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SNSS > SEC Filings for SNSS > Form 10-Q on 14-Nov-2011All Recent SEC Filings

Show all filings for SUNESIS PHARMACEUTICALS INC

Form 10-Q for SUNESIS PHARMACEUTICALS INC


14-Nov-2011

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition as of September 30, 2011 and results of operations for the three and nine months ended September 30, 2011 and 2010 should be read together with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and in our other Securities and Exchange Commission, or SEC, filings, including our Annual Report on Form 10-K for the year ended December 31, 2010, filed with the SEC on March 29, 2011.

This discussion and analysis 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, or the Exchange Act, which involve risks, uncertainties and assumptions. All statements, other than statements of historical facts, are "forward-looking statements" for purposes of these provisions, including without limitation any statements relating to our strategy, including our plans with respect to unblinding the VALOR trial, the planned interim analysis of the VALOR trial, presenting clinical data and initiating clinical trials, our future research and development activities, including clinical testing and the costs and timing thereof, sufficiency of our cash resources, our ability to raise additional funding when needed, any statements concerning anticipated regulatory activities or licensing or collaborative arrangements, our research and development and other expenses, our operations and legal risks, and any statement of assumptions underlying any of the foregoing. In some cases, forward-looking statements can be identified by the use of terminology such as "anticipates," "believe," "continue," "estimates," "expects," "intend," "look forward," "may," "could," "seeks," "plans," "potential," or "will" or the negative thereof or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, there can be no assurance that such expectations or any of the forward-looking statements will prove to be correct, and actual results could differ materially from those projected or assumed in the forward-looking statements. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including but not limited to those set forth under "Risk Factors," and elsewhere in this report. We urge you not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. All forward-looking statements included in this report are based on information available to us on the date of this report, and we assume no obligation to update any forward-looking statements contained in this report.

In this report, "Sunesis," the "Company," "we," "us," and "our" refer to Sunesis Pharmaceuticals, Inc. and its wholly-owned subsidiary, except where it is made clear that the term means only the parent company.

Overview

We are a biopharmaceutical company focused on the development and commercialization of new oncology therapeutics for the treatment of solid and hematologic cancers. Our efforts are currently focused on the development of vosaroxin for the treatment of acute myeloid leukemia, or AML. In December 2010, we commenced enrollment of a Phase 3, multi-national, randomized, double-blind, placebo-controlled, pivotal trial of vosaroxin in combination with cytarabine in patients with relapsed or refractory AML, or the VALOR trial.

The VALOR trial is designed to evaluate the effect of vosaroxin in combination with cytarabine, a widely used chemotherapy in AML, on overall survival as compared to placebo in combination with cytarabine. With an anticipated 450 evaluable patients, the trial is designed to have a 90% probability of detecting a 40% difference in overall survival. The trial includes a single pre-specified interim analysis by the independent Data and Safety Monitoring Board, or DSMB, that may recommend a one-time sample size adjustment of 225 additional evaluable patients if deemed beneficial by the DSMB to maintain adequate power across a range of clinically meaningful and statistically significant survival outcomes. The interim analysis is expected to occur in mid-2012. In February 2011, the U.S. Food and Drug Administration, or FDA, granted fast track designation to vosaroxin for the potential treatment of relapsed or refractory AML in combination with cytarabine.

We are also in the survival follow-up stage of two fully-enrolled clinical trials of vosaroxin: (a) the Phase 2 portion of a Phase 1b/2 trial of vosaroxin in combination with cytarabine for the treatment of patients with first relapsed or primary refractory AML, and (b) a Phase 2 trial in previously untreated elderly patients with AML, or REVEAL-1, which explored three different dose schedules. In addition, we completed a Phase 2 single agent trial of vosaroxin in platinum-resistant ovarian cancer patients in 2010, which explored three different dose cohorts.

We own worldwide development and commercialization rights to vosaroxin. In 2009, the FDA granted orphan drug designation to vosaroxin for the treatment of AML. In November 2010, the U.S. Patent and Trademark Office, or USPTO, granted us a patent covering pharmaceutical compositions of vosaroxin, including the formulation used in our VALOR trial. In January 2011, the European Patent Office, or EPO, granted us a similar patent, which has been validated in multiple European Patent Convention, or EPC, member states. These patents provide coverage to 2025, and corresponding applications are pending in other major markets, including Japan, Australia and Canada. In August 2011, the USPTO granted us a patent covering methods of use for vosaroxin at clinically relevant dose ranges and schedules for the treatment of leukemia. This patent provides coverage through 2026, and corresponding applications are pending in other major markets, including Europe, Japan, Australia and Canada. In December 2009, the EPO granted us a patent covering combinations of vosaroxin with cytarabine, which provides coverage to 2025 in multiple EPC member states. In June 2011, the USPTO granted us a similar patent, which provides coverage to 2026. Corresponding applications are pending in other major markets, including Japan, Australia and Canada.


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On March 31, 2011, we entered into three agreements as part of a series of agreements between Biogen Idec MA Inc., or Biogen Idec, Millennium Pharmaceuticals, Inc., or Millennium, and ourselves:

A license agreement with Millennium, or the Millennium Agreement, pursuant to which we granted Millennium exclusive licenses for the development of our oral, selective pan-Raf kinase inhibitor and one additional undisclosed kinase inhibitor program in oncology that were previously a part of our August 2004 collaboration agreement with Biogen Idec, or the Original Biogen Idec Agreement. Under this agreement, we may in the future receive up to approximately $60.0 million in pre-commercialization milestone payments related to the development of the first two indications for each of the licensed products directed against the two exclusively licensed targets, and royalty payments depending on future product sales. The agreement also provides us with future co-development and co-promotion rights.

An amendment and restatement of the Original Biogen Idec Agreement, or the Restated Biogen Idec Agreement, to provide for the discovery, development and commercialization of small molecule inhibitors of a unique preclinical kinase inhibitor program involved in immunology. Under this agreement, we continue to be eligible to receive up to approximately $60.0 million in pre-commercialization milestone payments related to the development of the first two indications for licensed products against the specified immunology target, and royalty payments depending on future product sales. We also retain future co-development and co-promotion rights.

A termination and transition agreement with Biogen Idec and Millennium, which provides for the termination of Biogen Idec's exclusive rights under the Original Biogen Idec Agreement to all discovery programs under such agreement other than a preclinical kinase inhibitor program involved in immunology, the permitted assignment of assets and rights to Millennium as provided in the Millennium Agreement, and the upfront, non-refundable payment of $4.0 million to us as consideration for the above, which was received in April 2011.

On September 26, 2011, we announced that Millennium had initiated a Phase 1 clinical study of MLN2480, an oral, investigative drug selective for pan-Raf kinase inhibition, which was licensed to them under the Millennium Agreement. This multi-center, open-label study will evaluate the safety, tolerability and maximum tolerated dose of MLN2480 in patients with relapsed or refractory solid tumors, and will be conducted in two stages: dose escalation and dose expansion. The dose escalation phase will include patients with advanced solid tumors who have failed or are not candidates for standard therapies or for whom no approved therapy is available. Secondary endpoints will assess preliminary anti-tumor activity, as well as pharmacokinetic and pharmacodynamic properties of MLN2480.

On August 8, 2011, SARcode Bioscience, Inc., or SARcode, repaid three promissory notes that had originally been issued to us upon entering into a license agreement with SARcode in March 2006. The license agreement, which related to LFA-1 patents and know-how, was terminated in March 2009 when we sold the related rights back to SARcode. The total amount we received from SARcode was $1.2 million, which represented the aggregate principal value of $1.0 million of the three notes plus accrued interest.

Recent Financial History

On October 18, 2011, we entered into a loan and security agreement, or the Loan Agreement, with a syndicate led by Oxford Finance LLC and partnered with Silicon Valley Bank and Horizon Technology Finance Corporation, or collectively, the Lenders, under which we may borrow up to $25.0 million in two tranches. The first tranche of $10.0 million was funded at closing. The second tranche of $15.0 million may be drawn at our option between June 30, 2012 and September 30, 2012, subject to our continued compliance with the Loan Agreement and contingent upon the recommendation by the DSMB following the interim analysis of the VALOR trial to either: (a) discontinue the trial due to positive efficacy, or
(b) continue the trial. In connection with the drawdown of the first tranche of $10.0 million, we issued warrants to purchase 386,100 shares of our common stock to the Lenders at an exercise price of $1.30 per share.

In April 2010, we entered into a controlled equity offering sales agreement with Cantor Fitzgerald & Co., or Cantor, pursuant to which we may issue and sell shares of our common stock having an aggregate offering price of up to $20.0 million from time to time through Cantor acting as agent and/or principal. In the three months ended September 30, 2011, no sales were made under this facility, and as of September 30, 2011, $2.0 million of common stock remained available to be sold, subject to certain conditions as specified in the agreement.

In August 2011, we entered into an additional controlled equity offering sales agreement with Cantor, pursuant to which we may issue and sell shares of our common stock having an aggregate offering price of up to $20.0 million from time to time through Cantor acting as agent and/or principal. As of September 30, 2011, no sales had been made under this facility, and $20.0 million of common stock remained available to be sold, subject to certain conditions as specified in the agreement.


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On February 14, 2011, we effected a one-for-six reverse split of our capital stock, or the Reverse Split. As a result of the Reverse Split, every six shares of our capital stock were combined into one share of capital stock. The Reverse Split affected the shares of our common stock: (a) outstanding immediately prior to the effective time of the Reverse Split, (b) available for issuance under our equity incentive plans, and (c) issuable upon the exercise of outstanding stock options and warrants. All share and per share amounts in this Quarterly Report on Form 10-Q have been adjusted to give retroactive effect to the Reverse Split.

We have incurred significant losses in each year since our inception. As of September 30, 2011, we had cash, cash equivalents and marketable securities of $41.8 million and an accumulated deficit of $392.4 million. We expect to continue to incur significant losses for the foreseeable future as we continue the development process and seek regulatory approvals for vosaroxin.

Capital Requirements

While we believe that we currently have the resources to fund our operations until the planned unblinding of the VALOR trial in 2013, we may need to raise additional capital if the costs of the trial exceed our current estimates or unblinding does not occur within the currently anticipated timeframe. We will need to raise substantial additional capital to complete development and the potential commercialization of vosaroxin.

We expect to finance our future cash needs primarily through equity issuances, debt arrangements, a possible license, collaboration or other similar arrangement with respect to development and/or commercialization rights to vosaroxin, or a combination of the above. However, we do not know whether additional funding will be available on acceptable terms, or at all. If we are unable to raise required funding on acceptable terms or at all, we will need to reduce operating expenses, enter into a collaboration or other similar arrangement with respect to development and/or commercialization rights to vosaroxin, outlicense intellectual property rights to vosaroxin, sell assets, or a combination of the above, or be forced to delay or reduce the scope of our vosaroxin development program, potentially including the VALOR trial, and/or limit or cease our operations.

Critical Accounting Policies and Significant Judgments and Estimates

There have been no significant changes during the nine months ended September 30, 2011 to our critical accounting policies and significant judgments and estimates as disclosed in our management's discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2010.

Results of Operations

Revenue

Total revenues were $1.0 million and $5.0 million for the three and nine months ended September 30, 2011 as compared to zero and $27,000 for the same periods in 2010. Revenue in the three months ended September 30, 2011 was due to the recognition of revenue associated with the license of certain intellectual property rights to SARcode in March 2006. SARcode issued promissory notes to us totaling $1.0 million in exchange for these intellectual property rights, however, we had previously not recognized any revenue due to the uncertainty of the collectability of the notes, which was resolved following their repayment by SARcode in August 2011. Revenue in the nine months ended September 30, 2011 also included the upfront payment of $4.0 million to us for the termination of the Original Biogen Idec Agreement and the permitted assignment of assets and rights to Millennium as provided in the Millennium Agreement, which occurred on March 31, 2011. The payment was received in April 2011.

We are entitled to receive milestone payments under each of the Restated Biogen Idec Agreement and the Millennium Agreement upon the achievement of certain development milestones by Biogen Idec and Millennium, respectively, and royalty payments based on future sales of products, if any. Such payments may be increased if we exercise our option to co-fund product candidates worldwide, but are subject to reduction if Biogen Idec or Millennium is required to in-license third party intellectual property related to certain technology jointly developed under the collaboration agreement in order to commercialize a licensed product. We cannot predict whether we will receive any milestone or royalty payments from these agreements in the foreseeable future, if at all.

We have not generated any revenue from sales of commercial products and do not expect to generate any product revenue in the foreseeable future.


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Research and Development Expense

Research and development expense consists primarily of clinical costs, which include payments for work performed by our contract research organization, clinical trial sites, labs and other clinical service providers; drug-related costs, which include payments for drug manufacturing, packaging, storage and distribution; personnel costs for related permanent and temporary employees; and payments under license agreements. We expense all research and development costs as they are incurred.

Research and development expense was $6.2 million and $16.2 million for the three and nine months ended September 30, 2011, as compared to $3.5 million and $9.6 million for the same periods in 2010, substantially all relating to the vosaroxin development program. The increase of $2.7 million between the comparable three month periods was primarily due to an increase of $2.3 million in clinical expenses as a result of the ramp-up of the VALOR trial and an increase of $0.4 million in personnel expenses. The increase of $6.7 million between the comparable nine month periods was primarily due to increases of $5.8 million in clinical expenses as a result of the ramp-up of the VALOR trial and $1.1 million as a result of drug manufacturing activities, partially offset by a reduction of $0.3 million in allocated facility expenses.

Payments to sites for both start-up costs and patient treatment are expected to continue to be higher in 2011 as compared to 2010 as sites are activated and patients are enrolled in connection with the VALOR trial. Similarly, costs incurred by our contract research organization and other third party contractors, including other clinical service providers and the contract manufacturers of vosaroxin, are expected to be higher in 2011. As a result, we expect research and development expense to be significantly higher in 2011 as compared to 2010.

We are currently developing vosaroxin in AML. Based on results of translational research, clinical results, regulatory and competitive concerns and our overall financial resources, we anticipate that we will make determinations as to which indications to pursue and patient populations to treat in the future, and how much funding to direct to each indication, which will affect our research and development expense.

If we engage a development or commercialization partner for our vosaroxin program, or if, in the future, we acquire additional product candidates, our research and development expenses could be significantly affected. We cannot predict whether future licensing or collaborative arrangements will be secured, if at all, and to what degree such arrangements would affect our development plans and capital requirements.

Under the Restated Biogen Idec Agreement and the Millennium Agreement, we have the right to participate in co-development and co-promotion activities for the related product candidates. If we were to exercise our option on one or more product candidates, our research and development expense would increase significantly.

General and Administrative Expense

General and administrative expense consists primarily of personnel costs for the related employees, including non-cash stock-based compensation; professional service costs, including fees paid to outside legal advisors, marketing consultants and our independent registered public accounting firm; facilities expenses; and other administrative costs.

General and administrative expense was $2.2 million and $6.1 million for the three and nine months ended September 30, 2011, as compared to $1.8 million and $5.2 million for the same periods in 2010. The increase of $0.4 million between the comparable three month periods was primarily due to higher personnel expenses. The increase of $0.9 million between the comparable nine month periods was primarily due to increases of $0.5 million in legal and marketing costs and $0.4 million in personnel expenses.

Other Income, Net

Net other income was $2.4 million and $6.0 million for the three and nine months ended September 30, 2011, as compared to $0.2 million in each of the same periods in 2010. Net other income for the three and nine months ended September 30, 2011 was primarily comprised of non-cash credits of $2.5 million and $5.7 million, respectively, for the revaluation of warrants issued in the October 2010 offering to their fair value as of September 30, 2011.

Liquidity and Capital Resources

Sources of Liquidity

Since our inception, we have funded our operations primarily through the issuance of common and preferred stock, debt financings, the receipt of funds from our collaboration partners, and from research grants.

Our cash, cash equivalents and marketable securities totaled $41.8 million as of September 30, 2011, as compared to $53.4 million as of December 31, 2010. The decrease of $11.6 million was primarily due to $15.6 million of net cash used in operating activities (which is net of the $4.0 million upfront payment received from Millennium and the $1.2 million note repayment from SARcode), partially offset by net proceeds of $4.1 million from sales of our common stock through Cantor (including $0.4 million from settlement of sales made in 2010).


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On October 18, 2011, we entered into a Loan Agreement with Oxford Finance LLC, Silicon Valley Bank and Horizon Technology Finance Corporation under which we may borrow up to $25.0 million in two tranches. The first tranche of $10.0 million was funded at closing. The second tranche of $15.0 million may be drawn at our option between June 30, 2012 and September 30, 2012, subject to our continued compliance with the Loan Agreement and contingent upon recommendation by the DSMB following the interim analysis of the VALOR trial to either:
(a) discontinue the trial due to positive efficacy, or (b) continue the trial.

In April 2010, we entered into a controlled equity offering sales agreement with Cantor, pursuant to which we may issue and sell shares of our common stock having an aggregate offering price of up to $20.0 million from time to time through Cantor acting as agent and/or principal. Cantor is entitled to a 3% commission rate of the gross sales price per share of any common stock sold through Cantor as agent under the sales agreement. In the nine months ended September 30, 2011, we sold an aggregate of 1,302,383 shares of common stock at an average price of approximately $2.93 per share for gross proceeds of $3.8 million and net proceeds of $3.7 million, after deducting Cantor's commission. As of September 30, 2011, $2.0 million of common stock remained available to be sold, subject to certain conditions as specified in the agreement.

In August 2011, we entered into an additional controlled equity offering sales agreement with Cantor, pursuant to which we may issue and sell shares of our common stock having an aggregate offering price of up to $20.0 million from time to time through Cantor acting as agent and/or principal. As of September 30, 2011, no sales had been made under this facility, and $20.0 million of common stock remained available to be sold, subject to certain conditions as specified in the agreement.

Cash Flows

Net cash used in operating activities was $15.6 million for the nine months ended September 30, 2011, as compared to $15.2 million for the same period in 2010. Net cash used in the 2011 period resulted primarily from the net loss of $11.4 million and net adjustments for non-cash items of $4.6 million (including a net credit of $5.7 million for the revaluation of warrants issued in the underwritten offering completed in October 2010, partially offset by $0.9 million of non-cash stock-based compensation), partially offset by changes in operating assets and liabilities of $0.5 million, primarily as a result of an increase in accrued clinical expenses related to the VALOR trial. Net cash used in the 2010 period resulted primarily from the net loss of $14.5 million and changes in operating assets and liabilities of $1.2 million, partially offset by net adjustments for non-cash items of $0.6 million (primarily for stock-based compensation).

Net cash provided by investing activities was $9.2 million for the nine months ended September 30, 2011, as compared to $26.4 million used in investing activities for the same period in 2010. Net cash provided in the 2011 period consisted primarily of proceeds from maturities of marketable securities, partially offset by purchases of marketable securities. Net cash used in the 2010 period consisted primarily of purchases of marketable securities.

Net cash provided by financing activities was $4.1 million for the nine months ended September 30, 2011, as compared to $51.5 million for the same period in 2010. Net cash provided in the 2011 period was from sales of our common stock through Cantor. Net cash provided in the 2010 period was from net proceeds of $26.7 million from the sale of our common stock in the third and final closing of a private placement that was initiated in 2009, and from net proceeds of $24.7 million from sales of our common stock through Cantor.

Operating Capital Requirements

We expect to continue to incur substantial operating losses in the future. We will not receive any product revenue until a product candidate has been approved by the FDA or similar regulatory agencies in other countries, and has been successfully commercialized, if at all. We need to raise substantial additional funding to complete the development and potential commercialization of vosaroxin. Additionally, we may evaluate in-licensing and acquisition opportunities to gain access to new drugs or drug targets that would fit with our strategy. Any such transaction would likely increase our funding needs in the future.

Our future funding requirements will depend on many factors, including but not limited to:

the rate of progress and cost of our clinical trials, including the VALOR trial in particular;

the need for additional or expanded clinical trials (including in particular potential expansion of the number of patients included in the VALOR trial based on the pre-specified interim analysis of data from the trial by the DSMB);

the timing, economic and other terms of any licensing, collaboration or other similar arrangement into which we may enter;

the costs and timing of seeking and obtaining FDA and other regulatory approvals;

the extent of our other development activities;

the costs associated with building or accessing commercialization and additional manufacturing capabilities and supplies;

the costs of acquiring or investing in businesses, product candidates and technologies, if any;

the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;

the effect of competing technological and market developments; and

the costs, if any, of supporting our arrangements with Biogen Idec and Millennium.


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