[May 10, 2013] AVEO PHARMACEUTICALS INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations. Tweet (Edgar Glimpses Via Acquire Media NewsEdge) Forward-Looking Information The following discussion of our financial condition and results of operations should be read with our unaudited condensed consolidated financial statements and notes included in Part I. Item 1 of this Quarterly Report on Form 10-Q for the three months ended March 31, 2013, as well as the audited consolidated financial statements and notes and Management's Discussion and Analysis of Financial Condition and Results of Operations, included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed with the Securities and Exchange Commission, or SEC, on March 11, 2013. This Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations, estimates, forecasts, and projections and the beliefs and assumptions of our management and include, without limitation, statements with respect to our expectations regarding our research, development and commercialization plans and prospects, results of operations, general and administrative expenses, research and development expenses, and the sufficiency of our cash for future operations. Words such as "anticipate," "target," "project," "believe," "goals," "estimate," "potential," "predict," "may," "expect," "might," "could," "intend," variations of these terms or the negative of those terms and similar expressions are intended to identify these forward-looking statements. Readers are cautioned that these forward-looking statements are predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Among the important factors that could cause actual results to differ materially from those indicated by our forward-looking statements are those discussed under the heading "Risk Factors" in Item 1A of Part II and elsewhere in this report. Recent Developments On November 27, 2012, the U.S. Food and Drug Administration, or the FDA, accepted for filing our New Drug Application, or NDA, for tivozanib, our lead product candidate, with the proposed indication for the treatment of patients with advanced renal cell carcinoma, or RCC. On May 2, 2013, the FDA's Oncologic Drugs Advisory Committee, or ODAC, which provides the FDA with independent expert advice and recommendations, reviewed our NDA for tivozanib and voted 13 to 1 that the application for tivozanib did not demonstrate a favorable benefit/risk evaluation for the treatment of advanced RCC in an adequate and well-controlled trial. Furthermore, the ODAC's vote was consistent with the position taken by the FDA at the ODAC meeting. The FDA's review of the NDA is expected to be complete by no later than July 28, 2013 according to the timelines established by the Prescription Drug User Fee Act, or PDUFA. Given the ODAC's determination and its 13 to 1 vote, as well as the position taken by the FDA at the ODAC meeting, it is now significantly more likely that the FDA will make an adverse determination with respect to our current NDA and there is an increased probability that the FDA will conclude that an additional trial or trials are needed before marketing approval for tivozanib can be granted, if at all. We are currently evaluating the effect of the ODAC's decision, and likely adverse FDA determination, on our strategic operating plan, including: • evaluating the implementation of a strategy to maximize the value of our oncology programs and pipeline assets, which we expect to include a potential restructuring to conserve existing capital; and • evaluating, with our tivozanib partner, Astellas Pharma, Inc., or Astellas, the clinical and regulatory path forward for tivozanib in RCC, including Astellas' decision as to whether to submit a Marketing Authorization Application, or MAA, for RCC to the European Medicines Agency, or EMA. On May 9, 2013, a class action lawsuit was filed against us and certain of our officers in the United States District Court for the District of Massachusetts, captioned Paul Sanders v. Aveo Pharmaceuticals, Inc., et al., No. 1:13-cv-11157-JLT. The complaint purports to be brought on behalf of shareholders who purchased our common stock between January 3, 2012 and May 1, 2013. The complaint generally alleges that we and certain of our officers violated Sections 10(b) and/or 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by making allegedly false and/or misleading statements concerning the phase 3 trial design and results for the TIVO-1 study in an effort to lead investors to believe that the drug would receive approval from the FDA. The complaint seeks unspecified damages, interest, attorneys' fees, and other costs. We deny any allegations of wrongdoing and intend to vigorously defend against this lawsuit. However, there is no assurance that we will be successful in our defense or that insurance will be available or adequate to fund any settlement or judgment or the litigation costs of this action. Moreover, we are unable to predict the outcome or reasonably estimate a range of possible loss at this time. Overview We are a cancer therapeutics company, which does business as AVEO Oncology™, committed to discovering, developing and commercializing targeted cancer therapies to impact patients' lives. Our product candidates are directed against important mechanisms, or targets, known or believed to be involved in cancer. Our proprietary Human Response Platform™, a novel method of building preclinical models of human cancer, provides us with unique insights into cancer biology. 21 -------------------------------------------------------------------------------- Table of Contents We have announced detailed data from our global, phase 3 clinical trial comparing the efficacy and safety of tivozanib with Nexavar® (sorafenib), an approved therapy, for first-line treatment in advanced RCC, which we refer to as the TIVO-1 (Tivozanib Versus Sorafenib in 1st line Advanced RCC) study. The TIVO-1 study was conducted in patients with advanced clear cell RCC who had undergone a prior nephrectomy (kidney removal) and who had not received any prior VEGF- or mTOR-targeted therapy. In this trial, we measured, among other things, each patient's progression-free survival, or PFS, which refers to the period of time that began when a patient entered the clinical trial and ended when either the patient died or the patient's cancer had grown by a specified percentage or spread to a new location in the body. PFS was the primary endpoint in the TIVO-1 study. Secondary endpoints included overall survival, for which patients continue to be followed, and safety. Key data from the TIVO-1 study include: • Tivozanib demonstrated a statistically significant improvement in PFS over Nexavar with a median PFS of 11.9 months for tivozanib compared to a median PFS of 9.1 months for Nexavar in the overall study population (HR=0.797, 95% confidence interval, or CI, 0.639-0.993; P=0.042). • Tivozanib also demonstrated a statistically significant improvement in PFS with a median PFS of 12.7 months compared to a median PFS of 9.1 months for Nexavar in the pre-specified subpopulation of patients who received no prior systemic anti-cancer therapy for metastatic disease-a subpopulation that comprised approximately 70% of the total study population (HR=0.756, 95% CI 0.580-0.985; P=0.037). • Tivozanib demonstrated a well-tolerated safety profile as evidenced by a lower rate of dose reductions (11.6% vs. 42.8%; p<0.001) and interruptions (17.8% vs. 35.4%; p<0.001) due to adverse events and discontinuations (4.2% vs. 5.4%; p=0.683) due to drug-related adverse events compared to Nexavar. • The most commonly reported side effect for tivozanib was hypertension (44% for tivozanib vs. 34% for Nexavar), and for Nexavar was hand-foot syndrome (13% for tivozanib vs. 54% for Nexavar). Other side effects that are commonly associated with other VEGF receptor inhibitors included: diarrhea (22% for tivozanib vs. 32% for Nexavar), dysphonia, or hoarseness of voice (21% for tivozanib vs. 5% for Nexavar), fatigue (18% for tivozanib vs. 16% for Nexavar), and neutropenia, a condition of having a lower than normal number of white blood cells (10% for tivozanib vs. 9% for Nexavar). • The final, protocol-specified analysis of overall survival, or OS, at 24 months since last patient enrolled showed a median OS of 28.8 months (95% CI: 22.5-NA) for the tivozanib arm versus a median OS of 29.3 months (95% CI: 29.3-NA) for the Nexavar arm. No statistical difference between the two arms (HR=1.245, p=0.105) was observed. A one-sided crossover for patients randomized to the Nexavar arm was offered pursuant to a separate, long-term treatment protocol to allow trial participants originally treated in the Nexavar arm to receive tivozanib upon disease progression. This resulted in a substantial difference in the use of subsequent therapies. Of 189 patients who discontinued their initial therapy on the tivozanib arm, 36% received some form of subsequent therapy, including 10% who received subsequent anti-VEGF therapy. Of 226 patients who discontinued their initial therapy on the Nexavar arm, 74% received some form of subsequent therapy, including 70% who received subsequent anti-VEGF therapy (98% of whom received tivozanib). Although TIVO-1 met its primary endpoint of PFS, the ODAC advised us that due to the OS trend favoring the control arm, it believes that a favorable risk/benefit profile was not conclusively demonstrated. Please see "-Recent Development" for a further discussion of the ODAC's determination as to the TIVO-1 trial, and related positions taken by the FDA. In addition to the TIVO-1 study, we are evaluating tivozanib in multiple clinical trials including our BATON (Biomarker Assessment of Tivozanib in ONcology) program, a series of clinical trials assessing biomarkers in solid tumors that may be predictive of clinical response to tivozanib in patients with advanced RCC, metastatic colorectal cancer, and locally recurrent or metastatic triple negative breast cancer. We also have an ongoing clinical study which we refer to as TAURUS (TivozAnib Use veRsUs Sutent in advanced RCC: Patient Preference), seeking to demonstrate patient preference of tivozanib compared to Sutent® (sunitinib) as first-line therapy in patients with advanced RCC. We expect that the results of all of our clinical trials will help to inform our clinical development plans for tivozanib as a monotherapy and in combination with other anti-cancer therapies in multiple cancer indications. We acquired exclusive rights to develop and commercialize tivozanib worldwide outside of Asia pursuant to a license agreement we entered into with Kirin Brewery Co. Ltd. (now Kyowa Hakko Kirin), or KHK, in 2006. Under the license agreement, we obtained an exclusive license to research, develop, manufacture and commercialize tivozanib, pharmaceutical compositions thereof and associated biomarkers for the diagnosis, prevention and treatment of any and all human diseases and conditions outside of Asia. KHK has retained all rights to tivozanib in Asia. We have obligations to make milestone and royalty payments to KHK. The royalty rates range from the low to mid-teens as a percentage of our net sales of tivozanib. We are also obligated to pay a specified percentage of certain amounts we receive from any third-party sublicensees, including Astellas. As discussed below under the heading "Strategic Partnerships," we entered into a strategic collaboration with Astellas in which we have agreed to share responsibility, including all profits and losses, with Astellas for continued development and commercialization of tivozanib in the United States, Mexico and Canada, or North America, and Europe. Throughout the rest of the world, outside of North America, Europe and Asia, we granted Astellas an exclusive, royalty-bearing license to develop and commercialize tivozanib. In addition to tivozanib, we have a pipeline of monoclonal antibodies derived from our proprietary Human Response Platform. Ficlatuzumab is an antibody which binds to hepatocyte growth factor, or HGF, thereby blocking its function. We intend to focus our 22 -------------------------------------------------------------------------------- Table of Contents efforts on further ficlatuzumab development through external collaborations. AV-203 is a monoclonal antibody that targets the ErbB3 receptor, which we have partnered outside of North America with Biogen Idec International GmbH, a subsidiary of Biogen Idec, Inc., and which we collectively refer to herein as Biogen Idec. In May 2012, we announced the initiation of a phase 1 clinical trial examining the safety, tolerability and preliminary efficacy of AV-203 along with exploratory biomarkers in patients with metastatic or advanced solid tumors. Our proprietary Human Response Platform was designed to overcome many of the limitations of traditional approaches to modeling human cancer, as we use patented genetic engineering techniques to grow populations of spontaneous tumors in animals containing human-relevant, cancer-causing mutations and tumor variations akin to what is seen in populations of human tumors. Because we believe that these populations of tumors better replicate what is seen in human cancer, we believe that our Human Response Platform provides us with unique insights into cancer biology and mechanisms of drug response and resistance, and represents a significant improvement over traditional approaches. The identification and development of potential biomarkers through our Human Response Platform is a core component of our oncology drug development efforts. We have devoted substantially all of our resources to our drug discovery efforts, including research and development, conducting clinical trials for our product candidates, protecting our intellectual property and supporting the general and administrative functions of these operations. We have generated no revenue from product sales through March 31, 2013, and have principally funded our operations through: • $373.1 million of non-dilutive capital in the form of license fees, milestone payments and research and development funding received from our strategic partners; • $169.6 million of funding from the sale of convertible preferred stock to investors prior to our initial public offering, including $77.5 million of equity sales to our strategic partners; • $89.7 million of gross proceeds from the sale of common stock in connection with the completion of our initial public offering; • $26.5 million of loan proceeds in connection with our loan agreement with Hercules Technology II, L.P. and Hercules Technology III, L.P.; • $68.3 million of gross proceeds from unregistered private placements of our common stock; and • $168.7 million of gross proceeds from the sale of common stock in connection with our public offerings of our common stock in June 2011 and January 2013. We do not have a history of being profitable and, as of March 31, 2013, we had an accumulated deficit of $354.3 million. We anticipate that we will continue to incur significant operating costs over the next several years as we continue our planned development activities of tivozanib, ficlatuzumab, AV-203 and certain of our existing antibody programs. We will need additional financing to support our operating activities. Strategic Partnerships Kyowa Hakko Kirin In December 2006, we entered into a license agreement with Kirin Brewery Co. Ltd. (now Kyowa Hakko Kirin) which we sometimes refer to as KHK, under which we obtained an exclusive license, with the right to grant sublicenses subject to certain restrictions, to research, develop, manufacture and commercialize tivozanib, pharmaceutical compositions thereof and associated biomarkers. Our exclusive license covers all territories in the world, except for Asia. KHK has retained rights to tivozanib in Asia. Under the license agreement, we obtained exclusive rights in our territory under certain KHK patents, patent applications and know-how related to tivozanib, to research, develop, make, have made, use, import, offer for sale, and sell tivozanib for the diagnosis, prevention and treatment of any and all human diseases and conditions. We and Kyowa Hakko Kirin each have access to and can benefit from the other party's clinical data and regulatory filings with respect to tivozanib and biomarkers identified in the conduct of activities under the license agreement. Under the license agreement, we are obligated to use commercially reasonable efforts to develop and commercialize tivozanib in our territory, including meeting certain specified diligence goals. Prior to the first anniversary of the first post-marketing approval sale of tivozanib in our territory, neither we nor any of our subsidiaries has the right to conduct certain clinical trials of, seek marketing approval for or commercialize any other cancer product that also works by inhibiting the activity of the VEGF receptor. Upon entering into the license agreement with KHK, we made a one-time cash payment in the amount of $5.0 million. In March 2010, we made a $10.0 million milestone payment to KHK in connection with the dosing of the first patient in our phase 3 clinical trial of tivozanib. We made a $22.5 million payment to KHK during the year ended December 31, 2011 related to the up-front license payment received under the collaboration and license agreement with Astellas which we entered into in February 2011. In December 2012, we made a $12.0 million milestone payment to KHK in connection with the acceptance by the FDA of our NDA filing for tivozanib. 23 -------------------------------------------------------------------------------- Table of Contents Under our license agreement with KHK, we may be required to: • make future milestone payments upon the achievement of specified regulatory milestones in the United States; • pay tiered royalty payments on net sales we make of tivozanib in our territory ranging from the low to mid-teens as a percentage of our net sales of tivozanib. The royalty rate escalates within this range during each calendar year based on increasing tivozanib sales during such calendar year. Our royalty payment obligations in a particular country in our territory begin on the date of the first commercial sale of tivozanib in that country, end on the later of 12 years after the date of first commercial sale of tivozanib in that country or expiration of the last-to-expire valid claim of the licensed patents covering tivozanib in that country, and are subject to offsets under certain circumstances; and • pay 30% of certain amounts we receive under our collaboration and license agreement with Astellas, which we describe below, in connection with Astellas' development and commercialization activities outside of North America and Asia related to tivozanib (including a potential $4.5 million milestone payable to KHK in connection with the acceptance by the EMA of the filing of a MAA and $9.0 million to KHK in connection with the EMA granting marketing approval in Europe), other than amounts we receive in respect of research and development funding or equity investments, subject to certain limitations. Astellas Pharma In February 2011, we entered into a collaboration and license agreement with Astellas and certain of its indirect wholly-owned subsidiaries in connection with which we and Astellas plan to develop and seek to commercialize tivozanib for the treatment of a broad range of cancers, including RCC, breast and colorectal cancers. For a discussion of recent regulatory developments relating to the planned development and commercialization of tivozanib for its lead indication in advanced RCC, see "-Recent Development." In view of the FDA-related uncertainties described therein, we and Astellas are currently evaluating the clinical and regulatory path forward for tivozanib, including Astellas' decision as to whether to submit a MAA for RCC to the EMA. Under the terms of the collaboration agreement, we and Astellas share responsibility for continued development and commercialization of tivozanib in North America and Europe under the joint development plan and joint commercialization plan, respectively. Throughout the rest of the world (which excludes North America, Europe and Asia), which we refer to as the royalty territory, Astellas has an exclusive, royalty-bearing license to develop and commercialize tivozanib. Our plan to commercialize tivozanib in collaboration with Astellas, as described herein, is subject to our and Astellas' receipt of necessary regulatory approvals from the FDA and foreign regulatory authorities based upon favorable results in clinical trials. There can be no assurance that such approvals will be obtained. If tivozanib is approved by applicable regulatory agencies, we will hold all marketing authorizations in North America, including any NDA in the United States, and Astellas will hold all marketing authorizations in the rest of the world, other than Asia. If tivozanib is approved by applicable regulatory agencies, we, as the lead commercialization party in North America, will have lead responsibility for formulating the commercialization strategy for North America under the joint commercialization plan, with each of us and Astellas responsible for conducting 50% of the sales efforts and medical affairs activities in North America. Astellas will have lead responsibility for commercialization activities in Europe under the joint commercialization plan, and we will be responsible for conducting 50% of the medical affairs activities in the major European countries. All costs associated with each party's conduct of development and commercialization activities (including clinical manufacturing and commercial manufacturing costs, if any) in North America (including any regulatory milestones and royalties associated with tivozanib in North America which may become payable by us to KHK under our license agreement with KHK), and any resulting profits or losses, are shared equally between the parties. All costs associated with each party's conduct of development and commercialization activities (including clinical manufacturing and commercial manufacturing costs, if any) in Europe, and any resulting profits or losses, are shared equally between the parties. As between the parties, we will remain responsible for complying with our sublicense revenue sharing obligations, if any, to KHK under our license agreement with KHK in connection with the development and commercialization of tivozanib outside of North America. We are responsible for manufacturing, through our third-party manufacturer, all of Astellas' requirements for tivozanib pursuant to a clinical supply agreement which we have entered into with Astellas, and a commercial supply agreement for supply of tivozanib in Europe and the royalty territory which the parties are currently negotiating. Each party is obligated to use commercially reasonable efforts to develop and commercialize tivozanib in North America, and to develop and commercialize tivozanib in each European country specified in the agreement. Astellas is also obligated to use commercially reasonable efforts to develop and commercialize tivozanib in each country in the royalty territory. During the term of the agreement, neither party nor its controlled affiliates may commercialize anywhere in North America, Europe or the royalty territory any product that has a specified mechanism of action (as further defined in the collaboration agreement) for any oncology indication, except that Astellas may commercialize specified compounds for hematological cancer. We and Astellas may also commercialize products (other than tivozanib) in the royalty territory, on a country-by-country basis, after expiration of the applicable royalty term, and in North America and Europe after expiration of all valid claims under the licensed patents. 24 -------------------------------------------------------------------------------- Table of Contents In connection with the agreement, we received an initial cash payment of $125 million, comprised of a $75 million license fee and $50 million in research and development funding, both of which are non-creditable and non-refundable against any amounts due under the collaboration agreement. We retained net proceeds of approximately $97.6 million of the initial cash payment from Astellas, after payments to KHK and strategic, legal and financial advisors. In December 2012, we received a $15.0 million milestone payment from Astellas in connection with the acceptance by the FDA of our NDA filing for tivozanib. We are also eligible to receive an aggregate of approximately $1.3 billion in potential future milestone payments, comprised of (i) up to $85 million in substantive milestone payments upon achievement of specified clinical and development milestone events, (ii) up to $475 million in substantive milestone payments upon achievement of specified regulatory milestone events, including up to $75 million in milestone payments in connection with specified regulatory filings, and receipt of marketing approvals, for tivozanib to treat RCC in the United States and Europe, and (iii) up to approximately $780 million in milestone payments upon the achievement of specified commercial sales events. The first anticipated clinical and development milestone is due to us upon initiation of our next phase 3 clinical trial in RCC in combination with another therapeutic, or in breast cancer, colorectal cancer or another indication. The timing of this milestone is uncertain, as we have not finalized plans for our future trials. We have elected to recognize all milestone payments as revenue once the milestones have been triggered if the milestone is deemed to be substantive. A potential significant near-term regulatory milestone is acceptance by the EMA of the first filing of a MAA ($15 million), if Astellas elects to submit a MAA to the EMA. In addition, if tivozanib is successfully developed and launched in the royalty territory, Astellas will be required to pay to us tiered, double digit royalties on net sales of tivozanib in the royalty territory, if any, subject to offsets under certain circumstances. We are required to pay KHK low to mid-teen royalties on our net sales in North America, and 30% of certain amounts we may receive from Astellas in connection with Astellas' development and commercialization activities in Europe and the royalty territory, including up-front license fees, milestone payments and royalties. We are accounting for the joint development and commercialization activities in North America and Europe as a joint risk-sharing collaboration in accordance with Accounting Standards Codification, or ASC, 808 Collaborative Arrangements. In addition, these activities were not deemed to be separate deliverables under the agreement with Astellas. Payments from Astellas with respect to Astellas' share of research and development costs incurred by us are recorded as a reduction to expense due to the joint cost-sharing provisions of the agreement in North America and Europe. As a result of the cost-sharing provisions in our agreement with Astellas, we reduced research and development expense by $6.3 million and $8.0 million during the three months ended March 31, 2013 and 2012, respectively and general and administrative expense by $1.3 million and $0.6 million during the three months ended March 31, 2013 and 2012, respectively. The net amount due to us from Astellas pursuant to the cost-sharing provisions is $7.2 million at March 31, 2013. Activities under the agreement with Astellas outside of the joint development and commercialization activities in North America and Europe were evaluated under ASC 605-25 Revenue Recognition-Multiple Element Arrangements, or ASC 605-25, to determine if they represented a multiple element revenue arrangement. The agreement with Astellas includes the following deliverables outside of the joint development and commercialization activities in North America and Europe: a co-exclusive license to develop and commercialize tivozanib in North America and Europe; a royalty-bearing license to develop and commercialize tivozanib in the royalty-bearing territory, which includes our obligation to provide access to clinical and regulatory information resulting from the activities in North America and Europe to Astellas for its development and commercialization of tivozanib in the royalty-bearing territory; and our obligation to supply clinical material to Astellas for development of tivozanib in the royalty-bearing territory. The co-exclusive license in North America and Europe is not sublicensable. Astellas has the right to sublicense the exclusive royalty-bearing license to develop and commercialize tivozanib in the royalty-bearing territory. Our obligation to provide access to clinical and regulatory information as part of the royalty territory deliverable includes the obligation to provide access, upon request, to all clinical data, regulatory filings, safety data and manufacturing data to Astellas for use in the development and commercialization of tivozanib in the royalty-bearing territory. The obligation to supply clinical material to Astellas for development in the royalty-bearing territory includes supplying such clinical material in accordance with current good manufacturing practices applicable to clinical materials and other relevant regulatory authority requirements, upon request, for the development of tivozanib in the royalty-bearing territory. All of these deliverables were deemed to have stand-alone value and to meet the criteria to be accounted for as separate units of accounting under ASC 605-25. ASC 605-25 establishes a selling price hierarchy for determining the selling price of a deliverable, which includes: (1) vendor-specific objective evidence if available; (2) third-party evidence if vendor-specific objective evidence is not available; and (3) estimated selling price if neither vendor-specific objective evidence nor third-party evidence is available. We allocated the up-front consideration of $125 million to the deliverables based on our best estimate of selling price of each deliverable using the relative selling price method as we did not have vendor specific objective evidence or third-party evidence for such deliverables. Our best estimate of selling price considered discounted cash flow models, the key assumptions of which included the market opportunity for commercialization of tivozanib in North America and Europe and in the royalty-bearing territory, the development costs and market opportunity for the expansion of tivozanib into other solid tumor types, and the time to commercialization of tivozanib for all potential oncology indications. We allocated $120.2 million of the up-front consideration from Astellas to the co-exclusive license in North America and Europe and $4.8 million of the up-front consideration from Astellas to the combined deliverable representing a royalty-bearing license to develop and commercialize tivozanib in the royalty-bearing territory along with our obligation to provide access to clinical and regulatory information resulting from the activities in North America and Europe to Astellas for its use in the royalty-bearing territory. The relative selling price for our obligation to supply clinical material to Astellas for development in the royalty-bearing territory had de minimis value. 25 -------------------------------------------------------------------------------- Table of Contents We recorded the $120.2 million relative selling price of the co-exclusive license granted in North America and Europe as collaboration revenue during the three months ended March 31, 2011 upon delivery of the license, and deferred approximately $4.8 million of revenue representing the relative selling price of the royalty-bearing license to develop and commercialize tivozanib in the royalty-bearing territory along with our obligation to provide access to clinical and regulatory information resulting from the activities in North America and Europe to Astellas for its use in the royalty-bearing territory. We are recording the $4.8 million ratably over our period of performance through April 2022, the remaining patent life of tivozanib. We estimated the period of performance considering that we plan to develop tivozanib with Astellas in several indications outside of RCC, including in breast cancer and colorectal cancer and potentially in other cancer indications. The clinical development of tivozanib in these indications is in earlier stages of development and, as a result, the clinical development timeline is uncertain and is expected to change as we obtain additional clinical data in these indications. As a result, we estimated the period of performance as the remaining patent life of tivozanib as it represents the longest period over which development of tivozanib could occur. We reassess the period of performance at each reporting period. We recorded approximately $107,000 of revenue associated with the royalty territory deliverable during each of the three month periods ended March 31, 2013 and 2012. Biogen Idec In March 2009, we entered into an exclusive option and license agreement with Biogen Idec, regarding the development and commercialization of our discovery-stage ErbB3-targeted antibodies for the potential treatment and diagnosis of cancer and other diseases in humans outside of North America. Under the agreement, we are responsible for developing ErbB3 antibodies through completion of the first phase 2 clinical trial designed in a manner that, if successful, will generate data sufficient to support advancement to a phase 3 clinical trial. Until a specified time after we complete this phase 2 clinical trial and deliver to Biogen Idec a detailed data package containing the results thereof, Biogen Idec may elect to obtain (1) a co-exclusive (with us) worldwide license, including the right to grant sublicenses, under our relevant intellectual property to develop and manufacture ErbB3 antibody products, and (2) an exclusive license, including the right to grant sublicenses, under our relevant intellectual property, to commercialize ErbB3 antibody products in all countries in the world other than North America. We retain the exclusive right to commercialize ErbB3 antibody products in North America. We account for the Biogen Idec arrangement pursuant to ASC 605-25. The deliverables under the arrangement include an option for a co-exclusive, worldwide license to develop and manufacture ErbB3 antibody products and an option for an exclusive license to commercialize ErbB3 antibody products in all countries in the world other than North America. We determined that these deliverables did not have standalone value due to the fact that the program was still in preclinical development and required our experience to advance development of the product. As such, we determined that the agreement should be accounted for as one unit of accounting. Under the terms of the agreement, Biogen Idec paid us an up-front cash payment of $5.0 million in March 2009, which is being amortized over our period of substantial involvement, defined as the patent life of the development candidate. In addition, Biogen Idec purchased 7,500,000 shares of series E convertible preferred stock at a per share price of $4.00, resulting in gross proceeds to us of $30.0 million. We determined that the price of $4.00 paid by Biogen Idec represented a premium of $1.09 per share over the fair value of the series E convertible preferred stock of $2.91 as calculated by us in our retrospective stock valuation; accordingly, we are recognizing the premium of $8.2 million as revenue on a straight-line basis over the period of substantial involvement. In connection with our initial public offering, consummated in March 2010 and the related 1:4 reverse stock split of our common stock, each four shares of outstanding series E convertible preferred stock were converted into one share of common stock. In June 2009, we earned a $5.0 million milestone payment for achievement of the first pre-clinical discovery milestone under the agreement. Since the $5.0 million milestone payment earned in June 2009 was related to a near-term milestone and not considered to be substantive, the revenue is being amortized as additional license revenue over our period of substantial involvement. We also earned a second $5.0 million milestone payment upon selection of a development candidate in March 2010 and a third $5.0 million milestone payment based on achieving the GLP toxicology initiation milestone in June 2011. These milestones were considered substantive and were included in revenue for the quarters ended March 31, 2010 and June 30, 2011, respectively. We could also receive an option exercise fee of $5.0 million and regulatory milestone payments of up to $45.0 million in the aggregate if Biogen Idec exercises its option to obtain exclusive rights to commercialize ErbB3 antibody products in its territory. The first regulatory milestone payment we may receive pursuant to this agreement of $25.0 million is due upon the receipt of the first regulatory approval of a licensed product from the EMA. We do not expect to achieve this milestone in the near future. OSI Pharmaceuticals In September 2007, we entered into a collaboration and license agreement with OSI Pharmaceuticals, Inc. (a wholly-owned subsidiary of Astellas US Holding Inc., a holding company owned by Astellas Pharma Inc.), or OSI. This strategic partnership is primarily focused on the identification and validation of genes and targets involved in the processes of epithelial-mesenchymal transition or mesenchymal-epithelial transition, in cancer. In July 2009, we expanded our strategic partnership with OSI and we granted OSI a non-exclusive license to use our proprietary bioinformatics platform, and non-exclusive, perpetual licenses to use bioinformatics data and to use a proprietary gene index related to a specific target pathway. As part of our expanded strategic 26 -------------------------------------------------------------------------------- Table of Contents partnership, in November 2010, OSI exercised an option to license certain elements of our proprietary technology platform, including components of the Human Response Platform for the identification/characterization of novel epithelial-mesenchymal transition agents and proprietary patient selection biomarkers, in support of OSI's clinical development programs. We received $12.5 million of upfront payments from OSI and research funding payments on a quarterly basis that were recognized as revenue through July 2011. In addition, OSI purchased 1,833,334 shares of our Series C Convertible Preferred Stock and 3,750,000 shares of our Series E Convertible Preferred Stock that were converted into shares of common stock upon our initial public offering. We determined that both equity issuances included a premium, which was recognized as additional license revenue through July 2011. Under the July 2009 expanded agreement, if all applicable milestones are achieved, all remaining payments for the successful achievement of discovery, development and commercialization milestones under the agreement could total, in the aggregate, over $46.0 million, comprised of approximately (i) $8.4 million in substantive milestone payments upon achievement of specified clinical and development milestone events, (ii) $20.7 million in substantive milestone payments upon achievement of specified regulatory milestone events, and (iii) $17.5 million in milestone payments upon the achievement of specified sales events. In addition, we are eligible to receive up to $24.0 million in biomarker-related milestones. In March 2011, we earned $1.5 million related to deliverables and research milestones under the agreement. In May 2012, we earned a patent-related milestone payment of $250,000 upon filing of a patent application by OSI, and we also earned a clinical and development milestone payment of $750,000 for commencement by OSI of GLP toxicology studies. The next milestone payment that we may receive pursuant to this agreement is a $2.0 million clinical and development milestone for phase 1 clinical trial dosing. The next regulatory milestone payment we may receive pursuant to this agreement is $7.0 million to be achieved for the filing of an NDA with the FDA. We do not expect to achieve either of these milestones in the near future. Centocor Ortho Biotech In May 2011, we entered into an exclusive license agreement with Centocor Ortho Biotech Inc., or Centocor, for the worldwide development and commercialization of antibodies, including our internally-discovered antibodies targeting the Recepteur d'Origine Nantais, or RON receptor, including the grant to Centocor of an exclusive, worldwide license to our proprietary RON-driven tumor models. On September 7, 2012, we received notice from Centocor of termination of the Centocor License Agreement, effective on December 6, 2012, at which point all rights and the responsibility for future research and development, manufacturing and commercialization activities and costs of the RON antibody program granted to Centocor under the Centocor License Agreement returned to us. In connection with the Centocor license agreement, we received a one-time cash payment in the amount of $7.5 million and a separate equity investment in the amount of approximately $7.5 million through the purchase by Johnson & Johnson Development Corporation, an affiliate of Centocor, of 438,340 newly issued shares of our common stock at a purchase price of $17.11 per share. This weighted average sales price of $17.11 per share resulted in a $1.22 per share discount from the May 31, 2011 closing price of $18.33 per share, or a discount of $534,775 from the fair market value of the common stock on the effective date of the Centocor license agreement. We determined this transaction was not within the scope of ASC 605-25 and, accordingly, we recorded the sale of common stock to Johnson & Johnson Development Corporation at fair value based on the closing price of our stock on May 31, 2011 of $18.33 per share. Centocor also funded certain research which we conducted during the term of the Centocor License Agreement, which, as noted above, terminated on December 6, 2012. Financial Overview Revenue To date, we have not generated any revenue from product sales. All of our revenue to date has been derived from license fees, milestone payments, premium over the fair value of convertible preferred shares sold to our strategic partners, and research and development payments received from our strategic partners. In the future, we may generate revenue from a combination of product sales, license fees, milestone payments and research and development payments in connection with strategic partnerships, and royalties resulting from the sales of products developed under licenses of our intellectual property. We expect that any revenue we generate will fluctuate from quarter to quarter as a result of the timing and amount of license fees, research and development reimbursements, milestone and other payments received under our strategic partnerships, and the amount and timing of payments that we receive upon the sale of our products, to the extent any are successfully commercialized. If we or our strategic partners fail to complete the development of our drug candidates in a timely manner or obtain regulatory approval for them, our ability to generate future revenue, and our results of operations and financial position, would be materially adversely affected. 27 -------------------------------------------------------------------------------- Table of Contents Research and Development Expenses Research and development expenses consist of expenses incurred in connection with the discovery and development of our product candidates. These expenses consist primarily of: • employee-related expenses, which include salaries and benefits; • expenses incurred under agreements with contract research organizations, investigative sites and consultants that conduct our clinical trials and a substantial portion of our preclinical studies; • the cost of acquiring and manufacturing clinical trial materials, as well as materials produced in support of regulatory filings for tivozanib; • facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities and equipment, and depreciation of fixed assets; • license fees for, and milestone payments related to, in-licensed products and technology; • stock-based compensation expense; and • costs associated with outsourced development activities, regulatory approvals and medical affairs. We expense research and development costs as incurred. Nonrefundable advance payments for goods and services that will be used in future research and development activities are expensed when the activity has been performed or when the goods have been received rather than when the payment is made. Research and development expenses are net of amounts reimbursed under our agreement with Astellas for Astellas' share of development costs incurred by us under our joint development plan with Astellas. Conducting a significant amount of research and development is central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later stage clinical trials. We plan to continue to expend considerable resources on our research and development expenses as we seek to advance our pipeline programs. We track external development expenses and personnel expenses on a program-by-program basis and allocate common expenses, such as scientific consultants and lab supplies, to each program based on the personnel resources allocated to such program. Facilities, depreciation, stock-based compensation, research and development management and research and development support services are not allocated among programs and are considered overhead. Below is a summary of our research and development expenses for the three months ended March 31, 2013 and 2012: Three Months Ended March 31, 2013 2012 (in thousands) Tivozanib $ 10,745 $ 11,056 Ficlatuzumab 1,673 3,883 AV-203 1,307 3,458 Other pipeline programs 1,566 1,907 Platform collaborations - 407 Other research and development 180 231 Overhead 5,491 3,834 Total research and development expenses $ 20,962 $ 24,776 Tivozanib On November 27, 2012, the U.S. Food and Drug Administration accepted for filing our NDA for tivozanib, our lead product candidate, with the proposed indication for the treatment of patients with advanced RCC. On May 2, 2013, the ODAC, which provides the FDA with independent expert advice and recommendations, reviewed our NDA for tivozanib and voted 13 to 1 that the application for tivozanib did not demonstrate a favorable benefit/risk evaluation for the treatment of advanced RCC in an adequate and well-controlled trial. Furthermore, the ODAC's vote was consistent with the position taken by the FDA at the ODAC meeting. Though the FDA is not bound by the ODAC's guidance, the ODAC's input will be considered in connection with the FDA's review of the NDA, which, according to the timelines established by the Prescription Drug User Fee Act, or PDUFA, is expected to be complete by July 28, 2013. We are currently evaluating the effect of the ODAC's decision on the tivozanib development program and any related impact on our operations, including a potential restructuring, and our collaboration with Astellas. We have announced detailed data from the TIVO-1 study. We are also evaluating tivozanib in multiple clinical trials including BATON-RCC, BATON-CRC, being conducted by our tivozanib partner, Astellas, and BATON-BC. Future research and development costs for the tivozanib program are uncertain because such costs are dependent on a number of variables, including the cost and design of any additional clinical trials including additional trials in combination with other drugs and the timing of the regulatory process. 28 -------------------------------------------------------------------------------- Table of Contents We entered into a collaboration and license agreement with Astellas in February 2011, pursuant to which we and Astellas share responsibility for tivozanib, including expenses for continued development and commercialization of tivozanib, in North America and Europe. Astellas is responsible for continued development and commercialization of tivozanib outside of North America, Europe and Asia. All costs associated with each party's conduct of development and commercialization activities in North America and Europe, and any resulting profits or losses, are shared equally between the parties pursuant to a joint development plan. We have included $6.3 million and $8.0 million in research and development cost reimbursements as a reduction in tivozanib-related expenses for the three months ended March 31, 2013 and 2012, respectively. Upon entering into our license agreement with KHK, we made a cash payment in the amount of $5.0 million to KHK. In the first quarter of 2010, we paid KHK a $10.0 million milestone payment in connection with the initiation of our phase 3 clinical trial of tivozanib. In the first quarter of 2011, we paid KHK $22.5 million related to the up-front license payment received under the collaboration and license agreement with Astellas. In December 2012, we made a $12.0 million milestone payment to KHK in connection with the acceptance of our NDA filing for tivozanib. Ficlatuzumab In March 2007, we entered into a license agreement related to ficlatuzumab with Merck (formerly Schering-Plough) pursuant to which Merck was responsible for all expenses relating to development of ficlatuzumab in accordance with an agreed-upon budget. The agreement terminated on December 27, 2010. As of the December 27, 2010 date of termination of the collaboration agreement, we became responsible for the performance and funding of all future research, development, manufacturing and commercialization activities for ficlatuzumab. In connection with the transition of responsibility for the ficlatuzumab program, we purchased supply of ficlatuzumab from Merck for $10.2 million to support ongoing clinical trials of ficlatuzumab. In November 2011, we entered into an agreement with Boehringer Ingelheim for large-scale process development and clinical manufacturing of ficlatuzumab. Boehringer Ingelheim will produce ficlatuzumab at its biopharmaceutical site in Fremont, CA. We have retained all rights to the development and commercialization of ficlatuzumab. Due to the unpredictable nature of preclinical and clinical development, we are unable to estimate with any certainty the costs we will incur in the future development of ficlatuzumab. In September 2012, we announced detailed data from our phase 2 clinical trial comparing the combination of ficlatuzumab and Iressa® (gefitinib) to Iressa monotherapy in previously untreated Asian subjects with non-small cell lung cancer. In the intent-to-treat population, the addition of ficlatuzumab to Iressa did not result in statistically significant improved overall response rate. We intend to focus our efforts on further ficlatuzumab development through external collaborations. AV-203 Through the use of our Human Response Platform, we have identified antibodies that have been shown to be potent and selective inhibitors of ErbB3 in preclinical studies. In preclinical testing, these antibodies have significantly inhibited the growth of a number of different tumors, including in breast, prostate and pancreatic cancers. We have granted Biogen Idec an exclusive option to co-develop (with us) and commercialize our ErbB3-targeted antibodies for the potential treatment and diagnosis of cancer and other diseases outside of North America. In May 2012, we announced the initiation of a phase 1 clinical trial examining the safety, tolerability and preliminary efficacy of AV-203 along with exploratory biomarkers in patients with metastatic or advanced solid tumors. Due to the unpredictable nature of preclinical and clinical development and given the early stage of this program, we are unable to estimate with any certainty the costs we will incur in the future development of AV-203. Other Pipeline Programs Future research and development costs for our pipeline programs are not reasonably certain because such costs are dependent on a number of variables, including the success of preclinical studies and the identification of other potential candidates. Platform Collaborations On September 7, 2012, we received notice from Centocor of termination effective on December 6, 2012, of its license agreement with us, at which point all rights to and the responsibility for future research and development of the RON antibody program returned to us. Centocor funded certain translational research studies using our proprietary Human Response Platform related to the RON program. The related expenses were captured as a cost of the agreement with Centocor. Other Research and Development Other research and development includes expenses related to our Human Response Platform, which are not specifically related to a particular product candidate or a specific strategic partnership. 29 -------------------------------------------------------------------------------- Table of Contents Uncertainties of Estimates Related to Research and Development Expenses The process of conducting preclinical studies and clinical trials necessary to obtain FDA approval for each of our product candidates is costly and time-consuming. The probability of success for each product candidate and clinical trial may be affected by a variety of factors, including, among others, the quality of the product candidate's early clinical data, investment in the program, competition, manufacturing capabilities and commercial viability. At this time, we cannot reasonably estimate or know the nature, specific timing and estimated costs of the efforts that will be necessary to complete the development of our product candidates, or the period, if any, in which material net cash inflows may commence from sales of any approved products. This uncertainty is due to the numerous risks and uncertainties associated with developing drugs, including the uncertainty of: • the progress and results of our clinical trials; • the scope, progress, results and costs of preclinical development, laboratory testing and clinical trials for any product candidate; • the costs, timing and outcome of regulatory review of our product candidates; • our ability to establish and maintain strategic partnerships, the terms of those strategic partnerships and the success of those strategic partnerships, if any, including the timing and amount of payments that we might receive from strategic partners; • the emergence of competing technologies and products and other adverse market developments; and • the costs of preparing, filing and prosecuting patent applications and maintaining, enforcing and defending intellectual property-related claims. As a result of the uncertainties associated with developing drugs, including those discussed above and, in particular, with respect to uncertainties relating to our future development of our lead product candidate, tivozanib, for the treatment of advanced RCC, as described under "-Recent Development," we are unable to determine the duration and completion costs of current or future clinical stages of our product candidates, or when, or to what extent, we will generate revenues from the commercialization and sale of any of our product candidates. Development timelines, probability of success and development costs vary widely. We anticipate that we will make determinations as to which additional programs to pursue and how much funding to direct to each program on an ongoing basis in response to the scientific and clinical success of each product candidate, as well as ongoing assessment of each product candidate's commercial potential. We will need to raise substantial additional capital in the future in order to fund the development of tivozanib, AV-203 and our other product candidates. General and Administrative Expenses General and administrative expenses consist principally of salaries and related costs for personnel in executive, finance, business development, marketing, information technology, legal and human resource functions. Other general and administrative expenses include facility costs not otherwise included in research and development expenses, patent filing, prosecution and defense costs and professional fees for legal, consulting, pre-commercialization activities, auditing and tax services. We anticipate that our general and administrative expenses will decrease as we decrease our activities supporting commercialization of tivozanib. Interest Income and Interest Expense Interest income consists of interest earned on our cash, cash equivalents and marketable securities. The primary objective of our investment policy is capital preservation. Interest expense consists primarily of interest, amortization of debt discount, and amortization of deferred financing costs associated with our loans payable. Income Taxes We calculate our provision for income taxes on ordinary income based on our projected annual tax rate for the year. As of March 31, 2013, we are projecting an ordinary loss for the year ended December 31, 2013, and since we maintain a full valuation allowance on all of our deferred tax assets, we have recorded no income tax provision or benefit in the current quarter. Critical Accounting Policies and Significant Judgments and Estimates Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in our financial statements. On an ongoing 30 -------------------------------------------------------------------------------- Table of Contents basis, we evaluate our estimates and judgments, including those related to revenue recognition, accrued clinical expenses, and stock-based compensation. We base our estimates on historical experience, known trends and events and various other factors that we and our management believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our significant accounting policies are described in the notes to our condensed consolidated financial statements appearing elsewhere in this report. There have been no material changes to our critical accounting policies during the three months ended March 31, 2013. Please refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", of our annual report on Form 10-K for the fiscal year ended December 31, 2012 for a discussion of our critical accounting policies and significant judgments and estimates. Results of Operations Comparison of Three Months Ended March 31, 2013 and 2012 The following table summarizes the results of our operations for each of the three months ended March 31, 2013 and 2012, together with the changes in those items in dollars and as a percentage: Three Months Ended March 31, Increase/ 2013 2012 (decrease) % (in thousands) Revenue $ 323 $ 860 $ (537 ) (62 )% Operating expenses: Research and development 20,962 24,776 (3,814 ) (15 )% General and administrative 12,449 8,983 3,466 39 % Restructuring 67 - 67 - Total operating expenses 33,478 33,759 (281 ) (1 )% Loss from operations (33,155 ) (32,899 ) (256 ) 1 % Other (expense) income, net (101 ) 299 (400 ) (134 )% Interest expense (870 ) (845 ) (25 ) 3 % Interest income 41 199 (158 ) (79 )% Net loss $ (34,085 ) $ (33,246 ) $ (839 ) 3 % The following table sets forth revenue for the three months ended March 31, 2013 and 2012: Three Months Ended March 31, Increase/ Revenue 2013 2012 (decrease) % (in thousands) Strategic Partner: Biogen Idec 216 216 - - Astellas 107 107 - - Centocor - 517 (517 ) (100 )% Other - 20 (20 ) (100 )% $ 323 $ 860 $ (537 ) (62 )% Revenue. Revenue for the three months ended March 31, 2013 was $0.3 million compared to $0.9 million for the three months ended March 31, 2012, a decrease of approximately $0.5 million or 62%. The decrease in revenue is primarily due to revenue recognized in the first quarter of 2012 under our collaboration agreement with Centocor that did not recur during the first quarter of 2013 since the agreement was terminated in December 2012. Revenue for the first quarter of 2013 related to amortization of previously deferred revenue associated with our collaboration agreements with Biogen Idec and Astellas. Research and development. Research and development, or R&D, expenses for the three months ended March 31, 2013 were $21.0 million compared to $24.8 million for the three months ended March 31, 2012, a decrease of $3.8 million or 15%. The decrease is primarily attributable to a decrease in clinical trial costs of $6.0 million primarily related to tivozanib; a decrease of $1.5 million in manufacturing costs related primarily to AV-203 and ficlatuzumab; and a decrease of $0.5 million in salaries, benefits and contract labor mainly due to a decrease in personnel supporting research and development activities. These decreases are partially offset by a decrease of $1.7 million in reimbursements to us by Astellas for tivozanib development costs; a $1.4 million increase in facility costs that were allocated to R&D expenses, primarily due to rent expense associated with our future headquarters at 650 East Kendall Street in Cambridge, Massachusetts; a $0.6 million increase in consulting costs primarily related to the development of tivozanib; and a $0.6 million increase in medical affairs activities. 31 -------------------------------------------------------------------------------- Table of Contents General and administrative. General and administrative, or G&A, expenses for the three months ended March 31, 2013 were $12.4 million compared to $9.0 million for the three months ended March 31, 2012, an increase of $3.5 million or 39%. The increase is primarily the result of an increase of $2.1 million in costs for planned commercialization activities related to tivozanib; a $1.0 million increase in salaries, benefits and other hiring costs due to an overall increase in personnel while we were preparing for the potential launch of tivozanib; and a $0.6 million increase in facility costs that were allocated to G&A expenses, primarily due to rent expense associated with our future headquarters at 650 East Kendall Street. These increases were partially offset by an increase of $0.7 million in the reimbursement to us by Astellas of tivozanib pre-commercialization activities. Other (expense) income, net. Other income, net for the three months ended March 31, 2013 was $(101,000) compared to $299,000 for the three months ended March 31, 2012, a decrease of $400,000 or 134%. Other expense for the three months ended March 31, 2013 is due to losses on foreign exchange rates and fixed asset disposals, while other income for the three months ended March 31, 2012 primarily related to proceeds from the sale of excess supplies. Interest expense. Interest expense for the three months ended March 31, 2013 was $0.9 million compared to $0.8 million for the three months ended March 31, 2012, an increase of 3%. Interest expense is related to our loan with Hercules Technology Growth. Interest income. Interest income for the three months ended March 31, 2013 was $41,000 compared to $199,000 for the three months ended March 31, 2012, a decrease of $158,000 or 79%. The decrease in interest income is primarily due to a lower average cash balance and lower average interest rates during the three months ended March 31, 2013 compared to the three months ended March 31, 2012. Liquidity and Capital Resources We have funded our operations principally through the sale of equity securities sold in connection with our public offerings, private placements of equity securities, revenue and expense reimbursements from strategic partnerships, debt financings and interest income. As of March 31, 2013, we have received gross proceeds of $89.7 million from the sale of common stock in our initial public offering, $68.3 million from private placements of shares of our common stock to institutional and accredited investors, $168.7 million from our subsequent public offerings of shares of our common stock, and $169.6 million from the sale of convertible preferred stock prior to becoming a public company. As of March 31, 2013, we had received an aggregate of $373.1 million in cash from our agreements with OSI, Biogen Idec, Astellas, Centocor and Eli Lilly and our three agreements with Merck, and $26.5 million in funding from our debt financing with Hercules Technology Growth and certain of its affiliates. As of March 31, 2013, we had cash, cash equivalents and marketable securities of approximately $191.6 million. Currently, our funds are invested in money market funds, municipal bonds, asset-backed commercial paper, asset-backed securities, and corporate debt, including commercial paper. The following table sets forth the primary sources and uses of cash for each of the periods set forth below: Three Months Ended March 31, 2013 2012 (in thousands) Net cash used in operating activities $ (21,608 ) $ (30,626 ) Net cash (used in) provided by investing activities (22,361 ) 58,506 Net cash provided by financing activities 53,708 1,683 Net increase in cash and cash equivalents $ 9,738 $ 29,563 For the three months ended March 31, 2013 and 2012, our operating activities used cash of $21.6 million, and $30.6 million, respectively. The cash used by operations for the three months ended March 31, 2013 was due primarily to our net loss adjusted for non-cash items, as well as a decrease in the accounts receivable balance of $11.5 million primarily related to payments received from Astellas during the three months ended March 31, 2013. The cash used by operations for the three months ended March 31, 2012 was due primarily to our net loss adjusted for non-cash items. For the three months ended March 31, 2013 and 2012, our investing activities (used) provided cash of $(22.4) million, and $58.5 million, respectively. The cash (used in) provided by investing activities for the three months ended March 31, 2013 and 2012 was primarily the net result of purchases of marketable securities partially offset by maturities and sales of marketable securities, in addition to purchases of property and equipment of $0.8 million and $1.1 million, respectively. For the three months ended March 31, 2013 and 2012, our financing activities provided $53.7 million and $1.7 million, respectively. The cash provided by financing activities for the three months ended March 31, 2013 was due to the sale and issuance of 7,667,050 shares of common stock at a price of $7.50 per share in our public offering in January 2013 with net proceeds of $53.6 32 -------------------------------------------------------------------------------- Table of Contents million, as well as proceeds from stock option exercises of $0.7 million. The cash provided by financing activities for the three months ended March 31, 2012 was due to proceeds from stock option exercises of $0.2 million, as well as net proceeds of $3.7 million from the refinancing of loans payable from our loan agreement entered into with affiliates of Hercules Technology Growth, offset partially by principal payments on loans payable in the amount of $2.2 million,. Credit Facilities. On May 28, 2010, we entered into a loan and security agreement, which we refer to as the loan agreement, with Hercules Technology II, L.P. and Hercules Technology III, L.P., affiliates of Hercules Technology Growth (which we refer to collectively as Hercules) which we amended on December 21, 2011 and March 31, 2012, and under which we received a loan in an aggregate principal amount of $26.5 million. We are required to repay the aggregate principal balance of the loan that is outstanding under the loan agreement in 30 equal monthly installments of principal starting on April 1, 2013. We began repaying principal related to the loan agreement on April 1, 2013. The loan agreement requires a deferred charge of $1.25 million, which was paid in May 2012 in connection with the amendment of the loan agreement with Hercules. The loan agreement also includes an obligation to pay an additional deferred charge of $1.24 million due on June 1, 2014 which has been recorded as a loan discount and is being amortized to interest expense over the term of the loan agreement using the effective interest rate method. We recorded a long-term liability for the full amount of the charge since the payment of such amount is not contingent upon any future event. Per annum interest is payable at the greater of 11.9% and an amount equal to 11.9% plus the prime rate of interest minus 4.75%, provided however, that the per annum interest shall not exceed 15.0%. We must make interest payments on the loan each month the loan remains outstanding. The unpaid principal balance and all accrued but unpaid interest will be due and payable on September 1, 2015. The loan is secured by a lien on all of our personal property (other than intellectual property), whether owned as of, or acquired after, the date of the amended loan agreement. As of March 31, 2013, the principal balance outstanding was $26.5 million. While we do not believe that there has been a material adverse change, as defined in the loan agreement, it is possible that Hercules could take the position that the recent adverse developments relating to the development and commercialization of tivozanib for RCC, including the substantially increased likelihood that the NDA for tivozanib will not be approved by FDA as a result of the ODAC vote, constitute a material adverse change, and, accordingly, an event of default, which could trigger a repayment of all principal and interest due under the loan unless such event of default is waived by Hercules. Operating Capital Requirements. We anticipate that we will continue to incur significant operating costs for the next several years as we incur expenses to continue to advance our clinical trial programs for tivozanib and AV-203, and develop certain pipeline programs, including ficlatuzumab. We believe that our existing cash, cash equivalents, and marketable securities will allow us to fund our operating plan into at least the second quarter of 2014, without giving effect to the implementation of a revised operating plan, which we expect to include a potential restructuring, due to the recent ODAC decision and likely adverse FDA determination related to tivozanib. Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical products, we are unable to estimate the exact amounts of our working capital requirements. Our future funding requirements will depend on many factors, including, but not limited to: • the outcome of the FDA's review of our NDA filing for tivozanib for advanced RCC and the effect of that outcome on our operations and our collaboration agreement with Astellas; • the number and characteristics of the product candidates we pursue; • the scope, progress, results and costs of researching and developing our product candidates, and conducting preclinical and clinical trials; • the timing of, and the costs involved in, obtaining regulatory approvals for our product candidates; • whether Astellas decides to submit a MAA to the EMA; • the cost of commercialization activities if any of our product candidates are approved for sale, including marketing, sales and distribution costs; • the cost of manufacturing our product candidates and any products we successfully commercialize; • our ability to establish and maintain strategic partnerships, licensing or other arrangements and the financial terms of such agreements; • the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims, including litigation costs and the outcome of such litigation; • whether we realize the full amount of any projected cost savings associated with any strategic restructuring; • the absence of any breach or event of default under our loan agreement with Hercules or under any other agreements with third parties; • the outcome of lawsuits against us, including the current purported class action lawsuit described below under "Part II, Item 1-Legal Proceedings;" • our ability to maintain our collaboration with Astellas; and • the timing, receipt and amount of sales of, or royalties on, our future products, if any. 33 -------------------------------------------------------------------------------- Table of Contents Furthermore, as described above, due to the recent ODAC decision and likely adverse FDA determination relating to our NDA for tivozanib, we are evaluating the implementation of a restructuring plan that could include a reduction in our workforce. While we have not yet finalized if, when and how such a restructuring might be implemented, even if we proceed with such plans we may not be able to successfully implement the restructuring and we may not realize the planned cost savings benefits of any such restructuring, which could adversely affect our estimate of the period in which we have capital to fund our operating plan. If our available cash and cash equivalents are insufficient to satisfy our liquidity requirements, or if we identify additional opportunities to do so, we may seek to sell additional equity or debt securities or obtain additional credit facilities. The sale of additional equity or convertible debt securities may result in additional dilution to our stockholders. If we raise additional funds through the issuance of debt securities or preferred stock or through additional credit facilities, these securities and/or the loans under credit facilities could provide for rights senior to those of our common stock and could contain covenants that would restrict our operations. We may require additional capital beyond our currently forecasted amounts. Additional funds may not be available when we need them, on terms that are acceptable to us, or at all. If adequate funds are not available to us on a timely basis, we may be required to: • delay, limit, reduce or terminate preclinical studies, clinical trials or other research and development activities for one or more of our product candidates; and/or • delay, limit, reduce or terminate our establishment of sales and marketing capabilities or other activities that may be necessary to commercialize our product candidates. Contractual Obligations and Commitments There have been no material changes to our contractual obligations and commitments outside the ordinary course of business from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2012 filed with the SEC on March 11, 2013. Off-Balance Sheet Arrangements We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under SEC rules. [ Back To TMCnet.com's Homepage ]