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TSRO > SEC Filings for TSRO > Form 10-Q on 26-Oct-2012All Recent SEC Filings

Show all filings for TESARO, INC.

Form 10-Q for TESARO, INC.


26-Oct-2012

Quarterly Report


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

The following information should be read in conjunction with the unaudited financial information and the notes thereto included in this Quarterly Report on Form 10-Q and the audited financial information and the notes thereto included in the Prospectus that forms a part of our Registration Statement on Form S-1 (File No. 333-180309), which Prospectus was filed with the Securities and Exchange Commission (the "SEC") pursuant to Rule 424 on June 29, 2012.

Except for the historical information contained herein, the matters discussed in this Quarterly Report on Form 10-Q may be deemed to be forward-looking statements that involve risks and uncertainties. We make such forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. In this Quarterly Report on Form 10-Q, words such as "may," "will," "expect," "anticipate," "estimate," "intend," and similar expressions (as well as other words or expressions referencing future events, conditions or circumstances) are intended to identify forward-looking statements.

Examples of forward looking statements contained in this report include statements regarding the following: our intent to continue to leverage the experience and competencies of our senior management team; our expectation that research and development and general and administrative expenses will increase in the future; our expectations regarding our development plans for rolapitant and development plans and targeted indications for niraparib and for TSR-011; and our plans not to develop backup compounds to which we currently have rights; our estimate of the earliest date at which we might commercialize any of our products; and the forecast of the period of time through which our financial resources will be adequate to support our operations.

Our actual results and the timing of certain events may differ materially from the results discussed, projected, anticipated or indicated in any forward-looking statements. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may differ materially from the forward-looking statements contained in this Quarterly Report. In addition, even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate are consistent with the forward-looking statements contained in this Quarterly Report, they may not be predictive of results or developments in future periods.

The following information and any forward-looking statements should be considered in light of factors discussed elsewhere in this Quarterly Report on Form 10-Q, including those risks identified in the Prospectus that forms a part of our Registration Statement on Form S-1 (File No. 333-180309), which Prospectus was filed with the SEC pursuant to Rule 424 on June 29, 2012.

We caution readers not to place undue reliance on any forward-looking statements made by us, which speak only as of the date they are made. We disclaim any obligation, except as specifically required by law and the rules of the SEC, to publicly update or revise any such statements to reflect any change in our expectations or in events, conditions or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements.


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Overview

We are an oncology-focused biopharmaceutical company dedicated to improving the lives of cancer patients. We are currently developing three in-licensed product candidates and we intend to continue to leverage the experience and competencies of our senior management team to identify, acquire, develop and commercialize cancer therapeutics and oncology supportive care products that are safer and more effective than existing treatments.

Product Candidate Portfolio. Our product candidate portfolio currently consists of three oncology-related product candidates:

Rolapitant, a long-acting neurokinin-1, or NK-1, receptor antagonist currently in Phase 3 trials for the prevention of chemotherapy induced nausea and vomiting, or CINV;

Niraparib, formerly known as MK-4827, is an orally active and potent poly (ADP-ribose) polymerase, or PARP, inhibitor that has undergone a Phase 1 clinical trial in cancer patients as a monotherapy and is currently under evaluation by Merck & Co., Inc., or Merck, for use in combination with temozolomide for the treatment of solid tumors. We intend to evaluate niraparib for the treatment of patients with solid tumors; and

TSR-011, an orally available anaplastic lymphoma kinase, or ALK, inhibitor (targeted anti-cancer agent) for which we recently announced that the Investigational New Drug (IND) application has become effective. We plan to test TSR-011 in clinical trials as a treatment for non-small cell lung cancer, or NSCLC, and potentially other cancer indications.

Development Stage Operations. We commenced business operations in May 2010. Our operations to date have been limited to organizing and staffing our company, business planning, raising capital, acquiring and developing product candidates, identifying potential product candidates and undertaking preclinical studies and clinical trials of our product candidates. To date, we have not generated any revenues and have financed our operations with net proceeds from private placements of our preferred stock and an initial public offering of our common stock. On June 19, 2012, we effectuated a 1 for 3.50 reverse stock split of our common stock. Our historical share and per share information has been retroactively adjusted to give effect to this reverse stock split.

As of September 30, 2012, we had a deficit accumulated during the development stage of $68.4 million. Our net losses were $43.1 million, $16.4 million and $9.0 million for the nine month period ended September 30, 2012, the year ended December 31, 2011 and for the period from March 26, 2010 (inception) to December 31, 2010, respectively. We expect to incur significant expenses and increasing operating losses for the foreseeable future. We expect our expenses to increase in connection with our ongoing activities, particularly as we continue the development and clinical trials of, and seek regulatory approval for, our product candidates. If we obtain regulatory approval for any of our product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. Furthermore, we expect to incur additional costs associated with operating as a public company. Accordingly, we will seek to fund our operations through public or private equity or debt financings or other sources. Adequate additional financing may not be available to us on acceptable terms, or at all. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy. We expect that research and development expenses will increase as we continue the development of our product candidates and general and administrative costs will increase as we grow and operate as a public company. We will need to generate significant revenues to achieve profitability, and we may never do so.


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Rolapitant. In December 2010, we entered into a license agreement with OPKO Health, Inc., or OPKO, to obtain exclusive worldwide rights to research, develop, manufacture, market and sell rolapitant. The license agreement also extended to an additional, backup compound, SCH900978, to which we have the same rights and obligations as rolapitant, but which we are not currently advancing. In consideration for this license, we paid OPKO $6.0 million upon signing the agreement and issued 1,500,000 shares of our Series O Preferred Stock. At the time of this transaction, the fair value of our Series O Preferred Stock was determined to be approximately $0.6 million. We are also required to make milestone payments to OPKO of up to an aggregate of $30.0 million if specified regulatory and initial commercial sales milestones are achieved. In addition, we are required to make additional milestone payments to OPKO of up to an aggregate of $85.0 million if specified levels of annual net sales of rolapitant are achieved. If commercial sales of rolapitant commence, we are required to pay OPKO tiered royalties on the amount of annual net sales achieved in the United States and Europe at percentage rates that range from the low teens to the low twenties, which we expect will result in an effective royalty rate in the low teens. The royalty rate on annual net sales outside of the United States and Europe is slightly above the single digits. We will pay royalties on rolapitant until the later of the date that all of the patent rights licensed from OPKO and covering rolapitant expire, are invalidated or are not enforceable and twelve years from the first commercial sale of the product, in each case, on a country-by-country and product-by-product basis. If we elect to develop and commercialize rolapitant in Japan through a third-party licensee we will share equally with OPKO all amounts received by us in connection with such activities under our agreement with such third party, subject to certain exceptions and deductions. OPKO also retains an option to become the exclusive distributor of such products in Latin America, provided that OPKO exercises that option within a defined period following specified regulatory approvals in the United States.

We are responsible for all preclinical, clinical, regulatory and other activities necessary to develop and commercialize rolapitant. There were no ongoing clinical trials for rolapitant or the additional compound at the time of our acquisition of these rights.

Niraparib. In May 2012, we entered into a license agreement with Merck Sharp & Dohme Corp., a subsidiary of Merck, under which we obtained exclusive, worldwide rights to certain patents and non-exclusive rights to certain Merck know-how, to research, develop, manufacture, market and sell niraparib and a backup compound, MK-2512, for all therapeutic and prophylactic uses in humans. We are not currently advancing MK-2512. Under the terms of the license agreement, we made an up-front payment to Merck of $7.0 million in June 2012. We are also required to make milestone payments to Merck of up to $57.0 million in development and regulatory milestones for the first indication, up to $29.5 million in development and regulatory milestones for each successive indication, and up to $87.5 million in one-time sales milestones based on the achievement of annual sales objectives. If commercial sales of niraparib commence, we will pay Merck tiered royalties at percentage rates in the low teens based on worldwide annual net sales, until the later of the expiration of the last patent licensed from Merck covering or claiming niraparib, or the tenth anniversary of the first commercial sale of niraparib, in either case, on a country-by-country basis.

We are responsible for all clinical, regulatory and other activities necessary to develop and commercialize niraparib. At the time of the license transaction, niraparib had completed a Phase 1 clinical trial in cancer patients as a monotherapy. It is currently under evaluation by Merck for use in combination with temozolomide for the treatment of solid tumors. None of the assets to which we acquired rights have alternative future uses, nor have they reached a stage of technological feasibility. We have accounted for this transaction as an asset acquisition because we did not acquire any processes or activities in addition


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to the license. Accordingly, we recorded the entire purchase price of $7.0 million to acquired in-process research and development expense.

ALK Program. In March 2011, we entered into a license agreement with Amgen, Inc., or Amgen, to obtain exclusive worldwide rights to research, develop, manufacture, market and sell certain licensed ALK inhibitor compounds. Under the terms of the license agreement, we made an up-front payment to Amgen of $0.5 million. We are also required to make milestone payments to Amgen of up to an aggregate of $138.0 million if specified clinical development, regulatory, initial commercialization and annual net product sales milestones are achieved. If commercial sales of a product commence, we will pay Amgen tiered royalties at percentage rates ranging from the mid-single digits to slightly above the single digits based on cumulative worldwide net sales until the later of the last patent licensed from Amgen covering the product, the loss of regulatory exclusivity for the product, or the tenth anniversary of the first commercial sale of the product, in all cases, on a country-by-country and product-by-product basis.

We are responsible for all preclinical, clinical, regulatory and other activities necessary to develop and commercialize the ALK product candidates. At the time of the license transaction, ALK was a preclinical compound. We recently announced that the IND application has become effective and that we plan to dose the first patient in a Phase 1/2 clinical study within the next few months.

Private Placements of Securities and Initial Public Offering. As of September 30, 2012, our principal source of liquidity was cash and cash equivalents, which totaled $138.6 million. Since our inception on March 26, 2010, we have funded our operations primarily through the private placement of our equity securities and an initial public offering of our common stock. As of September 30, 2012, we had received $120.4 million in net proceeds from the issuance of preferred stock. On June 28, 2012, the Company completed its initial public offering whereby the Company sold 6,000,000 shares of common stock at a price of $13.50 per share. The shares began trading on the NASDAQ Global Select Market on June 29, 2012, and the transaction closed on July 3, 2012. Immediately prior to the closing of the offering, all outstanding shares of convertible preferred stock converted into 19,410,490 shares of common stock. On July 23, 2012, the underwriters purchased an additional 430,183 shares by exercising a portion of the over-allotment option granted to them in connection with the initial public offering. As a result of the closing of the initial public offering and subsequent exercise of the over-allotment option, the Company received aggregate net proceeds of approximately $78.0 million, which is net of underwriting discounts and commissions and offering expenses.

Financial Operations Overview

The financial information presented from March 26, 2010 (inception) to December 31, 2010 is based solely on the results of TESARO, Inc. Subsequent to January 1, 2011, the financial information is consolidated and includes the results of our wholly owned subsidiary in the United Kingdom. All intercompany transactions and balances are eliminated in consolidation.

Revenue

To date, we have not generated any revenues. Our ability to generate revenue and become profitable depends upon our ability to successfully commercialize products, including any of our product candidates that we have in-licensed, rolapitant, niraparib and TSR-011, or other products or product


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candidates that we may in-license or acquire in the future. We expect to incur losses for the foreseeable future, and we expect these losses to increase as we continue our development of, and seek regulatory approvals for, our product candidates, and begin to commercialize any approved products. Because of the numerous risks and uncertainties associated with product development, we are unable to predict the timing or amount of increased expenses, or when or if we will be able to achieve or maintain profitability. Even if we are able to generate revenues from the sale of our products, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce our operations.

Research and Development Expenses

Research and development expenses consist primarily of costs incurred for the development of our product candidates, which include:

license fees related to the acquisition of in-licensed products, which are reported on our statements of operations as acquired in-process research and development;

employee-related expenses, including salaries, benefits, travel and stock-based compensation expense;

expenses incurred under agreements with contract research organizations, or CROs, and investigative sites that conduct our clinical trials and preclinical studies;

the cost of acquiring, developing and manufacturing active pharmaceutical ingredients and clinical trial materials;

facilities, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, insurance and other supplies; and

costs associated with other preclinical activities and regulatory operations.

Research and development costs are expensed as incurred. License fees and milestone payments related to in-licensed products and technology are expensed if it is determined that they have no alternative future use. Costs for certain development activities, such as clinical trials, are recognized based on an evaluation of the progress to completion of specific tasks using data such as patient enrollment, clinical site activations or information provided to us by our vendors.

Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We plan to increase our research and development expenses for the foreseeable future. Our costs associated with rolapitant will increase as we continue to enroll our Phase 3 clinical trials and continue the development of both the oral and intravenous formulations. While we have not had significant costs to date associated with niraparib, we expect to incur increasing costs and expenses associated with the product as it is further developed. We expect costs associated with TSR-011 to increase as we begin clinical development activities for this program.

We cannot determine with certainty the duration and completion costs of the current or future clinical trials of our product candidates or if, when, or to what extent we will generate revenues from the commercialization and sale of any of our product candidates that obtain regulatory approval. We may never succeed in achieving regulatory approval for any of our product candidates. The duration, costs and timing of clinical trials and development of our product candidates will depend on a variety of factors,


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including the uncertainties of future clinical and preclinical studies, uncertainties in clinical trial enrollment rate and significant and changing government regulation. In addition, the probability of success for each product candidate will depend on numerous factors, including competition, manufacturing capability and commercial viability. We will determine which programs to pursue and how much to fund each program in response to the scientific and clinical success of each product candidate, as well as an assessment of each product candidate's commercial potential.

The following table identifies research and development expenses and acquired in-process research and development expenses on a program-specific basis for our product candidates in-licensed through September 30, 2012. Personnel-related costs, depreciation and stock-based compensation are not allocated to a program, as they are deployed across multiple projects under development and, as such, are separately classified as personnel and other expenses in the table below (in thousands).

                                                                        The Period from
                                                                        March 26, 2010
                                           Nine Months Ended            (Inception) to
                                             September 30,               September 30,
                                         2011             2012               2012

Rolapitant Expenses
Acquired in-process research and
development                          $           -    $          -    $            6,630
Research and development                     2,359          24,184                33,239
Rolapitant total                             2,359          24,184                39,869

Niraparib Expenses
Acquired in-process research and
development                                      -           7,000                 7,000
Research and development                         -              70                    70
Niraparib total                                  -           7,070                 7,070

TSR-011 Expenses
Acquired in-process research and
development                                    500               -                   500
Research and development                       265           2,536                 3,224
TSR-011 total                                  765           2,536                 3,724

Personnel and Other Expenses                 1,143           4,768                 6,839
Total                                $       4,267    $     38,558    $           57,502

General and Administrative Expenses

General and administrative expenses consist principally of salaries and related costs for personnel, including stock-based compensation and travel expenses, in executive and other administrative functions. Other general and administrative expenses include facility related costs, communication expenses and professional fees for legal, patent review, consulting and accounting services.

We anticipate that our general and administrative expenses will increase in the future with continued research and development activities, potential commercialization of our product candidates and continued costs of operating as a public company. These increases will likely include increased costs


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related to the hiring of additional personnel and payments to outside consultants, lawyers and accountants, among other expenses. Additionally, if and when we believe a regulatory approval of the first product candidate appears likely, we anticipate an increase in payroll and expense as a result of our preparation for commercial operations, especially as it relates to the sales and marketing of our product candidates.

Other Income and Expense

Other income and expense consists of interest income earned on cash and cash equivalents and expense related to the issuance of certain rights to Series A-1 preferred stock investors to purchase shares of Series A-2 preferred stock, or the Series A-2 Purchase Rights. The Series A-2 Purchase Rights provided for the purchase of preferred stock and were deemed to be legally detachable and separately exercisable, and therefore represented free-standing financial instruments that were accounted for as a liability. We recorded the fair value of the Series A-2 Purchase Rights at the date of issuance of the Series A-1 preferred stock and adjusted the carrying value of such rights to their estimated fair value at each reporting date. The estimated fair value was determined using a valuation model which considers the probability of achieving defined milestones, our cost of capital, the estimated period the Series A-2 Purchase Rights would be outstanding, consideration received for the instrument with such rights, the number of shares to be issued to satisfy such rights and at what price and any changes in the fair value of the underlying instrument to such rights. From the date of issuance to December 31, 2010 the estimated change in fair value of the Series A-2 Purchase Rights was $0.7 million. On February 10, 2011, the holders of the Series A-2 Purchase Rights exercised such rights. From January 1, 2011 to February 10, 2011, the estimated change in the fair value of the Series A-2 Purchase Rights resulted in other expense of $1.0 million.

Results of Operations



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



                                                       Three Months Ended
                                                         September 30,                Increase
                                                    2011              2012           (Decrease)
                                                                 (in thousands)
Expenses:
Research and development                        $      1,921    $         11,876    $      9,955
General and administrative                               893               1,736             843
Acquired in-process research and development               -                   -               -
Total expenses                                         2,814              13,612          10,798

Loss from operations                                  (2,814 )           (13,612 )       (10,798 )
Other income (expense), net                               14                  53              39

Net loss                                        $     (2,800 )  $        (13,559 )  $    (10,759 )


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Research and Development Expenses. Research and development expenses were $11.9 million for the three months ended September 30, 2012, compared to $1.9 million for the three months ended September 30, 2011, an increase of $10.0 million. The increase was primarily due to expenses related to the development of our in-licensed product candidates, rolapitant and TSR-011. Significant 2012 activities causing the increase in expense included:

an increase of $8.3 million in costs associated with rolapitant clinical trials and the Phase 3 clinical program, including drug substance and drug product development, clinical supply manufacturing and distribution;

an increase of $0.3 million associated with niraparib and TSR-011 product development activities

an increase of $1.4 million for salaries, benefits and other personnel costs to support the growth of our development activities.

General and Administrative Expenses. General and administrative expenses for the three months ended September 30, 2012 were $1.7 million compared to $0.9 million for the three months ended September 30, 2011, an increase of $0.8 million. The increase was due primarily to an increase of $0.5 million in salaries, benefits and other personnel related costs and $0.3 million in professional and consulting fees and other expenses to support corporate operational activities including certain additional costs associated with public company operations.

Acquired In-Process Research and Development Expenses. We had no acquired in-process research and development expenses for either the three months ended September 30, 2012 or September 30, 2011.

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