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ANAC > SEC Filings for ANAC > Form 10-Q on 9-Aug-2012All Recent SEC Filings

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Form 10-Q for ANACOR PHARMACEUTICALS INC


9-Aug-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis together with our condensed financial statements and the notes to those statements included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements that involve risks and uncertainties. We use words such as "may," "will," "expect," "anticipate," "estimate," "intend," "plan," "predict," "potential," "believe," "should" and similar expressions to identify forward-looking statements. These statements appearing throughout this Quarterly Report on Form 10-Q are statements regarding our intent, belief, or current expectations, primarily regarding our operations. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q. As a result of many factors, such as those set forth under "Risk Factors" and elsewhere in this Quarterly Report on Form 10-Q, our actual results may differ materially from those anticipated in these forward-looking statements.

Overview

We are a biopharmaceutical company focused on discovering, developing and commercializing novel small-molecule therapeutics derived from our boron chemistry platform. The productivity of our internal discovery capability has enabled us to generate a pipeline of both topical and systemic boron-based compounds. We have discovered, synthesized and developed seven molecules that are currently in development.

Our lead product candidates include two topically administered dermatologic compounds-tavaborole (formerly referred to as AN2690), an antifungal for the treatment of onychomycosis, and AN2728, an anti-inflammatory for the treatment of atopic dermatitis and psoriasis. In addition to our two lead programs, we have two other clinical product candidates, AN2718 and AN2898, which are backup compounds to tavaborole and AN2728, respectively. We have discovered three other compounds that we have out-licensed for further development-GSK2251052, or GSK '052 (formerly referred to as AN3365), a systemic antibiotic for the treatment of infections caused by Gram-negative bacteria that is licensed to GlaxoSmithKline LLC, or GSK, AN8194, a compound for the treatment of an animal health indication that is licensed to Eli Lilly and Company, or Lilly, and AN5568, also referred to as SCYX-7158, for human African trypanosomiasis (HAT, or sleeping sickness), which is licensed to Drugs for Neglected Diseases initiative, or DNDi. We also have a pipeline of other internally discovered topical and systemic boron-based compounds in development.

Our most advanced product candidate is tavaborole. We initiated our Phase 3 clinical trials for tavaborole in the fourth quarter of 2010 and completed enrollment for one of these two trials in November 2011 and the other in December 2011. In addition, we initiated a cardiac safety study in May 2012 and a repeat insult patch test (RIPT) study in July 2012. For AN2728, we completed a Phase 2 dose-ranging trial in psoriasis in the second quarter of 2010, a second Phase 2 clinical trial in psoriasis in the second quarter of 2011 and a Phase 1 absorption trial in the third quarter of 2011. We also completed a Phase 2 trial of AN2728 and AN2898, our second topical anti-inflammatory product candidate, in mild-to-moderate atopic dermatitis in the fourth quarter of 2011. In early 2012, we completed two safety studies of AN2728. Given the positive outcome from our atopic dermatitis trial, the safety profile exhibited by AN2728 and the large unmet need in atopic dermatitis relative to psoriasis, we intend to focus our AN2728 development efforts on atopic dermatitis in the near future and defer the start of the Phase 3 trial for psoriasis. As such, we initiated a Phase 2 safety, pharmacokinetics and efficacy trial for mild-to-moderate atopic dermatitis in adolescents in July 2012 and we are planning to initiate a Phase 2 dose-ranging study in mild-to-moderate atopic dermatitis in adolescents in the third quarter of 2012.

In the second quarter of 2010, we completed a Phase 1 trial of GSK '052 and achieved proof-of-concept as defined under our collaboration agreement with GSK. In the third quarter of 2010, GSK exercised its option to obtain an exclusive license to develop and commercialize GSK '052. In the second quarter of 2011, GSK initiated two Phase 2 trials of GSK '052 in complicated urinary tract infections (cUTI) and complicated intra-abdominal infections (cIAI). In March 2012, GSK voluntarily discontinued certain of its current clinical trials of GSK'052 due to a microbiological finding in a small number of patients in the Phase 2b trial for the treatment of cUTI. While we believe the microbiological finding seen in the cUTI study is not related to the safety of GSK '052, the potential to negatively impact efficacy led GSK to voluntarily discontinue that study as well as the Phase 2b study in cIAI and one of two Phase 1 studies in healthy volunteers. GSK is in the process of analyzing information from all enrolled subjects and will use this information to determine the appropriate next steps in the development of GSK '052.

In October 2007, we entered into a research and development collaboration, option and license agreement with GSK for the discovery, development and worldwide commercialization of boron-based systemic anti-infectives under which GSK '052 was developed and licensed. In September 2011, we amended and expanded this agreement to, among other things, provide GSK the option to extend its rights around the bacterial enzyme target leucyl-tRNA synthetase, or LeuRS, as well as to add new research programs using our boron chemistry platform for tuberculosis, or TB and, should GSK elect to initiate it, an additional collaborative research program directed towards LeuRS. The amendment also includes the option for GSK to acquire rights to compounds from Anacor's malaria program, currently being developed through a collaboration with Medicines for Malaria Venture, or MMV.


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In August 2010, we entered into a research, license and commercialization agreement with Lilly, under which we are collaborating to discover products for a variety of animal health applications. In July 2011, Lilly selected AN8194 as a development compound and will be responsible for all further development and commercialization of this compound.

In February 2011, we entered into a research and development collaboration with Medicis Pharmaceutical Corporation, or Medicis, to discover and develop compounds directed against a target for the potential treatment of acne.

We also have several collaborations with organizations that fund research leveraging our boron chemistry to discover new treatments for neglected diseases. In addition to potentially developing new therapies for such diseases, these collaborations provide us the potential benefits of expanding the chemical diversity of our boron compounds, understanding new properties of our boron compounds, receiving future incentives, such as the potential grant of a priority review voucher by the FDA, and, ultimately if a drug is approved, potential revenue in some regions. Our collaboration partners include DNDi to develop new therapeutics for HAT, visceral leishmaniasis and Chagas disease, MMV to develop compounds for the treatment of malaria, the Sandler Center for Drug Discovery at the University of California at San Francisco to discover new drug therapies for the treatment of river blindness, the Global Alliance for Livestock Veterinary Medicines (GALVMed) for the treatment of African animal trypanosomiasis and the University of California at San Francisco to develop compounds for the treatment of malaria under a National Institutes of Health grant. In 2011, DNDi completed pre-clinical studies of AN5568 for HAT, and in March 2012, AN5568 became the first compound from our neglected diseases initiatives to enter human clinical trials.

In February 2012, we issued and sold 3,250,000 shares of our common stock in connection with an underwriting agreement, or the Underwriting Agreement, with Canaccord Genuity Inc., or the Underwriter. The price to the public in this offering was $6.60 per share, for gross proceeds of approximately $21.5 million, and the Underwriter purchased the shares from us pursuant to the Underwriting Agreement at a price of $6.25 per share. Our net proceeds from this offering were approximately $19.9 million, after deducting the underwriting discount and other offering costs.

We began business operations in March 2002. To date, we have not generated any revenue from product sales and have never been profitable. As of June 30, 2012, we have an accumulated deficit of $188.3 million. We have funded our operations primarily through the sale of equity securities, payments received under our agreements with Schering Corporation, or Schering, GSK, Lilly and Medicis, government contracts and grants, contracts with not-for-profit organizations for neglected diseases and borrowings under debt arrangements. We expect to incur losses in future periods. The size of our future losses will depend, in part, on the rate of growth of our expenses, our ability to enter into additional licensing, research and development agreements and future payments earned under our agreements with GSK, Lilly, Medicis or any such future collaboration partners. Our intent is to enter into additional licensing and development agreements to further develop certain of our product candidates and to fund other areas of our research. If the GSK, Lilly and/or Medicis agreements are terminated or we are unable to enter into other collaboration agreements, we may incur additional operating losses and our ability to expand and continue our research and development activities and move our product candidates into later stages of development may be limited. To fund our future operations, including research, development and commercialization of our product candidates, we will need to seek additional capital through research and development collaborations; a possible license, collaboration or other similar arrangement with respect to commercialization rights to tavaborole; equity offerings or debt financings.

Critical Accounting Policies and Significant Judgments and Estimates

Our management's discussion and analysis of our financial condition and results of operations is based on our condensed financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these condensed financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments related to revenue recognition, preclinical study and clinical trial accruals, deferred advance payments and stock-based compensation. We base our estimates on historical experience and on various other factors that we believe to be reasonable under the circumstances and review our estimates on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are described in more detail in our Annual Report on Form 10-K, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our condensed financial statements.


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Revenue Recognition

Our contract revenues are generated primarily through research and development collaboration agreements, which typically may include non-refundable, non-creditable upfront fees, funding for research and development efforts, payments for achievement of specified development, regulatory and sales goals and royalties on product sales of licensed products.

For multiple element arrangements, we evaluate the components of each arrangement as separate elements based on certain criteria. Where multiple deliverables are combined as a single unit of accounting, revenues are recognized based on the performance requirements of the agreements. We recognize revenue when persuasive evidence of an arrangement exists; transfer of technology has been completed, services are performed or products have been delivered; the fee is fixed or determinable; and collection is reasonably assured.

For arrangements with multiple deliverables, we evaluate each deliverable to determine whether it qualifies as a separate unit of accounting. This determination is generally based on whether the deliverable has stand-alone value to the customer. The selling price used for each unit of accounting will be based on vendor-specific objective evidence, if available, third-party evidence if vendor-specific objective evidence is not available or estimated selling price if neither vendor-specific nor third-party evidence is available. Our management may be required to exercise considerable judgment in determining whether a deliverable is a separate unit of accounting and in estimating the selling prices of identified units of accounting for new agreements.

Upfront payments for licensing our intellectual property are evaluated to determine if the licensee can obtain stand-alone value from the license separate from the value of the research and development services to be provided by us. Typically, we have determined that the licenses we have granted to collaborators do not have stand-alone value separate from the value of the research and development services provided. As such, upfront payments are recorded as deferred revenue in the condensed balance sheet and are recognized as contract revenue over the contractual or estimated performance period that is consistent with the term of the research and development obligations contained in the research and development collaboration agreement. When stand-alone value is identified, the related consideration is recorded as revenue in the period in which the license or other intellectual property rights are issued.

Some arrangements involving the licensing of our intellectual property, the provision of research and development services or both may also include exclusivity clauses whereby we agree that, for a specified period of time, we will not conduct further research on licensed compounds or on compounds that would compete with licensed compounds or that we will do so only on a limited basis. Such provisions may also restrict the future development or commercialization of such compounds. We do not treat such exclusivity clauses as a separate element within an arrangement and any upfront payments received related to the exclusivity clause would be allocated to the identified elements in the arrangement and recognized as described in the preceding paragraph.

Payments resulting from our efforts under research and development agreements or government grants are recognized as the activities are performed and are presented on a gross basis. Revenue is recorded gross because we act as a principal, with discretion to choose suppliers, bear credit risk and perform part of the services. The costs associated with these activities are reflected as a component of research and development expense in our condensed statements of operations and the revenues recognized from such activities approximate the related costs.

For certain contingent payments under research or development arrangements, we recognize revenue using the milestone method. Under the milestone method, a payment that is contingent upon the achievement of a substantive milestone is recognized in its entirety in the period in which the milestone is achieved. A milestone is an event (i) that can be achieved based in whole or in part on either our performance or on the occurrence of a specific outcome resulting from our performance, (ii) for which there is substantive uncertainty at the date the arrangement is entered into that the event will be achieved and (iii) that would result in additional payments being due to us. The determination that a milestone is substantive is judgmental and is made at the inception of the arrangement. Milestones are considered substantive when the consideration earned from the achievement of the milestone is (i) commensurate with either our performance to achieve the milestone or the enhancement of value of the item delivered as a result of a specific outcome resulting from our performance to achieve the milestone, (ii) relates solely to past performance and (iii) is reasonable relative to all deliverables and payment terms in the arrangement.

Other contingent payments received for which payment is either contingent solely upon the passage of time or the results of a collaboration partner's performance (bonus payments) are not accounted for using the milestone method. Such bonus payments will be recognized as revenue when earned and when collectibility is reasonably assured.


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Royalties based on reported sales of licensed products will be recognized based on contract terms when reported sales are reliably measurable and collectibility is reasonably assured. To date, none of our products have been approved and therefore we have not earned any royalty revenue from product sales.

Preclinical Study and Clinical Trial Accruals and Deferred Advance Payments

We estimate preclinical study and clinical trial expenses based on the services performed pursuant to contracts with research institutions and clinical research organizations that conduct these activities on our behalf. In recording service fees, we estimate the time period over which the related services will be performed and compare the level of effort expended through the end of each period to the cumulative expenses recorded and payments made for such services and, as appropriate, accrue additional service fees or defer any non-refundable advance payments until the related services are performed. If the actual timing of the performance of services or the level of effort varies from our estimate, we will adjust our accrual or deferred advance payment accordingly. If we underestimate or overestimate the level of services performed or the costs of these services, our actual expenses could differ from our estimates. To date, we have not experienced significant changes in our estimates of preclinical study and clinical trial accruals.

Stock-Based Compensation

Employee stock-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the employee's requisite service period (generally the vesting period). Stock option awards granted to our nonemployee directors for their board-related services are included in employee stock-based compensation in accordance with current accounting standards. We use the Black-Scholes option-pricing model to estimate the fair value of our stock-based awards and use the straight-line (single-option) method for expense attribution. We estimate forfeitures and recognize expense only for those shares expected to vest.

We account for equity instruments issued to nonemployees based on their fair values on the measurement dates using the Black-Scholes option-pricing model. The fair values of the options granted to nonemployees are remeasured as they vest. As a result, the noncash charge to operations for nonemployee options with vesting is affected each reporting period by changes in the fair value of our common stock.

We recorded noncash stock-based compensation for employee and nonemployee stock option grants and Employee Stock Purchase Program, or ESPP, stock purchase rights of $0.9 million and $1.2 million for the three months ended June 30, 2012 and 2011, respectively, and $1.9 million and $1.8 million for the six months ended June 30, 2012 and 2011, respectively. As of June 30, 2012, we had outstanding options to purchase 3,952,652 shares of our common stock and had $6.9 million of unrecognized stock-based compensation expense, net of estimated forfeitures, related to outstanding stock options and $0.1 million related to ESPP stock purchase rights that will be recognized over weighted-average periods of 2.5 and 0.4 years, respectively. There were 48,440 common shares purchased under the ESPP for the six months ended June 30, 2012. No shares were purchased under the ESPP during the three months ended June 30, 2012. We expect to continue to grant stock options and ESPP stock purchase rights in the future, which will increase our stock-based compensation expense in future periods. If any of the assumptions used in the Black-Scholes model change significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period.

Recently Adopted Accounting Pronouncements

On January 1, 2012, we adopted new guidance on the presentation of comprehensive income (loss). Specifically, the new guidance allows an entity to present components of net income (loss) and other comprehensive income (loss) in one continuous statement, referred to as the statement of comprehensive income
(loss), or in two separate but consecutive statements. The new guidance eliminates the current option to report other comprehensive income (loss) and its components in the statement of changes in equity. While the new guidance changes the presentation of comprehensive income (loss), there are no changes to the components that are recognized in net income (loss) or other comprehensive income (loss) under current accounting guidance. We elected to adopt the two separate but consecutive statements presentation and the adoption of this guidance did not have a material impact on our condensed financial statements.

In May 2011, an amendment to an accounting standard was issued that amends the fair value measurement guidance and includes some enhanced disclosure requirements. The most significant change is the disclosure information required for Level 3 measurements based on unobservable inputs. This standard became effective for us on January 1, 2012 and did not have a material impact on our condensed financial statements.


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Results of Operations



                                      Three Months Ended June 30,                 Six Months Ended June 30,
                                                              Increase/                                Increase/
                                   2012           2011       (decrease)       2012          2011       (decrease)

Contract revenue                $     2,562    $     2,857   $      (295 ) $    4,979    $    5,066   $        (87 )
Research and development
expenses(1)                          14,100         15,473        (1,373 )     26,768        28,162         (1,394 )
General and administrative
expenses(1)                           2,671          2,353           318        6,101         4,979          1,122
Interest income                          19             44           (25 )         40            95            (55 )
Interest expense                        638            351           287        1,292           680            612
Loss on early extinguishment
of debt                                   -              -             -            -           313           (313 )
Other expense                            12             19            (7 )         25            19              6



(1) Includes the following stock-based compensation expenses:

Research and development expenses $ 510 $ 673 $ (163 ) $ 988 $ 1,134 $ (146 ) General and administrative expenses 390 485 (95 ) 870 715 155

Comparison of the Three Months Ended June 30, 2012 and 2011

Contract revenue. For the three months ended June 30, 2012, we recognized $0.3 million of the $7.0 million upfront fee received under the Medicis agreement and $0.4 million primarily for research funding under our collaboration agreement with GSK. We also recognized $0.9 million for research work performed under research and development agreements, including under agreements with not-for-profit organizations for neglected diseases. During each of the three month periods ending June 30, 2012 and 2011, we recognized $0.8 million for research funding and $0.2 million of the $3.5 million upfront fee received under the Lilly agreement. For the three months ended June 30, 2011, we also recognized $0.5 million of the $12.0 million non-refundable, non-creditable upfront fee received from GSK, $0.3 million of the upfront fee received under the Medicis agreement and $1.0 million for research work performed under our agreements with not-for-profit organizations for neglected diseases.

Research and development expenses. Research and development expenses consist primarily of costs associated with research activities, as well as costs associated with our product development efforts, including preclinical studies and clinical trials. Research and development expenses, including those paid to third parties, are recognized as incurred. Research and development expenses include:

external research and development expenses incurred pursuant to agreements with third-party manufacturing organizations, contract research organizations and investigational sites;

employee and consultant-related expenses, which include salaries, benefits, stock-based compensation and consulting fees;

third-party supplier expenses; and

facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities, amortization or depreciation of leasehold improvements, equipment and laboratory supplies and other expenses.

Research and development expenses decreased by $1.4 million in the three months ended June 30, 2012 as compared to the same period in the prior year. Although expenses for our AN2728 and AN2898 programs decreased by $1.6 million and $0.9 million, respectively, these decreases were partially offset by an increase of $1.7 million in expenses for our tavaborole program. During the three months ended June 30, 2012, we were performing the following activities for tavaborole:
conducting two fully-enrolled Phase 3 clinical trials, initiating a cardiac safety trial, planning for an RIPT study and engaging in regulatory activities in preparation for the potential 2013 filing of our new drug application, or NDA. During the same period in the prior year, we were enrolling patients in our Phase 3 trials, completing the packaging and labeling activities for our clinical supplies for the trials and developing the processes to manufacture the product in commercial quantities. The cardiac safety trial initiated in May 2012 and our internal regulatory efforts were primarily responsible for the increase in our tavaborole costs.


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In the fourth quarter of 2011, we completed a Phase 2 trial of AN2728 and AN2898 in mild-to-moderate atopic dermatitis. Based upon the positive results of this trial, the safety profile exhibited by AN2728 and the greater unmet need in atopic dermatitis relative to psoriasis, we decided to focus our AN2728 development efforts on atopic dermatitis in the near future and defer further development of AN2898. As a result, our activities for our AN2898 program were minimal in the second quarter of 2012 compared to second quarter of 2011 when we were manufacturing clinical supplies, conducting preclinical studies and . . .

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