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ZIOPHARM ONCOLOGY INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) Forward Looking Statements This quarterly report on Form 10-Q contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. In particular, statements contained in this Form 10-Q, including but not limited to, statements regarding the costs and timing of our clinical trials and of the development and commercialization of our pipeline products and services; the sufficiency of our cash, investments and cash flows from operations and our expected uses of cash; our ability to finance our operations and business initiatives and obtain funding for such activities; our future results of operations and financial position, business strategy and plan prospects, projected revenue or costs and objectives of management for future research, development or operations, are forward-looking statements. These statements relate to our future plans, objectives, expectations and intentions and may be identified by words such as "may," "will," "should," "expects," "plans," "anticipates," "intends," "targets," "projects," "contemplates," "believes," "seeks," "goals," "estimates," "predicts," "potential" and "continue" or similar words. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict, including those identified below, under Part II, Item 1A. "Risk Factors" and elsewhere herein. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. We undertake no obligation to revise or update any forward-looking statements for any reason. Company Overview ZIOPHARM Oncology, Inc. is a biopharmaceutical company that seeks to acquire, develop and commercialize, on its own or with partners, a diverse portfolio of cancer therapies that can address high unmet medical needs. Pursuant to an exclusive channel agreement with Intrexon Corporation, or Intrexon, we obtained exclusive rights to Intrexon's synthetic biology platform for use in the field of oncology, which included two existing clinical stage product candidates, Ad-RTS-IL-12 + veledimex and DC-RTS-IL-12 + veledimex. The synthetic biology platform employs an inducible gene-delivery system that enables controlled delivery of genes that produce therapeutic proteins to treat cancer. Ad-RTS-IL-12 + veledimex is our lead drug candidate, which uses this gene delivery system to produce Interleukin-12, or IL-12, a potent, naturally occurring anti-cancer protein. We are currently studying Ad-RTS-IL-12 + veledimex in two Phase 2 studies, the first for the treatment of metastatic melanoma, and the second for the treatment of metastatic breast cancer, and expect to announce additional data from these Phase 2 studies in the fourth quarter of 2014. We plan to continue to combine Intrexon's synthetic biology platform with our capabilities to translate science to the patient setting to develop additional products to stimulate key pathways, including those used by the body's immune system to inhibit the growth and metastasis of cancers. We have numerous programs under development and expect to file multiple investigational new drug, or IND, applications through 2015. We also have a portfolio of small molecule drug candidates, which are no longer a strategic focus of our development activities for which we have established and will continue to seek additional partners to pursue further development and potential commercialization. Enabling Technology Synthetic biology entails the application of engineering principles to biological systems for the purpose of designing and constructing new biological systems or redesigning/modifying existing biological systems. Biological systems are governed by DNA, which control cellular processes by coding for the production of proteins and other molecules that have a functional purpose and by regulating the activities of these molecules. This regulation occurs via complex biochemical and cellular reactions working through intricate cell signaling pathways, and control over these molecules modifies the output of biological systems. Synthetic biology has been enabled by the application of information technology and advanced statistical analysis, also known as bioinformatics, to genetic engineering, as well as by improvements in DNA synthesis. Synthetic biology aims to engineer gene-based programs or codes to modify cellular function to achieve a desired biological outcome. Its application is intended to allow more precise control of drug concentration and dose, thereby improving the therapeutic index associated with the resulting drug. On January 6, 2011, we entered into an Exclusive Channel Partner Agreement with Intrexon, which we refer to as the Channel Agreement, to develop and commercialize novel DNA-based therapeutics in the field of cancer treatment by combining Intrexon's synthetic biology platform with our capabilities to translate science to the patient setting. As a result, our DNA synthetic biology platform employs an inducible gene-delivery system that enables controlled delivery of genes that produce therapeutic proteins to treat cancer. The first example of this regulated controlled delivery is achieved by producing IL-12, a potent, naturally occurring anti-cancer protein, under the control of Intrexon's proprietary biological "switch" to turn on/off the therapeutic protein expression at the tumor site. We and Intrexon refer to this "switch" as the RheoSwitch Therapeutic System® or RTS® platform. Our initial drug candidates being developed using the synthetic biology platform are Ad-RTS-IL-12 + veledimex and DC-RTS-IL-12 + veledimex with a current focus on Ad-RTS-IL-12 + veledimex. 23 -------------------------------------------------------------------------------- Table of Contents We have demonstrated that we are able to simultaneously express multiple effectors under control of the RTS® platform from the same construct. In mice, we have also shown that we are able to express multigenic DNA constructs in an embedded, controlled bioreactor, by injecting into skeletal muscle and measuring the DNA-coded proteins in the blood. Furthermore, we have also demonstrated the ability to express these same three genes under RTS® platform control in mesenchymal stem cells, or MSCs. More detailed descriptions of Ad-RTS-IL-12 + veledimex, DC-RTS-IL-12 + veledimex, our remaining small molecule programs, and our clinical development and commercialization plans for each are set forth in this report under the caption "Business - Product Candidates." Recent Developments ZIOPHARM is currently conducting or planning Phase 2 studies of Ad-RTS-IL-12, alone or in combination with existing treatment standards, in melanoma and breast cancer, with plans to initiate a Phase 1 study in high-grade gliomas (brain cancer). We have numerous other programs under preclinical development and expect to file multiple investigational new drug, or IND, applications through 2015. ZIOPHARM has continued to expand the scope of its synthetic immuno-oncology programs in collaboration with Intrexon Corporation focusing on synthetic biologic approaches to chimeric antigen receptor T-cell (CAR-T) therapy and other cell based programs. More detail will be elucidated in multiple presentations at the upcoming American Association for Cancer Research (AACR) Special Tumor Immunology and Immunotherapy meeting, to be held December 1-4, 2014. This will include updated information on the IL-12 programs and on genetically modified and controllable cell programs for treating cancers. At the American Society of Gene & Cell Therapy 17th annual meeting (ASGCT 2014) held May 21-24, 2014, we presented study data showing that Ad-RTS-mIL-12 + veledimex exhibits controllable systemic immune activation in human subjects with melanoma and breast cancer. In an orthotopic murine glioma model we have demonstrated that Ad-RTS-mIL-12 + veledimex significantly reduces brain cancer stem cells and in another preclinical study we also demonstrated that Ad-RTS-mIL-12 + veledimex improves survival over temozolomide, dexamethasone and bevacizumab. These findings support the utility of localized, regulatable IL-12 production as an approach for the treatment of malignant glioma in human subjects. 24 -------------------------------------------------------------------------------- Table of Contents Product candidates The following chart identifies our current synthetic biology product candidates and their stage of development, each of which are described in more detail below. [[Image Removed: LOGO]] Synthetic Biology Programs: Ad-RTS-IL-12 + veledimex. Ad-RTS-IL-12 + veledimex is currently being tested in two Phase 2 studies, the first for the treatment of metastatic melanoma, and the second for the treatment of unresectable recurrent or metastatic breast cancer. Ad-RTS-IL-12 + veledimex is our lead drug candidate, which uses our gene delivery system to produce Interleukin-12, or IL-12, a potent, naturally occurring anti-cancer protein. Interleukin-12 (IL-12) is a potent immunostimulatory cytokine which activates and recruits dendritic cells that facilitate the cross-priming of tumor antigen-specific T cells. Intratumoral administration of Ad-RTS-IL-12 + veledimex, which allows for adjustment of IL-12 gene expression upon varying the dose of veledimex, is designed to reduce the toxicity elicited by systemic delivery of IL-12, and increase efficacy through high intratumoral expression. In March 2013, we announced the initiation of a Phase 2 clinical study of Ad-RTS-IL-12 + veledimex to treat metastatic breast cancer. The two-part, multi-center U.S. study is enrolling patients with unresectable, recurrent or metastatic breast cancer who have visible lesions or lesions accessible by injection. This study was designed to assess the safety and efficacy of the therapeutic effect of Ad-RTS-IL-12 + veledimex in this indication. The primary endpoint of the study is rate of progression-free survival at 16 weeks. Secondary endpoints include objective response rate, duration of response and evaluation of pharmacodynamic tumor markers. 25-------------------------------------------------------------------------------- Table of Contents In May 2013, we announced promising results from nonclinical and Phase 1 studies in metastatic melanoma using Ad-RTS-IL-12 + veledimex. In these studies, the controlled expression of IL-12, through a regulatable gene therapy strategy, was found to limit systemic toxicity while inducing biological and clinical activity. The findings were presented in an oral session at the 16th Annual Meeting of the American Society of Gene and Cell Therapy (ASGCT). In June 2013, updated results were presented at the 2013 American Society for Clinical Oncology (ASCO). Ad-RTS-IL-12 + veledimex induce production of IL-12 mRNA in the tumor microenvironment (switch on). Upon removal of veledimex, IL-12 mRNA levels return to baseline (switch off). Following treatment with Ad-RTS-IL-12 + veledimex, increases in TILs (CD8+, CD45RO+) were observed in the tumor microenvironment. Clinical activity was observed in injected and non-injected lesions primarily at the higher doses of veledimex. Inflammation, shrinkage, flattening, and depigmentation of lesions correlated with the elevated serum levels of IFN-g. Ad-RTS-IL-12 + veledimex therapy was generally well-tolerated and its safety profile is consistent with other immunotherapies. We reported the controlled local expression of IL-12 as an immunotherapeutic treatment of glioma through the use of the RTS® at the October 2013 AACR-NCI-EORTC. Veledimex brain penetration was demonstrated in normal mice and monkeys with intact blood brain barriers. Treatment with Ad-RTS-IL-12 + veledimex and DC-RTS-IL-12 + veledimex both demonstrated dose-related increase in survival in the mouse GL-261 glioma model with no adverse clinical signs observed. In December 2013, we announced the unanimous approval of the Recombinant DNA Advisory Committee of the National Institutes of Health (RAC/NIH) for the initiation of a Phase 1 study of Ad-RTS-IL-12 + veledimex, in subjects with recurrent or progressive high grade gliomas (brain cancer). The FDA has requested additional nonclinical information to support the Phase 1 study, this data is currently being generated. Upon agreement with the FDA, we anticipate initiation of the Phase 1 study during the first half of 2015. Glioblastoma is by far the most frequent malignant brain tumor and is associated with a particularly aggressive course and dismal prognosis. The current standard of care is based in surgical resection to the maximum feasible extent, followed by radiotherapy and concomitant adjuvant temozolomide. Such aggressive treatment, however, is associated with only modest improvements in survival resulting in a very high unmet medical need. Newly diagnosed glioblastoma patients have a median overall survival, or OS, of 11-17 months. In December 2013, we presented positive interim results from the ongoing Phase 1/2 study of Ad-RTS-IL-12 + veledimex in patients with advanced melanoma. The results from this multicenter study were presented at Melanoma Bridge 2013 Conference at the session "Best Abstracts on News in Immunotherapy", an international conference co-sponsored by Istituto Nazionale Tumori Fondazione, Sidra Medical and Research Center, and the Society for ImmunoTherapy of Cancer was held in Naples, Italy. In this study, 21 patients with unresectable, recurrent stage III/IV melanoma have been treated with intratumoral injections of Ad-RTS-IL-12 + veledimex and the oral activator veledimex. The purpose of the study is to evaluate the safety and tolerability of the Ad-RTS-IL-12 + veledimex therapy, determine tumor and immune response, and select the optimal dose and schedule of veledimex for future study. To date, expression of IL-12 mRNA in study subjects' tumors was determined to be controlled by veledimex. In addition, upon stopping veledimex dosing, expression of the IL-12 mRNA returned to baseline levels, demonstrating the "on" and "off" control of the RTS®. In this dose range, results to date demonstrate that Ad-RTS-IL-12 + veledimex therapy has potent biologic activity, as measured by on-mechanism and on-target toxicity and response in injected and non-injected lesions. Following treatment, 11 of 16 evaluable patients have demonstrated a response of stable disease or better on a per lesion basis. The most common severe adverse events or SAEs, were pyrexia, hypotension, mental status changes, and cytokine release syndrome. Four of seven patients with SAEs had veledimex dosing stopped during cycle one. Three had SAEs during subsequent cycles, and stopped veledimex dosing at that time. Importantly, all SAEs were reversed after veledimex dosing was stopped, demonstrating the "on" and "off" control of veledimex on gene expression. 26-------------------------------------------------------------------------------- Table of Contents Also in December 2013, we announced preliminary results from the ongoing Phase 2 clinical study of Ad-RTS-IL-12 + veledimex therapy in patients with unresectable recurrent or metastatic breast cancer. The findings were reported in a poster presentation at the San Antonio Breast Cancer (SABC) Symposium in San Antonio, Texas. This multicenter Phase 2 study is designed to evaluate the safety and efficacy of Ad-RTS-IL-12 + veledimex in subjects with recurrent/metastatic breast cancer with accessible tumor(s). The primary endpoint of the study is rate of progression-free survival at 16 weeks. Secondary objectives include objective response rate, duration of response and evaluation of pharmacodynamic tumor markers. Six patients were evaluable for safety at the time of presentation. The most common severe adverse events (SAEs) were neutropenia, AST elevation and pyrexia. Importantly, in the absence of disease progression, all SAEs were reversed after veledimex dosing was stopped, demonstrating the "on" and "off" control of veledimex on gene expression. Preliminary monotherapy PFS rate was reported for two patients to date, with one subject progressing at 12 weeks and a second at 16 weeks. Recruitment for the Phase 2 clinical trial is ongoing to refine the dose and dosing schedule. With this dosing data, the Company will initiate a Phase 1b/2 clinical trial of Ad-RTS-hIL-12 + veledimex following first- or second-line standard treatment in subjects with locally advanced or metastatic breast cancer. The Company continues to conduct Phase 2 monotherapy studies in melanoma and breast cancer using Ad-RTS-IL-12 + veledimex. Additionally, the Company expects future trials with IL-12 in combination therapies with standard of care for breast cancer. As the treatment of advanced melanoma has undergone and continues to undergo a rapid evolution with the introduction and approval of highly promising new single and combination agents, the standard of care in this indication has become uncertain, resulting in a much more competitive and commercially unpredictable environment. As a result, the Company is pursuing intratumoral injection of Ad-RTS-IL-12 + veledimex in brain cancer and breast cancer, and will pause further development of Ad-RTS-IL-12 + veledimex in melanoma with intratumoral injection. Through current strategic initiatives, the Company expects to utilize RTS-IL-12 + veledimex in cell based immunotherapy of melanoma and other cancers. The Company plans to initiate a Phase 1 trial to evaluate Ad-RTS-IL-12 + veledimex as a single agent in the treatment of patients with brain cancer in the first half of 2015. DC-RTS-IL-12 + veledimex. We completed enrollment in a Phase 1 dose escalation study of DC-RTS-IL-12 + veledimex in the second quarter of 2012 in the United States. DC-RTS-IL-12 + veledimex employs intratumoral injection of modified dendritic cells from each patient and oral dosing of veledimex to turn on in vivo expression of IL-12. DC-RTS-IL-12 + veledimex , through the RTS® platform, controls the timing and level of transgene expression. The RTS® technology functions as a "gene switch" for the regulated expression of human IL-12 in the patients' dendritic cells which are transduced with a replication incompetent adenoviral vector carrying the IL-12 gene under the control of the RTS® platform. Currently, there are no actively enrolling studies using DC-RTS-IL-12 + veledimex, as we have prioritized our clinical development efforts on Ad-RTS-IL-12 + veledimex. Earlier Stage Programs. At the October 2013 AARC-NCI-EORTC we also presented results showing systemic expression of three distinct immune effectors from a single RTS® regulated multigenic construct in mice, in vitro data demonstrating the potential use of MSCs for tumor-targeted delivery of single or multiple RTS® regulated cancer immunotherapies, and data demonstrating functional single chain variable fragment-Fc fusion proteins as an alternate approach to monoclonal antibodies which are more amenable for multigenic therapies. We are also actively pursuing several other synthetic biology approaches, including additional gene delivery and multigenic approaches in our discovery pipeline to address unmet medical needs in cancer that are expected to result in multiple INDs through 2015. Small Molecule Programs Palifosfamide, ZIO-201. The small molecule palifosfamide, or isophosphoramide mustard, is a proprietary active metabolite of the pro-drug ifosfamide. Because palifosfamide is the stabilized active metabolite of ifosfamide and a distinct pharmaceutical composition without the acrolein or chloroacetaldehyde metabolites we believe that the administration of palifosfamide may be an effective and well-tolerated agent to treat cancer. In addition to anticipated lower toxicity, palifosfamide may have other advantages over ifosfamide and cyclophosphamide. Palifosfamide cross-links DNA differently than the active metabolite of cyclophosphamide, resulting in a different activity profile. We are seeking transactions with third parties for the possible out-license of palifosfamide. Soft Tissue Sarcoma. Previously we have studied palifosfamide in combination with doxorubicin in patients with soft tissue sarcoma. In March 2013, we announced that the pivotal Phase 3 study, PICASSO 3, did not meet its primary endpoint of progression-free survival, and that we would terminate our development program in metastatic soft tissue sarcoma. PICASSO 3 study data was presented in September 2013 at the European Cancer Congress. Small-Cell Lung Cancer. Small-Cell Lung Cancer, or SCLC, is almost exclusively associated with smoking. Standard of care for SCLC, which is etoposide and platinum therapy, has changed little in decades. Published studies of ifosfamide in combination with standard of care have evidenced enhanced efficacy but also with enhanced side effects, providing for an unfavorable benefit to risk association. We believe that combining palifosfamide with standard of care could offer a separation of enhanced efficacy from increased toxicity. 27-------------------------------------------------------------------------------- Table of Contents Data from a Phase 1 trial of palifosfamide in combination with etoposide and carboplatin informed appropriate dosing for initiating an adaptive Phase 3 trial in first-line, metastatic SCLC. In June 2012, the Company initiated an international, multi-center, open-label, adaptive, randomized study of palifosfamide in combination with carboplatin and etoposide, or PaCE, chemotherapy versus carboplatin and etoposide, or CE, alone in chemotherapy naïve patients with metastatic small cell lung cancer, which we refer to as MATISSE. The trial's primary endpoint is overall survival. Based on the outcome of PICASSO 3 in soft tissue sarcoma and the resulting revision in the Company's development plans for palifosfamide, enrollment in this study was suspended with 188 patients enrolled. The analysis of overall survival events in MATISSE will be submitted for presentation at a scientific forum during the first half of 2015. Darinaparsin, ZIO-101. Darinaparsin is an anti-mitochondrial (organic arsenic) compound (covered by issued patents and pending patent applications in the United States and in foreign countries). Phase 1 testing of the intravenous, or IV, form of darinaparsin in solid tumors and hematological cancers was completed. We reported clinical activity and a safety profile from these studies as predicted by preclinical results. We subsequently completed Phase 2 studies in advanced myeloma, primary liver cancer and in certain other hematological cancers. At the May 2009 annual meeting of ASCO, we reported favorable results from the IV trial in lymphoma, particularly peripheral T-cell lymphoma, or PTCL. A Phase 1 trial in solid tumors with an oral form of darinaparsin has completed enrollment. We have obtained Orphan Drug Designation for darinaparsin in the United States and Europe for the treatment of PTCL and have entered into an amended and restated global licensing agreement with Solasia Pharma K.K., or Solasia on July 31, 2014 granting Solasia an exclusive worldwide license to develop and commercialize darinaparsin, and related organoarsenic molecules, in both intravenous and oral forms in all indications for human use. In exchange, we will be eligible to receive from Solasia development-and sales-based milestones, a royalty on net sales of darinaparsin, once commercialized, and a percentage of any sublicense revenues generated by Solasia (see Note 8 in the accompanying unaudited financial statements). Current Plans Our current plans involve using our principal internal financial resources to develop the synthetic biology program, with the intention of ultimately partnering or otherwise raising additional capital to support further development activities for our strategic product candidates. As of September 30, 2014, we had approximately $46.1 million of cash and cash equivalents. Based upon our current plans, we anticipate that our cash resources will be sufficient to fund our operations into the fourth quarter of 2015. This forecast of cash resources is forward-looking information that involves risks and uncertainties, and the actual amount of our expenses could vary materially and adversely as a result of a number of factors, including the factors discussed in the "Risk Factors" section of this report and the uncertainties applicable to our forecast for the overall sufficiency of our capital resources. We have based our estimates on assumptions that may prove to be wrong, and our expenses could prove to be significantly higher than we currently anticipate. Furthermore, the successful development of our product candidates is highly uncertain. Product development costs and timelines can vary significantly for each product candidate, are difficult to accurately predict, and will require us to obtain additional funding, either alone or in connection with partnering arrangements. Various statutes and regulations also govern or influence the development, manufacturing, safety, labeling, storage, record keeping and marketing of each product. The lengthy process of seeking approval and the subsequent compliance with applicable statutes and regulations require the expenditure of substantial resources. Any failure by us to obtain, or any delay in obtaining, regulatory approvals could materially, adversely affect our business. To date, we have not received approval for the sale of any product candidates in any market and, therefore, have not generated any revenues from our product candidates. 28 -------------------------------------------------------------------------------- Table of Contents Financial Overview Overview of Results of Operations Three and nine months ended September 30, 2014 compared to three and nine months ended September 30, 2013 Revenue. Revenue during the three and nine months ended September 30, 2014 and 2013 was as follows: Three months ended Nine months ended September 30, September 30, 2014 2013 Change 2014 2013 Change ($ in thousands) Collaboration revenue $ 633 $ 200 $ 433 217 % $ 1,033 $ 600 $ 433 72 % Revenue for the three and nine months ended September 30, 2014 increased in comparison to the three and nine months ended September 30, 2013. In connection with our March 7, 2011 collaboration agreement with Solasia Pharma K.K., we received $5.0 million in research and development funding which was being earned over the period of effort, originally estimated to be 75 months. In July 2014, we entered into an amended and restated License and Collaboration Agreement with Solasia (see Note 8 to the accompanying unaudited financial statements), resulting in the Company no longer being obligated to continue their research and development efforts in connection with the upfront payment. However, there are certain deliverables that are included in the amended and restated License and Collaboration Agreement which are not separable from the agreement and have no stand-alone value. As a result, the Company has determined that the estimated period for amortizing the upfront payment is now 6 months at September 30, 2014. Accordingly, the Company has recorded $1 million in revenue during the nine months ended September 30, 2014 while the remaining deferred revenue balance of $1.7 million at September 30, 2014 has been classified as current. Research and development expenses. Research and development expenses during the three and nine months ended September 30, 2014 and 2013 were as follows: Three months ended Nine months ended September 30, September 30, 2014 2013 Change 2014 2013 Change ($ in thousands) Research and development $ 9,733 $ 6,247 $ 3,486 56 % $ 24,621 $ 40,133 $ (15,512 ) (39 %) Research and development expenses for the three months ended September 30, 2014 increased by $3.5 million when compared to the three months ended September 30, 2013. The increase is due to $1.5 million in discovery activities, $1.4 million of nonclinical activities, and $0.6 million of clinical activities, all related to our synthetic biology program. Research and development expenses for the nine months ended September 30, 2014 decreased by $15.5 million when compared to the nine months ended September 30, 2013. On March 26, 2013, we announced the decision to immediately terminate development of palifosfamide in first-line metastatic soft tissue sarcoma and during the quarter ended September 30, 2013, completed a workforce reduction plan to reduce costs (see Note 4 in the accompanying unaudited financial statements). This resulted in lower costs of $3.1 million related to the Phase 3 palifosfamide study in SCLC as the decision was made to suspend enrollment pending further data, lower costs related to the Phase 3 palifosfamide study in soft tissue sarcoma ("STS") of $11.0 million, lower other clinical costs of $1.2 million, lower employee-related costs of $1.5 million and lower manufacturing costs of $5.4 million. The decrease was offset by an increase of $4.2 million in discovery activities, $2.3 million in nonclinical activities, and $0.2 million of other costs all related to our synthetic biology program. 29-------------------------------------------------------------------------------- Table of Contents Our research and development expense consists primarily of salaries and related expenses for personnel, costs of contract manufacturing services, costs of facilities and equipment, fees paid to professional service providers in conjunction with our clinical trials, fees paid to research organizations in conjunction with preclinical animal studies, costs of materials used in research and development, consulting, license and milestone payments and sponsored research fees paid to third parties. We have not accumulated and tracked our internal historical research and development costs or our personnel and personnel-related costs on a program-by-program basis. Our employee and infrastructure resources are allocated across several projects, and many of our costs are directed to broadly applicable research endeavors. As a result, we cannot state the costs incurred for each of our oncology programs on a program-by-program basis. Our future research and development expenses in support of our current and future programs will be subject to numerous uncertainties in timing and cost to completion. We test potential products in numerous preclinical studies for safety, toxicology and efficacy. We may conduct multiple clinical trials for each product. As we obtain results from trials, we may elect to discontinue or delay clinical trials for certain products in order to focus our resources on more promising products or indications. Completion of clinical trials may take several years or more, and the length of time generally varies substantially according to the type, complexity, novelty and intended use of a product. It is not unusual for preclinical and clinical development of each of these types of products to require the expenditure of substantial resources. We estimate that clinical trials of the type generally needed to secure new drug approval are typically completed over the following timelines: Clinical Phase Estimated Completion Period Phase 1 1 - 2 years Phase 2 2 - 3 years Phase 3 2 - 4 years The duration and the cost of clinical trials may vary significantly over the life of a project as a result of differences arising during clinical development, including, among others, the following: • The number of clinical sites included in the trials; • The length of time required to enroll suitable patents; • The number of patients that ultimately participate in the trials; • The duration of patient follow-up to ensure the absence of long-term product-related adverse events; and • The efficacy and safety profile of the product. As a result of the uncertainties discussed above, we are unable to determine the duration and completion costs of our programs or when and to what extent we will receive cash inflows from the commercialization and sale of a product. Our inability to complete our programs in a timely manner or our failure to enter into appropriate collaborative agreements could significantly increase our capital requirements and could adversely impact our liquidity. These uncertainties could force us to seek additional, external sources of financing from time-to-time in order to continue with our product development strategy. Our inability to raise additional capital, or to do so on terms reasonably acceptable to us, would jeopardize the future success of our business. 30-------------------------------------------------------------------------------- Table of Contents General and administrative expenses. General and administrative expenses during the three and nine months ended September 30, 2014 and 2013 were as follows: Three months ended Nine months ended September 30, September 30, 2014 2013 Change 2014 2013 Change($ in thousands) General and administrative $ 2,842 $ 3,068 $ (226 ) (7 %) $ 9,315 $ 11,459 $ (2,144 ) (19 %) General and administrative expenses for the three months ended September 30, 2014 decreased by $0.2 million when compared to the three months ended September 30, 2013. The decrease was primarily due to lower non-employee contracted costs. General and administrative expenses for the nine months ended September 30, 2014 decreased by $2.1 million when compared to the nine months ended September 30, 2013. The decrease was primarily due to lower employee-related costs of $0.9 million as a result of our workforce reduction plan (see Note 4 in the accompanying unaudited financial statements) and $1.2 million in non-employee contracted costs. Other income (expense). Other income (expense) for three and nine months ended September 30, 2014 and 2013 was as follows: Three months ended Nine months ended September 30, September 30, 2014 2013 Change 2014 2013 Change ($ in thousands) Other income, net $ 2 $ (191 ) $ 193 (101 %) $ (6 ) $ (190 ) $ 184 (97 %) Change in fair value of warrants 5,847 (7,407 ) 13,254 179 % 11,529 2,979 8,550 287 % Total $ 5,849 $ (7,598 ) $ 13,447 $ 11,523 $ 2,789 $ 8,734 The increase in other income (expense) from the three months ended September 30, 2014 compared to the three months ended September 30, 2013 was due primarily to the change in the fair value of liability-classified warrants, which yielded a gain of $5.8 million for the three months ended September 30, 2014 as compared to a loss of $7.4 million for the three months ended September 30, 2013. The change in liability-classified warrants is primarily attributable to decreases in our stock price, remaining term and volatility. The decrease in other income (expense) from the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013 was due primarily to the change in the fair value of liability-classified warrants, which yielded a gain of $11.5 million for the nine months ended September 30, 2014 as compared to a gain of $3.0 million for the nine months ended September 30, 2013. The change in liability-classified warrants is primarily attributable to decreases in our stock price, remaining term and volatility. 31-------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources As of September 30, 2014, we had approximately $46.1 million in cash and cash equivalents, compared to $68.2 million in cash and cash equivalents as of December 31, 2013. We anticipate that our cash resources will be sufficient to fund our operations into the fourth quarter of 2015. However, changes may occur that would consume our existing capital prior to that time, including the scope and progress of our research and development efforts and changes in governmental regulation. Actual costs may ultimately vary from our current expectations, which could materially impact our use of capital and our forecast of the period of time through which our financial resources will be adequate to support our operations. We have estimated the sufficiency of our cash resources based in part on the anticipated advancement of our synthetic biology product candidates in the clinic under our exclusive channel partnership with Intrexon, and we expect that the costs associated with these and additional product candidates will increase the level of our overall research and development expenses significantly going forward. Although all human clinical trials are expensive and difficult to design and implement, we believe that due to complexity, costs associated with clinical trials for synthetic biology products are greater than the corresponding costs associated with clinical trials for small molecule candidates. In addition to these factors, our actual cash requirements may vary materially from our current expectations for a number of other factors that may include, but are not limited to, changes in the focus and direction of our development programs, competitive and technical advances, costs associated with the development of our product candidates, our ability to secure partnering arrangements, and costs of filing, prosecuting, defending and enforcing our intellectual property rights. If we exhaust our capital reserves more quickly than anticipated, regardless of the reason, and we are unable to obtain additional financing on terms acceptable to us or at all, we will be unable to proceed with development of some or all of our product candidates on expected timelines and will be forced to prioritize among them. We expect that we will need additional financing to support our long-term plans for clinical trials and new product development. We expect to finance our cash needs through the sale of equity securities, strategic collaborations and/or debt financings, or through other sources that may be dilutive to existing stockholders. There can be no assurance that we will be able to obtain funding from any of these sources or, if obtained, what the terms of such funding(s) may be, or that any amount that we are able to obtain will be adequate to support our working capital requirements until we achieve profitable operations. We have no current committed sources of additional capital. Recently, capital markets have experienced a period of instability that may severely hinder our ability to raise capital within the time periods needed or on terms we consider acceptable, if at all. If we are unable to raise additional funds when needed, we may not be able to continue development and regulatory approval of our products, or we could be required to delay, scale back or eliminate some or all our research and development programs. In December 2014, approximately 8.2 million warrants to purchase shares of our common stock at $3.93 per share will expire. If fully exercised, the warrants would result in net cash proceeds of up to approximately $32.3 million. 32-------------------------------------------------------------------------------- Table of Contents The following table summarizes our net increase (decrease) in cash and cash equivalents for the nine months ended September 30, 2014 and 2013: Nine months ended September 30, 2014 2013 ($ in thousands) Net cash provided by (used in): Operating activities $ (26,780 ) $ (50,464 ) Investing activities (193 ) (118 ) Financing activities 4,891 907 Net increase (decrease) in cash and cash equivalents $ (22,082 ) $ (49,675 ) Net cash used in operating activities was $26.8 million for the nine months ended September 30, 2014 compared to $50.5 million for the nine months ended September 30, 2013. The $23.7 million decrease in cash used was primarily due to a decrease in research and development expenses, in conjunction with our restructuring efforts (see note 4 to the accompanying unaudited financial statements). Net cash used in investing activities was $193 thousand for the nine months ended September 30, 2014 compared to $118 thousand for the nine months ended September 30, 2013. The change was due to increased spending on property, plant, and equipment. Net cash provided by financing activities was $4.9 million for the nine months ended September 30, 2014 compared to $0.9 million for the nine months ended September 30, 2013. The change is primarily attributable to an increase in proceeds from warrant exercises. 33-------------------------------------------------------------------------------- Table of Contents Operating capital and capital expenditure requirements We anticipate that losses will continue for the foreseeable future. At September 30, 2014, our accumulated deficit was approximately $362.2 million. Our actual cash requirements may vary materially from those planned because of a number of factors including: • Changes in the focus, direction and pace of our development programs; • Competitive and technical advances; • Costs associated with the development of our product candidates; • Our ability to secure partnering arrangements; • Costs of filing, prosecuting, defending and enforcing any patent claims and any other intellectual property rights, or other developments, and • Other matters identified under Part II - Item 1A. "Risk Factors." Working capital as of September 30, 2014 was $36.2 million, consisting of $47.8 million in current assets and $11.7 million in current liabilities. Working capital as of December 31, 2013 was $62.5 million, consisting of $70.3 million in current assets and $7.8 million in current liabilities. Contractual obligations The following table summarizes our outstanding obligations as of September 30, 2014 and the effect those obligations are expected to have on our liquidity and cash flows in future periods: Less than More than ($ in thousands) Total 1 year 2 - 3 years 4 - 5 years 5 years Operating leases $ 3,462 $ 1,227 $ 1,683 $ 552 $ - Royalty and license fees 2,125 1,275 550 300 - Contract milestone / installment payments 231 231 - - - Total $ 5,818 $ 2,733 $ 2,233 $ 852 $ - Our commitments for operating leases relate to the lease for our corporate headquarters in Boston, MA, and office space in New York, NY. Our commitments for royalty and license fees relate to our royalty agreements with Southern Research Institute, requiring minimum royalty payments, as well as our license agreement with The University of Texas M. D. Anderson Cancer Center, requiring payment upon the first patient treated in a pivotal trial in darinaparsin, currently being developed under the amended and restated License and Collaboration Agreement with Solasia. As part of the amended and restated License and Collaboration agreement with Solasia (see Note 8 to the accompanying unaudited financial statements), we will receive full reimbursement of this license payment. The contract milestone and contract installment payments relate to our agreement with Baxter Healthcare Corporation for the purchase of the assets relating to indibulin, and to our CRO agreements with Novella Clinical, Inc. The remaining contract installment payments to Baxter are comprised of four separate $250 thousand payments on November 3, 2014-2017. The timing of the remaining contract milestone payments to Novella are dependent upon factors that are beyond our control, including our ability to recruit patients, the outcome of future clinical trials and any requirements imposed on our clinical trials by regulatory agencies. However, for the purpose of the above table, we have assumed that the payment of the milestones will occur within five years of September 30, 2014. On July 16, 2012, we decided to close our Germanton, Maryland office. In June 2013, we paid off the remainder of the Germantown, Maryland lease obligation. Included in the above table are obligations for the subleased portion of our Boston and New York offices as noted below and in Note 8 to the financial statements. We expect to receive a total of $118 thousand in the next year and $108 thousand in the next 2-3 years from our subtenant in the Boston office. We also expect to receive a total of $334 thousand in the next year, $612 thousand in the next 2-3 years, and $361 thousand in the next 4-5 years from our subtenant in the New York office. 34-------------------------------------------------------------------------------- Table of Contents Off-balance sheet arrangements During the nine months ended September 30, 2014 and 2013, we did not engage in any off-balance sheet arrangements. Critical Accounting Policies and Estimates In our Annual Report on Form 10-K, as amended, for the fiscal year ended December 31, 2013, our most critical accounting policies and estimates upon which our financial status depends were identified as those relating to stock-based compensation; net operating losses and tax credit carryforwards; and impairment of long-lived assets. We reviewed our policies and determined that those policies remain our most critical accounting policies for the nine months ended September 30, 2014. |