 is no longer incurred. Of the $41.3 million of interest expense adjustment presented for the year ended December 31, 2016, only $6.0 million would be incurred as a result of the Commitment fee, which would also be recorded on the balance sheet as a reduction in cash and accumulated deficit.
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The unaudited pro forma balance sheet would reflect $524.6 million of net proceeds from the Offering after deducting the underwriting discounts and commissions and incremental estimated transaction costs of $700,000 for the Offering. With the exception of estimated transaction costs that would reduce cash and accumulated deficit, the net proceeds would be recorded in cash and allocated to common stock and accumulated paid-in capital based on par value of $0.001.
The number of shares issued under the Offering would be added to the weighted average shares for each period for purposes of computing pro forma net loss per share.
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Exhibit 99.3
Throughout the information in this Exhibit 99.3, unless the context specifies or implies otherwise, the terms “Company,” “Cascadian Therapeutics,” “we,” “us,” and “our” refer to Cascadian Therapeutics, Inc., its predecessors, Oncothyreon Inc, and Biomira Inc., and its subsidiaries.
Overview
We are a clinical-stage biopharmaceutical company focused on the development of therapeutic products for the treatment of cancer. Our goal is to develop and commercialize novel targeted compounds that have the potential to improve the lives and outcomes of cancer patients. Our lead clinical-stage product candidate is tucatinib, an oral, HER2-selective small molecule tyrosine kinase inhibitor. Our pipeline also includes two preclinical-stage product candidates: CASC-578, a Chk1 kinase inhibitor, and CASC-674, an antibody program against an immuno-oncology target known as TIGIT.
Tucatinib
Our lead development candidate, tucatinib, is an investigational orally bioavailable, potent tyrosine kinase inhibitor (TKI) that is highly selective for HER2, also known as ErbB2, a growth factor receptor that is over-expressed in approximately 20% of breast cancers. In addition to breast cancer, HER2 is over-expressed in other malignancies, including subsets of bladder, cervical, colorectal, esophageal, gastric, lung and ovarian cancers. We are currently developing tucatinib for the treatment of HER2-positive (HER2+) metastatic breast cancer. Over-expression of HER2 in breast cancer has been associated historically with increased mortality in early stage disease, decreased time to relapse and increased incidence of metastases. Similarly, the overexpression of HER2 is thought to play an important role in the development and progression of other cancers.
The introduction of HER2-targeted therapies, including antibody-based therapies and small molecule TKIs, has led to improvement in the outcomes of patients with HER2+ cancer. Unlike pan-HER TKIs, tucatinib selectively inhibits HER2 and is at least 1,000-fold more selective for HER2 than the epidermal growth factor receptor (EGFR). This selectivity may improve drug tolerability by reducing the risk of severe diarrhea and skin rash commonly seen with pan-HER TKIs.
We are currently conducting a randomized (2:1), double-blind, controlled pivotal clinical trial, known as HER2CLIMB, comparing tucatinib versus placebo, each in combination with capecitabine (Xeloda®) and trastuzumab (Herceptin®), and without loperamide or budesonide prophylaxis, in patients with locally advanced or metastatic HER2+ breast cancer who have had prior treatment with a taxane, trastuzumab, pertuzumab (Perjeta®) and ado-trastuzumab emtansine or T-DM1 (Kadcyla®) and who may or may not have brain metastases. The primary endpoint is progression-free survival (PFS) based upon independent radiologic review. Patients will also be followed for overall survival, which is a secondary endpoint. Key objectives related to assessing activity in brain metastases include a secondary endpoint of PFS in a subset of patients with brain metastases. HER2CLIMB is currently enrolling patients in the United States, Canada, Western Europe and Australia and is expected to expand into Israel early in 2018. The HER2CLIMB clinical trial is intended to support a potential new drug application (NDA) submission to the United States Food and Drug Administration (FDA) and a potential Marketing Authorization Application (MAA) to the European Medicines Agency (EMA).
In addition, our two Phase 1b trials of tucatinib, one in combination with T-DM1 and another in combination with capecitabine and/or trastuzumab, are fully enrolled and active patients remain on treatment. Results to date from the Phase 1b trials indicate these drug combinations are well tolerated and may provide clinical activity in heavily pretreated patients with metastatic breast cancer, with and without brain metastases.
Updated results from the Phase 1b triplet combination study (tucatinib with capecitabine and trastuzumab) showed that the combination continued to be well tolerated. Compared to previously reported interim results, the updated PFS increased to 7.8 months and the overall response rate (ORR) increased to 61%. The median duration of response was 10 months. Patients in the Phase 1b triplet combination trial previously received a median of three HER2-targeted agents such as trastuzumab, pertuzumab, lapatinib or T-DM1. These updated results were presented at the 2016 San Antonio Breast Cancer Symposium (SABCS).
In September 2017, results from the pooled analysis of Phase 1b combination studies showed further support for the potential utility of tucatinib for patients with HER2+ metastatic breast cancer with brain metastases, including untreated or progressive brain metastases after radiation therapy. In addition, data from nonclinical models were presented that support the evaluation of tucatinib in HER2+ gastrointestinal cancers. These results were presented at the European Society for Medical Oncology 2017 Congress.
In December 2017, the Company reported results from a subgroup analysis from its two ongoing combination studies of tucatinib, which demonstrated prolonged progression-free survival benefit regardless of presence of brain metastases or patient characteristics. These results were presented at the 2017 SABCS.
In July 2017, we announced that the EMA confirmed that positive results from HER2CLIMB could serve as a single registrational trial for submission of a MAA to the EMA for potential marketing approval. We had received similar confirmation from the FDA in 2016.
In September 2017, we announced tucatinib was granted orphan drug designation by the FDA for the treatment of HER2+ colorectal cancer and, in June 2017, we announced that tucatinib was granted orphan drug designation by the FDA for the treatment of breast cancer patients with brain metastases.
In June 2016, tucatinib was granted Fast Track designation by the FDA for the treatment of metastatic HER2+ breast cancer. The FDA’s Fast Track process is designed to facilitate the development and expedite the review of drugs to treat serious conditions and fill an unmet medical need.
Tucatinib is also being evaluated in investigator-initiated studies in combination with approved agents.
In June 2017, a Phase 2 study called MOUNTAINEER was initiated to evaluate tucatinib in combination with trastuzumab for patients with HER2 amplified metastatic colorectal cancer and recently began enrolling participants in the U.S.
In December 2017, the first patient was enrolled in an investigator-initiated Phase 1b/2 trial that is evaluating tucatinib in combination with an aromatase inhibitor and CDK4/6 agent for patients with hormone receptor-positive and HER2-positive (HR+/HER2+) metastatic breast cancer.
We have an exclusive license agreement with Array BioPharma Inc. for the worldwide rights to develop, manufacture and commercialize tucatinib.
Other Pipeline Candidates
Although our efforts are focused primarily on developing and commercializing tucatinib, we have two preclinical programs. Our earlier stage product candidates are CASC-578, a Chk1 cell cycle inhibitor that is an orally available, small molecule kinase inhibitor, and CASC-674, an antibody against an immuno-oncology target known as TIGIT.
Chk1 is a protein kinase that regulates the cell division cycle and is activated in response to DNA damage and DNA replication stress. Cancer cells often have mutations that alter DNA damage response signaling pathways that function in parallel with Chk1 to regulate the cell cycle. These mutations may make tumor cells more reliant on the activity of Chk1 to provide cell cycle checkpoint control, which represents a potential weak point that can be exploited by drugs that target Chk1.
TIGIT (T-cell immunoreceptor with Ig and ITM domains), is an inhibitory receptor expressed on T-cells and NK cells that may negatively regulate immune response to cancers. Antibodies that inhibit TIGIT function may potentially activate anti-tumor immune responses.
The continued research and development of our product candidates will require significant additional expenditures, including preclinical studies, clinical trials, manufacturing costs and the expenses of seeking regulatory approval.
Product Candidate Portfolio
In the table below, under the heading “Development Stage, “Pivotal” indicates clinical testing of efficacy, safety, dosage tolerance, pharmacokinetics and pharmacodynamics of the product candidate in a trial designed for registration with the FDA for marketing of the product. “Preclinical” indicates the product candidate is undergoing tumor modeling, toxicology and pharmacology studies intended to support subsequent clinical development.
| Product Candidate |
Technology |
Most Advanced Indication |
Development Stage | |||
| Tucatinib |
Small Molecule | Breast cancer | Pivotal Study | |||
| Chk1 |
Small Molecule | To be determined | Preclinical | |||
| TIGIT |
Antibody | To be determined | Preclinical |
Development Candidates
Tucatinib
Our lead development candidate, tucatinib, is an orally bioavailable, potent TKI that is highly selective for HER2, also known as ErbB2, a growth factor receptor that is over-expressed in approximately 20% of breast cancers. In addition to breast cancer, HER2 is overexpressed in other malignancies, including subsets of bladder, cervical, colorectal, esophageal, gastric, lung and ovarian cancers. We are currently developing tucatinib for the treatment of HER2+ metastatic breast cancer. Over-expression of HER2 in breast cancer has been associated historically with increased mortality in early stage disease, decreased time to relapse and increased incidence of metastases. The introduction of HER2-targeted therapies, including antibody-based therapies and the small molecule TKI, lapatinib, has led to improvement in the outcomes of patients with HER2+ cancer. However, in third line HER2 positive metastatic breast cancer, there is no single established standard of care treatment regimen, and up to 50% of patients have brain metastases. Unlike lapatinib, tucatinib selectively inhibits HER2 and is at least 1,000-fold more selective for HER2 than EGFR. This selectivity may improve drug tolerability by reducing Grade 3 (severe) diarrhea and skin rash. We acquired tucatinib in December 2014 pursuant to an agreement under which we have certain royalty and milestone payment obligations. See the section titled “License and Collaboration Agreements” for additional information.
Tucatinib has been studied as a single agent in a Phase 1 clinical trial, with both dose-escalation and cohort expansion components, which enrolled 50 patients, 43 of whom had HER2+ metastatic breast cancer. All HER2+ breast cancer patients had progressed on a trastuzumab-containing regimen that may have also included other chemotherapeutic agents. In addition, over 80% had been treated with lapatinib, with many patients having progressed on this therapy. In this study, tucatinib demonstrated an acceptable safety profile; treatment-related adverse events were primarily Grade 1. Because tucatinib is selective for HER2 and does not inhibit the EGFR, there was a low incidence and severity of treatment-related diarrhea, rash and fatigue which may be associated with tucatinib’s high selectively for HER2 over EGFR. Additionally, there were no treatment-related cardiac events or Grade 4 treatment-related adverse events reported. Twenty-two HER2+ breast cancer patients with measurable disease were treated with tucatinib at doses greater than or equal to 600 mg BID. In this heavily pretreated patient population, there was a clinical benefit rate of 27% (partial response [n = 3] plus stable disease for at least 6 months [n = 3]).
In February 2014, we initiated two Phase 1b trials of tucatinib. The trials are closed to enrollment although patients remain on treatment. The following is a summary of these studies:
Phase 1b Clinical Trial of tucatinib in combination with TDM-1:
This Phase 1b clinical trial studied tucatinib in combination with T-DM1 in patients with metastatic HER2+ breast cancer who had progressed following prior treatment with trastuzumab and a taxane. This trial was a dose-escalation study of tucatinib in combination with the approved dose of T-DM1, with expansion cohorts in patients with and without brain metastases. The primary objective was to determine the maximum tolerated dose/recommended phase 2 dose (MTD/RP2D) of tucatinib in combination with the approved dose of T-DM1. Secondary objectives included an evaluation of the safety and preliminary anti-tumor activity of the combination.
As reported at the 2016 American Society of Clinical Oncology Annual Meeting, patients treated at the MTD of tucatinib with T-DM1 had previously been treated with trastuzumab, and, in addition, 46% had been treated with prior pertuzumab, and 20% with prior lapatinib. Overall,60% of patients had a history of brain metastases and 42% had brain metastases that were either untreated or had progressed after prior local treatment. In this high-risk population, durable (> 6 months) systemic and CNS responses as well as disease stabilization were seen. The ORR was 41% (14/34) in patients with measurable disease and at least one follow-up scan, and the CNS response rate was 33% (4/12).
The combination of tucatinib and T-DM1 was clinically well tolerated. In 50 patients treated at the MTD of tucatinib, the majority of adverse events were low grade in severity, Grade 1 or 2, and included nausea, fatigue, diarrhea, vomiting, thrombocytopenia and asymptomatic elevated liver enzymes. Grade 3 diarrhea occurred in only two patients (4%), with no mandatory use of anti-diarrheal medications. While asymptomatic elevations in ALT/AST were seen in most patients, the majority were Grade 1 or 2 in severity requiring no change in dosing. Asymptomatic Grade 3 elevations were reported in 18% of patients (9/50) and Grade 4 elevation in 2% (1/50). Except in the setting of progressive liver metastases, all Grade 3 or greater elevations of ALT/AST were reversible with dose interruption and dose reduction of tucatinib and T-DM1. Two of 50 patients (4%), experienced asymptomatic decreases in left ventricular ejection fraction, reported as Grade 1 heart failure. Both of these patients had a prior history of treatment with trastuzumab and pertuzumab. Treatment with both tucatinib and T-DM1 was discontinued in one of these patients, and treatment with T-DM1 alone was discontinued in a second patient who went on to recover normal cardiac function.
Phase 1b Clinical Trial of tucatinib in combination with capecitabine and/or trastuzumab:
In December 2015, updated results from the Phase 1b clinical trial of tucatinib evaluating tucatinib in combination with capecitabine and/or trastuzumab in patients previously treated with trastuzumab and TDM-1 for HER2+ metastatic breast cancer were presented at the 2015 San Antonio Breast Cancer Symposium. Some patients had also been previously treated with pertuzumab or lapatinib. The primary objective of this study was to determine the maximum-tolerated and/or recommended Phase 2 dose (MTD/RP2D) of tucatinib in combination with the approved dose of either capecitabine or trastuzumab, or both. Secondary objectives included an evaluation of the safety and preliminary anti-tumor activity of the combinations. The trial included expansion cohorts at the MTD/RP2D of tucatinib in combination with both capecitabine and trastuzumab and with trastuzumab or capecitabine alone in patients with and without brain metastases.
In a heavily pretreated population, durable (> 6 months) systemic and CNS responses as well as disease stabilization were seen across all three treatment combinations, including patients previously treated with pertuzumab and/or lapatinib as well as trastuzumab and T-DM1. As reported at SABCS in 2015, in seven patients treated with tucatinib and capecitabine, the ORR was 83%, with a CNS response in the one patient with assessable brain metastases and at least one follow-up scan. In 16 patients treated with tucatinib and trastuzumab, the ORR was 29%, with a CNS response in one of seven patients with assessable brain metastases and at least one follow-up scan. In 18 patients treated with tucatinib and capecitabine and trastuzumab, the ORR was 39%, with CNS response in two of four patients with assessable brain metastases and at least one follow-up scan.
In June 2016, updated data from our Phase 1b clinical trial combining tucatinib with trastuzumab and capecitabine were presented at our R&D Day held in New York. In this combination trial, the majority of adverse events were Grade 1, with most patients being able to continue on the full dose of tucatinib. Grade 3 diarrhea was infrequent without a requirement for prophylactic anti-diarrheal medicine. The ORR was 58% and the interim PFS was 6.3 months, with many patients still active on study at the time of the data analysis. Outcomes in patients with brain metastases were similar to patients without brain metastases.
In October 2016, data from our on-going combination trial of tucatinib with trastuzumab and capecitabine demonstrating clinical activity in HER2+ metastatic lesions to the skin was presented at the 2016 European Society of Clinical Oncology meeting.
In December 2016, updated data from the Phase 1b trial showed encouraging safety and anti-tumor activity in patients with and without brain metastases, with an updated median PFS of 7.8 months (a 24% improvement over prior median PFS), ORR of 61% and a median duration of response of 10 months. Patients with and without brain metastases had similar response rates. The combination of tucatinib with trastuzumab and capecitabine was well-tolerated. Most treatment-emergent adverse events were Grade 1, with few tucatinib dose reductions and no required prophylactic use of antidiarrheal agents. These updated data were presented at the 2016 SABCS meeting.
In December 2016, we reported that following a meeting with the FDA and discussions with our external Steering Committee, we had amended the ongoing HER2CLIMB Phase 2 clinical trial of tucatinib by increasing the sample size so that, if successful, the trial could serve as a single pivotal study to support registration. HER2CLIMB is a randomized (2:1), double-blind, controlled pivotal clinical trial comparing tucatinib vs. placebo in combination with capecitabine and trastuzumab in patients with locally advanced or metastatic HER2-positive breast cancer who have had prior treatment with trastuzumab, pertuzumab and T-DM1. The primary endpoint remains PFS based upon independent radiologic review, and the sample size has increased to approximately 480 patients, including patients already enrolled in the trial. Key objectives related to assessing activity in brain metastases include a key secondary endpoint of PFS in a subset of patients with brain metastases. All patients will be followed for overall survival. HER2CLIMB is currently enrolling in the United States, Canada, Western Europe and Australia, and there appears to be strong physician interest as evidenced by robust enrollment in this trial. HER2CLIMB has opened 150 clinical trial sites and is expected to complete enrollment in 2019. HER2CLIMB is the only known pivotal TKI clinical trial to allow enrollment and assessment of patients with active brain metastases.
Preclinical Programs
Checkpoint kinase 1 inhibitor
Checkpoint kinase 1 (Chk1) is a protein kinase that is activated in response to DNA damage and DNA replication stress. Together with other cellular factors, Chk1 provides a coordinated “checkpoint” to arrest the cell division cycle in response to damaged DNA. The induction of this cell cycle checkpoint enables cells to repair DNA lesions and ensures the fidelity of the cell division process. Cancer cells commonly have mutations that reduce or eliminate the activity of DNA damage response factors that function in parallel with Chk1. These mutations make tumor cells more reliant on the activity of Chk1 to provide cell cycle checkpoint control, which may make them more sensitive to Chk1 inhibitors and produce a synergistic tumor killing effect when combined with DNA targeted chemotherapy drugs.
We have identified a lead development candidate, CASC-578, which is an orally available, highly potent and selective Chk1 inhibitor and we are conducting preclinical studies. CASC-578 was developed in collaboration with Sentinel Oncology Ltd., Cambridge, United Kingdom. See the section titled “License and Collaboration Agreements” for additional information.
Immuno-oncology
We have identified novel antibodies to TIGIT, an immune receptor that may block the induction of adaptive and innate immune response to cancers. The TIGIT antibody program is in preclinical development and is part of the collaborative effort with Adimab for the discovery of novel antibodies against immunotherapy targets. See the section titled “Licensed and Collaboration Agreements” for additional information.
License and Collaboration Agreements
Array BioPharma Inc. In December 2014, we entered into a license agreement with Array. Pursuant to the license agreement, Array has granted us an exclusive license to develop, manufacture and commercialize tucatinib. The license agreement replaced a development and commercialization agreement under which we and Array were previously jointly developing tucatinib. As part of the agreement, we paid Array $20 million as an upfront fee. In addition, we will pay Array a portion of any payments received from sublicensing tucatinib rights. Array is also entitled to receive up to a low double-digit royalty based on net sales of tucatinib by us and a single digit royalty based on net sales of tucatinib by our sublicensees. The term of the license agreement expires on a country-by-country basis upon the later of the expiration of the last valid claim covering tucatinib within that country or 10 years after the first commercial sale of tucatinib within that country.
Sentinel Oncology Ltd. In 2014, we entered into a research collaboration agreement with Sentinel for the discovery of novel Chk1 inhibitors. Under the agreement, we made payments to Sentinel to support their chemistry research. We are responsible for preclinical and clinical development, manufacture and commercialization of any resulting compounds. Sentinel is eligible to receive success-based development and commercial milestone payments up to approximately $90 million based on development and commercialization events, including the initiation of toxicology studies under the FDA’s good laboratory practices (GLP) regulations, the initiation of certain clinical trials, regulatory approval and first commercial sale. Sentinel is also entitled to a single-digit royalty based on net sales.
Adimab LLC. In 2014, we initiated a collaboration with Adimab for the discovery of novel antibodies against immunotherapy targets in oncology. We have sole responsibility for the manufacture, development and commercialization of any antibody product candidates that result from the collaboration. The collaboration is currently at an early preclinical development stage. Adimab is entitled to certain research funding, success-based development milestone payments of up to $17 million per product and a low single-digit royalty based on net sales.
Patents and Proprietary Information
Our objective is to obtain, maintain and enforce intellectual property protection for our pipeline candidates and other proprietary technologies; to preserve our trade secrets; and to operate without infringing on the valid proprietary rights of other parties. We believe the protection of patents, trademarks and other proprietary rights that we own or license is critical to our success and competitive position. We rely on a combination of patent, trademark, copyright, trade secret, confidentiality agreements and other measures to protect our proprietary rights.
With respect to our development candidates, as of December 31, 2017, we owned three U.S. patent and 20 patent applications in other jurisdictions. In addition, as of December 31, 2017, we had licensed approximately 182 issued patents and 81 patent applications from third parties, mostly on an exclusive basis. The patent portfolios for our leading product candidates as of December 31, 2017 are summarized below.
Tucatinib. In the United States, the composition of matter for tucatinib is covered by U.S. Patent No. 8,648,087, entitled “N4-phenyl-quinazoline-4-amine derivatives and related compounds as ErbB type I receptor tyrosine kinase inhibitors for the treatment of hyperproliferative diseases,” which will provide patent coverage for tucatinib until 2031. We have also licensed U.S. Patent No. 9,693,989, with the same title. Patent applications corresponding to U.S. Patent No. 8,648,087 have issued in Australia, Canada, China, Columbia, Europe, Hong Kong, Indonesia, Israel, Japan, South Korea, Mexico, Philippines, Russia, Singapore, Ukraine and South Africa. Corresponding patent applications are pending in Brazil, Egypt, India, Israel, Norway and Russia. These foreign patents and patent applications, if issued, are not due to expire until at least 2026. The Array patent portfolio also includes other issued patents and pending patent applications drawn to tucatinib formulations, polymorphs and methods of use in the U.S. and in many foreign jurisdictions.
The patents and patent applications covered by the Array License Agreement are prosecuted by Array and reviewed and monitored by outside legal counsel on behalf of the Company.
CASC-578. CASC-578, a Chk1 kinase inhibitor, is licensed from Sentinel. The Sentinel Chk1 kinase inhibitor patent portfolio includes two issued U.S. patents, U.S. Patent No. 8,716,287, entitled “Pharmaceutical compounds,” and U.S. Patent No. 9,630,931, entitled “Pharmaceutically active pyrazine derivatives,” and a U.S. patent application, all of which are drawn to compounds and compositions that inhibit Chk-1 kinase activity. A foreign patent application also drawn to compounds and compositions that inhibit Chk-1 kinase activity has issued in Europe. The current U.S. issued patents and patent application, if issued, are not due to expire until at least 2031. The European patent is not due to expire until at least 2032.
The CASC-578 patent portfolio includes a pending U.S. patent application covering substituted pyrazoles, many of which have Chk1 inhibitor activity. Related foreign patent applications are pending in Australia, Brazil, Canada, China, Europe, Hong Kong, Indonesia, Israel, India, Japan, South Korea, Mexico, Malaysia, New Zealand, Philippines, Russia, Singapore, Ukraine and South Africa. The currently pending U.S. and foreign patent applications, if issued, are not due to expire until at least 2035. Certain jurisdictions may provide mechanisms for restoring a period of patent term consumed by regulatory review. We will take advantage of all opportunities to extend the patent term in each jurisdiction where we are able to do so.
CASC-674. CASC-674, an antibody program against an immuno-oncology target known as TIGIT, was obtained from Adimab LLC. Cascadian Therapeutics is collaborating with Adimab for the discovery of novel antibodies against TIGIT. As of December 31, 2017, we have one patent application directed to TIGIT.
Certain jurisdictions, including the U.S., Japan and Europe, provide mechanisms for restoring a period of patent term consumed by regulatory review. We plan to take advantage of all opportunities to extend the patent term in each jurisdiction where we are able to do so.
Manufacturing
We use third party contractors to procure the necessary materials and manufacture, as applicable, starting materials, active pharmaceutical ingredients and finished drug product, as well as for labeling, packaging, storage and distribution of our compounds. This arrangement allows us to use contract manufacturers that have extensive Good Manufacturing Practices, or cGMP, manufacturing experience. We have a staff with experience in the management of contract manufacturing and in the development of efficient commercial manufacturing processes for our products candidates. We currently intend to outsource the manufacture of all our commercial products.
We believe that our existing supplies of tucatinib, along with our contract manufacturing relationships with our existing contract manufacturers, will be sufficient to supply tucatinib for HER2CLIMB and other clinical trials of tucatinib and to supply initial commercial quantities of tucatinib for commercial sale. As our business expands, we expect that our manufacturing, distribution and related operational requirements will increase correspondingly, and we may need to retain additional contractors to ensure adequate supplies of our products. Each third-party contractor undergoes a formal qualification process by our subject matter experts before services by that contractor commence, and each contractor is audited periodically thereafter as required by cGMP.
Competition
The pharmaceutical and biotechnology industries are intensely competitive, and any product candidate developed by us will compete with existing drugs and therapies. There are many pharmaceutical companies, biotechnology companies, public and private universities, government agencies and research organizations that compete with us in developing various approaches to cancer therapy. Many of these organizations have substantially greater financial, technical, manufacturing and marketing resources than we have. Several of them have developed or are developing therapies that could be used for treatment of the same diseases that we are targeting. In addition, many of these competitors have significant commercial infrastructures that we do not currently have. Our ability to compete successfully will depend largely on our ability to:
| • | design and develop products that are superior to other products in the market and under development; |
| • | attract and retain qualified scientific, product development, manufacturing and commercial personnel; |
| • | obtain patent and/or other proprietary protection for our product candidates and technologies; |
| • | obtain required regulatory approvals; |
| • | successfully collaborate with pharmaceutical companies in the design, development and commercialization of new products; |
| • | compete on, among other things, product efficacy and safety profile, time to market, price, and the types of and convenience of treatment procedures; and |
| • | identify, secure the rights to and develop products and exploit these products commercially before others are able to develop competitive products. |
Our ability to compete may be affected by government policies relating to the pricing and reimbursement of proprietary drug products and the policies of insurers and other third-party payors encouraging the use of generic products, all of which may make branded products less attractive to buyers from a cost perspective.
Tucatinib. Tucatinib is an inhibitor of the receptor tyrosine kinase HER2, also known as ErbB2. Multiple marketed products target HER2, including the antibodies trastuzumab (Herceptin®) and pertuzumab (Perjeta®) and the antibody toxin conjugate ado-trastuzumab emtansine (Kadcyla®), all from Roche/Genentech. In addition, lapatinib (Tykerb®), from GlaxoSmithKline, is a dual HER1/HER2 oral kinase inhibitor for the treatment of metastatic breast cancer and neratinib (Nerlynx®), from Puma Biotechnology, is a EGFR/HER2/HER4 inhibitor indicated for extended adjuvant use that is also being studied for use in metastatic breast cancer.
Employees
As of December 31, 2017, we had 71 employees. A number of our management and professional employees have had prior experience with other pharmaceutical or medical products companies.
Our ability to develop marketable products and to establish and maintain our competitive position in light of technological developments will depend, in part, on our ability to attract and retain qualified personnel. Competition for such personnel is intense. We have also chosen to outsource activities where skills are in short supply or where it is economically prudent to do so.
None of our employees are covered by collective bargaining agreements and we believe that our relations with our employees are good.
Risk Factors
Set forth below, and in other documents we file with the SEC, are descriptions of risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this report. Because of the following factors, as well as other variables affecting our operating results, past financial performance should not be considered a reliable indicator of future performance and investors should not use historical trends to anticipate results or trends in future periods. The risks and uncertainties described below are not the only ones facing us. Other events that we do not currently anticipate or that we currently deem immaterial may also affect our results of operations and financial condition.
Risks Relating to our Business
Product candidates that appear promising in research and development may be delayed or may fail to reach later stages of clinical development.
The successful development of pharmaceutical products is highly uncertain. Product candidates that appear promising in research and development may be delayed or fail to reach later stages of development. For example, preliminary data from our Phase 1b trial of ONT-10 in combination with the T-cell agonist antibody, varlilumab, did not demonstrate sufficient activity to move forward with the program. We, therefore, decided not to continue this trial and, in February 2016, we terminated our collaboration agreement with Celldex. The ongoing or future trials for tucatinib (ONT-380) and our other programs may fail to demonstrate that these product candidates are sufficiently safe and effective to warrant further development.
Furthermore, decisions regarding the further development of product candidates must be made with limited and incomplete data, which makes it difficult to accurately predict whether the allocation of limited resources and the expenditure of additional capital on specific product candidates will result in desired outcomes. Preclinical and clinical data can be interpreted in different ways, and negative or inconclusive results or adverse medical events during a clinical trial could delay, limit or prevent the development of a product candidate, which could harm our business, financial condition or the trading price of our securities. There can be no assurance as to whether or when we will receive regulatory approvals for any of our product candidates, including tucatinib, CASC-578 and CASC-674.
There is no assurance that tucatinib will be safe, effective or receive regulatory approval for any indication.
Tucatinib is a late-stage clinical development candidate and the risks associated with its development are significant. Promising preclinical data in animal models and early clinical data may not be predictive of later clinical trial results. Clinical data from our pivotal HER2CLIMB clinical trial may fail to establish that tucatinib is effective in treating HER2+ breast cancer or associated brain metastases or may indicate safety profile concerns not indicated by earlier clinical data.
In December 2014, we announced that interim data from our ongoing Phase 1b combination trials indicated preliminary clinical activity and tolerability in a heavily pretreated patient population. Updates to some of these data provided further preliminary evidence of clinical activity and tolerability, including in brain metastases. Based upon this data, we commenced a Phase 2 clinical trial of tucatinib in February 2016 and are continuing that trial as our pivotal HER2CLIMB trial. However, none of these trials are complete, and even if final Phase 1b data are encouraging, the results from the pivotal HER2CLIMB clinical trial and any other clinical trials may not indicate a favorable safety and efficacy profile for tucatinib or may otherwise fail to support continued development of this product candidate.
In December 2016, we announced that, following discussions with the Food and Drug Administration (FDA) and discussions with our external Steering Committee, we amended the HER2CLIMB clinical trial of tucatinib by increasing the sample size so that, if successful, the trial could serve as a single pivotal study to support a new drug application. The primary endpoint remains progression-free survival (PFS) and the sample size has been increased to approximately 480 patients from 180 patients. Patients will also be followed for overall survival which is a secondary endpoint. Key objectives related to assessing activity in brain metastases include a secondary endpoint of PFS in a subset of patients with brain metastases. There is no assurance that the clinical data will achieve these endpoints in whole or in part. For example, the clinical data may achieve the primary endpoint in the overall study population, but not achieve the secondary endpoint in patients with brain metastases. We have not received a Special Protocol Assessment for the HER2CLIMB study. Thus, even if some or all of the endpoints are achieved and we file an NDA seeking approval for the commercial sale of tucatinib in metastatic breast cancer, there is no assurance that the FDA will approve the application.
In June 2017, an investigator-sponsored trial was initiated to evaluate tucatinib in patients with colorectal cancer. Additional investigator-sponsored clinical trials of tucatinib in other indications may also be initiated in the future. We may also initiate additional clinical trials of tucatinib. Data from clinical trials we or investigators may initiate in other indications may fail to demonstrate that tucatinib is effective in the indications studied or safety profile concerns may arise. In that event, even if the pivotal HER2CLIMB succeeds in reaching its endpoints and receives regulatory approval, we may not be able to continue development of tucatinib in other indications or to receive regulatory approval for additional indications, which may limit the commercial potential of tucatinib and harm our business.
Reports of adverse events or safety concerns involving tucatinib could delay or prevent us from obtaining regulatory approval.
Reports of adverse events or safety concerns involving tucatinib or the combination of tucatinib with capecitabine or trastuzumab being studied in the HER2CLIMB study or the combination of tucatinib with other drugs could interrupt, delay or halt the HER2CLIMB clinical trial and/or other clinical trials of tucatinib. Tucatinib alone and in combination with other drugs has been studied in a limited number of patients to date and the known safety information is correspondingly limited. With study in additional patients, more severe or unanticipated adverse events may be experienced by patients. Reports of adverse events or safety concerns involving tucatinib could result in regulatory authorities denying approval of tucatinib or limiting its use. There are no assurances that patients receiving tucatinib in combination with other drugs will not experience serious adverse events in the future or that unexpected or unanticipated adverse events will not occur. Further, there are no assurances that patients receiving tucatinib with co-morbid diseases will not experience new or different serious adverse events in the future.
Adverse events may also negatively impact the sales of tucatinib, if it is approved for sale in any jurisdiction. If tucatinib is approved for sale in the United States, we could be required to implement a Risk Evaluation and Mitigation Strategy to address safety concerns, which could adversely affect tucatinib’s acceptance in the market, make competition easier or make it more difficult or expensive for us to distribute and sell tucatinib.
We rely on agreements with third parties for our product candidate technology. Failure to maintain those agreements could prevent us from continuing to develop and commercialize our product candidates.
We entered into an exclusive license agreement with Array BioPharma, Inc. for our tucatinib technology. If Array BioPharma were to terminate our license agreement or if we are unable to maintain the exclusivity of that license agreement, we may be unable to continue to develop tucatinib. Further, we may in the future have a dispute with Array BioPharma which may impact our ability to develop and commercialize tucatinib or require us to enter into additional licenses.
We also have an exclusive license from Sentinel Oncology for our Chk1 program. If Sentinel Oncology were to terminate our license agreement or if we are unable to maintain the exclusivity of that license agreement, we may lose our rights to CASC-578. Further, we may in the future have a dispute with Sentinel Oncology which may adversely impact our business objectives regarding CASC-578 or require us to enter into additional licenses.
We also have a development and option agreement for our CASC-674 program with Adimab. If Adimab were to terminate that agreement or if we do not exercise our option to acquire a license from Adimab, we may be unable to continue our CASC-674 program. Further, even if we exercise our option we may in the future have a dispute with Adimab which may adversely impact our business objectives regarding CASC-674 or require us to enter into additional licenses.
An adverse result in potential future disputes with our licensors and partners may impact our ability to develop and commercialize tucatinib and our other product candidates, may require us to enter into additional licenses, or may require us to incur additional costs in litigation or settlement. In addition, continued development and commercialization of tucatinib and our other product candidates may require us to secure licenses to additional technologies. We may not be able to secure these licenses on commercially reasonable terms, if at all.
Our ability to continue with our planned operations is dependent on our success at raising additional capital sufficient to meet our obligations on a timely basis. If we fail to obtain additional financing when needed, we may be unable to complete the development, regulatory approval and commercialization of our product candidates.
We have expended and will continue to expend substantial funds in connection with our product development activities and clinical trials and regulatory approvals. Conducting a large pivotal trial and other clinical trials and IND-enabling studies is very costly and our funds are very limited. Accordingly, to commercialize tucatinib, if our HER2CLIMB trial is successful, to continue tucatinib’s development into other indications, and to fund the continued development of our other programs, we will need to raise additional funds from the sale of our securities, partnering arrangements or other financing transactions in order to finance the commercialization of tucatinib and our other product candidates. We cannot be certain that additional financing will be available when and as needed or, if available, that it will be available on acceptable terms. If financing is
available, it may be on terms that adversely affect the interests of our existing stockholders or restrict our ability to conduct our operations. To the extent that we raise additional funds through collaboration and licensing arrangements, we may be required to relinquish some rights to our technologies or product candidates, or grant licenses on terms that are not favorable to us. Our actual capital requirements will depend on numerous factors, including:
| • | the pace of enrollment in the HER2CLIMB trial and the actual costs of that trial; |
| • | whether we enter into licensing or collaboration arrangements for any of our product candidates that reduce our costs to develop those product candidates; |
| • | activities and arrangements related to the commercialization of our product candidates; |
| • | the progress of our research and development programs; |
| • | the progress of preclinical and clinical testing of our product candidates; |
| • | the time and cost involved in obtaining regulatory approvals for our product candidates; |
| • | the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights with respect to our intellectual property; |
| • | the effect of competing technological and market developments; |
| • | the effect of changes and developments in our existing licensing and other relationships; and |
| • | the terms of any new collaborative, licensing and other arrangements that we may establish. |
If we require additional financing and cannot secure sufficient financing on acceptable terms, we may need to delay, reduce or eliminate some or all of our research and development programs, any of which could have a material adverse effect on our business and financial condition.
We have a history of net losses, we anticipate additional losses and we may never become profitable.
Other than the year ended December 31, 2008, we have incurred net losses in each fiscal year since we commenced our research activities, and we do not anticipate realizing net income for the foreseeable future. As of September 30, 2017, our accumulated deficit was approximately $612.5 million. Our losses have resulted primarily from expenses incurred in research and development of our product candidates. We make significant capital commitments to fund the development of our product candidates. If these development efforts are unsuccessful, the development costs would be incurred without any future revenue, which could have a material adverse effect on our financial condition. We do not know when or if we will complete our product development efforts, receive regulatory approval for any of our product candidates, or successfully commercialize any approved products. As a result, it is difficult to predict the extent of any future losses or the time required to achieve profitability, if at all. Any failure of tucatinib or our other product candidates to complete successful clinical trials and obtain regulatory approval and any failure to become and remain profitable could adversely affect the price of our common stock and our ability to raise capital and continue operations.
We may be unable to enter into licensing or collaboration relationships.
We may from time to time seek to enter into licensing or collaboration relationships. Proposing, negotiating and implementing an economically viable licensing or collaboration arrangement is a lengthy and complex process. We compete for partnering arrangements and license agreements with pharmaceutical and biotechnology companies and other institutions. Our competitors may have stronger relationships with third parties with whom we are interested in collaborating or may have more established histories of developing and commercializing products. As a result, our competitors may have a competitive advantage in entering into partnering or licensing arrangements with such third parties. In addition, even if we generate interest in a partnering or licensing arrangement, we may not be able to enter into such arrangements on terms that we find acceptable, if at all. If we do enter into such arrangements, our obligations under the arrangement may require commitments of time and resources that may additional resources.
The failure to enroll patients in the HER2CLIMB study or in other clinical trials may cause delays in developing our product candidates.
We may encounter delays if we are unable to enroll enough patients to timely complete the pivotal HER2CLIMB clinical trial or any of our other clinical trials. Patient enrollment depends on many factors, including the size of the patient population, the ability to engage clinical sites, the nature of the protocol, the proximity of patients to clinical sites, the eligibility criteria for the trial, and competition for patients with competing trials. The HER2CLIMB clinical trial has specific criteria for enrollment that may limit the number of patients eligible to participate in the trial and only a small fraction of potentially eligible patients in a given patient population ever seek to participate in a clinical trial. We undertake feasibility studies to help us determine the number of investigative sites required to enroll the patients needed for a given clinical trial, but the results of those studies are estimates and enrollment may be substantially slower than anticipated. Moreover, when one product candidate is evaluated in multiple clinical trials, patient enrollment in ongoing trials can be adversely affected by negative results from completed trials. Our product candidates are focused in oncology, which can be a difficult patient population to recruit. If we fail to enroll patients for HER2CLIMB or our other clinical trials, HER2CLIMB or our other clinical trials may be delayed or suspended, which could delay our ability to generate revenues or raise capital to fund our operations. To enroll patients, we may have to seek additional clinical sites which cause additional expense and time with no guarantee of recruiting patients to our trials.
There is no assurance that we will be granted regulatory approval for tucatinib for metastatic breast cancer or any other indication or be granted regulatory approval for any of our other product candidates.
We are currently conducting a pivotal clinical trial and following patients in Phase 1b trials of tucatinib. There can be no assurance that these and future studies and trials will demonstrate sufficient safety and efficacy to obtain the requisite regulatory approvals. A number of companies in the biotechnology and pharmaceutical industries, including our company, have suffered significant setbacks in advanced clinical trials, even after promising results in earlier trials.
Further, we may be unable to submit applications to regulatory agencies within the time frame we currently expect. Once submitted, applications must be approved by various regulatory agencies before we can commercialize the product described in the application. Additionally, even if applications are submitted, regulatory approval may not be obtained for any of our product candidates, and regulatory agencies could require additional clinical trials to verify safety or efficacy, which could make further development of our product candidates impracticable. If our product candidates are not shown to be safe and effective in clinical trials, we may not receive regulatory approval, which would have a material adverse effect on our business, financial condition and results of operations.
We currently rely on third-party manufacturers and other third parties to manufacture, package and supply tucatinib. Any disruption in production, inability of these third parties to produce adequate, satisfactory quantities to meet our needs or other impediments with respect to, manufacturing and supply could adversely affect our ability to continue the HER2CLIMB and other clinical trials of tucatinib, delay submissions of our regulatory applications or adversely affect our ability to commercialize tucatinib in a timely manner, or at all.
We are responsible for the manufacturing, labeling, packaging and distribution of tucatinib, which we outsource to third parties. Manufacture and supply of drug products such as tucatinib is a complex process involving multiple steps and multiple manufacturers and service providers. If our third-party manufacturers cease or interrupt production, if our third-party manufacturers and other service providers fail to supply satisfactory materials, products or services for any reason or experience performance delays or quality concerns, or if materials or products are lost in transit or in the manufacturing process, such interruptions could substantially delay progress on our programs or impact clinical trial drug supply, with the potential for additional costs and a material adverse effect on our business, financial condition and results of operations.
Our product candidates have not yet been manufactured on a commercial scale. Manufacturing at commercial scale may require third-party manufacturers to increase manufacturing capacity, which may require the manufacturers to fund capital improvements to support the scale up of manufacturing and related activities. With respect to a product candidate, we may be required to provide all or a portion of these funds. Third-party manufacturers may not be able to successfully increase manufacturing capacity for a product candidate for which we obtain marketing approval in a timely or economic manner, or at all. If any manufacturer is unable to provide commercial quantities of a product candidate, we will need to successfully transfer manufacturing technology to a new manufacturer. Engaging a new manufacturer for a particular product candidate could require us to conduct comparative studies or use other means to determine equivalence between that product candidate manufactured by a new manufacturer and the product candidate manufactured by the existing manufacturer, which could delay or prevent commercialization of our product candidate. If any of these manufacturers is unable or unwilling to increase its manufacturing capacity or if alternative arrangements are not established on a timely basis or on acceptable terms, the development and commercialization of the particular product candidate may be delayed or there may be a shortage in supply.
Manufacturers of our product candidates and related service providers must comply with GMP requirements enforced by the FDA through its facilities inspection program or by foreign regulatory agencies. These requirements include quality control, quality assurance and the maintenance of records and documentation. Manufacturers of our products and related service providers may be unable to comply with these GMP requirements and with other FDA, state and foreign regulatory requirements. We have little control over our manufacturers’ or service providers’ compliance with these regulations and standards. A failure to comply with these requirements may result in fines and civil penalties, suspension of production, or restrictions on the use of products produced, suspension or delay in product approval, product seizure or recall, or withdrawal of product approval. If the safety of any quantities supplied is compromised due to our manufacturers’ or other service providers’ failure to adhere to GMP or other applicable laws or for other reasons, we may not be able to obtain regulatory approval for our product candidates, the development and commercialization of our product candidates may be delayed and there may be a shortage in supply, which may prevent successful commercialization of our products.
Preclinical and clinical trials are expensive and time consuming, and any failure or delay in commencing or completing clinical trials for our product candidates could severely harm our business.
We are currently conducting a pivotal Phase 2 clinical trial and following patients in ongoing Phase 1b clinical trials for tucatinib. Each of our product candidates must undergo extensive preclinical studies and clinical trials as a condition to regulatory approval. Preclinical studies and clinical trials are expensive and take many years to complete. The commencement and completion of clinical trials for our product candidates may be delayed by many factors, including:
| • | safety issues or side effects; |
| • | delays in patient enrollment and variability in the number and types of patients available for clinical trials; |
| • | our ability to engage to timely engage suitable clinical trial sites that have personnel with the expertise required to conduct our clinical trial; |
| • | poor effectiveness of product candidates during clinical trials; |
| • | governmental or regulatory delays and changes in regulatory requirements, policy and guidelines; |
| • | our ability to satisfy regulatory requirements to commence a clinical trial and conduct the clinical trial in accordance with good clinical practices; |
| • | our ability to manufacture or obtain from third parties materials sufficient for use in preclinical studies and clinical trials; and |
| • | varying interpretation of data by the FDA and similar foreign regulatory agencies. |
It is possible that none of our product candidates will complete clinical trials in any of the markets in which we intend to sell those product candidates. Accordingly, we may not receive the regulatory approvals necessary to market our product candidates. Any failure or delay in commencing or completing clinical trials or obtaining regulatory approvals for product candidates would prevent or delay their commercialization and severely harm our business and financial condition.
In addition, both prior to and after regulatory approval of a product, regulatory agencies may require us to delay, restrict or discontinue clinical trials on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk. In addition, all statutes and regulations governing the conduct of clinical trials are subject to change in the future, which could affect the cost of such clinical trials. Any unanticipated delays in clinical studies could delay our ability to generate revenues and harm our financial condition and results of operations.
We rely on third parties to conduct our clinical trials. If these third parties do not perform as contractually required or otherwise expected, we may not be able to obtain regulatory approval for or be able to commercialize our product candidates.
We rely on third parties, such as contract research and clinical organizations, medical institutions, clinical investigators and contract laboratories, to assist in conducting our clinical trials. We have, in the ordinary course of business, entered into agreements with these third parties. Nonetheless, we are responsible for confirming that each of our clinical trials is conducted in accordance with its general investigational plan and protocol. Moreover, the FDA and foreign regulatory agencies require us to comply with regulations and standards, commonly referred to as good clinical practices, for conducting, recording and reporting the results of clinical trials to assure that data and reported results are credible and accurate and that the trial participants are adequately protected. Our reliance on third parties does not relieve us of these
responsibilities and requirements. If these third parties do not successfully carry out their contractual duties or regulatory obligations or meet expected deadlines, if the third parties need to be replaced or if the quality or accuracy of the data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements or for other reasons, our clinical trials may be extended, delayed, suspended or terminated, and we may not be able to obtain regulatory approval for our product candidates.
We may be unable to maintain the benefits associated with orphan drug designation, including the potential for market exclusivity, for tucatinib, and may be unsuccessful in obtaining orphan drug designation or transfer of designations obtained by others for future product candidates.
Regulatory authorities in some jurisdictions, including the United States and Europe, may designate drugs intended to treat relatively small patient populations as orphan drugs. Under the U.S. Orphan Drug Act, the FDA may designate a drug as an orphan drug if it is intended to treat a rare disease or condition, which is defined as a patient population of fewer than 200,000 individuals in the United States. In the United States, orphan drug designation entitles a party to financial incentives such as opportunities for grant funding towards clinical trial costs, tax credits for qualified clinical research costs, and prescription drug user fee waivers.
Generally, if a drug with an orphan drug designation subsequently receives the first marketing approval for the indication for which it has such designation, the drug is entitled to a period of marketing exclusivity, which precludes EMA or the FDA from approving another marketing application for the same drug and indication for that time period, except in limited circumstances. If our competitors are able to obtain orphan drug exclusivity prior to us for products that constitute the same active moiety and treat the same indications as our product candidates, we may not be able to have competing products approved by the applicable regulatory authority for a significant period of time. The applicable period is seven years in the United States.
As part of our business strategy, we have sought and received orphan drug designation for tucatinib in the United States for the treatment of HER2+ colorectal cancer and the treatment of breast cancer patients with brain metastases. However, orphan drug designation does not guarantee future orphan drug marketing exclusivity.
Additionally, even though we have obtained an orphan drug designation for tucatinib, and even if we obtain orphan drug exclusivity for this product candidate and other product candidates, that exclusivity may not effectively protect tucatinib from competition because drugs with different active moieties can be approved for the same condition. Even after an orphan drug is approved, the FDA can also subsequently approve a later application for a drug with the same active moiety for the same condition if the FDA concludes that the later drug is clinically superior in that it is shown to be safer in a substantial portion of the target populations, more effective or makes a major contribution to patient care. In addition, a designated orphan drug may not receive orphan drug exclusivity if it is approved for a use that is broader than the indication for which it received orphan designation. Moreover, orphan drug exclusive marketing rights in the United States may be lost if the FDA later determines that the request for designation was materially defective or if we are unable to manufacture sufficient quantities of the product to meet the needs of patients with the rare disease or condition. Orphan drug designation does not shorten the development time or regulatory review time of a drug and does not give the drug any advantage in the regulatory review or approval process.
Our product candidates may never achieve market acceptance even if we obtain regulatory approvals.
Even if we receive regulatory approvals for the commercial sale of our product candidates, the commercial success of these product candidates will depend on, among other things, their acceptance by physicians, patients, third-party payers such as health insurance companies, and other members of the medical community as a therapeutic and cost-effective alternative to competing products and treatments. New patterns of care, alternative new treatments or different reimbursement and payer paradigms, possibly due to economic conditions or governmental policies, could negatively impact the commercial viability of our product candidates. If our product candidates fail to gain market acceptance, we may be unable to earn sufficient revenue to continue our business. Market acceptance of, and demand for, any product that we may develop and commercialize will depend on many factors, including:
| • | our ability to provide acceptable evidence of safety and efficacy; |
| • | the prevalence and severity of adverse side effects; |
| • | availability, relative cost and relative efficacy of alternative and competing treatments; |
| • | the effectiveness of our marketing and distribution strategy; |
| • | publicity concerning our products or competing products and treatments; and |
| • | our ability to obtain sufficient third-party insurance coverage or reimbursement. |
If our product candidates do not become widely accepted by physicians, patients, third-party payers and other members of the medical community, our business, financial condition and results of operations would be materially and adversely affected.
Even if regulatory approval is received for our product candidates, we are subject to ongoing regulatory obligations that, if not met, may adversely affect our ability to commercialize an approved product.
We are subject to ongoing regulatory obligations following approval of a product including potential requirements for additional clinical trials, ongoing GMP manufacturing requirements, and other requirements. If a product is approved for commercial sale, safety concerns may arise that were not present in clinical trials or occur at higher rates than in our clinical trials of the product which may result in regulatory restrictions. In addition, reports of adverse events or safety concerns could result in the FDA or other regulatory authorities denying or withdrawing approval of the product for any or all indications. There is no assurance that patients will not experience such adverse events or safety concerns.
In addition, we will be required to comply with other limitations and restrictions imposed by U.S., state and foreign governments in connection with the marketing of an approved product and reimbursement for approved products. Our failure to meet any of these requirements may have an adverse effect on our ability to commercialize an approved product and our business would suffer.
In addition, if we fail to comply with any applicable requirements, we could be subject to penalties, including:
| • | warning letters; |
| • | untitled letters; |
| • | suspension of clinical trials; |
| • | product liability litigation; |
| • | total or partial suspension of manufacturing or costly new manufacturing requirements; |
| • | fines; |
| • | product recalls; |
| • | withdrawal of regulatory approval; |
| • | operating restrictions; |
| • | disgorgement of profits; |
| • | injunctions; and |
| • | criminal prosecution. |
Any of these penalties may result in substantial costs to us and could adversely affect our ability to commercialize an approved product and our business would suffer.
Failure to obtain regulatory approval in foreign jurisdictions would prevent us from marketing our products internationally.
We intend to have our product candidates marketed outside the United States. In order to market our products in the European Union and many other non-U.S. jurisdictions, we must obtain separate regulatory approvals and comply with numerous and varying regulatory requirements. To date, we have not filed for marketing approval for any of our product candidates and may not receive the approvals necessary to commercialize our product candidates in any market.
The approval procedure varies among countries and may include all the risks associated with obtaining FDA approval. The time required to obtain foreign regulatory approval may differ from that required to obtain FDA approval, and additional clinical trials, testing and data review may be required. We may not obtain foreign regulatory approvals on a timely basis, if at all. Additionally, approval by the FDA does not ensure approval by regulatory agencies in other countries, and approval by one foreign regulatory authority does not ensure approval by regulatory agencies in other foreign countries or by the FDA. However, a failure or delay in obtaining regulatory approval in one jurisdiction may have a negative effect on the regulatory approval process in other jurisdictions, including approval by the FDA. The failure to obtain regulatory approval in foreign jurisdictions could limit commercialization of our products, reduce our ability to generate profits and harm our business.
We may expand our business through the acquisition of companies or businesses or by entering into collaborations or in-licensing product candidates that could disrupt our business and harm our financial condition.
We have in the past and may in the future seek to expand our pipeline and capabilities by acquiring one or more companies or businesses, entering into collaborations or in-licensing one or more product candidates. For example, in December 2014, we entered into a license agreement with Array for exclusive rights to develop and commercialize tucatinib. Acquisitions, collaborations and in-licenses involve numerous risks, including:
| • | substantial cash expenditures; |
| • | potentially dilutive issuance of equity securities; |
| • | incurrence of debt and contingent liabilities, some of which may be difficult or impossible to identify at the time of acquisition; |
| • | potential adverse consequences if the acquired assets are worth less than we anticipated or we are unable to successfully develop and commercialize the acquired assets for any reason; |
| • | difficulties in assimilating the operations and technology of the acquired companies; |
| • | potential disputes, including litigation, regarding contingent consideration for the acquired assets; |
| • | the assumption of unknown liabilities of the acquired businesses; |
| • | diverting our management’s attention away from other business concerns; |
| • | entering markets in which we have limited or no direct experience; and |
| • | potential loss of our key employees or key employees of the acquired companies or businesses. |
Our experience in making acquisitions, entering collaborations and in-licensing product candidates is limited. We cannot assure you that any acquisition, collaboration or in-license will result in short-term or long-term benefits to us. We may incorrectly judge the value or worth of an acquired company or business or in-licensed product candidate. In addition, our future success may depend in part on our ability to manage the growth and technology integration associated with any of these acquisitions, collaborations and in-licenses. We cannot assure you that we will be able to successfully combine our business with that of acquired businesses, manage collaborations or integrate in-licensed product candidates or that such efforts would be successful. Furthermore, the development or expansion of our business or any acquired business or company or any collaboration or in-licensed product candidate may require a substantial capital investment by us. We may also seek to raise funds by selling shares of our capital stock, which could dilute our current stockholders’ ownership interest, or securities convertible into our capital stock, which could dilute current stockholders’ ownership interest upon conversion. We may also incur debt obligations, which could require us to comply with covenants which could restrict our ability to operate our business and negatively impact the value of our common stock.
Our success depends in large part on our and our licensors’ ability to obtain and maintain patent and other intellectual property protection worldwide with respect to our proprietary technology and products that are important to our business.
Our ability to successfully commercialize our technology and products and to compete effectively may be materially adversely affected if we are unable to obtain and maintain effective intellectual property rights to our technologies and product candidates throughout the world. The intellectual property position of pharmaceutical and biotechnology companies generally is highly uncertain and involves complex legal and factual questions. The process of filing patent applications in the United States and abroad is expensive and time-consuming, and we or our licensors may not be able to file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner.
In recent years, there have been significant changes in both the patent laws and interpretation of the patent laws in the United States and other countries. As a result, the issuance, scope, validity, enforceability and commercial value of our and our licensors’ patent rights are highly uncertain. Our owned and licensed patents may be challenged in the courts or patent offices in the United States and abroad. Such challenges may result in patent claims being narrowed, invalidated or held unenforceable, which could limit our ability to obtain and maintain patent protection for our products and could prevent us from effectively blocking others from commercializing competitive technologies and products or limit the duration of the patent protection for our technology and products.
Our and our licensors’ pending and future patent applications may not result in patents being issued which protect our technology or products. Our competitors may be able to circumvent our owned or licensed patents by developing similar or alternative technologies or products in a non-infringing manner.
We have in-licensed or acquired a portion of our intellectual property necessary to develop certain of our product candidates. If we fail to comply with our obligations in our intellectual property licenses with third parties, we could lose such licenses or intellectual property rights that are important to our business.
We are a party to intellectual property license agreements with other parties, including with respect to tucatinib, and expect to enter into additional license agreements in the future. In some circumstances, we may not have the right to enter into additional license agreements in the future. In some circumstances, we may not have the right to control the preparation, filing and prosecution of patent applications, or to maintain the patents, covering technology or products that we license from third parties. Therefore, we cannot be certain that these patents and applications will be prosecuted and enforced in a manner consistent with the best interests of our business. In addition, if the parties who license patents to us fail to maintain such patents, or lose rights to those patents, the rights we have licensed may be reduced or eliminated. If we fail to meet our obligations in our license agreements, our licensors may have the right to terminate these agreements, in which event we may lose intellectual property rights to a product candidate that is covered by the agreement. Termination of these licenses or reduction or elimination of our licensed rights may result in our having to negotiate new or reinstated licenses with less favorable terms or our not having sufficient intellectual property rights to operate our business.
Protection of trade secrets and confidential information is difficult and we may not be successful in protecting our rights to our unpatented proprietary know-how and trade secrets, thus harming our business and competitive position.
We rely on unpatented proprietary know-how, trade secrets and continuing technological innovations to develop and maintain our competitive position. We employ various methods, including confidentiality agreements with employees and consultants, customers, suppliers and potential collaborators to protect our know-how and trade secrets. However, these agreements may not adequately protect us or provide an adequate remedy. Our trade secrets or know-how may become known or be independently discovered by our competitors. Unpatented proprietary rights, including trade secrets and know-how, can be difficult to protect and lose their value if they are discovered or disclosed.
Further, we may not be able to deter current and former employees, contractors and other parties from breaching confidentiality agreements and misappropriating our proprietary information. It is possible that other parties may copy or otherwise obtain and use our information and proprietary technology without authorization.
We may be subject to claims that our employees have wrongfully used or disclosed intellectual property of their former employers, which may cause us to spend substantial resources and distract our personnel from their normal responsibilities.
Many of our employees were previously employed at universities or other companies, including our competitors or potential competitors. Although we try to ensure that our employees do not use the proprietary information or know-how of others, we may be subject to claims that we or our employees have used or disclosed proprietary information of a former employer. Litigation may be necessary to defend against these claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. Even if we are successful in defending against such claims, legal proceedings relating to the defense may cause us to incur significant expenses and reduce our resources available for development activities.
If our trademarks are not adequately protected, we may not be able to build name recognition in our markets of interest and our business may be adversely affected.
Our trademarks, CASCADIAN THERAPEUTICS and CASCADIAN, may be challenged, infringed, circumvented or declared generic or determined to be infringing on other marks. We may not be able to protect our rights to this trademark and build name recognition in our markets of interest. Over the long term, if we are unable to establish name recognition based on our trademark, then we may not be able to compete effectively and our business may be adversely affected.
If we are unable to obtain intellectual property rights to develop or market our products or we infringe on a third-party patent or other intellectual property rights, we may need to alter or terminate a product development program.
If our product candidates infringe or conflict with the rights of others, we may not be able to manufacture or market our product candidates, which could have a material and adverse effect on us.
While conducting clinical trials, we are exempt from patent infringement based on the Drug Price Competition and Patent Term Restoration Act or Hatch–Waxman Act, (codified in relevant part at 35 U.S.C. §271(e)), which provides an exemption for activities conducted in order to obtain FDA approval of a drug product. However, issued patents held by others may limit our ability to develop commercial products. All issued patents are entitled to a presumption of validity under the laws of the United States. If we need licenses to such patents to permit us to develop or market our product candidates, we may be required to pay significant fees or royalties, and we cannot be certain that we would be able to obtain such licenses on commercially reasonable terms, if at all. Competitors or third parties may obtain patents that may cover subject matter we use in developing the technology required to bring our product candidates to market.
We know that others have filed patent applications in various jurisdictions that relate to several areas in which we are developing products. Some of these patent applications have already resulted in the issuance of patents and some are still pending. We may be required to alter our processes or product candidates, pay licensing fees or cease activities.
If use of technology incorporated into or used to produce our product candidates is challenged, or if our processes or product candidates conflict with patent rights of others, third parties could bring legal actions against us, in the United States, Europe, and elsewhere, claiming damages and seeking to enjoin manufacturing and marketing of the affected products. Additionally, it is not possible to predict with certainty what patent claims may issue from pending applications. In the United States, for example, patent prosecution can proceed in secret prior to issuance of a patent. As a result, third parties may be able to obtain patents with claims relating to our product candidates or technology, which they could attempt to assert against us. Further, as we develop our products, third parties may assert that we infringe the patents currently held or licensed by them and it is difficult to predict the outcome of any such action. Ultimately, we could be prevented from commercializing a product, or forced to cease some aspect of our business operations as a result of claims of patent infringement or violation of other intellectual property rights, which could have a material and adverse effect on our business, financial condition and results of operations.
We may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property rights, and we may be unable to protect our rights in, or to use, our technology.
There has been significant litigation in the biopharmaceutical industry over patents and other proprietary rights and if we become involved in any litigation, it could consume a substantial portion of our resources, regardless of the outcome of the litigation. If these legal actions are successful, in addition to any potential liability for damages, we could be required to obtain a license, grant cross-licenses and pay substantial royalties in order to continue to manufacture or market the affected products.
The cost of litigation to uphold the validity of patents to prevent infringement or to otherwise protect our proprietary rights can be substantial. If the outcome of litigation is adverse to us, third parties may be able to use the challenged technologies without payment to us. There is also the risk that, even if the validity of a patent were upheld, a court would refuse to stop the other party from using the inventions, including because its activities do not infringe that patent. There is no assurance that we would prevail in any legal action or that any license required under a third-party patent would be made available on acceptable terms or at all. If any of these events were to occur, our business, financial condition and results of operations would be materially and adversely effected.
If any products we develop become subject to unfavorable pricing regulations, third-party reimbursement practices or healthcare reform initiatives, our ability to successfully commercialize our products will be impaired.
Our future revenues, profitability and access to capital will be affected by the continuing efforts of governmental and private third-party payers to contain or reduce the costs of health care through various means. We expect a number of federal, state and foreign proposals to control the cost of drugs through government regulation. We are unsure of the impact that the potential repeal of recent health care reform legislation may have on our business or what actions federal, state, foreign and private payers may take or reforms that may be implemented in the future. Therefore, it is difficult to predict the effect of any
potential reform on our business. Our ability to commercialize our products successfully will depend, in part, on the extent to which reimbursement for the cost of such products and related treatments will be available from government health administration authorities, such as Medicare and Medicaid in the United States, private health insurers and other organizations. Significant uncertainty exists as to the reimbursement status of newly approved health care products, particularly for indications for which there is no current effective treatment or for which medical care typically is not sought. Adequate third-party coverage may not be available to enable us to maintain price levels sufficient to realize an appropriate return on our investment in product research and development. If adequate coverage and reimbursement levels are not provided by government and third-party payers for use of our products, our products may fail to achieve market acceptance without a substantial reduction in price or at all and our results of operations will be harmed.
Governments often impose strict price controls, which may adversely affect our future profitability.
We intend to seek approval to market our future products in both the United States and foreign jurisdictions. If we obtain approval in one or more foreign jurisdictions, we will be subject to rules and regulations in those jurisdictions relating to our product. In some foreign countries, particularly in the European Union, prescription drug pricing is subject to government control. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a drug candidate. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our future product to other available therapies.
Domestic and foreign governments continue to propose and pass legislation designed to reduce the cost of healthcare, including drugs. In the United States, there have been, and we expect that there will continue to be, federal and state proposals to implement similar governmental control. In addition, increasing emphasis on managed care in the United States will continue to put pressure on the pricing of pharmaceutical products. While the current federal administration has indicated an intent to repeal the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, or collectively, PPACA, the current administration has also indicated an intent to address prescription drug pricing and recent Congressional hearings have brought increased public attention to the costs of prescription drugs.
We anticipate that healthcare reform measures that may be adopted in the future, may result in more rigorous coverage criteria and downward pressure on the price for any approved product, and could seriously harm our prospects. Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payers. If reimbursement of our future products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, we may be unable to achieve or sustain profitability.
We face potential product liability exposure, and if successful claims are brought against us, we may incur substantial liability for a product candidate which may limit its commercial potential.
The use of tucatinib or our other product candidates in clinical trials and the sale of any products for which we obtain marketing approval expose us to the risk of product liability claims. Product liability claims might be brought against us by consumers, health care providers, pharmaceutical companies or other third parties. If we cannot successfully defend ourselves against these claims, we will incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:
| • | decreased demand for approved products; |
| • | delay in completing or failure to complete enrollment in any clinical trial of the affected product; |
| • | impairment of our business reputation; |
| • | withdrawal of clinical trial participants; |
| • | costs of related litigation; |
| • | substantial monetary awards to patients or other claimants; |
| • | loss of revenues; and |
| • | the inability to commercialize our product candidates. |
Although we currently have product liability insurance coverage for our clinical trials for expenses or losses up to a $10 million aggregate annual limit, our insurance coverage may not reimburse us or may not be sufficient to reimburse us for any or all expenses or losses we may suffer. Moreover, insurance coverage is becoming increasingly expensive and, in the future, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to clinical trial or product liability. We intend to expand our insurance coverage to include the sale of commercial products if we obtain marketing approval for tucatinib or our other product candidates in development, but we may be unable to obtain commercially reasonable product liability insurance for any products approved for marketing. On occasion, large judgments have been awarded in class action lawsuits based on products that had unanticipated side effects. A successful product liability claim or series of claims brought against us could cause our stock price to fall and, if judgments exceed our insurance coverage, could decrease our cash and adversely affect our business.
We face substantial competition, which may result in others discovering, developing or commercializing products before, or more successfully, than we do.
The life sciences industry is highly competitive, and we face significant competition from many pharmaceutical, biopharmaceutical and biotechnology companies that are researching and marketing products designed to address cancer indications for which we are currently developing products or for which we may develop products in the future. Our future success depends on our ability to demonstrate and maintain a competitive advantage with respect to the design, development and commercialization of tucatinib and our other product candidates. We expect any product candidate that we commercialize on our own or with a collaboration partner will compete with existing, market-leading products and products in development. The following information provides a landscape view of known marketed products or programs in development that compete with our product candidates:
Tucatinib is an inhibitor of the receptor tyrosine kinase HER2, also known as ErbB2. There are multiple marketed products which target HER2, including the antibodies trastuzumab (Herceptin®) and pertuzumab (Perjeta®) and the antibody toxin conjugate ado-trastuzumab emtansine or T-DM1 (Kadcyla®). In addition, lapatinib (Tykerb®) is a dual EGFR/HER2 oral kinase inhibitor for the treatment of metastatic breast cancer and neratinib (Nerlynx®) is a EGFR/HER2/HER4 inhibitor indicated for extended adjuvant use that is also being studied for use in metastatic breast cancer.
With respect to CASC-578 and CASC-674, there are multiple competing product candidates in clinical trials and preclinical development.
Many of our potential competitors have substantially greater financial, technical and personnel resources than we have. In addition, many of these competitors have significantly greater commercial infrastructures than we have. Our ability to compete successfully will depend largely on our ability to:
| • | design and develop product candidates that are superior to other products in the market; |
| • | attract qualified scientific, medical, sales and marketing and commercial personnel; |
| • | obtain patent and/or other proprietary protection for our processes and product candidates; |
| • | obtain required regulatory approvals; and |
| • | successfully collaborate with others, as needed, in the design, development and commercialization of our product candidates. |
In addition, established competitors may invest significant resources to quickly discover and develop novel compounds that could make tucatinib or our other product candidates obsolete. In addition, any new product that competes with a generic market-leading product must demonstrate compelling advantages in efficacy, convenience, tolerability and safety in order to overcome severe price competition and to be commercially successful. If we are not able to compete effectively against our current and future competitors, our business will not grow and our financial condition and operations will suffer.
If we are unable to enter into agreements with partners to perform sales and marketing functions, or build these functions ourselves, we will not be able to commercialize our product candidates.
We currently do not have any internal sales, marketing or distribution capabilities. In order to commercialize tucatinib or any of our other product candidates, we must either acquire or internally develop a selling, marketing and distribution infrastructure or enter into agreements with partners to perform these services for us. We may not be able to enter into such arrangements on commercially acceptable terms, if at all. Factors that may inhibit our efforts to commercialize our product candidates without entering into arrangements with third parties include:
| • | our inability to recruit and retain adequate numbers of effective sales and marketing personnel; |
| • | the inability of sales personnel to obtain access to or persuade adequate numbers of physicians to prescribe our products; |
| • | the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage relative to companies with more extensive product lines; and |
| • | unforeseen costs and expenses associated with creating a sales and marketing organization. |
If we are not able to partner with a third party and are not successful in recruiting sales and marketing personnel or in building a sales and marketing and distribution infrastructure, we will have difficulty commercializing tucatinib or any of our other product candidates, which would adversely affect our business and financial condition. The complexity of regulations regarding the sales and marketing of pharmaceutical products may require costly and time-consuming efforts to train any sales and marketing personnel, which would negatively impact our financial condition and business operations.
If we lose key personnel, or we are unable to attract and retain highly-qualified personnel on a cost-effective basis, it will be more difficult for us to manage our existing business operations and to identify and pursue new growth opportunities.
Our success depends in large part upon our ability to attract and retain highly qualified scientific, clinical, manufacturing, and management personnel. In addition, future growth will require us to continue to implement and improve our managerial, operational and financial systems, and continue to retain, recruit and train additional qualified personnel, which may impose a strain on our administrative and operational infrastructure. Any difficulties in hiring or retaining key personnel or managing this growth could disrupt our operations. The competition for qualified personnel in the biopharmaceutical field is strong. We are highly dependent on our continued ability to attract, retain and motivate highly-qualified management, clinical and scientific personnel. Due to our limited resources, and the strong competition for qualified personnel, we may not be able to effectively recruit, train and retain additional qualified personnel. If we are unable to retain key personnel or manage our growth effectively, we may not be able to implement our business plan.
Furthermore, we have not entered into non-competition agreements with all of our key employees and we do not maintain “key person” life insurance on any of our officers, employees or consultants. The loss of the services of existing personnel, the failure to recruit additional key scientific, technical and managerial personnel in a timely manner, and the loss of our employees to our competitors would each harm our research, development and clinical programs and our business.
Our business is subject to complex environmental legislation that increases both our costs and the risk of noncompliance.
Our business involves the use of hazardous material, which requires us to comply with environmental regulations and we will be required to adjust to new and upcoming requirements relating to the materials composition of our product candidates. If we use hazardous materials in a manner that causes contamination or injury or violates laws, we may be liable for damages. Environmental regulations could have a material adverse effect on the results of our operations and our financial position. We maintain insurance for any liability associated with our hazardous materials activities, and it is possible in the future that our coverage would be insufficient if we incurred a material environmental liability.
CASCADIAN THERAPEUTICS, INC.
Audited Consolidated Financial Statements
As of December 31, 2016 and 2015, and for each of the three years in the period ended December 31, 2016
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Cascadian Therapeutics Inc.
We have audited the accompanying consolidated balance sheets of Cascadian Therapeutics, Inc. as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2016. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cascadian Therapeutics, Inc. at December 31, 2016 and 2015, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Cascadian Therapeutics Inc.’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 9, 2017 expressed an unqualified opinion thereon.
| /s/ Ernst & Young LLP |
| Seattle, Washington |
| March 9, 2017 |
F-2
CASCADIAN THERAPEUTICS, INC.
(In thousands, except share and per share amounts)
| As of December 31, | ||||||||
| 2016 | 2015 | |||||||
| ASSETS | ||||||||
| Current: |
||||||||
| Cash and cash equivalents |
$ | 13,721 | $ | 27,850 | ||||
| Short-term investments |
49,084 | 28,510 | ||||||
| Accounts and other receivables |
238 | 200 | ||||||
| Prepaid and other current assets |
1,411 | 1,418 | ||||||
|
|
|
|
|
|||||
| Total current assets |
64,454 | 57,978 | ||||||
| Property and equipment, net |
1,402 | 1,845 | ||||||
| Indefinite-lived intangible assets |
— | 19,738 | ||||||
| Goodwill |
16,659 | 16,659 | ||||||
| Other assets |
750 | 354 | ||||||
|
|
|
|
|
|||||
| Total assets |
$ | 83,265 | $ | 96,574 | ||||
|
|
|
|
|
|||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current: |
||||||||
| Accounts payable |
$ | 824 | $ | 439 | ||||
| Accrued and other liabilities |
3,323 | 2,689 | ||||||
| Accrued compensation and related liabilities |
4,274 | 1,522 | ||||||
| Current portion of restricted share unit liability |
352 | 145 | ||||||
|
|
|
|
|
|||||
| Total current liabilities |
8,773 | 4,795 | ||||||
| Other liabilities |
105 | 743 | ||||||
| Restricted share unit liability |
— | 363 | ||||||
| Deferred tax liability |
— | 6,908 | ||||||
| Class UA preferred stock, 12,500 shares authorized, 12,500 shares issued and outstanding |
30 | 30 | ||||||
| Commitments and contingencies |
||||||||
| Stockholders’ equity: |
||||||||
| Preferred stock, $0.0001 par value; 10,000,000 shares authorized as of December 31, 2016 and 2015; Series A Convertible Preferred Stock – 10,000 shares issued and outstanding as of December 31, 2016 and 2015; Series B Convertible Preferred Stock – 5,333 shares issued and outstanding as of December 31, 2016 and 2015; Series C Convertible Preferred Stock – 7,500 shares issued and outstanding as of December 31, 2016 and 2015; Series D Convertible Preferred Stock – 17,250 shares and zero shares issued and outstanding as of December 31, 2016 and 2015, respectively |
— | — | ||||||
| Common stock, $0.0001 par value; 66,666,667 shares and 33,333,333 shares authorized as of December 31, 2016 and 2015, respectively; 22,562,640 shares and 15,826,985 shares issued and outstanding as of December 31, 2016 and 2015, respectively (1) |
353,849 | 353,856 | ||||||
| Additional paid-in capital |
297,922 | 249,572 | ||||||
| Accumulated deficit |
(572,334 | ) | (514,629 | ) | ||||
| Accumulated other comprehensive loss |
(5,080 | ) | (5,064 | ) | ||||
|
|
|
|
|
|||||
| Total stockholders’ equity |
74,357 | 83,735 | ||||||
|
|
|
|
|
|||||
| Total liabilities and stockholders’ equity |
$ | 83,265 | $ | 96,574 | ||||
|
|
|
|
|
|||||
| (1) | Common stock shares authorized, issued and outstanding as of December 31, 2015 have been adjusted retroactively to reflect the 1-for-6 reverse stock split. |
See accompanying notes to the consolidated financial statements
F-3
CASCADIAN THERAPEUTICS, INC.
Consolidated Statements of Operations
(In thousands, except share and per share amounts)
| Years Ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| Operating expenses |
||||||||||||
| Research and development |
$ | 27,467 | $ | 23,468 | $ | 41,884 | ||||||
| General and administrative |
17,630 | 9,321 | 8,951 | |||||||||
| Intangible asset impairment |
19,738 | — | — | |||||||||
|
|
|
|
|
|
|
|||||||
| Total operating expenses |
64,835 | 32,789 | 50,835 | |||||||||
|
|
|
|
|
|
|
|||||||
| Loss from operations |
(64,835 | ) | (32,789 | ) | (50,835 | ) | ||||||
| Other income (expense) |
||||||||||||
| Investment and other income (expense), net |
222 | 80 | 76 | |||||||||
| Change in fair value of warrant liability |
— | 128 | 796 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total other income (expense), net |
222 | 208 | 872 | |||||||||
|
|
|
|
|
|
|
|||||||
| Loss before income taxes |
(64,613 | ) | (32,581 | ) | (49,963 | ) | ||||||
| Income tax (benefit) provision |
(6,908 | ) | — | — | ||||||||
|
|
|
|
|
|
|
|||||||
| Net loss |
(57,705 | ) | (32,581 | ) | (49,963 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Deemed dividend related to beneficial conversion feature on Series D convertible preferred stock |
(2,588 | ) | — | — | ||||||||
|
|
|
|
|
|
|
|||||||
| Net loss attributable to common stockholders |
$ | (60,293 | ) | $ | (32,581 | ) | $ | (49,963 | ) | |||
|
|
|
|
|
|
|
|||||||
| Net loss per share — basic and diluted (1) |
$ | (3.13 | ) | $ | (2.02 | ) | $ | (3.86 | ) | |||
|
|
|
|
|
|
|
|||||||
| Shares used to compute basic and diluted net loss per share (1) |
19,264,121 | 16,102,860 | 12,936,640 | |||||||||
|
|
|
|
|
|
|
|||||||
| (1) | Basic and diluted net loss per share, and shares to used compute basic and diluted net loss per share for the years ended December 31, 2015 and 2014 have been adjusted retroactively to reflect the 1-for-6 reverse stock split. |
See accompanying notes to the consolidated financial statements
F-4
CASCADIAN THERAPEUTICS, INC.
Consolidated Statements of Comprehensive Loss
(In thousands)
| Years Ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| Net loss |
$ | (57,705 | ) | $ | (32,581 | ) | $ | (49,963 | ) | |||
| Other comprehensive income (loss): |
||||||||||||
| Available-for-sale securities: |
||||||||||||
| Unrealized gains (loss) during the period, net |
(16 | ) | 27 | (34 | ) | |||||||
| Reclassification adjustment |
— | — | (6 | ) | ||||||||
|
|
|
|
|
|
|
|||||||
| Other comprehensive income (loss) |
(16 | ) | 27 | (40 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| Comprehensive loss |
$ | (57,721 | ) | $ | (32,554 | ) | $ | (50,003 | ) | |||
|
|
|
|
|
|
|
|||||||
See accompanying notes to the consolidated financial statements
F-5
CASCADIAN THERAPEUTICS, INC.
Consolidated Statements of Stockholders’ Equity
(In thousands, except share amounts)
| Common Stock | Preferred Stock | Additional Paid-in Capital |
Accumulated Deficit |
Accumulated Other Comprehensive Loss |
Stockholders’ Equity |
|||||||||||||||||||||||||||
| Shares (1) | Amount | Shares | Amount | |||||||||||||||||||||||||||||
| Balance at December 31, 2013 |
11,778,861 | $ | 353,854 | — | $ | — | $ | 154,832 | $ | (432,085 | ) | $ | (5,051 | ) | $ | 71,550 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Net loss |
— | — | — | — | — | (49,963 | ) | — | (49,963 | ) | ||||||||||||||||||||||
| Unrealized losses on available-for-sale securities |
— | — | — | — | — | — | (40 | ) | (40 | ) | ||||||||||||||||||||||
| Common stock issued, net of offering costs of $1.4 million |
1,919,580 | 1 | — | — | 21,552 | — | — | 21,553 | ||||||||||||||||||||||||
| Series A Convertible Preferred Stock issued, net of offering costs of $1.4 million |
— | — | 10,000 | — | 18,693 | — | — | 18,693 | ||||||||||||||||||||||||
| Acquisition of Alpine Biosciences, Inc. (Alpine) |
1,540,891 | 1 | — | — | 27,232 | — | — | 27,233 | ||||||||||||||||||||||||
| Issuances under employee stock purchase plan |
12,802 | — | — | — | 114 | — | — | 114 | ||||||||||||||||||||||||
| Restricted stock units converted |
13,764 | — | — | — | 287 | — | — | 287 | ||||||||||||||||||||||||
| Share-based compensation expense |
— | — | — | — | 1,832 | — | — | 1,832 | ||||||||||||||||||||||||
| Stock options exercised |
1,001 | 7 | 7 | |||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Balance at December 31, 2014 |
15,266,899 | 353,856 | 10,000 | — | 224,549 | (482,048 | ) | (5,091 | ) | 91,266 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Net loss |
— | — | — | — | — | (32,581 | ) | — | (32,581 | ) | ||||||||||||||||||||||
| Unrealized gains on available-for-sale securities |
— | — | — | — | — | — | 27 | 27 | ||||||||||||||||||||||||
| Common stock issued, net of offering costs of $1.5 million |
2,449,943 | 1 | — | — | 20,557 | — | — | 20,558 | ||||||||||||||||||||||||
| Series B Convertible Preferred Stock issued, net of offering costs of $0.1 million |
(666,667 | ) | — | 5,333 | — | 1,863 | — | — | 1,863 | |||||||||||||||||||||||
| Series C Convertible Preferred Stock issued |
(1,250,000 | ) | (1 | ) | 7,500 | — | — | — | — | (1 | ) | |||||||||||||||||||||
| Issuances under employee stock purchase plan |
11,255 | — | — | — | 112 | — | — | 112 | ||||||||||||||||||||||||
| Restricted stock units converted |
12,231 | — | — | — | 278 | — | — | 278 | ||||||||||||||||||||||||
| Share-based compensation expense |
— | — | — | — | 2,179 | — | — | 2,179 | ||||||||||||||||||||||||
| Stock options exercised |
3,324 | — | — | — | 34 | — | — | 34 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Balance at December 31, 2015 |
15,826,985 | 353,856 | 22,833 | — | 249,572 | (514,629 | ) | (5,064 | ) | 83,735 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Net loss |
— | — | — | — | — | (57,705 | ) | — | (57,705 | ) | ||||||||||||||||||||||
| Unrealized loss on available-for-sale securities |
— | — | — | — | — | — | (16 | ) | (16 | ) | ||||||||||||||||||||||
| Common stock issued, net of offering costs of $2.4 million |
6,708,333 | 4 | — | — | 29,820 | — | — | 29,824 | ||||||||||||||||||||||||
| Series D Convertible Preferred Stock issued, net of offering costs of $0.3 million |
— | — | 17,250 | — | 13,458 | — | — | 13,458 | ||||||||||||||||||||||||
| Beneficial conversion feature related to the issuance of Series D preferred stock |
— | — | — | (2,588 | ) | 2,588 | — | — | — | |||||||||||||||||||||||
| Deemed dividend related to beneficial conversion feature of Series D preferred stock |
— | — | — | 2,588 | (2,588 | ) | — | — | — | |||||||||||||||||||||||
| Reverse stock split adjustment |
(7 | ) | (11 | ) | — | — | 11 | — | — | — | ||||||||||||||||||||||
| Issuances under employee stock purchase plan |
19,161 | — | — | — | 91 | — | — | 91 | ||||||||||||||||||||||||
| Restricted stock units converted |
8,168 | — | — | — | 60 | — | — | 60 | ||||||||||||||||||||||||
| Share-based compensation expense |
— | — | — | — | 4,685 | — | — | 4,685 | ||||||||||||||||||||||||
| Recovery of related party short-swing profit |
— | — | — | — | 225 | — | — | 225 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Balance at December 31, 2016 |
22,562,640 | $ | 353,849 | 40,083 | $ | — | $ | 297,922 | $ | (572,334 | ) | $ | (5,080 | ) | $ | 74,357 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| (1) | Common stock shares for the years ended December 31, 2015, 2014 and 2013 have been adjusted retroactively to reflect the 1-for-6 reverse stock split. |
See accompanying notes to the consolidated financial statements
F-6
CASCADIAN THERAPEUTICS, INC.
Consolidated Statements of Cash Flows
(In thousands)
| Years Ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| Cash flows from operating activities |
||||||||||||
| Net loss |
$ | (57,705 | ) | $ | (32,581 | ) | $ | (49,963 | ) | |||
| Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||||||
| Depreciation and amortization |
642 | 613 | 512 | |||||||||
| Amortization of premiums and accretion of discounts on securities |
238 | 305 | 533 | |||||||||
| Share-based compensation expense |
4,609 | 2,748 | 2,187 | |||||||||
| Change in fair value of warrant liability |
— | (128 | ) | (796 | ) | |||||||
| Cash settled on conversion of restricted share units |
(20 | ) | (93 | ) | (96 | ) | ||||||
| Intangible assets impairment |
19,738 | — | — | |||||||||
| Income tax (benefit) provision |
(6,908 | ) | — | — | ||||||||
| Other |
69 | (7 | ) | (1 | ) | |||||||
| Net changes in assets and liabilities: |
||||||||||||
| Accounts and other receivables |
(38 | ) | 98 | (101 | ) | |||||||
| Prepaid and other current assets |
7 | (530 | ) | (168 | ) | |||||||
| Other long-term assets |
(396 | ) | (124 | ) | (9 | ) | ||||||
| Accounts payable |
385 | (250 | ) | 144 | ||||||||
| Accrued and other liabilities |
514 | 765 | (810 | ) | ||||||||
| Accrued compensation and related liabilities |
2,752 | (92 | ) | 303 | ||||||||
| Other long-term liabilities |
(638 | ) | 406 | (102 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| Net cash used in operating activities |
(36,751 | ) | (28,870 | ) | (48,367 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Cash flows from investing activities |
||||||||||||
| Purchases of investments |
(92,268 | ) | (61,556 | ) | (62,411 | ) | ||||||
| Redemption of investments |
71,440 | 86,027 | 71,861 | |||||||||
| Purchases of property and equipment |
(147 | ) | (771 | ) | (380 | ) | ||||||
| Cash assumed in connection with the acquisition of Alpine |
— | — | 104 | |||||||||
|
|
|
|
|
|
|
|||||||
| Net cash provided by (used in) investing activities |
(20,975 | ) | 23,700 | 9,174 | ||||||||
|
|
|
|
|
|
|
|||||||
| Cash flows from financing activities |
||||||||||||
| Proceeds from issuance of common stock and warrants, net of issuance costs |
29,914 | 20,669 | 21,668 | |||||||||
| Proceeds from issuance of convertible preferred stock, net of issuance cost |
13,458 | 1,863 | 18,693 | |||||||||
| Proceeds from stock options exercised |
— | 34 | 7 | |||||||||
| Recovery of related party short-swing profit |
225 | — | — | |||||||||
|
|
|
|
|
|
|
|||||||
| Net cash provided by financing activities |
43,597 | 22,566 | 40,368 | |||||||||
|
|
|
|
|
|
|
|||||||
| Increase (decrease) in cash and cash equivalents |
(14,129 | ) | 17,396 | 1,175 | ||||||||
| Cash and cash equivalents, beginning of year |
27,850 | 10,454 | 9,279 | |||||||||
|
|
|
|
|
|
|
|||||||
| Cash and cash equivalents, end of year |
$ | 13,721 | $ | 27,850 | $ | 10,454 | ||||||
|
|
|
|
|
|
|
|||||||
| Supplemental disclosures of non-cash investing and financing activities: |
||||||||||||
| Accretion on Series D convertible preferred stock associated with beneficial conversion feature |
$ | 2,588 | $ | — | $ | — | ||||||
| Issuance of common stock in connection with the acquisition of Alpine |
$ | — | $ | — | $ | 27,233 | ||||||
|
|
|
|
|
|
|
|||||||
See accompanying notes to the consolidated financial statements
F-7
CASCADIAN THERAPEUTICS, INC.
Notes to the Consolidated Financial Statements
| 1. | DESCRIPTION OF BUSINESS |
Cascadian Therapeutics, Inc. (the Company) is a clinical-stage biopharmaceutical company incorporated in the State of Delaware on September 7, 2007 and is listed on the NASDAQ Global Select Market under the ticker symbol “CASC.” The Company is focused primarily on the development of targeted therapeutic products for the treatment of cancer. The Company’s goal is to develop and commercialize compounds that have the potential to improve the lives and outcomes of cancer patients. The Company’s operations are not subject to any seasonality or cyclicality factors.
| 2. | SIGNIFICANT ACCOUNTING POLICIES |
Basis of presentation
These consolidated financial statements have been prepared using accounting principles generally accepted in the United States of America (U.S. GAAP) and reflect the following significant accounting policies.
Reverse Stock Split and Change in Authorized Shares
On November 29, 2016, the Company effected a one-for-six reverse stock split of its outstanding common stock. As a result of the reverse stock split, each six outstanding shares of the Company’s common stock were combined into one outstanding share of common stock. The reverse stock split was effective November 29, 2016, and trading of the Company’s common stock on the NASDAQ Global Select Market began on a split-adjusted basis on November 29, 2016. No fractional share was issued in connection with the reverse stock split. The Company will pay in cash the fair value of such fractional shares to the common stock shareholders who are entitled to receive such fractional shares. All per share and share amounts for all periods presented have been adjusted retrospectively to reflect the 1-for-6 reverse stock split.
On November 18, 2016, the Company’s stockholders approved a decrease in the Company’s authorized shares of common stock from 200,000,000 to 66,666,667 shares. On a split-effected basis, authorized shares increased from 33,333,333 to 66,666,667 shares.
Basis of consolidation
The Company’s consolidated financial statements include the accounts of the company and its wholly-owned subsidiaries, including Protocell Therapeutics Inc., Oncothyreon Canada Inc., Biomira Management Inc., ProlX Pharmaceuticals Corporation, Biomira BV and Oncothyreon Luxembourg. All intercompany balances and transactions have been eliminated upon consolidation.
Accounting estimates
The preparation of financial statements in accordance with U.S. GAAP requires management to make complex and subjective judgments and estimates that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. By their nature, these judgments are subject to an inherent degree of uncertainty and as a consequence actual results may differ from those estimates.
Cash and cash equivalents
Cash equivalents include short-term, highly liquid investments that are readily convertible to known amounts of cash with original maturities of 90 days or less at the time of purchase. At December 31, 2016, cash and cash equivalents was comprised of $7.2 million in cash, and $6.5 million in money market funds and government securities. As of December 31, 2015, cash and cash equivalents was comprised of $6.2 million in cash and $21.7 million in money market funds. The carrying value of cash equivalents approximates their fair value.
Investments
Investments are classified as available-for-sale securities and are carried at fair value with unrealized temporary holding gains and losses excluded from net income or loss and reported in other comprehensive income or loss and also as a net amount in accumulated other comprehensive income or loss until realized. Available-for-sale securities are written down
F-8
to fair value through income whenever it is necessary to reflect other-than-temporary impairments. The Company determined that the unrealized losses on its marketable securities as of December 31, 2016 were temporary in nature, and the Company currently does not intend to sell these securities before recovery of their amortized cost basis. All short-term investments are limited to a final maturity of less than one year from the reporting date. The Company’s long-term investments are investments with maturities exceeding 12 months but less than five years from the reporting date. The Company is exposed to credit risk on its cash equivalents, short-term investments and long-term investments in the event of non-performance by counterparties, but does not anticipate such non-performance and mitigates exposure to concentration of credit risk through the nature of its portfolio holdings. If a security falls out of compliance with the Company’s investment policy, it may be necessary to sell the security before its maturity date in order to bring the investment portfolio back into compliance. The cost basis of any securities sold is determined by specific identification. The fair value of available-for-sale securities is based on prices obtained from a third-party pricing service. The Company utilizes third-party pricing services for all of its marketable debt security valuations. The Company reviews the pricing methodology used by the third-party pricing services including the manner employed to collect market information. On a periodic basis, the Company also performs review and validation procedures on the pricing information received from the third-party pricing services. These procedures help ensure that the fair value information used by the Company is determined in accordance with applicable accounting guidance. The amortized cost, unrealized gain or losses and fair value of the Company’s cash, cash equivalents and investments for the periods presented are summarized below:
| Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | |||||||||||||
| (In thousands) | ||||||||||||||||
| As of December 31, 2016: |
||||||||||||||||
| Cash |
$ | 7,162 | $ | — | $ | — | $ | 7,162 | ||||||||
| Money market funds |
6,559 | — | — | 6,559 | ||||||||||||
| Debt securities of U.S. government agencies |
38,387 | 1 | (10 | ) | 38,378 | |||||||||||
| Corporate bonds |
10,711 | — | (5 | ) | 10,706 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 62,819 | $ | 1 | $ | (15 | ) | $ | 62,805 | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
| As of December 31, 2015: |
||||||||||||||||
| Cash |
$ | 6,152 | $ | — | $ | — | $ | 6,152 | ||||||||
| Money market funds |
9,199 | — | — | 9,199 | ||||||||||||
| Debt securities of U.S. government agencies |
31,511 | 3 | (7 | ) | 31,507 | |||||||||||
| Corporate bonds |
9,496 | 7 | (1 | ) | 9,502 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 56,358 | $ | 10 | $ | (8 | ) | $ | 56,360 | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
The following table summarizes the Company’s available for sale securities by contractual maturity:
| As of December 31, 2016 | As of December 31, 2015 | |||||||||||||||
| Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||
| (In thousands) | ||||||||||||||||
| Less than one year |
$ | 55,657 | $ | 55,643 | $ | 50,206 | $ | 50,208 | ||||||||
Warrants
Warrants issued in connection with the Company’s September 2010 financings are recorded as liabilities as both have the potential for cash settlement upon the occurrence of a fundamental transaction (as defined in the warrant; see “Note 6 — Share Capital”). Changes in the fair value of the warrants are recognized as other income (expense) in the consolidated statements of operations. Warrants issued in connection with the Company’s September 2010 financing expired on October 12, 2015. None of the liability-classified warrants were outstanding as of December 31, 2016.
Accounts and other receivables
Accounts and other receivables are reviewed whenever circumstances indicate that the carrying amount of the receivable may not be recoverable. At this time, the Company does not deem an allowance to be necessary.
F-9
Property and equipment, depreciation and amortization
Property and equipment are recorded at cost and depreciated over their estimated useful lives on a straight-line basis, as follows:
| Scientific and office equipment |
5 years | |||
| Computer software and equipment |
3 years | |||
| Leasehold improvements and leased equipment |
Shorter of useful life or the term of the lease |
Long-lived assets
Long-lived assets, such as property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset be tested for impairment, the Company first compares the undiscounted cash flows expected to be generated by the asset to the carrying value of the asset. If the carrying value of the long-lived asset is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its estimated fair value. Fair value is determined by management through various valuation techniques, including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. No impairment charges were recorded for any of the periods presented.
Indefinite-lived intangible assets — IPR&D
Intangible assets related to In Process Research & Development (IPR&D) are considered to be indefinite-lived until the completion or abandonment of the associated research and development efforts. Upon completion of the project, the Company will make a separate determination of useful life of the IPR&D and the related amortization will be recorded as an expense over the estimated useful life. If the IPR&D is abandoned, the carrying value of the asset will be expensed. During the period the assets are considered indefinite-lived, they will not be amortized but will be tested for impairment on October 1 of each year or more frequently when events or changes in circumstances indicate that the asset may be impaired. In the event that the carrying value of IPR&D exceeds its fair value, an impairment loss would be recognized. Subsequent research and development costs associated with the initial recognition of IPR&D assets are expensed as incurred.
Goodwill
Goodwill is not amortized, but is reviewed annually for impairment on October 1 of each year or more frequently when events or changes in circumstances indicate that the asset may be impaired. In the event that the carrying value of goodwill exceeds its fair value, an impairment loss would be recognized. No impairment charges were recorded for any of the periods presented.
Other liabilities
Other liabilities includes the long-term portion of accrued milestone payments and deferred rent. Certain milestone payments under our previous agreement with STC.UNM are accrued on a straight-line basis from initiation of the license agreement to the milestone payment date. Also included in this line item is the long-term portion of deferred rent. Rent expense is recognized on a straight-line basis over the term of the lease. Lease incentives, including rent holidays provided by lessors, and rent escalation provisions are accounted for as deferred rent.
Revenue recognition
The Company recognizes revenue when there is persuasive evidence that an arrangement exists, delivery has occurred, the price is fixed and determinable, and collection is reasonably assured.
Research and development costs
Research and development expenses include personnel and facility related expenses, which includes depreciation and amortization, outside contract services including clinical trial costs, manufacturing and process development costs, research costs and other consulting services. Research and development costs are expensed as incurred. In instances where the Company enters into agreements with third parties for clinical trials, manufacturing and process development,
F-10
research, licensing arrangements and other consulting activities, costs are expensed as services are performed. Amounts due under such arrangements may be either fixed fee or fee for service, and may include upfront payments, monthly payments, and payments upon the completion of milestones or receipt of deliverables.
The Company’s accruals for clinical trials are based on estimates of the services received and pursuant to contracts with numerous clinical trial centers and clinical research organizations. In the normal course of business, the Company contracts with third parties to perform various clinical trial activities in the ongoing development of potential products. The financial terms of these agreements are subject to negotiation and variation from contract to contract and may result in uneven payment flows. Payments under the contracts depend on factors such as the achievement of certain events, the successful accrual of patients, and the completion of portions of the clinical trial or similar conditions. The objective of the Company’s accrual policy is to match the recording of expenses in its consolidated financial statements to the period in which they are incurred. As such, expense accruals related to clinical trials are recognized based on its estimate of the degree of completion of the event or events specified in the specific clinical study or trial contract.
Income or loss per share
Basic net loss per share is calculated by dividing net loss attributable to common stockholders, which may include a deemed dividend from the amortization of a beneficial conversion feature, by the weighted average number of shares outstanding for the period. Diluted net loss per share is calculated by adjusting the numerator and denominator of the basic net loss per share calculation for the effects of all potentially dilutive common shares. Potential dilutive shares of the Company’s common stock include stock options, restricted share units, warrants, Series A, B, C and D convertible preferred stock and shares granted under the 2010 Employee Stock Purchase Plan (ESPP). The calculation of diluted loss per share requires that, to the extent the average market price of the underlying shares for the reporting period exceeds the exercise price of the warrants and the presumed exercise of such securities are dilutive to loss per share for the period, adjustments to net loss used in the calculation are required to remove the change in fair value of the warrants for the period. Furthermore, adjustments to the denominator are required to reflect the addition of the related dilutive shares. Shares used to calculate basic and dilutive net loss per share for the years ended December 31, 2016, 2015 and 2014, were the same, since all potentially dilutive shares were anti-dilutive. Basic and diluted net loss per share for all periods presented have been adjusted retrospectively to reflect the 1-for-6 reverse stock split. For additional information regarding the income or loss per share, see “Note 6 — Share Capital.”
Income taxes
The Company follows the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future income tax consequences attributable to differences between the carrying amounts and tax bases of assets and liabilities and losses carried forward and tax credits. Deferred tax assets and liabilities are measured using enacted tax rates and laws applicable to the years in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided to the extent that it is more likely than not that deferred tax assets will not be realized.
The Company recognizes the financial statement effects of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. The Company does not believe any uncertain tax positions currently pending will have a material adverse effect on its consolidated financial statements nor expects any material change in its position in the next twelve months. Penalties and interest, of which there are none, would be reflected in income tax expense. Tax years are open to the extent the Company has net operating loss carryforwards available to be utilized currently.
Accumulated other comprehensive income (loss)
Comprehensive income or loss is comprised of net income or loss and other comprehensive income or loss. Other comprehensive income or loss includes unrealized gains and losses on the Company’s available-for-sale investments. In addition to unrealized gains and losses on investments, accumulated other comprehensive income or loss consists of foreign currency translation adjustments which arose from the conversion of the Canadian dollar functional currency consolidated financial statements to the U.S. dollar reporting currency consolidated financial statements prior to January 1, 2008. Should the Company liquidate or substantially liquidate its investments in its foreign subsidiaries, the Company would be required to recognize the related cumulative translation adjustments pertaining to the liquidated or substantially liquidated subsidiaries, as a charge to earnings in the Company’s consolidated statements of operations and comprehensive loss.
F-11
There were no reclassifications out of accumulated other comprehensive loss during the years ended December 31, 2016 and 2015. $6,000 was reclassified out of accumulated other comprehensive loss during the year ended December 31, 2014. The table below shows the changes in accumulated balances of each component of accumulated other comprehensive loss for the years ended December 31, 2016, 2015 and 2014:
| Net Unrealized Gains/(losses) on Available-for-Sale Securities |
Foreign Currency Translation Adjustment |
Accumulated Other Comprehensive Loss |
||||||||||
| (In thousands) | ||||||||||||
| Balance at December 31, 2013 |
15 | (5,066 | ) | (5,051 | ) | |||||||
| Other comprehensive loss |
(40 | ) | — | (40 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| Balance at December 31, 2014 |
$ | (25 | ) | $ | (5,066 | ) | $ | (5,091 | ) | |||
| Other comprehensive income |
27 | — | 27 | |||||||||
|
|
|
|
|
|
|
|||||||
| Balance at December 31, 2015 |
$ | 2 | $ | (5,066 | ) | $ | (5,064 | ) | ||||
| Other comprehensive income |
(16 | ) | — | (16 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| Balance at December 31, 2016 |
$ | (14 | ) | $ | (5,066 | ) | $ | (5,080 | ) | |||
|
|
|
|
|
|
|
|||||||
Share-based compensation
The Company recognizes in the statements of operations the estimated grant date fair value of share-based compensation awards granted to employees over the requisite service period. Share-based compensation expense in the consolidated statements of operations is recorded on a straight-line basis over the requisite service period for the entire award, which is generally the vesting period, with the offset to additional paid-in capital. The Company uses the Black-Scholes option pricing model to estimate the fair value of stock options granted to employees. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
On June 23, 2016, the Company’s stockholders approved a new 2016 Equity Incentive Plan (2016 EIP). As of that date, the Company ceased granting options under its Amended and Restated Share Option Plan (the Option Plan) and transferred the remaining shares available for issuance under the Option Plan to the 2016 EIP.
For non-employee directors, the Company sponsors a RSU Plan that was established in 2005. According to an amendment to the RSU Plan in October 2011, approximately 25% of each RSU represents a contingent right to receive cash upon vesting, and the Company is required to deliver an amount in cash equal to the fair market value of the shares on the vesting date to facilitate the satisfaction of the non-employee directors’ U.S. federal income tax obligation with respect to the vested RSUs. This amendment resulted in the RSUs being classified as a liability. The outstanding RSU awards are required to be re-measured at each reporting date until settlement of the award, and changes in valuation are recorded as compensation expense for the period. To the extent that the liability recorded in the balance sheet is less than the original award value, the difference is recognized in equity. The Company uses the closing share price of its shares on the NASDAQ Global Market at the reporting or settlement date to determine the fair value of RSUs. In June 2014, the Company’s stockholders approved an increase of 83,333 shares in the number of shares of the Company’s common stock reserved for issuance under the RSU Plan. On June 23, 2016, the stockholders approved the 2016 EIP and the Company ceased granting RSUs under the RSU Plan and transferred the remaining shares available for issuance under the RSU Plan to the 2016 EIP.
The Company maintains an ESPP under which a total of 150,000 shares of common stock were reserved for sale to employees of the Company. The Company recognizes in the statement of operations the estimated fair value of the ESPP, which is determined by the Black-Scholes option pricing model.
For additional information regarding share-based compensation, see “Note 7 — Share-based Compensation.”
Business Combinations
In a business combination, the Company determines if the acquired property and activities meet the definition of a business under current accounting guidance. If the combination meets the definition of a business, the Company measures the significance of the combination to determine the required reporting and disclosure requirements for the transaction. Business combinations are required to be accounted for under the acquisition method which requires that identifiable assets acquired, liabilities assumed and any non-controlling interest in the acquiree be recognized and measured as of the acquisition date at fair value. In addition, all consideration transferred must be measured at its acquisition-date fair value.
F-12
When necessary, the Company uses a third party valuation expert to determine the fair value of the identifiable assets and liabilities acquired. The estimated fair values of in-process research and development acquired in a business combination which have not been fully developed are capitalized as indefinite-lived intangible assets and impairment testing is conducted periodically.
Segment information
The Company operates in a single business segment — research and development of therapeutic products for the treatment of cancer.
Recent accounting pronouncements
In August 2016, the FASB issued Accounting Standards Update (ASU) 2016-15, Statement of Cash Flows (Topic 230), a consensus of the FASB’s Emerging Issues Task Force. The guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The guidance addresses the classification of cash flows related to (1) debt prepayment or extinguishment costs, (2) settlement of zero-coupon debt instruments, (3) contingent consideration payments made after a business combination, (4) proceeds from the settlement of insurance claims, (5) proceeds from the settlement of corporate-owned life insurance, including bank-owned life insurance, (6) distributions received from equity method investees and (7) beneficial interests in securitization transactions. The guidance requires application using a retrospective transition method and is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those years. Early adoption is permitted. The Company is currently evaluating any impact this guidance may have on its consolidated statements of cash flows.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends ASC Topic 718, Compensation – Stock Compensation. The guidance will change how companies account for certain aspects of share-based payments to employees including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The guidance is effective for public business entities for fiscal years beginning after December 15, 2016, and interim periods within those years. The Company will adopt this standard as of January 1, 2017. Because the Company has incurred net losses since its inception and maintains a full valuation allowance on its net deferred tax assets, the adoption of this standard is not expected to have a material impact on the Company’s financial condition, results of operations and cash flows, or financial statement disclosures.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), to improve financial reporting for leasing transactions. The new standard requires lessees to recognize on the balance sheets a right of use asset and related lease liability. Lessor accounting under the new standard remains similar under current GAAP. The ASU also requires disclosures about the amount, timing, and uncertainty of cash flows arising from leases. The effective date for public entities is fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted for all entities. The Company is currently evaluating any impact this standard may have on its consolidated financial position and results of operations.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The guidance will change how entities measure equity investments that do not result in consolidation and are not accounted for under the equity method and how they present changes in the fair value of financial liabilities measured under the fair value option that are attributable to their own credit. The new guidance also changes certain disclosure requirements and other aspects of current US GAAP. It does not change the guidance for classifying and measuring investments in debt securities and loans. ASU 2016-01 is effective for public business entities for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. With the exception of early application guidance outlined in this standard, early adoption is not permitted. The Company is currently evaluating any impact this guidance may have on its consolidated financial position and results of operations.
In August 2015, FASB issued Accounting Standards Update (ASU) 2015-14, Revenue from Contracts with Customers (Topic 606)—Deferral of the Effective Date, which defers by one year the effective date of ASU 2014-09, Revenue from Contracts with Customers. For public entities, the standard is effective for annual reporting periods beginning after
F-13
December 15, 2017, including interim reporting periods within that reporting period. Early adoption is permitted as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within those annual periods. As the Company does not currently have any revenue arrangements in the scope of the new revenue standard, it does not expect the adoption of this standard to have a material effect on its financial position or results of operations. However, if the Company does enter into license, collaboration or other revenue arrangements during 2017, there may be material differences in the accounting treatment under the current guidance and the new revenue standard as of the adoption date, January 1, 2018.
| 3. | FAIR VALUE MEASUREMENTS |
The Company measures certain financial assets and liabilities at fair value in accordance with a hierarchy which requires an entity to maximize the use of observable inputs which reflect market data obtained from independent sources and minimize the use of unobservable inputs. There are three levels of inputs that may be used to measure fair value:
| • | 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 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. |
The Company’s financial assets and liabilities measured at fair value on a recurring basis consisted of the following as of December 31, 2016 and 2015:
| December 31, 2016 | December 31, 2015 | |||||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||
| Financial Assets: |
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| Money market funds |
$ | 6,559 | $ | — | $ | — | $ | 6,559 | $ | 9,199 | $ | — | $ | — | $ | 9,199 | ||||||||||||||||
| Debt securities of U.S. government agencies |
— | 38,378 | — | 38,378 | — | 31,507 | — | 31,507 | ||||||||||||||||||||||||
| Corporate bonds |
— | 10,706 | — | 10,706 | — | 9,502 | — | 9,502 | ||||||||||||||||||||||||
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| $ | 6,559 | $ | 49,084 | $ | — | $ | 55,643 | $ | 9,199 | $ | 41,009 | $ | — | $ | 50,208 | |||||||||||||||||
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| Financial Liability: |
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| Restricted Share Units |
$ | 352 | $ | — | $ | — | $ | 352 | $ | 508 | $ | — | $ | — | $ | 508 | ||||||||||||||||
If quoted market prices in active markets for identical assets are not available to determine fair value, then the Company uses quoted prices of similar instruments and other significant inputs derived from observable market data obtained from third-party data providers. These investments are included in Level 2 and consist of debt securities of U.S government agencies and corporate bonds.
There were no transfers between Level 1 and Level 2 during 2016. The Company classified its warrant liability within Level 3 because the warrant liability was valued using valuation models with significant unobservable inputs. The estimated fair value of warrants accounted for as liabilities was determined on the issuance date and are subsequently re-measured to fair value at each reporting date. The warrants issued from a September 2010 financing expired on October 12, 2015. None of the liability-classified warrants were outstanding as of December 31, 2016.
The change in fair value of the warrants is recorded in the statement of operations as other income or other expense by using the Black-Scholes option-pricing model.
F-14
The table below shows the reconciliation of the warrant liability measured and recorded at fair value on a recurring basis, using significant unobservable inputs (Level 3):
| Years Ended December 31, | ||||||||
| 2016 | 2015 | |||||||
| (In thousands) | ||||||||
| Balance at beginning of period |
$ | — | $ | 128 | ||||
| Change in fair value of warrant liability included in Other expense (income) |
— | (128 | ) | |||||
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| Balance at the end of period |
$ | — | $ | — | ||||
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| 4. | PROPERTY AND EQUIPMENT |
The table below outlines the cost, accumulated depreciation and amortization and net carrying value of the Company’s property and equipment for the years ended December 31, 2016 and 2015:
| 2016 | ||||||||||||
| Cost | Accumulated Depreciation and Amortization |
Net Carrying Value |
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| (In thousands) | ||||||||||||
| Scientific equipment |
$ | 3,077 | $ | (2,241 | ) | $ | 836 | |||||
| Leasehold improvements |
1,627 | (1,269 | ) | 358 | ||||||||
| Computer software and equipment |
390 | (315 | ) | 75 | ||||||||
| Office equipment |
170 | (37 | ) | 133 | ||||||||
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| $ | 5,264 | $ | (3,862 | ) | $ | 1,402 | ||||||
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| 2015 | ||||||||||||
| Cost | Accumulated Depreciation and Amortization |
Net Carrying Value |
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| (In thousands) | ||||||||||||
| Scientific equipment |
$ | 3,155 | $ | (1,847 | ) | $ | 1,308 | |||||
| Leasehold improvements |
1,590 | (1,109 | ) | 481 | ||||||||
| Computer software and equipment |
375 | (320 | ) | 55 | ||||||||
| Office equipment |
34 | (33 | ) | 1 | ||||||||
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| $ | 5,154 | $ | (3,309 | ) | $ | 1,845 | ||||||
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Depreciation and leasehold improvement amortization expense was $0.6 million, $0.6 million and $0.5 million for the years ended December 31, 2016, 2015 and 2014, respectively.
| 5. | INTANGIBLE ASSET IMPAIRMENT |
On May 5, 2016, the Company entered into an agreement with STC.UNM to mutually terminate the license agreement relating to protocell technology. As a result of the termination and the Company’s intent to no longer develop, license or commercialize the protocell technology, the indefinite-lived intangible assets acquired in the 2014 acquisition of Alpine Biosciences, Inc. (Alpine) were considered impaired. Accordingly, $19.7 million was fully written-off and recorded as intangible asset impairment in the Company’s consolidated statements of operations for the year ended December 31, 2016. The indefinite-lived intangible assets represented the value assigned to in-process research and development when the Company acquired the protocell technology. Additionally, as a result of the impairment, the deferred tax liability, which solely relates to the indefinite-lived intangible assets was reversed, resulting in a federal tax benefit of $6.9 million during the year ended December 31, 2016. See “Note 10 — Income Tax”. The impairment charge did not result in any significant cash expenditures or otherwise impact the Company’s liquidity or cash.
F-15
| 6. | SHARE CAPITAL |
The Company has the authority to issue a total of 76,679,167 shares of capital stock divided into three classes as follows:
| • | 66,666,667 shares of Common Stock, $0.0001 par value per share. |
| • | 10,000,000 shares of Preferred Stock(1), $0.0001 par value per share |
| • | 12,500 shares of Class UA Preferred Stock, no par value (the “Class UA Preferred Stock” ). |
| (1) | The Preferred Stock may be issued from time to time in one or more series pursuant to a resolution or resolutions providing for such issue duly adopted by the Board of Directors (authority to do so being hereby expressly vested in the Board of Directors). The Board of Directors is further authorized, subject to limitations prescribed by law, to fix by resolution or resolutions the designations, powers, preferences and rights, and the qualifications, limitations or restrictions thereof, of any wholly unissued series of Preferred Stock, including without limitation authority to fix by resolution or resolutions the dividend rights, dividend rate, conversion rights, voting rights, rights and terms of redemption (including sinking fund provisions), redemption price or prices, and liquidation preferences of any such series, and the number of shares constituting any such series and the designation thereof, or any of the foregoing |
Class UA preferred stock
As of December 31, 2016 and 2015, the Company had 12,500 shares of Class UA preferred stock authorized, issued and outstanding. The Class UA preferred stock has the following rights, privileges, and limitations:
Voting. Each share of Class UA preferred stock will not be entitled to receive notice of, or to attend and vote at, any Stockholder meeting unless the meeting is called to consider any matter in respect of which the holders of the shares of Class UA preferred stock would be entitled to vote separately as a class, in which case the holders of the shares of Class UA preferred stock shall be entitled to receive notice of and to attend and vote at such meeting. Amendments to the certificate of incorporation of Cascadian Therapeutics that would increase or decrease the par value of the Class UA preferred stock or alter or change the powers, preferences or special rights of the Class UA preferred stock so as to affect them adversely would require the approval of the holders of the Class UA preferred stock.
Conversion. The Class UA preferred stock is not convertible into shares of any other class of Cascadian Therapeutics capital stock.
Dividends. The holders of the shares of Class UA preferred stock will not be entitled to receive dividends.
Liquidation preference. In the event of any liquidation, dissolution or winding up of the Company, the holders of the Class UA preferred stock will be entitled to receive, in preference to the holders of the Company’s common stock, an amount equal to the lesser of (1) 20% of the after tax profits (“net profits”), determined in accordance with Canadian generally accepted accounting principles, where relevant, consistently applied, for the period commencing at the end of the last completed financial year of the Company and ending on the date of the distribution of assets of the Company to its stockholders together with 20% of the net profits of the Company for the last completed financial year and (2) CDN $100 per share.
Holders of Class UA preferred stock are entitled to mandatory redemption of their shares if the Company realizes “net profits” in any year. For this purpose, “net profits … means the after tax profits determined in accordance with generally accepted accounting principles, where relevant, consistently applied.” The Company has taken the position that this applies to Canadian GAAP and, accordingly, there have been no redemptions to date.
Redemption. The Company may, at its option and subject to the requirements of applicable law, redeem at any time the whole or from time to time any part of the then-outstanding shares of Class UA preferred stock for CDN $100 per share. The Company is required each year to redeem at CDN $100 per share that number of shares of Class UA preferred stock as is determined by dividing 20% of the net profits by CDN $100.
The difference between the redemption value and the book value of the Class UA preferred stock will be recorded at the time that the fair value of the shares increases to redemption value based on the Company becoming profitable as measured using Canadian GAAP.
F-16
Preferred stock
As of December 31, 2016 and 2015, the Company had authorized 10,000,000 shares of undesignated preferred stock, $0.0001 par value per share. As of December 31, 2016, the Company had 10,000 shares of Series A convertible preferred stock, 5,333 shares of Series B convertible preferred stock, 7,500 shares of Series C convertible preferred stock and 17,250 shares of Series D convertible preferred stock issued and outstanding. As of December 31, 2015, the Company had 10,000 shares of Series A convertible preferred stock, 5,333 shares of Series B convertible preferred stock and 7,500 shares of Series C convertible preferred stock issued and outstanding. Shares of preferred stock may be issued in one or more series from time to time by the board of directors of the Company, and the board of directors is expressly authorized to fix by resolution or resolutions the designations and the powers, preferences and rights, and the qualifications, limitations and restrictions thereof, of the shares of each series of preferred stock. Subject to the determination of the board of directors of the Company, the preferred stock would generally have preferences over common stock with respect to the payment of dividends and the distribution of assets in the event of the liquidation, dissolution or winding up of the Company.
Series A Convertible Preferred Stock
As of December 31, 2016 and 2015, the Company had 10,000 shares of Series A convertible preferred stock issued and outstanding.
On September 22, 2014, in connection with the public offering of 10,000 shares of the Company’s Series A convertible preferred stock, the Company designated 10,000 shares of its authorized and unissued preferred stock as Series A convertible preferred stock and filed a Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock with the Delaware Secretary of State. Each share of Series A convertible preferred stock is convertible into 166.67 shares of the Company’s common stock at any time at the holder’s option. The holder, however, will be prohibited from converting Series A convertible preferred stock into shares of common stock if, as a result of such conversion, the holder, together with its affiliates, would own more than 4.99% of the shares of the Company’s common stock then issued and outstanding. In the event of the Company’s liquidation, dissolution, or winding up, holders of Series A convertible preferred stock will receive a payment equal to $0.0001 per share of Series A convertible preferred stock before any proceeds are distributed to the holders of common stock, after any proceeds are distributed to the holder of the Company’s Class UA preferred stock and on parity with any distributions to the holders of the Company’s Series B convertible preferred stock and Series C convertible preferred stock. Shares of Series A convertible preferred stock will generally have no voting rights, except as required by law and except that the consent of holders of a majority of the outstanding Series A convertible preferred stock will be required to amend the terms of the Series A convertible preferred stock. Shares of Series A convertible preferred stock will not be entitled to receive any dividends, unless and until specifically declared by the Company’s board of directors, and will rank:
| • | senior to all common stock; |
| • | senior to any class or series of capital stock created specifically ranking by its terms junior to the Series A convertible preferred stock; |
| • | on parity with the Company’s Series B convertible preferred stock, Series C convertible preferred stock and any class or series of capital stock created specifically ranking by its terms on parity with the Series A convertible preferred stock; and |
| • | junior to the Company’s Class UA preferred stock and any class or series of capital stock created specifically ranking by its terms senior to the Series A convertible preferred stock; |
in each case, as to distribution of assets upon the Company’s liquidation, dissolution or winding up whether voluntarily or involuntarily.
Series B Convertible Preferred Stock
As of December 31, 2016 and 2015, the Company had 5,333 shares of Series B convertible preferred stock issued and outstanding.
On February 11, 2015, in connection with the public offering of 1,333 shares of the Company’s Series B convertible preferred stock, the Company designated 5,333 shares of its authorized and unissued preferred stock as Series B convertible preferred stock and filed a Certificate of Designation of Preferences, Rights and Limitations of Series B Convertible Preferred Stock with the Delaware Secretary of State. Each share of Series B convertible preferred stock is convertible into 166.67 shares of the Company’s common stock at any time at the holder’s option. The holder, however, will be prohibited from converting Series B convertible preferred stock into shares of common stock if, as a result of such conversion, the holder, together with its affiliates, would own more than 4.99% of the shares of the Company’s common stock then issued and outstanding. In the event of the Company’s liquidation, dissolution, or winding up, holders of Series B convertible preferred stock will receive a payment equal to $0.0001 per share of Series B convertible preferred stock
F-17
before any proceeds are distributed to the holders of common stock, after any proceeds are distributed to the holder of the Company’s Class UA preferred stock and on parity with any distributions to the holders of the Company’s Series A convertible preferred stock and Series C convertible preferred stock. Shares of Series B convertible preferred stock will generally have no voting rights, except as required by law and except that the consent of holders of a majority of the outstanding Series B convertible preferred stock will be required to amend the terms of the Series B convertible preferred stock. Shares of Series B convertible preferred stock will not be entitled to receive any dividends, unless and until specifically declared by the Company’s board of directors, and will rank:
| • | senior to all common stock; |
| • | senior to any class or series of capital stock created specifically ranking by its terms junior to the Series B convertible preferred stock; |
| • | on parity with the Company’s Series A convertible preferred stock, Series C convertible preferred stock and any class or series of capital stock created specifically ranking by its terms on parity with the Series B convertible preferred stock; and |
| • | junior to the Company’s Class UA preferred stock and any class or series of capital stock created specifically ranking by its terms senior to the Series B convertible preferred stock; |
in each case, as to distributions of assets upon the Company’s liquidation, dissolution or winding up whether voluntarily or involuntarily.
Series C Convertible Preferred Stock
As of December 31, 2016 and 2015, the Company had 7,500 shares of Series C convertible preferred stock issued and outstanding.
On May 14, 2015, the Company designated 7,500 shares of its authorized and unissued preferred stock as Series C Convertible Preferred Stock and filed a Certificate of Designation of Preferences, Rights and Limitations of Series C Convertible Preferred Stock with the Delaware Secretary of State. The Company entered into an exchange agreement with certain affiliates of Biotechnology Value Fund (BVF) to exchange 1,245,022 shares of common stock previously purchased by BVF for 7,500 shares of Series C Convertible Preferred Stock. Each share of Series C Convertible Preferred Stock is convertible into 166.67 shares of the Company’s Common Stock at any time at the holder’s option. The holder, however, will be prohibited from converting Series C Convertible Preferred Stock into shares of common stock if, as a result of such conversion, the holder, together with its affiliates, would own more than 9.99% of the shares of the Company’s Common Stock then issued and outstanding. In the event of the Company’s liquidation, dissolution, or winding up, holders of Series C Convertible Preferred Stock will receive a payment equal to $0.0001 per share of Series C Convertible Preferred Stock before any proceeds are distributed to the holders of common stock, after any proceeds are distributed to the holder of the Company’s Class UA Preferred Stock and on parity with any distributions to the holders of the Company’s Series A Convertible Preferred Stock and Series B Convertible Preferred Stock. Shares of Series C Convertible Preferred Stock will generally have no voting rights, except as required by law and except that the consent of holders of a majority of the outstanding Series C Convertible Preferred Stock will be required to amend the terms of the Series C Convertible Preferred Stock. Shares of Series C Convertible Preferred Stock will not be entitled to receive any dividends, unless and until specifically declared by the Company’s board of directors, and will rank:
| • | senior to all common stock; |
| • | senior to any class or series of capital stock hereafter created specifically ranking by its terms junior to the Series C Convertible Preferred Stock; |
| • | on parity with the Company’s Series A Convertible Preferred Stock, Series B Convertible Preferred Stock and any class or series of capital stock hereafter created specifically ranking by its terms on parity with the Series C Convertible Preferred Stock; and |
| • | junior to the Company’s Class UA Preferred Stock and any class or series of capital stock hereafter created specifically ranking by its terms senior to the Series C Convertible Preferred Stock; |
in each case, as to distributions of assets upon the Company’s liquidation, dissolution or winding up whether voluntarily or involuntarily.
Series D Convertible Preferred Stock
F-18
As of December 31, 2016 and 2015, the Company had 7,500 shares and zero shares of Series D convertible preferred stock issued and outstanding.
On June 28, 2016, the Company closed a registered direct offering of 17,250 shares of its Series D Convertible Preferred Stock at a price of $800.00 per share directly to affiliates of BVF Partners L.P. (BVF), which are existing stockholders and affiliates of a member of the board of directors, for gross proceeds of $13.8 million. The Company designated 17,250 shares of its authorized and unissued preferred stock as Series D convertible preferred stock and filed a Certificate of Designation of Preferences, Rights and Limitations of Series D Convertible Preferred Stock with the Delaware Secretary of State.
Each share of Series D Convertible Preferred Stock is convertible into 166.67 shares of the Company’s Common Stock at any time at the holder’s option. The holder, however, will be prohibited from converting Series D Convertible Preferred Stock into shares of common stock if, as a result of such conversion, the holder, together with its affiliates, would own more than 19.99% of the shares of the Company’s Common Stock then issued and outstanding, which percentage may change at the holders’ election to any other number less than or equal to 19.99% upon 61 days’ notice to the Company. In the event of the Company’s liquidation, dissolution, or winding up, holders of Series D Convertible Preferred Stock will receive a payment equal to $0.0001 per share of Series D Convertible Preferred Stock before any proceeds are distributed to the holders of common stock, after any proceeds are distributed to the holder of the Company’s Class UA Preferred Stock and on parity with any distributions to the holders of the Company’s Series A Convertible Preferred Stock, Series B Convertible Preferred Stock and Series C Convertible Preferred Stock. Shares of Series D Convertible Preferred Stock will generally have no voting rights, except as required by law and except that the consent of holders of a majority of the outstanding Series D Convertible Preferred Stock will be required to amend the terms of the Series D Convertible Preferred Stock. Shares of Series D Convertible Preferred Stock will not be entitled to receive any dividends, unless and until specifically declared by the Company’s board of directors, and will rank:
| • | senior to all common stock; |
| • | senior to any class or series of capital stock created that specifically ranks by its terms junior to the Series D convertible preferred stock; |
| • | on parity with the Company’s Series A convertible preferred stock, Series B Convertible Preferred Stock and Series C convertible preferred stock, and any class or series of capital stock created that specifically ranks by its terms on parity with the Series D convertible preferred stock; and |
| • | junior to the Company’s Class UA preferred stock and any class or series of capital stock created that specifically ranks by its terms senior to the Series D convertible preferred stock; |
in each case, as to distributions of assets upon the Company’s liquidation, dissolution or winding up, whether voluntarily or involuntarily.
Beneficial Conversion Feature
A beneficial conversion feature exists when the effective conversion price of a convertible security is less than the market price per share on the commitment date, creating a discount. The value of the discount is determined by the difference between the market price and the conversion price multiplied by the potential conversion shares purchased. The discount is recognized as a non-cash deemed dividend from the date of issuance to the earliest conversion date.
The Company recognized a beneficial conversion feature in the amount of $2.6 million, calculated as the number of potential conversion shares multiplied by the excess of the market price of its common stock over the price per conversion share of the Series D convertible preferred stock on the commitment date. The non-cash deemed dividends of $2.6 million was recorded in additional paid-in capital and as a deemed dividend on the Series D convertible preferred stock, and was used in determining the net loss applicable to common stockholders in the consolidated statement of operations for the year ended December 31, 2016.
Common stock
On November 18, 2016, the Company’s stockholders approved a 1-for-6 reverse stock split and separately approved a decrease in the Company’s authorized shares of common stock from 200,000,000 to 66,666,667 shares. On a split-effected basis, authorized shares increased from 33,333,333 to 66,666,667 shares. The reverse stock split became effective on November 29, 2016.
F-19
As of December 31, 2016 and 2015, the Company had 66,666,667 shares and 33,333,333 shares of common stock, $0.0001 par value per share, authorized, respectively. The holders of common stock are entitled to receive such dividends or distributions as are lawfully declared on the Company’s common stock, to have notice of any authorized meeting of stockholders, and to exercise one vote for each share of common stock on all matters which are properly submitted to a vote of the Company’s stockholders. As a Delaware corporation, the Company is subject to statutory limitations on the declaration and payment of dividends. In the event of a liquidation, dissolution or winding up of the Company, holders of common stock have the right to a ratable portion of assets remaining after satisfaction in full of the prior rights of creditors, including holders of the Company’s indebtedness, all liabilities and the aggregate liquidation preferences of any outstanding shares of preferred stock. The holders of common stock have no conversion, redemption, preemptive or cumulative voting rights.
Amounts pertaining to issuances of common stock are classified as common stock on the consolidated balance sheet, approximately $2,256 and $1,583 of which represents par value of common stock as of December 31, 2016 and 2015, respectively. Additional paid-in capital primarily relates to amounts for equity financings and share-based compensation.
Warrants
In connection with certain equity and debt financings, the Company issued warrants to purchase shares of its common stock. The shares and prices of the warrants have been adjusted to reflect the 1-for-6 reverse stock split.
Warrants to purchase 530,358 shares of the Company’s common stock from a September 2010 financing expired on October 12, 2015.
In February 2011, the Company issued 8,116 warrants, which were classified as equity, to purchase shares of common stock in connection with a Loan and Security Agreement entered into with General Electric Capital Corporation.
In June 2013, the Company issued warrants to purchase 833,333 shares of common stock, which were classified as equity, in connection with a registered direct offering to Biotechnology Value Fund, L.P. and other affiliates of BVF Partners L.P. (collectively, “BVF”).
A summary of outstanding warrants as of December 31, 2016 and 2015 and changes during the years are presented below.
| 2016 | 2015 | |||||||
| Shares Underlying Warrants |
Shares Underlying Warrants |
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| Balance, beginning of year |
841,449 | 1,371,807 | ||||||
| Warrants expired |
— | (530,358 | ) | |||||
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| Balance, end of year |
841,449 | 841,449 | ||||||
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The following table summarizes information regarding warrants outstanding at December 31, 2016:
| Exercise Prices |
Shares Underlying Outstanding Warrants |
Expiry Date | ||||||
| $18.48 |
8,116 | February 8, 2018 | ||||||
| $30.00 |
833,333 | December 5, 2018 | ||||||
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| 841,449 | ||||||||
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F-20
| Years Ended December 31, | ||||||||
| 2016 | 2015 | |||||||
| Shares underlying warrants outstanding classified as equity |
841,449 | 841,449 | ||||||
Equity Financings
On June 28, 2016, the Company closed an underwritten public offering of 6,708,333 shares of our common stock at a price to the public of $4.80 per share for gross proceeds of $32.2 million. The shares include 875,000 shares of common stock sold pursuant to the over-allotment option granted by the Company to the underwriters, which option was exercised in full. In addition, the Company closed a registered direct offering of 17,250 shares of our Series D convertible preferred stock at a price of $800.00 per share directly to affiliates of BVF for gross proceeds of $13.8 million. Each share of Series D convertible preferred stock is non-voting and convertible into 1,000 shares of our common stock, provided that conversion will be prohibited if, as a result, the holder and its affiliates would beneficially own more than 19.99% of the common stock then outstanding. Aggregate gross proceeds from the offerings were approximately $46.0 million. Aggregate net proceeds from the offerings, after underwriting discounts and commissions and other expenses of $2.7 million, were approximately $43.3 million.
On February 6, 2015, the Company entered into two underwriting agreements with Jefferies LLC, as underwriter, for separate but concurrent offerings of the Company’s securities. On February 11, 2015, the Company closed concurrent but separate underwritten offerings of 2,250,000 shares of its common stock at a price to the public of $9.00 per share, for gross proceeds of approximately $20.3 million and 1,333 shares of its Series B convertible preferred stock at a price to the public of $1,500 per share, for gross proceeds of approximately $2.0 million. Each share of Series B convertible preferred stock is non-voting and convertible into 166.67 shares of the Company’s common stock, provided that conversion will be prohibited if, as a result, the holder and its affiliates would beneficially own more than 4.99% of the common stock then outstanding. As part of the common stock offering, the Company also granted the underwriters a 30-day option to purchase 337,500 additional shares of its common stock. On February 18, 2015, the Company closed a partial exercise of the underwriter’s option to purchase 199,943 additional shares of its common stock, at a price to the public of $9.00 per share, less underwriting discounts and commissions, which resulted in net proceeds to the Company of approximately $1.7 million. Aggregate gross proceeds from the offerings were approximately $24.0 million. Aggregate net proceeds from the offerings, after underwriting discounts and commissions and estimated expenses of $1.6 million, were approximately $22.4 million.
On September 18, 2014, the Company entered into two underwriting agreements with Cowen and Company, LLC as representative of the underwriters named therein for concurrent but separate offerings of the Company’s securities. On September 23, 2014, the Company closed concurrent but separate underwritten offerings of 1,666,667 shares of its common stock at a price of $12.00 per share, for gross proceeds of $20 million, and 10,000 shares of its Series A convertible preferred stock at a price of $2,000 per share, for gross proceeds of $20 million. Each share of Series A convertible preferred stock is non-voting and convertible into 166.67 shares of the Company’s common stock at any time at the option of the holder, provided that conversion will be prohibited if, as a result, the holder and its affiliates would beneficially own more than 4.99% of the common stock then outstanding. As part of the common stock offering, the Company also granted the underwriters, and the underwriters exercised, a 30-day option to purchase 250,000 additional shares of the Company’s common stock. Aggregate gross proceeds from the offerings were approximately $43.0 million. Aggregate net proceeds from the offerings, after commissions and estimated expenses of $2.8 million, was approximately $40.2 million which included $21.6 million from the Company’s common stock offering and $18.6 million from the Company’s Series A convertible preferred stock offering.
“At-the-Market” Equity Offering Program
On June 2, 2016, the Company entered into a Sales Agreement (the Sales Agreement) with Cowen and Company, LLC (Cowen) to sell shares of the Company’s common stock, par value $0.0001 per share, having aggregate sales proceeds of up to $50,000,000, from time to time, through an “at the market” equity offering program under which Cowen will act as sales agent. Under the Sales Agreement, the Company will set the parameters for the sale of shares, including the number of shares to be issued, the time period during which sales are requested to be made, any limits on the number of shares that may be sold in any one trading day and any minimum price below which sales may not be made. The Sales Agreement provides that Cowen will be entitled to compensation for its services equal to 3.0% of the gross proceeds from the sale of shares sold pursuant to the Sales Agreement. Sales under the ATM are limited by the greater of (i) the number of shares that are available to be issued or (ii) $50 million. The Company has no obligation to sell any shares under the Sales Agreement, and may at any time suspend solicitations and offers under the Sales Agreement. The Company terminated the Sales Agreement effective as of the close of business on January 23, 2017. No shares had been sold under the Sales Agreement since inception.
F-21
Net loss per share
Basic net loss per share is calculated by dividing net loss attributable to common stockholders, which may include a deemed dividend from the amortization of a beneficial conversion feature, by the weighted average number of shares outstanding for the period. Diluted net loss per share is calculated by adjusting the numerator and denominator of the basic net loss per share calculation for the effects of all potentially dilutive common shares. Potential dilutive shares of the Company’s common stock include stock options, restricted share units, warrants, Series A, B, C and D convertible preferred stock and shares granted under the 2010 ESPP. The calculation of diluted loss per share requires that, to the extent the average market price of the underlying shares for the reporting period exceeds the exercise price of the warrants and the presumed exercise of such securities are dilutive to loss per share for the period, adjustments to net loss used in the calculation are required to remove the change in fair value of the warrants for the period. Furthermore, adjustments to the denominator are required to reflect the addition of the related dilutive shares. Shares used to calculate basic and dilutive net loss per share for the years ended December 31, 2016, 2015 and 2014 were the same, since all potentially dilutive shares were anti-dilutive.
The following table is a reconciliation of the numerators and denominators used in the calculation of basic and diluted net loss per share computations for the years ended December 31, 2016, 2015 and 2014. Basic and diluted net loss per share and shares to used compute basic and diluted net loss per share for the years ended December 31, 2016, 2015 and 2014 have been adjusted retroactively to reflect the 1-for-6 reverse stock split.
| Years Ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| (in thousands, except share and per share amounts) | ||||||||||||
| Numerator: |
||||||||||||
| Net loss attributable to common stockholders used to compute net loss per share |
||||||||||||
| Basic |
$ | (60,293 | ) | $ | (32,581 | ) | $ | (49,963 | ) | |||
|
|
|
|
|
|
|
|||||||
| Diluted |
$ | (60,293 | ) | $ | (32,581 | ) | $ | (49,963 | ) | |||
|
|
|
|
|
|
|
|||||||
| Denominator: |
||||||||||||
| Weighted average shares outstanding used to compute net loss per share: |
||||||||||||
| Basic |
19,264,121 | 16,102,860 | 12,936,640 | |||||||||
|
|
|
|
|
|
|
|||||||
| Diluted |
19,264,121 | 16,102,860 | 12,939,640 | |||||||||
|
|
|
|
|
|
|
|||||||
| Net loss per share—basic and diluted |
$ | (3.13 | ) | $ | (2.02 | ) | $ | (3.86 | ) | |||
|
|
|
|
|
|
|
|||||||
The following table presents the number of shares that were excluded from the number of shares used to calculate diluted net loss per share. The share data for the years ended December 31, 2016, 2015 and 2014 has been adjusted to reflect the 1-for-6 reverse stock split.
| Years Ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| Director and employee stock options |
1,866,711 | 1,225,194 | 869,685 | |||||||||
| Warrants |
841,449 | 841,449 | 1,371,806 | |||||||||
| Series A convertible preferred stock (as converted to common stock) |
1,666,697 | 1,666,697 | 1,666,697 | |||||||||
| Series B convertible preferred stock (as converted to common stock) |
888,851 | 888,851 | — | |||||||||
| Series C convertible preferred stock (as converted to common stock) |
1,250,022 | 1,250,022 | — | |||||||||
| Series D convertible preferred stock (as converted to common stock) |
2,875,055 | — | — | |||||||||
| Non-employee director restricted share units |
81,619 | 38,157 | 27,207 | |||||||||
| Employee stock purchase plan |
1,830 | 449 | 666 | |||||||||
F-22
| 7. | SHARE-BASED COMPENSATION |
At the opening of trading on November 29, 2016, the Company effected a 1-for-6 reverse stock split of its issued common stock. The per share price and the share amounts under the Company’s share-based compensation plans have been adjusted to reflect the 1-for-6 reverse stock split.
2016 Equity Incentive Plan
On June 23, 2016, the Company’s stockholders approved a new 2016 EIP. As of that date, the Company ceased granting options under its Amended and Restated Share Option Plan (the Option Plan), ceased granting restricted shares units under its Amended and Restated RSU Plan (the RSU Plan) and transferred the remaining shares available for issuance under the Option Plan and the RSU Plan to the 2016 EIP. 1,200,905 shares of common stock were reserved for issuance under the 2016 EIP, consisting of 1,050,000 shares available for awards under the 2016 EIP plus 82,884 and 68,021 shares of common stock previously reserved but unissued under the Option Plan and the RSU Plan, respectively, that were available for issuance under the 2016 EIP on the effective date of the 2016 EIP. All grants under the 2016 EIP may have a term up to ten years from the date of grant. Vesting schedules are determined by the compensation committee of the board of directors or its designee when each award is granted. During the year ended December 31, 2016, the Company granted 92,608 stock options under the 2016 EIP. No stock options were exercised under the 2016 EIP during the year ended December 31, 2016. During the year ended December 31, 2016, the Company granted 54,348 RSUs with a fair value of $300,000 under the 2016 EIP.
Share option plan
The Company sponsored an Option Plan under which a maximum fixed reloading percentage of 10% of the issued and outstanding common shares of the Company may be granted to employees, directors, and service providers. Prior to April 1, 2008, options were granted with a per share exercise price, in Canadian dollars, equal to the closing market price of the Company’s shares of common stock on the Toronto Stock Exchange on the date immediately preceding the date of the grant. After April 1, 2008, options were granted with a per share exercise price, in U.S. dollars, equal to the closing price of the Company’s shares of common stock on The NASDAQ Global Market on the date of grant. Canadian dollar amounts reflected in the tables below, which approximates their U.S. dollar equivalents as differences between the U.S. dollar and Canadian dollar exchange rates for the periods reflected below are not material. During the year ended December 31, 2016, the Company granted 313,040 stock options under the Option Plan. No stock options were exercised under the Option Plan during the year ended December 31, 2016. On June 23, 2016, the stockholders approved the 2016 EIP and the Company ceased granting options under the Option Plan. Options granted under the Option Plan prior to January 2010 began vesting after one year from the date of grant, are exercisable in equal amounts over four years on the anniversary date of the grant, and expire eight years following the date of grant. Options granted to employees under the Option Plan after January 2010 vest 25% on the first anniversary of the vesting commencement date, with the balance vesting in monthly increments for 36 months following the first anniversary of grant, and expire eight years following the date of grant. Due to the adoption of the 2016 EIP on June 23, 2016, all shares remaining for future grant under the Option Plan were transferred to the 2016 EIP plan leaving no shares of common stock available for future grant under the Option Plan.
Inducement Grant
On April 4, 2016, the Company made an inducement stock option grant (Inducement Grant) of 474,810 options. Options granted under the Inducement Grant vest 25% on the first anniversary of the vesting commencement date, with the balance vesting in monthly increments for 36 months following the first anniversary of grant, and expire ten years following the date of grant. No stock options were exercised under the inducement grant during the year ended December 31, 2016.
As of December 31, 2016, 1,053,949 shares of common stock remain available for future grant under the 2016 EIP. A summary of option activity under the 2016 EIP, Inducement Grant and Option Plan as of December 31, 2016, and changes during such year is presented below. As described above, prior to April 1, 2008, exercise prices were denominated in Canadian dollars and in U.S. dollars thereafter. The weighted average exercise prices listed below are in their respective dollar denominations.
F-23
| Options |
Stock Options | Weighted Average Exercise Price |
Weighted Average Remaining Contractual Term |
Aggregate Intrinsic Value |
||||||||||||
| In Canadian dollars ($CDN): |
||||||||||||||||
| Outstanding at January 1, 2016 |
750 | $ | 27.6 | |||||||||||||
| Granted |
— | — | ||||||||||||||
| Exercised |
— | — | ||||||||||||||
| Forfeited |
— | — | ||||||||||||||
| Expired |
(750 | ) | 27.6 | |||||||||||||
|
|
|
|||||||||||||||
| Outstanding at December 31, 2016 |
— | $ | — | — | $ | — | ||||||||||
|
|
|
|||||||||||||||
| Vested or expected to vest at December 31, 2016 |
— | $ | — | — | $ | — | ||||||||||
|
|
|
|||||||||||||||
| Vested and exercisable at December 31, 2016 |
— | $ | — | — | $ | — | ||||||||||
|
|
|
|||||||||||||||
| In US dollars ($US): |
||||||||||||||||
| Outstanding at January 1, 2016 |
1,224,444 | $ | 19.10 | |||||||||||||
| Granted |
880,458 | 6.83 | ||||||||||||||
| Exercised |
— | — | ||||||||||||||
| Forfeited |
(225,355 | ) | 18.61 | |||||||||||||
| Expired |
(12,836 | ) | 20.58 | |||||||||||||
|
|
|
|||||||||||||||
| Outstanding at December 31, 2016 |
1,866,711 | $ | 13.36 | 6.60 | $ | — | ||||||||||
|
|
|
|||||||||||||||
| Vested or expected to vest at December 31, 2016 |
1,751,629 | $ | 13.72 | 6.47 | $ | — | ||||||||||
|
|
|
|||||||||||||||
| Vested and exercisable at December 31, 2016 |
800,586 | $ | 18.98 | 4.54 | $ | — | ||||||||||
|
|
|
|||||||||||||||
The weighted average grant-date fair values of options granted were $4.53, $13.40 and $7.46, for the years ended December 31, 2016, 2015 and 2014, respectively.
The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted price of the Company’s common stock for all options that were in-the-money at December 31, 2016. Under the 2016 EIP, Option Plan and Inducement Grant, the total fair value of stock options vested during the years ended December 31, 2016, 2015 and 2014 was $10.6 million, $8.0 million and $6.3 million, respectively. There were zero, 3,324 and 1,001 stock options exercised for the year ended December 31, 2016, 2015 and 2014, respectively. Cash received from stock option exercises and the total intrinsic value of stock option exercises for the year ended December 31, 2016 was zero. Cash received from stock option exercises and the total intrinsic value of stock option exercises for all periods presented were immaterial. As of December 31, 2016, there was no exercisable, in-the-money stock options based on the Company’s closing share price of $4.31 on The NASDAQ Global Market.
Share-based compensation expense related to the 2016 EIP, the Option Plan and Inducement Grant of $4.6 million, $2.1 million and $1.7 million was recognized for the years ended December 31, 2016, 2015 and 2014, respectively. The stock compensation expense during the year ended December 31, 2016 included the acceleration of share-based compensation expense related to the retirement of the Company’s former chief executive officer in January 2016. Total compensation cost related to non-vested stock options not yet recognized was $4.7 million as of December 31, 2016, which is expected to be recognized over the next 35 months on a weighted-average basis. The Company uses the Black-Scholes option pricing model to value options upon grant date, under the following weighted average assumptions:
| 2016 | 2015 | 2014 | ||||||||||
| Expected dividend rate |
0.00 | % | 0.00 | % | 0.00 | % | ||||||
| Expected volatility |
74.63 | % | 72.15 | % | 78.67 | % | ||||||
| Risk-free interest rate |
1.46 | % | 1.63 | % | 1.65 | % | ||||||
| Expected life of options in years |
6.22 | 6.00 | 5.82 | |||||||||
F-24
The expected life represents the period that the Company’s stock options are expected to be outstanding and is based on historical data. The expected volatility is based on the historical volatility of the Company’s common stock for a period equal to the stock option’s expected life. The risk-free interest rate is based on the yield at the time of grant of a U.S. Treasury security with an equivalent expected term of the option. The Company does not expect to pay dividends on its common stock. The amounts estimated according to the Black-Scholes option pricing model may not be indicative of the actual values realized upon the exercise of these options by the holders.
Share-based compensation guidance requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from estimates. The Company estimates forfeitures based on its historical experience.
Restricted share unit plan
The RSU Plan was established in 2005 for non-employee directors. On June 23, 2016, the stockholders approved the 2016 EIP and the Company ceased granting RSUs under the RSU Plan.
The RSU Plan provided for grants to be made from time to time by the board of directors or a committee thereof. Each restricted stock unit (RSU) granted was made in accordance with the RSU Plan and terms specific to that grant. Outstanding RSUs under the RSU Plan have a vesting term of one to two years. Approximately 75% of each RSU represents a contingent right to receive approximately 0.75 of a share of the Company’s common stock upon vesting. Approximately 25% of each RSU represents a contingent right to receive cash upon vesting, and the Company is required to deliver an amount in cash equal to the fair market value of these shares on the vesting date to facilitate the satisfaction of the non-employee directors’ U.S. federal income tax obligation with respect to the vested RSUs. The outstanding RSU awards are required to be re-measured at each reporting date until settlement of the award, and changes in valuation are recorded as compensation expense for the period. The fair value of the outstanding RSUs on the reporting date is determined to be the closing trading price of the Company’s common shares on that date.
On June 6, 2014, the Company’s stockholders approved an increase of 83,333 shares in the number of shares of the Company’s common stock reserved for issuance under the RSU Plan. Upon vesting, RSUs of 10,893, 16,308 and 18,351 with a weighted average fair value of $18.36, $22.75 and $20.85 were converted into 10,893, 16,308 and 18,351 shares of common stock for the years ended December 31, 2016, 2015 and 2014, respectively. Pursuant to an October 2011 amendment to the Company’s RSU Plan, the Company withheld 2,723 shares of the 10,893 RSUs for the year ended December 31, 2016, 4,078 shares of the 16,308 RSUs for the year ended December 31, 2015 and 4,588 shares of the 18,351 RSUs for the year ended December 31, 2014. The Company delivered to non-employee directors cash totaling $20,098, $92,759 and $95,653, which was equal to the fair value of the shares withheld on the vesting date in order to facilitate satisfaction of the non-employee directors’ income tax obligation with respect to the vested RSUs for the years ended December 31, 2016, 2015 and 2014, respectively.
Upon the adoption of the 2016 EIP on June 23, 2016, all shares remaining for future grant under the RSU Plan became available for issuance under the 2016 EIP plan and the Company ceased granting RSUs under the RSU Plan.
The fair value of each RSU has been determined to be the closing trading price of the Company’s common shares on the date of grant as quoted in NASDAQ Global Market.
A summary of the RSU activity under the Company’s 2016 EIP and RSU Plan as of December 31, 2016, and changes during such year is presented below:
| Restricted Share Units |
Restricted Share Units |
Weighted Average Fair Value per Unit |
||||||
| Non-vested at January 1, 2016 |
38,164 | $ | 13.32 | |||||
| Granted |
54,348 | 5.52 | ||||||
| Converted |
(10,893 | ) | 18.36 | |||||
|
|
|
|||||||
| Non-vested at December 31, 2016 |
81,619 | $ | 4.31 | |||||
|
|
|
|||||||
| Expected to vest at December 31, 2016 |
81,619 | $ | 4.31 | |||||
|
|
|
|||||||
F-25
As of December 31, 2016, there was no unrecognized compensation cost related to unvested RSUs. The re-measurement of the outstanding RSUs together with the grant and conversion of the RSUs resulted in a reduction of $0.1 million in share-based compensation expense recorded in general and administrative expenses in the consolidated statement of operations for the years ended December 31, 2016 and an additional $0.6 million and $0.4 million in share-based compensation expense recorded in general and administrative expenses in the consolidated statement of operations for the years ended December 31, 2015 and 2014, respectively.
Employee Stock Purchase Plan (ESPP)
The Company adopted an ESPP on June 3, 2010, pursuant to which a total of 150,000 shares of common stock were reserved for sale to employees of the Company. The ESPP is administered by the compensation committee of the board of directors and is open to all eligible employees of the Company. Under the terms of the ESPP, eligible employees may purchase shares of the Company’s common stock at six month intervals during 18-month offering periods through their periodic payroll deductions, which may not exceed 15% of any employee’s compensation and may not exceed a value of $25,000 in any calendar year, at a price not less than the lesser of an amount equal to 85% of the fair market value of the Company’s common stock at the beginning of the offering period or an amount equal to 85% of the fair market value of the Company’s common stock on each purchase date. The maximum aggregate number of shares that may be purchased by each eligible employee during each offering period is 15,000 shares of the Company’s common stock.
Fair value of shares purchases under the Company’s ESPP was estimated at subscription dates using a Black-Scholes valuation model, which requires the input of highly subjective assumptions including expected stock price volatility and expected term. The expected volatility is based on the historical volatility of the Company’s common stock for a period equal to the ESPP’s expected term, which is determined by length of time between the subscription date and the purchase date. The risk-free interest rate is based on the yield at the time of grant of a U.S. Treasury security with an equivalent expected term of the ESPP. The Company does not expect to pay dividends on its common stock.
For the year ended December 31, 2016, 2015 and 2014, expense related to this plan was $120,540, $95,764 and $101,796, respectively. As of December 31, 2016, there are 69,673 shares reserved for future purchases and there was approximately $149,000 of unrecognized compensation cost related to the ESPP, which is expected to be recognized over an estimated weighted-average period of 1.50 years. The following table summarizes information for shares issued under the ESPP for the years ended December 31, 2016, 2015 and 2014:
| Shares Issued for the Years Ended December 31, | ||||||||||||
| Purchase Prices |
2016 | 2015 | 2014 | |||||||||
| $4.45 |
10,900 | — | — | |||||||||
| $5.10 |
8,261 | — | — | |||||||||
| $8.94 |
— | 4,698 | 12,801 | |||||||||
| $9.72 |
— | 1,899 | — | |||||||||
| $11.10 |
— | 4,656 | — | |||||||||
|
|
|
|
|
|
|
|||||||
| Total |
19,161 | 11,253 | 12.801 | |||||||||
|
|
|
|
|
|
|
|||||||
| 8. | COLLABORATIVE AND LICENSE AGREEMENTS |
Array BioPharma, Inc.
On December 11, 2014, the Company entered into a License Agreement (the License Agreement) with Array BioPharma Inc. (Array). Pursuant to the License Agreement, Array granted the Company an exclusive license to develop, manufacture and commercialize tucatinib (previously known as ONT-380), an orally active, reversible and selective small-molecule HER2 inhibitor.
Under the terms of the License Agreement, the Company paid Array an upfront fee of $20 million, which was recorded as part of research and development expense upon initiation of the exclusive license agreement. In addition, if the Company sublicenses rights to tucatinib to a third party, the Company will pay Array a percentage of any sublicense payments it receives, with the percentage varying according to the stage of development of tucatinib at the time of the sublicense. If the Company is acquired within three years of the effective date of the License Agreement, and tucatinib has not been sublicensed to another entity prior to such acquisition, then the acquirer will be required to make certain milestone payments of up to $280 million to Array, which are primarily based on potential tucatinib sales. Array is also entitled to receive up to a double-digit royalty based on net sales of tucatinib.
F-26
The License Agreement will expire on a country-by-country basis ten years following the first commercial sale of the product in each respective country, but may be terminated earlier by either party upon material breach of the License Agreement by the other party or the other party’s insolvency, or by the Company on 180 days’ notice to Array. The Company and Array have also agreed to indemnify the other party for certain of their respective warranties and obligations under the License Agreement.
STC.UNM
Effective June 30, 2014, Alpine entered into an exclusive license agreement with STC.UNM, by assignment from The Regents of the University of New Mexico, to license the rights to use certain technology relating to protocells, a mesoporous silica nanoparticle delivery platform. The Company subsequently acquired Alpine in August 2014. Under the terms of the license agreement, the Company, as successor to Alpine, had the right to conduct research, clinical development and commercialize all inventions and products that are developed from the platform technology in certain fields of use as described in the license agreement. In exchange for the exclusive license, the Company was obligated to make a series of payments including on-going annual license payments, reimbursement of patent costs, success and time-based milestones up to $5 million. Royalty obligations under the license agreement included a double-digit royalty on commercial sublicensing income and a low single-digit royalty based on net sales.
On May 5, 2016, the Company entered into an agreement with STC.UNM to terminate the license agreement relating to protocell technology. The agreement provided for a mutual release of claims and payment of a termination and license fee totaling $325,000. As a result of the termination and the Company’s intent to no longer develop, license or commercialize the protocell technology, the indefinite-lived intangible assets acquired in the 2014 acquisition of Alpine were considered impaired. Accordingly, $19.7 million was fully written-off and recorded as intangible asset impairment in the Company’s consolidated statements of operations for the year ended December 31, 2016. The indefinite-lived intangible assets represent the value assigned to in-process research and development when the Company acquired the protocell technology. The Company also recognized a $6.9 million tax benefit during the year ended December 31, 2016, upon the reversal of its deferred tax liability, which solely relates to the indefinite-lived intangible assets. In addition, $1.5 million of previously recorded time-based milestones for license fees associated with the STC.UNM license agreement was reversed from research and development expenses during year ended December 31, 2016. The impairment charge did not result in any significant future cash expenditures, or otherwise impact the Company’s liquidity or cash. See the “Note 5 – Intangible Asset Impairment” and “Note 10 — Income Tax” of the audited financial statements included in this report for additional information.
Sentinel Oncology Ltd.
In April 2014, the Company entered into an exclusive license and research collaboration agreement with Sentinel Oncology Limited (Sentinel) for the development of novel small molecule Chk1 kinase inhibitors. Under the agreement, the Company has made payments to Sentinel to support their chemistry research. The Company is responsible for preclinical and clinical development, manufacturing and commercialization of any resulting compounds. Sentinel is eligible to receive success-based development and commercial milestone payments up to approximately $90 million based on development and commercialization events, including a $1.0 million milestone for the initiation of GLP toxicology studies, the initiation of certain clinical trials, regulatory approval and first commercial sale. Sentinel is also entitled to a single-digit royalty based on net sales.
Merck KGaA
In May 2001, the Company and Merck KGaA entered into a collaborative arrangement to pursue joint global product research, clinical development and commercialization for two product candidates, including tecemotide (formerly known as L-BLP25 or Stimuvax), a MUC1-based liposomal cancer vaccine. This collaboration agreement was subsequently revised and ultimately replaced in 2008 with a license agreement. Under the 2008 license agreement, (1) the Company licensed to Merck KGaA the exclusive right to develop, commercialize and manufacture tecemotide and the right to sublicense to other persons all rights licensed to Merck KGaA by the Company, (2) the Company transferred certain manufacturing know-how, (3) the Company agreed not to develop any product, other than ONT-10, that is competitive with tecemotide and (4) if the Company intends to license the development or commercialization rights to ONT-10, Merck KGaA will have a right of first negotiation with respect to such rights. In 2014, Merck KGaA announced that it does not intend to continue the clinical development of tecemotide.
F-27
| 9. | NET INVESTMENT AND OTHER INCOME (EXPENSE) |
Net investment and other income (expense) include the following components for the periods indicated:
| Years Ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| (In thousands) | ||||||||||||
| Investment income, net |
$ | 240 | $ | 73 | $ | 73 | ||||||
| Net foreign exchange gain (loss) |
1 | (5 | ) | (4 | ) | |||||||
| Gain (loss) on sale of equipment |
(69 | ) | 7 | 1 | ||||||||
| Gain on sale of investment |
— | — | 6 | |||||||||
| Other income |
50 | 5 | — | |||||||||
|
|
|
|
|
|
|
|||||||
| Total investment and other income (expense), net |
$ | 222 | $ | 80 | $ | 76 | ||||||
|
|
|
|
|
|
|
|||||||
| 10. | INCOME TAX |
The provision (benefit) for income taxes consists of the following:
| 2016 | 2015 | 2014 | ||||||||||
| (In thousands) | ||||||||||||
| Current income tax expense (benefit) |
$ | — | $ | — | $ | — | ||||||
| Deferred income tax expense (benefit) |
(6,908 | ) | — | — | ||||||||
|
|
|
|
|
|
|
|||||||
| Total income tax expense (benefit) |
$ | (6,908 | ) | $ | — | $ | — | |||||
|
|
|
|
|
|
|
|||||||
The Company recorded an income tax benefit of $6.9 million in 2016 due to the reversal of its deferred tax liability, which related solely to the impairment of the indefinite-lived intangible asset.
The provision for income taxes was different from the expected statutory federal income tax rate as follows:
| 2016 | 2015 | 2014 | ||||||||||
| Tax benefit at statutory rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
| Change in fair value of warrant liability |
0.0 | 0.1 | 0.6 | |||||||||
| Stock based compensation |
(0.9 | ) | 0.8 | (2.1 | ) | |||||||
| Other |
0.4 | 0.4 | (0.5 | ) | ||||||||
| Change in valuation allowance |
(23.7 | ) | (40.0 | ) | (30.1 | ) | ||||||
| Net operating loss expiration and true ups |
0.0 | 3.7 | (2.9 | ) | ||||||||
|
|
|
|
|
|
|
|||||||
| Income tax benefit (provision) |
10.8 | % | 0.0 | % | 0.0 | % | ||||||
|
|
|
|
|
|
|
|||||||
The Company’s net deferred tax assets and deferred tax liabilities were recorded in other assets and accrued and other liabilities, respectively on the Consolidated Balance Sheets and consist of the following as of December 31, 2016 and 2015:
| 2016 | 2015 | |||||||
| (In thousands) | ||||||||
| Deferred tax assets |
||||||||
| Accrued expenses and other |
$ | 1,510 | $ | 602 | ||||
| Tax benefits from losses carried forward and tax credits |
147,001 | 130,602 | ||||||
| Stock based compensation |
4,119 | 3,143 | ||||||
| Intangible assets |
9,776 | 11,049 | ||||||
F-28
| 2016 | 2015 | |||||||
| (In thousands) | ||||||||
| Other |
207 | 167 | ||||||
|
|
|
|
|
|||||
| Total deferred tax assets |
$ | 162,613 | $ | 145,563 | ||||
| Valuation allowance |
(162,414 | ) | (145,370 | ) | ||||
|
|
|
|
|
|||||
| Net deferred tax assets |
199 | 193 | ||||||
|
|
|
|
|
|||||
| Deferred tax liabilities |
||||||||
| Prepaid expenses |
199 | 193 | ||||||
| Intangible asset |
— | 6,908 | ||||||
|
|
|
|
|
|||||
| Total deferred tax liabilities |
199 | 7,101 | ||||||
| Net deferred tax liability |
$ | — | $ | 6,908 | ||||
|
|
|
|
|
|||||
Based on the available evidence, the Company has recorded a full valuation allowance against its net deferred income tax assets as it is more likely than not that the benefit of these deferred tax assets will not be realized. The valuation allowance increased by $17.0 million and increased by $5.4 million during the years ended December 31, 2016 and December 31, 2015, respectively.
The Company has recorded the following reserve for uncertain tax positions as of December 31, 2016, 2015 and 2014:
| 2016 | 2015 | 2014 | ||||||||||
| (In thousands) | ||||||||||||
| Balance at January 1 |
$ | 662 | $ | 545 | $ | 662 | ||||||
| Increase related to prior year tax positions |
117 | — | ||||||||||
| Decrease related to current year tax positions |
— | — | (117 | ) | ||||||||
| Lapses of statute of limitations |
— | — | — | |||||||||
|
|
|
|
|
|
|
|||||||
| Balance at December 31 |
$ | 662 | $ | 662 | $ | 545 | ||||||
|
|
|
|
|
|
|
|||||||
None of the unrecognized tax benefits that, if recognized, would affect the effective tax rate due to valuation allowance. We are currently not under audit by the federal, state and foreign tax authorities. We do not believe that it is reasonably possible that the total amounts of unrecognized tax benefit will materially increase or decrease within the next 12 months.
United States
The Company has accumulated net operating losses of $260.0 million and $218.7 million for United States federal tax purposes at December 31, 2016 and 2015, respectively, some of which are restricted pursuant to Section 382 of the Internal Revenue Code, and which may not be available entirely for use in future years. These losses expire in fiscal years 2018 through 2036. The Company has federal research and development tax credit carryforwards of $0.7 million that will expire in fiscal years 2018 through 2029, if not utilized.
Canada
The Company has unclaimed Canada federal investment tax credits of $15.2 million and $14.7 million at December 31, 2016 and 2015, respectively, that expire in fiscal years 2018 through 2028. The Company has scientific research & experimental development expenditures of $102.1 million and $99.0 million for Canada federal purposes and $44.7 million and $43.3 million for provincial purposes at December 31, 2016 and 2015, respectively. These expenditures may be utilized in any period and may be carried forward indefinitely. The Company also has Canada federal capital losses of $140.6 million and $134.5 million and provincial capital losses of $140.7 million and $134.5 million at December 31, 2016 and 2015, respectively, which can be carried forward indefinitely to offset future capital gains. The Company has accumulated net operating losses of $4.8 million and $4.7 million at December 31, 2016 and 2015 for Canada federal tax purposes and $3.1 million and $3.0 million at December 31, 2016 and 2015 for provincial purposes which expire between 2026 and 2036. The Company is subject to examination by the Canada Revenue Agency for years after 2008. However, carryforward attributes that were generated prior to 2008 may still be adjusted by a taxing authority upon examination if the attributes have been or will be used in a future period.
F-29
Other
The Company files federal and foreign income tax returns in the United States and abroad. For U.S. federal income tax purposes, the statute of limitations is open for 1998 and onward for the United States and Canada due to net operating loss carried forwards.
| 11. | CONTINGENCIES, COMMITMENTS, AND GUARANTEES |
On January 9, 2016, the Company adopted a Retention Payment Plan, effective as of January 11, 2016 (Retention Plan), to provide cash retention payments to certain employees in order to induce such employees to remain employed through January 10, 2017 (Retention Date). Any employee who participates in the Retention Plan and (i) remains continuously employed by the Company through the Retention Date or (ii) has been terminated by the Company other than for cause prior to the Retention Date, and (iii) signs a general release of claims shall be paid a lump-sum cash payment as determined on an individual basis. If such employee’s service is terminated for cause or the employee voluntarily resigns prior to the Retention Date, no such payments shall be made. As of December 31, 2016, $2.3 million was accrued in compensation and related liabilities pursuant to the Retention Plan.
Royalties
Pursuant to various license agreements, the Company may be obligated to make payments based on the achievement of certain event based milestones, a percentage of revenues derived from the licensed technology and royalties on net sales. As of December 31, 2016, no payments were obligated as there were no milestones achieved, no technology licensed and the Company had no net sales, as defined in the agreements. As such, the Company is not currently contractually committed to any significant quantifiable payments for licensing fees, royalties or other contingent payments.
Employee benefit plan
Under a defined contribution plan available to permanent employees, the Company is committed to matching employee contributions up to limits set by the terms of the plan, as well as limits set by U.S. tax authorities. The Company’s matching contributions to the plan totaled $0.2 million for each of the years ended December 31, 2016, 2015 and 2014. There were no changes to the plan during the year ended December 31, 2016.
Lease obligations — operating leases
The Company is committed to annual minimum payments under operating lease agreements for its office and laboratory space and equipment) as follows (in thousands):
| Year Ending December 31, |
||||
| 2017 |
$ | 732 | ||
| 2018 |
689 | |||
| Thereafter |
2 | |||
|
|
|
|||
| Total |
$ | 1,423 | ||
|
|
|
|||
Rental expense for operating leases in the amount of $0.5 million has been recorded in the consolidated statements of operations for each of the years ended December 31, 2016, 2015 and 2014. In May 2008, the Company entered into a lease agreement to lease office and laboratory space for its headquarters in Seattle, Washington totaling approximately 17,000 square feet. In November 2016, the Company entered into an amendment to the existing lease to add approximately 2,600 square feet of office space. The amended lease, which expires in December 2018, provides for a monthly base rent of $47,715 increasing to $57,910 in 2018. The Company has also entered into operating lease obligations through November 2019 for certain office equipment, which are included in the table above.
Guarantees
In the normal course of operations, the Company indemnifies counterparties in transactions such as purchase and sale contracts for assets or shares, manufacturing and other service agreements, license agreements, director/officer contracts and leasing transactions. These indemnification agreements may require the Company to compensate the counterparties for costs incurred to third parties as a result of various events, including changes in (or in the interpretation of) laws and
F-30
regulations, the Company’s breach of contract or negligence, environmental liabilities, or as a result of litigation claims or statutory sanctions that may be suffered by the counterparties as a consequence of the transaction. The terms of these indemnification agreements vary based upon the contract, the nature of which prevents the Company from making a reasonable estimate of the maximum potential amount that could be required to pay to counterparties. Historically, the Company has not made any significant payments under such indemnification agreements and no amounts have been accrued in the accompanying consolidated financial statements with respect to these indemnification agreements.
| 12. | RELATED PARTY TRANSACTIONS |
Certain of the Company’s affiliates participated in the Company’s recent public underwritten offerings and registered direct offering. In February 2015, the Company closed concurrent but separate underwritten offerings of 2,250,000 shares of its common stock at a price of $9.00 per share, for gross proceeds of $20.3 million, and 1,333 shares of its Series B convertible preferred stock at a price of $1,500 per share for gross proceeds of $2.0 million. In this offering, affiliates of BVF, a holder of more than 5% of the Company’s outstanding common stock, purchased 1,333 shares of the Company’s Series B preferred stock for an aggregate purchase price of $2.0 million. Separate but concurrent with these offerings, affiliates of BVF also exchanged 666,667 shares of common stock for 4,000 shares of Series B preferred stock. In addition, in May 2015, the Company entered into an exchange agreement with certain affiliates of BVF to exchange 1,250,000 shares of common stock previously purchased by BVF for 7,500 shares of Series C Convertible Preferred Stock, and in June 2016, the Company closed a registered direct offering in which affiliates of BVF purchased 17,250 shares of the Company’s Series D preferred stock for an aggregate purchase price of $13.8 million.
In January 2016, the Company appointed Mr. Mark Lampert as a member of the board of directors as a Class I director of the Company. Mr. Lampert is an affiliate of BVF. On January 17, 2017, Mr. Mark Lampert resigned from the Board of Directors of the Company.
In January 2016, the Company appointed Dr. Gwen Fyfe as a member of the board of directors as a Class III director of the Company. Dr. Fyfe is also a consultant to the Company.
Mr. Scott Myers, the Company’s President, Chief Executive Officer and a member of the board of directors, purchased 10,416 shares of the Company’s common stock in the June 2016 public underwritten offering.
Recovery of Stockholder Short-Swing Profit
In August 2016, the Company received a payment of $0.2 million from a related-party stockholder in settlement of a short-swing profit claim under Section 16(b) of the Securities Exchange Act of 1934. The Company recognized these proceeds as a capital contribution from a stockholder, and recorded it as an increase to additional paid-in capital in its Consolidated Balance Sheets as of December 31, 2016.
| 13. | SUBSEQUENT EVENTS |
On January 27, 2017, the Company closed an underwritten offering of 26,659,300 shares of our common stock at a price to the public of $3.30 per share, for gross proceeds of approximately $88.0 million. The shares include 3,477,300 shares of common stock sold pursuant to the over-allotment option granted by the Company to the underwriters, which option was exercised in full. In addition, the Company closed an underwritten offering of 1,818 shares of its Series E convertible preferred stock at a price to the public of $3,300 per share, for gross proceeds of approximately $6.0 million. Each share of Series E convertible preferred stock is non-voting and convertible into 1,000 shares of our common stock, provided that conversion will be prohibited if, as a result, the holder and its affiliates would beneficially own more than 19.99% of the common stock then outstanding. Aggregate gross proceeds from the offerings, before deducting underwriting discounts, commissions and estimated expenses, were approximately $94.0 million.
| 14. | CONDENSED QUARTERLY FINANCIAL DATA (unaudited) |
The following table contains selected unaudited statement of operations information for each quarter of 2016 and 2015. The unaudited information should be read in conjunction with the Company’s audited financial statements and related notes included elsewhere in this report. The Company believes that the following unaudited information reflects all normal recurring adjustments necessary for a fair presentation of the information for the periods presented. The operating results for any quarter are not necessarily indicative of results for any future period.
F-31
Quarterly Financial Data:
| Three Months Ended, | ||||||||||||||||
| March 31 | June 30 | September 30 | December 31 | |||||||||||||
| (In thousands, except per share data) | ||||||||||||||||
| 2016 |
||||||||||||||||
| Operating expenses(1) |
$ | 12,970 | $ | 30,483 | $ | 10,792 | $ | 10,590 | ||||||||
| Net loss attributable to common stockholders(5) |
(12,887 | ) | (25,132 | ) | (11,762 | ) | (10,512 | ) | ||||||||
| Net loss per share — basic and diluted(4) |
(0.81 | ) | (1.57 | ) | (0.52 | ) | (0.47 | ) | ||||||||
| 2015 |
||||||||||||||||
| Operating expenses(2) |
$ | 8,079 | $ | 8,337 | $ | 7,222 | $ | 9,151 | ||||||||
| Net loss attributable to common stockholders(3) |
(7,935 | ) | (10,896 | ) | (4,619 | ) | (9,131 | ) | ||||||||
| Net loss per share — basic and diluted(4) |
(0.48 | ) | (0.66 | ) | (0.29 | ) | (0.58 | ) | ||||||||
| (1) | Operating expenses for the three months ended March 31, 2016 includes a cash severance and insurance benefits of $1.6 million and non-cash compensation expense of $2.3 million due to the acceleration of share-based compensation related to the retirement and separation agreement that the Company entered into with its former chief executive officer in January 2016. Operating expenses for the three months ended June 30, 2016 includes an intangible asset impairment charge of $19.7 million in connection with our termination of the STC.UNM license agreement and a $1.5 million reversal of the previously recorded time-based milestones for license fees in connection with the termination of the STC.UNM license agreement (see Note 8). |
| (2) | Operating expenses for the three months ended December 31, 2015 includes a $1.0 million cumulative adjustment related to the STC.UNM milestones (see Note 8). |
| (3) | Net loss attributable to common stockholders for the three months ended March 31, June 30, September 30 and December 31, 2015 includes change in fair value of warrants income (expense) of approximately $0.1 million, $(2.6) million, $2.6 million and zero respectively (see Note 3). |
| (4) | Basic and diluted net loss per share for all periods presented have been adjusted retroactively to reflect the 1-for-6 reverse stock split. |
| (5) | Net loss attributable to common stockholders for the three months ended June 30, 2016 included an income tax benefit of $6.9 million due to the reversal of its deferred tax liability, which related solely to the impairment of the indefinite-lived intangible asset (see Note 8), and a $1.6 million deemed dividend related to the beneficial conversion feature on our Series D convertible preferred stock. Net loss attributable to common stockholders for the three months ended September 30, 2016 included a $1.0 million deemed dividend. |
F-32
CASCADIAN THERAPEUTICS, INC.
Unaudited Consolidated Financial Statements
As of September 30, 2017 and December 31, 2016, and for the three and nine months ended September 30, 2017 and 2016
INDEX TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
| Page | ||
| Condensed Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016 |
1 | |
| 2 | ||
| 3 | ||
| 4 | ||
| 5 |
CASCADIAN THERAPEUTICS, INC.
Condensed Consolidated Balance Sheets
(In thousands, except share and per share amounts)
| September 30, 2017 |
December 31, 2016 |
|||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current: |
||||||||
| Cash and cash equivalents |
$ | 12,739 | $ | 13,721 | ||||
| Short-term investments |
89,259 | 49,084 | ||||||
| Accounts and other receivables |
333 | 238 | ||||||
| Prepaid and other current assets |
1,222 | 1,411 | ||||||
|
|
|
|
|
|||||
| Total current assets |
103,553 | 64,454 | ||||||
| Long-term investments |
10,981 | — | ||||||
| Property and equipment, net |
1,395 | 1,402 | ||||||
| Goodwill |
16,659 | 16,659 | ||||||
| Other assets |
799 | 750 | ||||||
|
|
|
|
|
|||||
| Total assets |
$ | 133,387 | $ | 83,265 | ||||
|
|
|
|
|
|||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current: |
||||||||
| Accounts payable |
$ | 619 | $ | 824 | ||||
| Accrued and other liabilities |
5,452 | 3,323 | ||||||
| Accrued compensation and related liabilities |
2,269 | 4,274 | ||||||
| Restricted share unit liability |
393 | 352 | ||||||
|
|
|
|
|
|||||
| Total current liabilities |
8,733 | 8,773 | ||||||
| Other liabilities |
8 | 105 | ||||||
| Class UA preferred stock, 12,500 shares authorized, 12,500 shares issued and outstanding |
30 | 30 | ||||||
| Commitments and contingencies |
||||||||
| Stockholders’ equity: |
||||||||
| Preferred stock, $0.0001 par value; 10,000,000 shares authorized as of September 30, 2017 and December 31, 2016; Series A Convertible Preferred Stock – 2,500 shares and 10,000 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively; Series B Convertible Preferred Stock – 5,333 shares issued and outstanding as of September 30, 2017 and December 31, 2016; Series C Convertible Preferred Stock – 7,500 shares issued and outstanding as of September 30, 2017 and December 31, 2016; Series D Convertible Preferred Stock – 17,250 shares issued and outstanding as of September 30, 2017 and December 31, 2016; Series E Convertible Preferred Stock – 1,818 shares and zero shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively |
— | — | ||||||
| Common stock, $0.0001 par value; 130,000,000 shares and 66,666,667 shares authorized as of September 30, 2017 and December 31, 2016, respectively; 50,560,320 shares and 22,562,640 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively |
353,852 | 353,849 | ||||||
| Additional paid-in capital |
388,362 | 297,922 | ||||||
| Accumulated deficit |
(612,506 | ) | (572,334 | ) | ||||
| Accumulated other comprehensive loss |
(5,092 | ) | (5,080 | ) | ||||
|
|
|
|
|
|||||
| Total stockholders’ equity |
124,616 | 74,357 | ||||||
|
|
|
|
|
|||||
| Total liabilities and stockholders’ equity |
$ | 133,387 | $ | 83,265 | ||||
|
|
|
|
|
|||||
See accompanying notes to the condensed consolidated financial statements
CASCADIAN THERAPEUTICS, INC.
Condensed Consolidated Statements of Operations
(In thousands, except share and per share amounts)
| Three months ended September 30, |
Nine months ended September 30, |
|||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| (Unaudited) | ||||||||||||||||
| Operating expenses |
||||||||||||||||
| Research and development |
$ | 10,910 | $ | 7,281 | $ | 31,011 | $ | 19,998 | ||||||||
| General and administrative |
3,448 | 3,511 | 9,930 | 14,509 | ||||||||||||
| Intangible asset impairment |
— | — | — | 19,738 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total operating expenses |
14,358 | 10,792 | 40,941 | 54,245 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Loss from operations |
(14,358 | ) | (10,792 | ) | (40,941 | ) | (54,245 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Other income |
||||||||||||||||
| Investment and other income, net |
297 | 19 | 769 | 144 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total other income, net |
297 | 19 | 769 | 144 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Loss before income taxes |
(14,061 | ) | (10,773 | ) | (40,172 | ) | (54,101 | ) | ||||||||
| Income tax benefit |
— | — | — | (6,908 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net loss |
$ | (14,061 | ) | $ | (10,773 | ) | $ | (40,172 | ) | $ | (47,193 | ) | ||||
|
|
|
|
|
|
|
|
|
|||||||||
| Deemed dividend related to beneficial conversion feature on convertible preferred stock |
— | (989 | ) | (982 | ) | (2,588 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net loss attributable to common stockholders |
$ | (14,061 | ) | $ | (11,762 | ) | $ | (41,154 | ) | $ | (49,781 | ) | ||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net loss per share—basic and diluted (1) |
$ | (0.28 | ) | $ | (0.52 | ) | $ | (0.87 | ) | $ | (2.74 | ) | ||||
|
|
|
|
|
|
|
|
|
|||||||||
| Shares used to compute basic and diluted net loss per |
50,404,201 | 22,551,740 | 47,089,996 | 18,159,603 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| (1) | Basic and diluted net loss per share, and shares to used compute basic and diluted net loss per share for the three and nine months ended September 30, 2016 have been adjusted retroactively to reflect the 1-for-6 reverse stock split. |
See accompanying notes to the condensed consolidated financial statements.
2
CASCADIAN THERAPEUTICS, INC.
Condensed Consolidated Statements of Comprehensive Loss
(In thousands)
| Three months ended September 30, |
Nine months ended September 30, |
|||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| (Unaudited) | ||||||||||||||||
| Net loss |
$ | (14,061 | ) | $ | (10,773 | ) | $ | (40,172 | ) | $ | (47,193 | ) | ||||
| Other comprehensive income (loss): |
||||||||||||||||
| Available-for-sale securities: |
||||||||||||||||
| Unrealized gain (loss) during the period, net |
23 | (30 | ) | (12 | ) | (1 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Other comprehensive income (loss) |
23 | (30 | ) | (12 | ) | (1 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Comprehensive loss |
$ | (14,038 | ) | $ | (10,803 | ) | $ | (40,184 | ) | $ | (47,194 | ) | ||||
|
|
|
|
|
|
|
|
|
|||||||||
See accompanying notes to the condensed consolidated financial statements
3
CASCADIAN THERAPEUTICS, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
| Nine months ended September 30, |
||||||||
| 2017 | 2016 | |||||||
| (Unaudited) | ||||||||
| Cash flows from operating activities |
||||||||
| Net loss |
$ | (40,172 | ) | $ | (47,193 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
| Depreciation and amortization |
538 | 483 | ||||||
| Amortization of premiums and accretion of discounts on securities |
22 | 139 | ||||||
| Share-based compensation expense |
2,515 | 4,520 | ||||||
| Intangible assets impairment |
— | 19,738 | ||||||
| Income tax benefit |
— | (6,908 | ) | |||||
| Other |
5 | 65 | ||||||
| Net change in assets and liabilities: |
||||||||
| Accounts and other receivable |
(95 | ) | (40 | ) | ||||
| Prepaid expenses and other current assets |
189 | 250 | ||||||
| Other long-term assets |
(49 | ) | (395 | ) | ||||
| Accounts payable |
(205 | ) | 302 | |||||
| Accrued and other liabilities |
2,129 | (27 | ) | |||||
| Accrued compensation and related liabilities |
(2,005 | ) | 1,638 | |||||
| Other long-term liabilities |
(97 | ) | (608 | ) | ||||
|
|
|
|
|
|||||
| Net cash used in operating activities |
(37,225 | ) | (28,036 | ) | ||||
|
|
|
|
|
|||||
| Cash flows from investing activities |
||||||||
| Purchases of investments |
(117,816 | ) | (74,000 | ) | ||||
| Redemption of investments |
66,626 | 47,284 | ||||||
| Purchases of property and equipment, net |
(536 | ) | (74 | ) | ||||
|
|
|
|
|
|||||
| Net cash used in investing activities |
(51,726 | ) | (26,790 | ) | ||||
|
|
|
|
|
|||||
| Cash flows from financing activities |
||||||||
| Proceeds from issuance of common stock, net of issuance cost |
82,432 | 29,823 | ||||||
| Proceeds from issuance of convertible preferred stock, net of issuance cost |
5,616 | 13,458 | ||||||
| Proceeds from exercise of stock options |
— | 42 | ||||||
| Cash paid upon conversion of restricted share units |
(79 | ) | (20 | ) | ||||
| Recovery of related party short-swing profit |
— | 225 | ||||||
|
|
|
|
|
|||||
| Net cash provided by financing activities |
87,969 | 43,528 | ||||||
|
|
|
|
|
|||||
| Decrease in cash and cash equivalents |
(982 | ) | (11,298 | ) | ||||
| Cash and cash equivalents, beginning of period |
13,721 | 27,850 | ||||||
|
|
|
|
|
|||||
| Cash and cash equivalents, end of period |
$ | 12,739 | $ | 16,552 | ||||
|
|
|
|
|
|||||
| Supplemental disclosures of non-cash investing and financing activities: |
||||||||
| Accretion on convertible preferred stock associated with beneficial conversion feature |
$ | 982 | $ | 2,588 | ||||
|
|
|
|
|
|||||
See accompanying notes to the condensed consolidated financial statements.
4
CASCADIAN THERAPEUTICS, INC.
Notes to the Condensed Consolidated Financial Statements
Three and nine months ended September 30, 2017 and September 30, 2016
(Unaudited)
1. DESCRIPTION OF BUSINESS
Cascadian Therapeutics, Inc. (the Company) is a clinical-stage biopharmaceutical company incorporated in the State of Delaware on September 7, 2007 and is listed on the NASDAQ Global Select Market under the ticker symbol “CASC.” The Company is focused primarily on the development of targeted therapeutic products for the treatment of cancer. The Company’s goal is to develop and commercialize compounds that have the potential to improve the lives and outcomes of cancer patients. The Company’s operations are not subject to any seasonality or cyclicality factors.
2. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial statements. The accounting principles and methods of computation adopted in these condensed consolidated financial statements are the same as those of the audited consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 filed with the Securities Exchange Commission (the SEC) on March 9, 2017.
Omitted from these statements are certain information and note disclosures normally included in the audited consolidated financial statements prepared in accordance with U.S. GAAP. The Company believes all adjustments necessary for a fair statement of the results for the periods presented have been made, and such adjustments consist only of those considered normal and recurring in nature. The financial results for the three and nine months ended September 30, 2017 are not necessarily indicative of financial results for the full year. The condensed consolidated balance sheet as of December 31, 2016 was derived from the audited financial statements at that date. The unaudited condensed consolidated financial statements and notes presented should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2016 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC on March 9, 2017.
Reverse Stock Split
On November 29, 2016, the Company effected a one-for-six reverse stock split of its outstanding common stock. Each six outstanding shares of the Company’s common stock were combined into one outstanding share of common stock. All per share and share amounts for all periods presented have been adjusted retrospectively to reflect the 1-for-6 reverse stock split.
Accumulated Other Comprehensive Income (Loss)
Comprehensive income or loss is comprised of net income or loss and other comprehensive income or loss. Other comprehensive income or loss includes unrealized gains and losses on the Company’s available-for-sale investments. In addition to unrealized gains and losses on investments, accumulated other comprehensive income or loss consists of foreign currency translation adjustments which arose from the conversion of the Canadian dollar functional currency consolidated financial statements to the U.S. dollar reporting currency consolidated financial statements prior to January 1, 2008. Should the Company liquidate or substantially liquidate its investments in its foreign subsidiaries, the Company would be required to recognize the related cumulative translation adjustments pertaining to the liquidated or substantially liquidated subsidiaries, as a charge to earnings in the Company’s condensed consolidated statements of operations and comprehensive loss.
5
There were no reclassifications out of accumulated other comprehensive loss during the three and nine months ended September 30, 2017. The tables below show the changes in accumulated balances of each component of accumulated other comprehensive loss for the three and nine months ended September 30, 2017 and September 30, 2016:
| Three months ended September 30, 2017 | ||||||||||||
| Net unrealized gains/(losses) on Available-for-sale Securities |
Foreign Currency Translation Adjustment |
Accumulated Other Comprehensive Loss |
||||||||||
| (In thousands) | ||||||||||||
| Balance at June 30, 2017 |
$ | (49 | ) | $ | (5,066 | ) | $ | (5,115 | ) | |||
| Current period other comprehensive income (loss) |
23 | — | 23 | |||||||||
|
|
|
|
|
|
|
|||||||
| Balance at September 30, 2017 |
$ | (26 | ) | $ | (5,066 | ) | $ | (5,092 | ) | |||
|
|
|
|
|
|
|
|||||||
| Three months ended September 30, 2016 | ||||||||||||
| Net unrealized gains/(losses) on Available-for-sale Securities |
Foreign Currency Translation Adjustment |
Accumulated Other Comprehensive Loss |
||||||||||
| (In thousands) | ||||||||||||
| Balance at June 30, 2016 |
$ | 31 | $ | (5,066 | ) | $ | (5,035 | ) | ||||
| Current period other comprehensive loss |
(30 | ) | — | (30 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| Balance at September 30, 2016 |
$ | 1 | $ | (5,066 | ) | $ | (5,065 | ) | ||||
|
|
|
|
|
|
|
|||||||
| Nine months ended September 30, 2017 | ||||||||||||
| Net unrealized gains/(losses) on Available-for-sale Securities |
Foreign Currency Translation Adjustment |
Accumulated Other Comprehensive Loss |
||||||||||
| (In thousands) | ||||||||||||
| Balance at December 31, 2016 |
$ | (14 | ) | $ | (5,066 | ) | $ | (5,080 | ) | |||
| Current period other comprehensive income (loss) |
(12 | ) | — | (12 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| Balance at September 30, 2017 |
$ | (26 | ) | $ | (5,066 | ) | $ | (5,092 | ) | |||
|
|
|
|
|
|
|
|||||||
| Nine months ended September 30, 2016 | ||||||||||||
| Net unrealized gains/(losses) on Available-for-sale Securities |
Foreign Currency Translation Adjustment |
Accumulated Other Comprehensive Loss |
||||||||||
| (In thousands) | ||||||||||||
| Balance at December 31, 2015 |
$ | 2 | $ | (5,066 | ) | $ | (5,064 | ) | ||||
| Current period other comprehensive income (loss) |
(1 | ) | — | (1 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| Balance at September 30, 2016 |
$ | 1 | $ | (5,066 | ) | $ | (5,065 | ) | ||||
|
|
|
|
|
|
|
|||||||
3. RECENT ACCOUNTING PRONOUNCEMENTS
In January 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This standard simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test which previously required measurement of any goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Instead, under this update, the impairment charge will be measured based on the excess of a reporting unit’s carrying value over its fair value. The standard will be applied prospectively and is effective for a public business entity that is an SEC filer for its annual and interim impairment tests performed in periods beginning after December 15, 2019. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. The Company is currently evaluating any impact this standard may have on its consolidated financial position and results of operations.
In March 2016, FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends ASC Topic 718, Compensation – Stock Compensation. This standard changes how companies account for certain aspects of share-based payments to employees including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This standard is effective for public business entities for fiscal years beginning after December 15, 2016, and interim periods within those years. The Company adopted this standard as of January 1, 2017. Because the Company has incurred net losses since its inception and maintains a full valuation allowance on its net deferred tax assets, the adoption of this standard did not have a material impact on the Company’s financial condition, results of operations and cash flows, or financial statement disclosures.
6
In August 2015, FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606)—Deferral of the Effective Date, which defers by one year the effective date of ASU 2014-09, Revenue from Contracts with Customers. For public entities, the standard is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Early adoption is permitted as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within those annual periods. As the Company does not currently have any revenue arrangements in the scope of the new revenue standard, it does not expect the adoption of this standard to have a material effect on its financial position or results of operations. However, if the Company does enter into license, collaboration or other revenue arrangements during 2017, there may be material differences in the accounting treatment under the current guidance and the new revenue standard as of the adoption date, January 1, 2018.
4. FAIR VALUE MEASUREMENTS
The Company measures certain financial assets and liabilities at fair value in accordance with a hierarchy which requires an entity to maximize the use of observable inputs which reflect market data obtained from independent sources and minimize the use of unobservable inputs which reflect the Company’s market assumptions when measuring fair value. There are three levels of inputs that may be used to measure fair value:
| • | 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 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. |
The Company’s financial assets and liabilities measured at fair value consisted of the following as of September 30, 2017 and December 31, 2016:
| September 30, 2017 | December 31, 2016 | |||||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||
| Financial assets: |
||||||||||||||||||||||||||||||||
| Money market funds |
$ | 5,271 | $ | — | $ | — | $ | 5,271 | $ | 6,559 | $ | — | $ | — | $ | 6,559 | ||||||||||||||||
| Debt securities of U.S. government agencies |
— | 66,508 | — | 66,508 | — | 38,378 | — | 38,378 | ||||||||||||||||||||||||
| Corporate bonds |
— | 33,732 | — | 33,732 | — | 10,706 | — | 10,706 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| $5,271 | $100,240 | $— | $105,511 | $6,559 | $49,084 | $— | $55,643 | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Financial liabilities: |
||||||||||||||||||||||||||||||||
| Restricted share units |
$ | 393 | $ | — | $ | — | $ | 393 | $ | 352 | $ | — | $ | — | $ | 352 | ||||||||||||||||
If quoted market prices in active markets for identical assets are not available to determine fair value, then the Company uses quoted prices of similar instruments and other significant inputs derived from observable market data obtained from third-party data providers. These investments are included in Level 2 and consist of debt securities of U.S government agencies and corporate bonds. There were no transfers between Levels 1 and 2 during the three- and nine-month period ended September 30, 2017.
5. FINANCIAL INSTRUMENTS
Financial instruments consist of cash and cash equivalents, investments and accounts and other receivables that will result in future cash receipts, as well as accounts payable, accrued and other liabilities, restricted share unit liabilities, and Class UA preferred stock that may require future cash outlays.
7
Investments
Investments are classified as available-for-sale securities and are carried at fair value with unrealized temporary holding gains and losses excluded from net income or loss and reported in other comprehensive income or loss and as a net amount in accumulated other comprehensive income or loss until realized. Available-for-sale securities are written down to fair value through income whenever it is necessary to reflect other-than-temporary impairments. The Company determined that the unrealized losses on its marketable securities as of September 30, 2017 were temporary in nature, and the Company currently does not intend to sell these securities before recovery of their amortized cost basis. All short-term investments are limited to a final maturity of less than one year from the reporting date. The Company’s long-term investments are investments with maturities exceeding 12 months from the reporting date. The Company is exposed to credit risk on its cash equivalents, short-term investments and long-term investments in the event of non-performance by counterparties, but does not anticipate such non-performance and mitigates exposure to concentration of credit risk through the nature of its portfolio holdings. If a security falls out of compliance with the Company’s investment policy, it may be necessary to sell the security before its maturity date in order to bring the investment portfolio back into compliance. The cost basis of any securities sold is determined by specific identification. The fair value of available-for-sale securities is based on prices obtained from third-party pricing services. The Company reviews the pricing methodology used by the third-party pricing services including the manner employed to collect market information. On a periodic basis, the Company also performs review and validation procedures on the pricing information received from the third-party pricing services. These procedures help ensure that the fair value information used by the Company is determined in accordance with applicable accounting guidance. The amortized cost, unrealized gain or losses and fair value of the Company’s cash, cash equivalents and investments for the periods presented are summarized below:
| Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | |||||||||||||
| (In thousands) | ||||||||||||||||
| As of September 30, 2017 |
||||||||||||||||
| Cash |
$ | 7,468 | $ | — | $ | — | $ | 7,468 | ||||||||
| Money market funds |
5,271 | — | — | 5,271 | ||||||||||||
| Debt securities of U.S. government agencies |
66,535 | 1 | (28 | ) | 66,508 | |||||||||||
| Corporate bonds |
33,731 | 6 | (5 | ) | 33,732 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 113,005 | $ | 7 | $ | (33 | ) | $ | 112,979 | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
| As of December 31, 2016 |
||||||||||||||||
| Cash |
$ | 7,162 | $ | — | $ | — | $ | 7,162 | ||||||||
| Money market funds |
6,559 | — | — | 6,559 | ||||||||||||
| Debt securities of U.S. government agencies |
38,387 | 1 | (10 | ) | 38,378 | |||||||||||
| Corporate bonds |
10,711 | — | (5 | ) | 10,706 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 62,819 | $ | 1 | $ | (15 | ) | $ | 62,805 | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
The following table summarizes the aggregate related fair value of investments with unrealized losses by investment category:
| As of September 30, 2017 | As of December 31, 2016 | |||||||||||||||
| Fair Value | Gross Unrealized Losses |
Fair Value | Gross Unrealized Losses |
|||||||||||||
| (In thousands) | ||||||||||||||||
| Debt securities of U.S. government agencies |
$ | 60,522 | $ | (28 | ) | $ | 31,990 | $ | (10 | ) | ||||||
| Corporate bonds |
13,766 | (5 | ) | 8,955 | (5 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 74,288 | $ | (33 | ) | $ | 40,945 | $ | (15 | ) | ||||||
|
|
|
|
|
|
|
|
|
|||||||||
The following table summarizes the Company’s available-for-sale securities by contractual maturity:
| As of September 30, 2017 | As of December 31, 2016 | |||||||||||||||
| Amortized Cost |
Fair Value | Amortized Cost |
Fair Value | |||||||||||||
| (In thousands) | ||||||||||||||||
| Less than one year |
$ | 94,549 | $ | 94,530 | $ | 55,657 | $ | 55,643 | ||||||||
| Greater than one year but less than five years |
10,988 | 10,981 | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 105,537 | $ | 105,511 | $ | 55,657 | $ | 55,643 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
8
Accounts and Other Receivables, Accounts Payable and Accrued and Other Liabilities
The carrying amounts of accounts and other receivables, accounts payable and accrued and other liabilities approximate their fair values due to the short-term nature of these financial instruments.
Class UA Preferred Stock
The fair value of class UA preferred stock is assumed to be equal to its carrying value as the amounts that will be paid and the timing of the payments cannot be determined with any certainty.
9
Limitations
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment; therefore, they cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
| 6. | INTANGIBLE ASSET IMPAIRMENT |
On May 5, 2016, the Company entered into an agreement with STC.UNM to mutually terminate the license agreement relating to protocell technology. As a result of the termination and the Company’s intent to no longer develop, license or commercialize the protocell technology, the indefinite-lived intangible assets acquired in the 2014 acquisition of Alpine Biosciences, Inc. (Alpine) were considered impaired. Accordingly, $19.7 million was fully written-off and recorded as intangible asset impairment in the Company’s condensed consolidated statements of operations for the three and nine months ended September 30, 2016. The indefinite-lived intangible assets represented the value assigned to in-process research and development when the Company acquired the protocell technology. Additionally, as a result of the impairment, the deferred tax liability, which solely relates to the indefinite-lived intangible assets was reversed, resulting in a federal tax benefit of $6.9 million during the nine months ended September 30, 2016. See “Note 13 — Income Tax” of the unaudited financial statements included in this report for additional information. The impairment charge did not result in any significant cash expenditures or otherwise impact the Company’s liquidity or cash. No impairment charges were recorded in the Company’s condensed consolidated statements of operations during the three and nine months ended September 30, 2017.
| 7. | NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS |
Basic net loss per share is calculated by dividing net loss attributable to common stockholders, which may include a deemed dividend from the amortization of a beneficial conversion feature, by the weighted average number of shares outstanding for the period. Diluted net loss per share is calculated by adjusting the numerator and denominator of the basic net loss per share calculation for the effects of all potentially dilutive common shares. Potential dilutive shares of the Company’s common stock include stock options, restricted share units, warrants, Series A, B, C, D and E convertible preferred stock and shares granted under the 2010 Employee Stock Purchase Plan (ESPP). Furthermore, adjustments to the denominator are required to reflect the addition of the related dilutive shares. Shares used to calculate basic and dilutive net loss per share for the three and nine months ended September 30, 2017, were the same, since all potentially dilutive shares were anti-dilutive.
The following table presents the number of shares that were excluded from the number of shares used to calculate diluted net loss per share:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Director and employee stock options |
3,248,853 | 1,804,159 | 3,248,853 | 1,804,159 | ||||||||||||
| Warrants |
841,449 | 841,449 | 841,449 | 841,449 | ||||||||||||
| Convertible preferred stock (as converted to common stock): |
||||||||||||||||
| Series A |
416,673 | 1,666,697 | 416,673 | 1,666,697 | ||||||||||||
| Series B |
888,851 | 888,851 | 888,851 | 888,851 | ||||||||||||
| Series C |
1,250,022 | 1,250,022 | 1,250,022 | 1,250,022 | ||||||||||||
| Series D |
2,875,055 | 2,875,055 | 2,875,055 | 2,875,055 | ||||||||||||
| Series E |
1,818,000 | — | 1,818,000 | — | ||||||||||||
| Employee restricted share units |
317,600 | — | 317,600 | — | ||||||||||||
| Non-employee director restricted share units |
95,999 | 81,612 | 95,999 | 81,612 | ||||||||||||
| Employee stock purchase plan |
17,641 | 6,192 | 17,641 | 6,192 | ||||||||||||
| 8. | EQUITY |
Increase in Authorized Common Stock
On June 8, 2017, the stockholders of the Company approved an amendment to the Company’s certificate of incorporation to increase the number of the Company’s authorized shares of common stock from 66,666,667 to 130,000,000. The Company filed the Certificate of Amendment to the Amended and Restated Certificate of Incorporation with the Delaware Secretary of State to effect such amendment.
January 2017 Financing
On January 27, 2017, the Company closed an underwritten offering for aggregate gross proceeds of $94.0 million, which included both common stock and convertible preferred stock. Aggregate net proceeds from the January 2017 offerings, after underwriting discounts, commissions and other expenses of $6.0 million, were approximately $88.0 million.
10
Common Stock
On January 27, 2017, the Company closed an underwritten offering of 26,659,300 shares of its common stock at a price to the public of $3.30 per share, for gross proceeds of approximately $88.0 million. The shares included 3,477,300 shares of common stock sold pursuant to the over-allotment option granted by the Company to the underwriters, which option was exercised in full.
Series E Convertible Preferred Stock
In addition, on January 27, 2017, the Company closed an underwritten offering of 1,818 shares of its Series E convertible preferred stock at a price to the public of $3,300 per share, for gross proceeds of approximately $6.0 million. The Company designated 1,818 shares of its authorized and unissued preferred stock as Series E convertible preferred stock and filed a Certificate of Designation of Preferences, Rights and Limitations of Series E Convertible Preferred Stock with the Delaware Secretary of State.
Each share of Series E Convertible Preferred Stock is convertible into 1,000 shares of the Company’s Common Stock at any time at the holder’s option. The holder, however, will be prohibited from converting Series E Convertible Preferred Stock into shares of common stock if, as a result of such conversion, the holder, together with its affiliates, would own more than 19.99% of the shares of the Company’s Common Stock then issued and outstanding, which percentage may change at the holders’ election to any other number less than or equal to 19.99% upon 61 days’ notice to the Company. In the event of the Company’s liquidation, dissolution, or winding up, holders of Series E Convertible Preferred Stock will receive a payment equal to $0.0001 per share of Series E Convertible Preferred Stock before any proceeds are distributed to the holders of common stock, after any proceeds are distributed to the holder of the Company’s Class UA Preferred Stock and on parity with any distributions to the holders of the Company’s Series A Convertible Preferred Stock, Series B Convertible Preferred Stock, Series C Convertible Preferred Stock and Series D Convertible Preferred Stock. Shares of Series E Convertible Preferred Stock will generally have no voting rights, except as required by law and except that the consent of holders of a majority of the outstanding Series E Convertible Preferred Stock will be required to amend the terms of the Series E Convertible Preferred Stock. Shares of Series E Convertible Preferred Stock will not be entitled to receive any dividends, unless and until specifically declared by the Company’s board of directors, and will rank:
| • | senior to all common stock; |
| • | senior to any class or series of capital stock created that specifically ranks by its terms junior to the Series E convertible preferred stock; |
| • | on parity with the Company’s Series A convertible preferred stock, Series B Convertible Preferred Stock, Series C convertible preferred stock and Series D convertible preferred stock, and any class or series of capital stock created that specifically ranks by its terms on parity with the Series E convertible preferred stock; and |
| • | junior to the Company’s Class UA preferred stock and any class or series of capital stock created that specifically ranks by its terms senior to the Series E convertible preferred stock; |
in each case, as to distributions of assets upon the Company’s liquidation, dissolution or winding up, whether voluntarily or involuntarily.
Beneficial Conversion Feature
A beneficial conversion feature exists when the effective conversion price of a convertible security is less than the market price per share on the commitment date, creating a discount. The value of the discount is determined by the difference between the market price and the conversion price multiplied by the potential conversion shares purchased. The discount is recognized as a non-cash deemed dividend from the date of issuance to the earliest conversion date.
The Company recognized a beneficial conversion feature as a non-cash dividend in the amount of $1.0 million, calculated as the number of potential conversion shares multiplied by the excess of the market price of its common stock over the price per conversion share of the Series E convertible preferred stock on the commitment date. The non-cash deemed dividend of $1.0 million was recorded in additional paid-in capital as a deemed dividend on the Series E convertible preferred stock, and was used in determining the net loss applicable to common stockholders in the condensed consolidated statement of operations for the nine months ended September 30, 2017.
June 2016 Financing
On June 28, 2016, the Company closed an underwritten offering for aggregate gross proceeds of $46.0 million, which included both common stock and convertible preferred stock. Aggregate net proceeds from the June 2016 offerings, after underwriting discounts, commissions and other expenses of $2.7 million, were approximately $43.3 million.
Common Stock
On June 28, 2016, the Company closed an underwritten public offering of 6,708,333 shares of its common stock at a price to the public of $4.80 per share for gross proceeds of $32.2 million. The shares included 875,000 shares of common stock sold pursuant to the option granted by the Company to the underwriters to purchase additional shares, which was exercised in full.
11
Series D Convertible Preferred Stock
In addition, on June 28, 2016, the Company closed a registered direct offering of 17,250 shares of its Series D Convertible Preferred Stock at a price of $800.00 per share directly to affiliates of BVF Partners L.P. (BVF), which are existing stockholders and affiliates of a former member of the board of directors, for gross proceeds of $13.8 million. The Company designated 17,250 shares of its authorized and unissued preferred stock as Series D convertible preferred stock and filed a Certificate of Designation of Preferences, Rights and Limitations of Series D Convertible Preferred Stock with the Delaware Secretary of State.
Each share of Series D Convertible Preferred Stock is convertible into 166.67 shares of the Company’s Common Stock at any time at the holder’s option. The holder, however, will be prohibited from converting Series D Convertible Preferred Stock into shares of common stock if, as a result of such conversion, the holder, together with its affiliates, would own more than 19.99% of the shares of the Company’s Common Stock then issued and outstanding, which percentage may change at the holders’ election to any other number less than or equal to 19.99% upon 61 days’ notice to the Company. In the event of the Company’s liquidation, dissolution, or winding up, holders of Series D Convertible Preferred Stock will receive a payment equal to $0.0001 per share of Series D Convertible Preferred Stock before any proceeds are distributed to the holders of common stock, after any proceeds are distributed to the holder of the Company’s Class UA Preferred Stock and on parity with any distributions to the holders of the Company’s Series A Convertible Preferred Stock, Series B Convertible Preferred Stock, Series C Convertible Preferred Stock and Series E Convertible Preferred Stock. Shares of Series D Convertible Preferred Stock will generally have no voting rights, except as required by law and except that the consent of holders of a majority of the outstanding Series D Convertible Preferred Stock will be required to amend the terms of the Series D Convertible Preferred Stock. Shares of Series D Convertible Preferred Stock will not be entitled to receive any dividends, unless and until specifically declared by the Company’s board of directors, and will rank:
| • | senior to all common stock; |
| • | senior to any class or series of capital stock created that specifically ranks by its terms junior to the Series D convertible preferred stock; |
| • | on parity with the Company’s Series A convertible preferred stock, Series B Convertible Preferred Stock, Series C convertible preferred stock and Series E convertible preferred stock, and any class or series of capital stock created that specifically ranks by its terms on parity with the Series D convertible preferred stock; and |
| • | junior to the Company’s Class UA preferred stock and any class or series of capital stock created that specifically ranks by its terms senior to the Series D convertible preferred stock; |
in each case, as to distributions of assets upon the Company’s liquidation, dissolution or winding up, whether voluntarily or involuntarily.
Beneficial Conversion Feature
The Company recognized a beneficial conversion feature in the amount of $2.6 million, calculated as the number of potential conversion shares multiplied by the excess of the market price of its common stock over the price per conversion share of the Series D convertible preferred stock on the commitment date. The Company immediately accreted $1.6 million of the $2.6 million beneficial conversion feature, representing approximately 60% of the Series D convertible preferred stock that could be converted at that time, upon issuance. The Company accreted the remaining $1.0 million beneficial conversion feature, representing 40% of the Series D convertible preferred stock that could not be converted upon issuance due to certain contractual limitations, from the issuance date to the earliest conversion date, which fell within the third quarter of 2016. The non-cash dividend of $1.0 million and $2.6 million was recorded in additional paid-in capital and as a deemed dividend on the Series D convertible preferred stock, and was used in determining the net loss applicable to common stockholders in the consolidated statement of operations for the three and nine months ended September 30, 2016, respectively.
“At-the-Market” Equity Offering Program
On June 2, 2016, the Company entered into a Sales Agreement (the Sales Agreement) with Cowen and Company, LLC (Cowen) to sell shares of the Company’s common stock, par value $0.0001 per share, having aggregate sales proceeds of up to $50,000,000, from time to time, through an “at the market” equity offering program under which Cowen will act as sales agent. The Company terminated the Sales Agreement effective as of the close of business on January 23, 2017. No shares were sold under the Sales Agreement.
Conversion of Series A Convertible Preferred Stock into Common Stock
During the three and nine months ended September 30, 2017, 7,500 shares of Series A convertible preferred stock were converted into 1,250,024 shares of the Company’s common stock. As of September 30, 2017, the Company had 2,500 shares of Series A convertible preferred stock issued and outstanding.
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9. WARRANTS
As of September 30, 2017, and December 31, 2016, equity-classified warrants to purchase a total of 841,449 shares of the Company’s common stock were outstanding. No warrants were exercised or expired during the three and nine months ended September 30, 2017 and September 30, 2016.
In June 2013, the Company issued equity-classified warrants to purchase 833,333 shares of common stock at an exercise price of $30.00 per share in connection with a registered direct offering to Biotechnology Value Fund, L.P. and other affiliates of BVF. The warrants expire on December 5, 2018.
In February 2011, the Company issued equity-classified warrants to purchase 8,116 shares of common stock at an exercise price of $18.48 per share in connection with a loan and security agreement entered into with General Electric Capital Corporation, now Capital One National Association. The warrants expire on February 8, 2018.
10. SHARE-BASED COMPENSATION
The Company uses the Black-Scholes option pricing model to value the options at each grant date, using the following weighted average assumptions:
| Three months ended September 30, |
Nine months ended September 30, |
|||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Expected dividend rate |
0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | ||||||||
| Expected volatility |
75.96 | % | 74.05 | % | 76.47 | % | 74.67 | % | ||||||||
| Risk-free interest rate |
1.90 | % | 1.34 | % | 1.94 | % | 1.42 | % | ||||||||
| Expected life of options (in years) |
5.69 | 6.20 | 5.69 | 6.22 | ||||||||||||
The expected life represents the period that the Company’s stock options are expected to be outstanding and is based on historical data. The expected volatility is based on the historical volatility of the Company’s common stock for a period equal to the stock option’s expected life. The risk-free interest rate is based on the yield at the time of grant of a U.S. Treasury security with an expected term equivalent to the expected term of the option. The Company does not expect to pay dividends on its common stock. The amounts estimated according to the Black-Scholes option pricing model may not be indicative of the actual values realized upon the exercise of these options by the holders.
The Company recognizes share-based compensation expense net of estimated forfeitures. The forfeiture rate is estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from estimates. The Company’s estimated forfeiture rate at the time of grant is based on its historical experience.
Share-based compensation expense under the 2016 Equity Incentive Plan (2016 EIP), the Amended and Restated Share Option Plan (the Option Plan), and for an inducement grant, was $0.7 million for each of the three months ended September 30, 2017 and September 30, 2016. Share-based compensation expense was $2.4 million and $4.6 million for the nine months ended September 30, 2017 and September 30, 2016, respectively. The Share-based compensation expense during the nine months ended September 30, 2016 included the acceleration of share-based compensation expense in connection with management changes in the first quarter of 2016.
2016 Equity Incentive Plan
On June 23, 2016, the Company’s stockholders approved the 2016 EIP. As of that date, the Company ceased granting options under its Option Plan, ceased granting restricted shares units under its Amended and Restated RSU Plan (the RSU Plan) and transferred the remaining shares available for issuance under the Option Plan and the RSU Plan to the 2016 EIP. As of the effective date of the 2016 EIP, 1,200,905 shares of common stock were reserved for issuance under the 2016 EIP, consisting of 1,050,000 shares available for awards under the 2016 EIP plus 82,884 and 68,021 shares of common stock previously reserved but unissued under the Option Plan and the RSU Plan, respectively, that were available for issuance under the 2016 EIP on the effective date of the 2016 EIP. On June 8, 2017, the Company’s stockholders approved an amendment to the 2016 EIP to increase the total shares of common stock available for issuance under the 2016 EIP from 1,200,905 shares to 7,900,905 shares.
All grants under the 2016 EIP may have a term up to ten years from the date of grant. Vesting schedules are determined by the compensation committee of the board of directors or its designee when each award is granted. Upon vesting of RSUs granted to employees, a portion of the RSUs will be settled in cash equivalent to the employee’s minimum required withholding tax on the value of the vested RSUs. The Company measures and recognizes compensation expense for equity-classified restricted stock units (RSUs), and stock options granted to our employees based on the fair value of the awards on the date of grant. The fair value of each RSU was determined to be the closing trading price of the Company’s common shares on the date of grant as quoted in NASDAQ Global Market. The fair value of stock options is estimated at the date of grant using the Black-Scholes option pricing model. Share-based compensation expense for equity-classified RSUs, and stock options is recognized on a straight-line basis over the requisite service period, which is generally the vesting period of the respective award. RSU grants made to its non-employee directors are classified as liabilities. Share-based compensation expense for liability-classified RSUs are re-measured at each reporting date until settlement of the award.
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During the three months ended September 30, 2017 and September 30, 2016, the Company did not grant RSUs to its non-employee directors. During the nine months ended September 30, 2017 and September 30, 2016, the Company granted 95,999 RSUs with a fair value of approximately $350,000 and 54,348 RSUs with a fair value of $300,000 to its non-employee directors, respectively. During the three and nine months ended September 30, 2017, the Company issued zero and 54,348 shares, respectively, upon conversion of RSUs under the 2016 EIP. During the three months ended September 30, 2017, the Company granted 778,380 stock options and 180,560 RSUs to its employees under the 2016 EIP. During the nine months ended September 30, 2017, the Company granted 1,502,923 stock options and 324,700 RSUs to its employees under the 2016 EIP. During the three and nine months ended September 30, 2016, the Company granted 23,469 stock options under the 2016 EIP. No stock options were exercised under the 2016 EIP during the three and nine months ended September 30, 2017 and September 30, 2016. As of September 30, 2017, there were 5,738,006 shares of common stock available for future grant under the 2016 EIP.
Option Plan
Under the Option Plan, a maximum fixed reloading percentage of 10% of the issued and outstanding common stock of the Company could be granted to employees, directors and service providers. On June 23, 2016, the stockholders approved the 2016 EIP and the Company ceased granting options under the Option Plan. Options granted under the Option Plan prior to January 2010 began vesting after one year from the date of grant, are exercisable in equal amounts over four years on the anniversary date of the grant, and expire eight years following the date of grant. Options granted to employees under the Option Plan after January 2010 vest 25% on the first anniversary of the vesting commencement date, with the balance vesting in monthly increments for 36 months following the first anniversary of grant, and expire eight years following the date of grant. Due to the adoption of the 2016 EIP on June 23, 2016, all shares remaining for future grant under the Option Plan were transferred to the 2016 EIP plan leaving no shares of common stock available for future grant under the Option Plan.
During the three and nine months ended September 30, 2016, the Company granted zero and 313,040 stock options under the Option Plan. No stock options were exercised during each of the three and nine months ended September 30, 2017 and September 30, 2016.
Inducement Grant
On April 4, 2016, the Company made an inducement stock option grant (Inducement Grant) of 474,810 options. Options granted under the Inducement Grant vest 25% on the first anniversary of the vesting commencement date, with the balance vesting in monthly increments for 36 months following the first anniversary of grant, and expire ten years following the date of grant. No stock options were exercised under the inducement grant during the three and nine months ended September 30, 2017.
Restricted Share Unit Plan
The RSU Plan was established in 2005 for non-employee directors. On June 23, 2016, the stockholders approved the 2016 EIP and the Company ceased granting RSUs under the RSU Plan.
The RSU Plan provided for grants to be made from time to time by the board of directors or a committee thereof. RSU grants to non-employee directors are classified as liabilities. The fair value of each RSU was determined to be the closing trading price of the Company’s common shares on the date of grant as quoted in NASDAQ Global Market. Each RSU granted was made in accordance with the RSU Plan and terms specific to that grant. Outstanding RSUs under the RSU Plan have a vesting term of one to two years. Approximately 75% of each RSU represents a contingent right to receive approximately 0.75 of a share of the Company’s common stock upon vesting and approximately 25% represents a contingent right to receive cash, equivalent to the value of 0.25 of a share, upon vesting without any further consideration payable to the Company in respect thereof. For the contingent right to receive cash, the Company is required to deliver an amount in cash equal to the fair market value of these shares on the vesting date to facilitate the satisfaction of the non-employee directors’ U.S. federal income tax obligation with respect to the vested RSUs. The outstanding RSU awards are required to be re-measured at each reporting date until settlement of the award, and changes in valuation are recorded as compensation expense for the period. The fair value of the outstanding RSUs on the reporting date was determined to be the closing trading price of the Company’s common shares on that date.
The re-measurement of the outstanding RSUs together with the grant and conversion of the RSUs under the RSU Plan resulted in $2,090 and a reduction of $11,980 in share-based compensation expense recorded in general and administrative expenses in the condensed consolidated statement of operations for the three and nine months ended September 30, 2017, respectively. The re-measurement of the outstanding RSUs together with the grant and conversion of the RSUs resulted in $0.1 million and a reduction of $0.2 million in share-based compensation expense recorded in general and administrative expenses in the condensed consolidated statement of operations for the three and nine months ended September 30, 2016, respectively.
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Upon the adoption of the 2016 EIP on June 23, 2016, all shares remaining for future grant under the RSU Plan became available for issuance under the 2016 EIP plan and the Company ceased granting RSUs under the RSU Plan. For the three and nine months ended September 30, 2017, 9,500 and 27,271 shares, respectively, were issued upon conversion of RSUs under the RSU Plan. For the three and nine months ended September 30, 2016, zero and 10,893 shares were issued upon conversion of RSUs under the RSU Plan.
Employee Stock Purchase Plan
The Company adopted an Employee Stock Purchase Plan (ESPP) on June 3, 2010, pursuant to which a total of 150,000 shares of common stock were reserved for sale to employees of the Company. The ESPP is administered by the compensation committee of the board of directors and is open to all eligible employees of the Company. Under the terms of the ESPP, eligible employees may purchase shares of the Company’s common stock at six month intervals during 18-month offering periods through periodic payroll deductions, which may not exceed 15% of any employee’s compensation and may not exceed a value of $25,000 in any calendar year, at a price not less than the lesser of an amount equal to 85% of the fair market value of the Company’s common stock at the beginning of the offering period or an amount equal to 85% of the fair market value of the Company’s common stock on each purchase date. The maximum aggregate number of shares that may be purchased by each eligible employee during each offering period is 15,000 shares of the Company’s common stock. For the three and nine months ended September 30, 2017, expense related to this plan was $45,284 and $144,246, respectively. For the three and nine months ended September 30, 2016, expense related to this plan was $25,014 and $93,707, respectively. Under the ESPP, the Company did not issue any shares to employees during each of the three-month periods ended September 30, 2017 and September 30, 2016. The Company issued 27,146 shares and 8,261 shares to employees during the nine months ended September 30, 2017 and September 30, 2016, respectively. There were 42,527 shares reserved for future issuances under the ESPP as of September 30, 2017.
11. CONTINGENCIES, COMMITMENTS, AND GUARANTEES
Pursuant to various license agreements, the Company may be obligated to make payments based on the achievement of certain event-based milestones, a percentage of revenues derived from the licensed technology and royalties on net sales. As of September 30, 2017, no payments were obligated as there were no milestones achieved, no technology licensed and the Company had no net sales, as defined in the agreements. As such, the Company is not currently contractually committed to any significant quantifiable payments for licensing fees, royalties or other contingent payments.
On January 9, 2016, the Company adopted a Retention Payment Plan, effective as of January 11, 2016 (Retention Plan), to provide cash retention payments to certain employees in order to induce such employees to remain employed through January 10, 2017 (Retention Date). Any employee who participated in the Retention Plan and (i) remained continuously employed by the Company through the Retention Date or (ii) had been terminated by the Company other than for cause prior to the Retention Date, and (iii) signed a general release of claims was paid a lump-sum cash payment as determined on an individual basis. If such employee’s service was terminated for cause or the employee voluntarily resigned prior to the Retention Date, no such payments were to be made. In January 2017, the Company paid $2.5 million related to this plan. There were no expenses related to the Retention Plan recorded under the Retention Plan for the three months ended September 30, 2017. An expense of $0.1 million related to the Retention Plan was recorded in the condensed consolidated statement of operations for the nine months ended September 30, 2017. An expense of $0.5 million and $1.9 million related to the Retention Plan was recorded in the condensed consolidated statement of operations for the three and nine months ended September 30, 2016, respectively. As of September 30, 2017, there were no liabilities recorded under the Retention Plan, since all obligations under the Retention Plan were paid in full.
In the normal course of operations, the Company indemnifies counterparties in transactions such as purchase and sale contracts for assets or shares, manufacturing and other service agreements, license agreements, director/officer contracts and leasing transactions. These indemnification agreements may require the Company to compensate the counterparties for costs incurred to third parties as a result of various events, including changes in (or in the interpretation of) laws and regulations, the Company’s breach of contract or negligence, environmental liabilities, or as a result of litigation claims or statutory sanctions that may be suffered by the counterparties as a consequence of the transaction. The terms of these indemnification agreements vary based upon the contract, the nature of which prevents the Company from making a reasonable estimate of the maximum potential amount that could be required to pay to counterparties. Historically, the Company has not made any significant payments under such indemnification agreements and no amounts have been accrued in the accompanying condensed consolidated financial statements with respect to these indemnification agreements.
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12. COLLABORATIVE AND LICENSE AGREEMENTS
Array BioPharma, Inc.
On December 11, 2014, the Company entered into a License Agreement (the License Agreement) with Array BioPharma Inc. (Array). Pursuant to the License Agreement, Array granted the Company an exclusive license to develop, manufacture and commercialize tucatinib (previously known as ONT-380), an orally active, reversible and selective small-molecule HER2 inhibitor.
Under the terms of the License Agreement, the Company paid Array an upfront fee of $20 million, which was recorded as part of research and development expense upon initiation of the exclusive license agreement. In addition, if the Company sublicenses rights to tucatinib to a third party, the Company will pay Array a percentage of any sublicense payments it receives, with the percentage varying according to the stage of development of tucatinib at the time of the sublicense. If the Company is acquired within three years of the effective date of the License Agreement, and tucatinib has not been sublicensed to another entity prior to such acquisition, then the acquirer will be required to make certain milestone payments of up to $280 million to Array, which are primarily based on potential tucatinib sales. Array is also entitled to receive up to a double-digit royalty based on net sales of tucatinib.
The License Agreement will expire on a country-by-country basis 10 years following the first commercial sale of the product in each respective country, but may be terminated earlier by either party upon material breach of the License Agreement by the other party or the other party’s insolvency, or by the Company on 180 days’ notice to Array. The Company and Array have also agreed to indemnify the other party for certain of their respective warranties and obligations under the License Agreement.
STC.UNM
Effective June 30, 2014, Alpine Biosciences, Inc, (Alpine) entered into an exclusive license agreement with STC.UNM, by assignment from The Regents of the University of New Mexico, to license the rights to use certain technology relating to protocells, a mesoporous silica nanoparticle delivery platform. The Company subsequently acquired Alpine in August 2014. Under the terms of the license agreement, the Company, as successor to Alpine, had the right to conduct research, clinical development and commercialize all inventions and products that are developed from the platform technology in certain fields of use as described in the license agreement.
On May 5, 2016, the Company entered into an agreement with STC.UNM to terminate the license agreement relating to protocell technology. The agreement provided for a mutual release of claims and payment of a termination and license fee totaling $325,000. As a result of the termination and the Company’s intent to no longer develop, license or commercialize the protocell technology, the indefinite-lived intangible assets acquired in the 2014 acquisition of Alpine were considered impaired. Accordingly, $19.7 million was fully written-off and recorded as intangible asset impairment in the Company’s condensed consolidated statements of operations for the nine months ended September 30, 2016. The indefinite-lived intangible assets represent the value assigned to in-process research and development when the Company acquired the protocell technology. The Company also recognized a $6.9 million tax benefit during the nine months ended September 30, 2016, upon the reversal of its deferred tax liability, which solely relates to the indefinite-lived intangible assets. In addition, $1.5 million of previously recorded time-based milestones for license fees associated with the STC.UNM license agreement was reversed from research and development expenses during the nine months ended September 30, 2016. The impairment charge did not result in any significant future cash expenditures, or otherwise impact the Company’s liquidity or cash. Please refer to “Note 8 — Collaborative and License Agreements” of the audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC on March 9, 2017 for additional information.
Sentinel Oncology Ltd.
In April 2014, the Company entered into an exclusive license and research collaboration agreement with Sentinel Oncology Limited (Sentinel) for the development of novel small molecule Chk1 kinase inhibitors. Under the agreement, the Company has made payments to Sentinel to support their chemistry research. The Company is responsible for preclinical and clinical development, manufacturing and commercialization of any resulting compounds. Sentinel is eligible to receive success-based development and commercial milestone payments up to approximately $90 million based on development and commercialization events, including a $1.0 million milestone for the initiation of GLP toxicology studies and certain payments related to the initiation of certain clinical trials, regulatory approval and first commercial sale. Sentinel is also entitled to a single-digit royalty based on net sales.
13. INCOME TAX
Due to projected and actual losses for the year ended December 31, 2017 and 2016, respectively, and the Company’s history of losses, the Company has not recorded an income tax benefit for the three and nine months ended September 30, 2017 and the three months ended September 30, 2016. The Company has recognized a valuation allowance on substantially all its deferred tax assets. The Company’s net deferred tax liabilities were recorded in deferred tax liability on the condensed consolidated balance sheets as of September 30, 2017 and December 31, 2016.
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During the nine months ended September 30, 2016, the Company recorded an income tax benefit of $6.9 million due to the reversal of its deferred tax liability, which related solely to the impairment of the indefinite-lived intangible asset. For additional information, see “Note 6 — Intangible Asset Impairment” of the unaudited financial statements included in this report. Otherwise, due to projected losses for 2016 and a history of losses, the Company has not recorded an additional income tax benefit for the nine months ended September 30, 2016 and has recognized a valuation allowance on all its deferred tax assets.
14. RELATED PARTY TRANSACTIONS
Certain of the Company’s affiliates participated in the Company’s recent public underwritten offerings. In January 2017, the Company closed an underwritten offering of 26,659,300 shares of its common stock at a price of $3.30 per share, for gross proceeds of $88.0 million, and 1,818 shares of its Series E convertible preferred stock at a price of $3,300 per share for gross proceeds of $6.0 million. In this offering, affiliates of New Enterprise Associates, a holder of more than 5% of the Company’s outstanding common stock, purchased 1,818 shares of the Company’s Series E preferred stock for an aggregate purchase price of $6.0 million. In June 2016, the Company closed an underwritten public offering of 6,708,333 shares of our common stock at a price to the public of $4.80 per share, for gross proceeds of $32.2 million, and 17,250 shares of its Series D convertible preferred stock at a price of $800.00 per share for gross proceeds of $13.8 million. In this offering, affiliates of BVF, a holder of more than 5% of the Company’s outstanding common stock, purchased 17,250 shares of the Company’s Series D preferred stock for an aggregate purchase price of $13.8 million.
In January 2016, the Company appointed Mr. Mark Lampert as a member of the board of directors as a Class I director of the Company. Mr. Lampert is an affiliate of BVF. On January 17, 2017, Mr. Mark Lampert resigned from the board of directors.
15. SUBSEQUENT EVENTS
None.