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

Show all filings for SUNESIS PHARMACEUTICALS INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for SUNESIS PHARMACEUTICALS INC


9-Aug-2012

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 June 30, 2012 and results of operations for the three and six months ended June 30, 2012 and 2011 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, 2011, filed with the SEC on March 14, 2012.

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 primarily 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. We expect to enroll 450 evaluable patients in the VALOR trial at more than 110 study sites in the U.S., Canada, Europe, Australia and New Zealand. The trial is designed to have a 90% probability of detecting a 40% difference in overall survival, and includes a single pre-specified interim analysis by the independent Data and Safety Monitoring Board, or DSMB, which is expected to occur in September 2012. The DSMB will examine pre-specified efficacy and safety data sets and decide whether to: (i) stop the trial early for efficacy or for futility; (ii) continue the study to its planned unblinding, which is expected in mid-2013; or
(iii) recommend a one-time sample size adjustment of 225 additional evaluable patients if deemed beneficial by the DSMB to maintain adequate statistical power across a range of clinically meaningful and statistically significant outcomes. In this event, trial unblinding would be expected in early 2014. In June 2012, we announced that the DSMB had completed a planned periodic safety review and recommended that the trial continue as planned without changes to study conduct.

We are also completing data analysis in preparation for database lock for 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 relapsed or refractory AML, and (b) a Phase 2 trial in previously untreated patients age 60 years or older with AML, or REVEAL-1, which explored three dose schedules of vosaroxin.

In March 2012, patient dosing commenced in the LI-1 Trial, a Phase 2/3 randomized, controlled, multi-center trial evaluating novel treatment regimens against low-dose cytarabine, or LD Ara-C, in patients older than 60 years with AML or high-risk myelodysplastic syndrome, or MDS. In this Cardiff University sponsored trial, several treatments, including two regimens containing vosaroxin, will be evaluated in a randomized Phase 2 design with key endpoints including complete remission, 12-month survival, and overall survival. Treatment arms exhibiting promising results on the basis of these endpoints may continue to enroll in a Phase 3 portion of the trial with a primary endpoint of overall survival.

In June 2012, we received a pre-commercialization event-based payment of $1.5 million from Biogen Idec for the advancement of pre-clinical work under the Restated Biogen Idec Agreement.

We own worldwide development and commercialization rights to vosaroxin. In April 2012, the European Commission granted orphan drug designation to vosaroxin for the treatment of AML, which provides for 10 years of marketing exclusivity in all member countries of the European Union following product approval in Europe. In 2009, vosaroxin received orphan drug designation for the treatment of AML from the U.S. Food and Drug Administration, or FDA. In February 2011, the FDA granted fast track designation to vosaroxin for the potential treatment of relapsed or refractory AML in combination with cytarabine. During the first half of 2012, we were granted the following key patents for vosaroxin:

In February 2012, the U.S. Patent and Trademark Office, or USPTO, granted us a patent covering certain vosaroxin hydrate forms, which is due to expire in 2028. Corresponding applications are pending in other major markets, including Europe, Japan, Australia and Canada.

In March 2012, the USPTO granted us a patent covering certain compositions related to vosaroxin, which is due to expire in 2030. Corresponding patent applications are pending internationally.


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Recent Financial History

Royalty Agreement

On March 29, 2012, we entered into a Revenue Participation Agreement, or the Royalty Agreement, with RPI Finance Trust, or RPI, an entity related to Royalty Pharma, under which RPI may acquire a revenue participation right, or the Revenue Participation Right, for $25.0 million. RPI will be obligated to purchase the Revenue Participation Right if, following the interim efficacy analysis of data from the VALOR trial, the DSMB recommends that we undertake a one-time 225 patient increase in sample size for the VALOR trial or terminate the VALOR trial for efficacy, and we follow such recommendation. If the DSMB recommends that we continue the VALOR trial with the planned sample size of 450 patients, RPI will have the option to purchase the Revenue Participation Right following unblinding of the VALOR trial. The applicable Revenue Participation Right payments are determined as follows: (a) if the DSMB recommends a stop for efficacy at the interim analysis, 3.6% of net sales; (b) if RPI exercises its option following continuation of the VALOR trial as planned, 3.6% of net sales; or (c) if the DSMB recommends a one-time increase in enrollment of the VALOR trial at the interim analysis, 6.75% of net sales. Revenue Participation Right payments will be made to RPI on a product-by-product and country-by-country basis world-wide through the later of: (i) the expiration of the last to expire of certain specifically identified patents, (ii) 10 years from the date of first commercial sale of such product in such country; or (iii) the expiration of all applicable periods of data, market or other regulatory exclusivity in such country with respect to such product.

In conjunction with the Royalty Agreement, we issued two five-year warrants to RPI, each to purchase 1,000,000 shares of our common stock, at exercise prices of $3.48 and $4.64 per share, respectively. RPI has the right to exercise the warrants only if the DSMB recommends that we expand enrollment of the VALOR trial, and we follow such recommendation. If the DSMB issues any other recommendation, the warrants will terminate.

If, following the purchase of the Revenue Participation Right by RPI, we fail to make payments due to RPI under the Royalty Agreement in a timely manner, RPI may require us to repurchase the Revenue Participation Right. Additionally, as collateral for these payments, we agreed to grant RPI a security interest in certain of our assets, including our intellectual property related to vosaroxin. The security interest will be granted at the time of any purchase of the Revenue Participation Right but may only be perfected following first product approval in any country or territory. The security interest will be released upon the satisfaction of certain conditions specified in the Agreement. In connection with entering into the Royalty Agreement, we amended our Loan and Security Agreement, dated October 18, 2011, or the Loan Agreement, with Oxford Finance LLC, Silicon Valley Bank and Horizon Technology Finance Corporation, or, collectively, the Lenders, to permit the grant of the security interest to RPI, and to concurrently grant to the Lenders a security interest in the same assets, which may also be perfected following the first product approval in any country or territory, to secure our obligations under the Loan Agreement. The Lenders will retain a senior position to the RPI security interest for so long as any indebtedness under the Loan Agreement remains outstanding.

RPI may terminate the Royalty Agreement without purchasing the Revenue Participation Right if the interim analysis of the VALOR trial is not completed by the end of 2012 or if the DSMB does not issue its recommendation by such date. In addition, the Royalty Agreement will terminate automatically if the DSMB recommends that we terminate the VALOR trial for futility. If RPI purchases the Revenue Participation Right, the Royalty Agreement will automatically terminate after all payment obligations to RPI have been satisfied.

Capital Requirements

We have incurred significant losses in each year since our inception. As of June 30, 2012, we had cash, cash equivalents and marketable securities of $29.3 million and an accumulated deficit of $423.6 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.

While we believe that we currently have access to resources to fund our operations until the unblinding of the VALOR trial, including if a sample size adjustment occurs, 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, the potential sale of revenue participation rights, 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 unsecured 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 six months ended June 30, 2012 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, 2011.


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Overview of Revenues

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

License and other revenue

In March 2011, we entered into three agreements as part of a series of agreements among Biogen Idec MA Inc., or Biogen Idec, Millennium Pharmaceuticals, Inc., a wholly-owned subsidiary of Takeda Pharmaceutical Company Limited, 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 $59.3 million in pre-commercialization event-based 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 Millennium Agreement also provides us with future co-development and co-promotion rights. In September 2011, we announced that Millennium had initiated a Phase 1 clinical study of an oral investigative drug selective for pan-Raf kinase inhibition, MLN2480, which was licensed to them under the Millennium Agreement.

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. In June 2012, we announced that we had received a pre-commercialization event-based payment of $1.5 million from Biogen Idec for the advancement of pre-clinical work under this agreement. We are eligible to receive up to an additional $58.5 million in pre-commercialization event-based payments related to the development of the first two indications for licensed products against the specified immunology target under the Restated Biogen Idec Agreement, 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 included a provision for an upfront, non-refundable payment of $4.0 million to us, which we received in April 2011.

We cannot predict whether we will receive any additional pre-commercialization event-based or royalty payments from these agreements in the foreseeable future, or at all.

Overview of Operating Expenses

Research and Development expense. Research and development expense consists primarily of clinical trial costs, which include payments for work performed by our contract research organizations, clinical trial sites, labs and other clinical service providers and for drug packaging, storage and distribution; drug manufacturing costs, which include costs for producing drug substance and drug product, and for stability and other testing; personnel costs for related permanent and temporary employees; other outside services and consulting costs; and payments under license agreements. We expense all research and development costs as they are incurred.

We are currently focused on the development of vosaroxin for the treatment of AML. Based on results of translational research, our own and investigator-sponsored trials, 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.

Results of Operations

Revenue

Total revenue was $1.5 million for the three and six months ended June 30, 2012, as compared to nil and $4.0 million for the same periods in 2011. Revenue in the six months ended June 30, 2012 was due the receipt of a payment of $1.5 million from Biogen Idec in June 2012 for the advancement of pre-clinical work under the Restated Biogen Idec Agreement. Revenue in the six months ended June 30, 2011 was due to 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 in March 2011. We expect revenue to be lower in 2012 than in 2011.

Research and Development Expense

Research and development expense was $8.1 million and $14.7 million for the three and six months ended June 30, 2012, as compared to $6.0 million and $10.0 million for the same periods in 2011, substantially all relating to the vosaroxin development program. The increase of $2.1 million between the comparable three month periods was primarily due to increases of $1.0 million in clinical trial expenses, $0.8 million in outside services and consulting costs, and $0.3 million in personnel costs, as a result of the ramp-up of the VALOR trial. The increase of $4.7 million between the comparable six month periods was primarily due to increases of $2.2 million in clinical trial expenses, $1.6 million in outside services and consulting costs, and $0.9 million in personnel costs. We expect research and development expense to be higher in 2012 than in 2011 as we continue the development of vosaroxin.


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General and Administrative Expense

General and administrative expense was $2.2 million and $4.4 million for the three and six months ended June 30, 2012, as compared to $2.0 million and $4.0 million for the same periods in 2011. The increases of $0.2 million and $0.4 million between the comparable three and six month periods were primarily due to higher non-cash stock-based compensation expenses.

Interest Expense

Interest expense was $0.3 million and $0.6 million for the three and six months ended June 30, 2012, as compared to nil for the same periods in 2011. The interest expense in the 2012 periods was due to our entering into the Loan Agreement with the Lenders in October 2011.

Other Income (Expense), Net

Net other income was $0.5 million for the three months ended June 30, 2012, as compared to net other expense of $0.3 million for the same period in 2011. Net other income for the 2012 period was primarily comprised of a non-cash credit of $0.7 million for the revaluation of warrants issued in the October 2010 underwritten offering, or the 2010 Offering, to their fair value as of June 30, 2012, partially offset by foreign exchange losses of $0.3 million. Net other expense for the comparable period in 2011 was primarily comprised of a non-cash expense of $0.4 million for the revaluation of these warrants.

Net other expense was $4.3 million for the six months ended June 30, 2012, as compared to net other income of $3.6 million for the same period in 2011. Net other expense for the six months ended June 30, 2012 was primarily comprised of non-cash expenses of $4.1 million for the revaluation of the warrants issued in the 2010 Offering to their fair value as of June 30, 2012 and foreign exchange losses of $0.2 million. Net other income for the comparable period in 2011 was primarily comprised of a non-cash credit of $3.2 million for the revaluation of these warrants and foreign exchange gains of $0.3 million.

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 $29.3 million as of June 30, 2012, as compared to $44.1 million as of December 31, 2011. The decrease of $14.8 million was primarily due to net cash used in operating activities.

On March 29, 2012, we entered into a Royalty Agreement with RPI, under which RPI may acquire a Revenue Participation Right for $25.0 million. RPI will be obligated to purchase the Revenue Participation Right if, following the interim efficacy analysis of data from the VALOR trial, the DSMB recommends that we undertake a one-time 225 patient increase in sample size for the VALOR trial or terminate the VALOR trial for efficacy. If the DSMB recommends that we continue the VALOR trial with the planned sample size of 450 patients, RPI will have the option to purchase the Revenue Participation Right following unblinding of the VALOR trial.

On October 18, 2011, we entered into the Loan Agreement with 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 on or before 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 3.0% commission rate of the gross sales price per share of any common stock sold through Cantor as agent under the sales agreement. In the six months ended June 30, 2012, we sold an aggregate of 88,500 shares of common stock at an average price of approximately $3.08 per share for gross and net proceeds of $0.3 million, after deducting Cantor's commission. As of June 30, 2012, $1.7 million of common stock remained available to be sold under this facility, 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 June 30, 2012, 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 $15.1 million for the six months ended June 30, 2012, as compared to $8.9 million for the same period in 2011. Net cash used in the 2012 period resulted primarily from the net loss of $22.5 million, partially offset by net adjustments for non-cash items of $5.6 million (including expenses of $4.1 million for the revaluation of warrants issued in the 2010 Offering and $1.1 million of stock-based compensation), and changes in operating assets and liabilities of $1.8 million, primarily as a result of an increase in accrued clinical expenses related to the VALOR trial. Net cash used in the 2011 period resulted primarily from the net loss of $6.4 million and net adjustments for non-cash items of $3.1 million (including a net credit of $3.2 million related to the revaluation of warrants issued in the 2010 Offering), partially offset by changes in operating assets and liabilities of $0.6 million, primarily as a result of an increase in accrued clinical expenses.

Net cash provided by investing activities was $17.1 million for the six months ended June 30, 2012, as compared to $1.8 million used in investing activities in the same period in 2011. Net cash provided in the 2012 period consisted primarily of proceeds from maturities of marketable securities, partially offset by purchases of marketable securities. Net cash used in the 2011 period consisted primarily of purchases of marketable securities, partially offset by proceeds from maturities of marketable securities.

Net cash provided by financing activities was $0.5 million for the six months ended June 30, 2012, as compared to $4.1 million for the same period in 2011. Net cash provided in both periods was primarily from sales of our common stock through Cantor.


Table of Contents

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 will 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:

. . .

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