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KERX > SEC Filings for KERX > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for KERYX BIOPHARMACEUTICALS INC

Form 10-Q for KERYX BIOPHARMACEUTICALS INC


8-Nov-2012

Quarterly Report


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

Unless the context requires otherwise, references in this report to "Keryx," the "Company," "we," "us" and "our" refer to Keryx Biopharmaceuticals, Inc., its predecessor company and our subsidiaries.

The following discussion and analysis contains forward-looking statements about our plans and expectations of what may happen in the future. Forward-looking statements are based on a number of assumptions and estimates that are inherently subject to significant risks and uncertainties, and our results could differ materially from the results anticipated by our forward-looking statements as a result of many known or unknown factors, including, but not limited to, those factors discussed in "Risk Factors." See also the "Special Cautionary Notice Regarding Forward-Looking Statements" set forth at the beginning of this report.

You should read the following discussion and analysis in conjunction with the unaudited consolidated financial statements, and the related footnotes thereto, appearing elsewhere in this report, and in conjunction with management's discussion and analysis and the audited consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2011.

OVERVIEW

We are a biopharmaceutical company focused on the acquisition, development and commercialization of medically important pharmaceutical products for the treatment of renal disease. We are developing Zerenex™ (ferric citrate), an oral, ferric iron-based compound that has the capacity to bind to phosphate in the gastrointestinal tract and form non-absorbable complexes. Zerenex is currently in Phase 3 clinical development in the United States, under a Special Protocol Assessment, or SPA, agreement with the U.S. Food and Drug Administration, or FDA, as a treatment for hyperphosphatemia (elevated phosphate levels) in patients with end-stage renal disease, or ESRD, on dialysis. Top-line data from the long-term Phase 3 study is expected to be announced by approximately year-end 2012.

In addition, Zerenex (ferric citrate) is in Phase 3 clinical development in Japan by our Japanese partner, Japan Tobacco Inc., or JT, and Torii Pharmaceutical Co., Ltd., or Torii.

We also engage in business development activities that include seeking strategic relationships for our drug candidate, as well as evaluating compounds and companies for in-licensing or acquisition. To date, we have not received approval for the sale of any drug candidate in any market and, therefore, have not generated any product sales from any drug candidate. We have generated, and expect to continue to generate, revenue from the licensing of rights to Zerenex in Japan to JT and Torii.

RECENT DEVELOPMENTS

ZerenexTM (ferric citrate)

On April 23, 2012, our Japanese partner for Zerenex (ferric citrate), JT and Torii, announced positive top-line results from a Phase 3 study of ferric citrate in Japan for the treatment of hyperphosphatemia in end-stage renal disease patients on hemodialysis. This study is part of an ongoing Phase 3 program for ferric citrate in Japan for the treatment of hyperphosphatemia. The Phase 3 study, conducted in Japan, was an open-label, randomized study evaluating the efficacy and safety of ferric citrate against an active control, sevelamer hydrochloride, over 12 weeks in hemodialysis patients with hyperphosphatemia. In the top-line results, which evaluated the change of serum phosphorus from baseline, the primary endpoint of efficacy met non-inferiority to sevelamer hydrochloride. Furthermore, there were no clinically significant findings on safety and tolerability of ferric citrate within the treatment period. JT and Torii stated that it is aiming to submit the marketing application for ferric citrate in Japan in their fiscal year ending March 31, 2013.

On November 1, 2012, we announced the initiation of a U.S. Phase 2 study of Zerenex (ferric citrate) in managing serum phosphorus and iron deficiency in anemic patients with Stage 3 to 5 non-dialysis dependent chronic kidney disease, or NDD-CKD. The Phase 2 study is a multicenter, randomized, safety and efficacy clinical trial designed to compare the ability of Zerenex to manage serum phosphorus and iron deficiency versus placebo in anemic patients with Stages 3 to 5 NDD-CKD. Eligible patients will be randomized 1:1 to receive either Zerenex or placebo for a 12-week treatment period. The primary endpoints of the study are to demonstrate changes in ferritin, TSAT and serum phosphorus levels over the 12-week treatment period. Secondary endpoints include changes in hemoglobin and FGF-23. The study plans to randomize approximately 150 patients from approximately 15 sites in the U.S. Patient enrollment is expected to take up to 6 months, with study completion expected in mid-2013.

KRX-0401 (perifosine)

On April 2, 2012, we reported that the Phase 3 "X-PECT" (Xeloda® + Perifosine Evaluation in Colorectal cancer Treatment) clinical trial evaluating perifosine (KRX-0401) + capecitabine (Xeloda) in patients with refractory advanced colorectal cancer did not meet the primary endpoint of improving overall survival versus capecitabine + placebo. On May 4, 2012, we executed a License Termination and Technology Transfer Agreement with Aeterna Zentaris GmbH, or Zentaris, whereby the license agreement for KRX-0401 (perifosine) was terminated, and in exchange for the transfer of the U.S. Investigational New Drug Application, development data, intellectual property and contracts to Zentaris, we will receive a royalty on future net sales, if any, of perifosine in the U.S., Canada and Mexico. Zentaris has assumed all costs related to the Perifosine program going forward. Due to the termination of the license for KRX-0401, we are no longer committed to pay to the former stockholders of ACCESS Oncology, Inc. certain contingent equity rights (up to 2,872,422 shares of our common stock). For the nine months ended September 30, 2012, we recognized a non-cash extraordinary gain of $2.6 million relating to the write-off of the contingent equity rights liability.

GENERAL CORPORATE

We have devoted substantially all of our efforts to the identification, in-licensing, development and partnering of drug candidates. We have incurred negative cash flow from operations each year since our inception. We anticipate incurring negative cash flows from operating activities for the foreseeable future. We have spent, and expect to continue to spend, substantial amounts in connection with implementing our business strategy, including our product development efforts, our clinical trials, partnership and licensing activities.

Our license revenues currently consist of license fees and milestone payments arising from our agreement with JT and Torii. We recognize license revenue in accordance with the revenue recognition guidance of the Codification. We analyze each element of our licensing agreement to determine the appropriate revenue recognition. The terms of the license agreement may include payment to us of non-refundable up-front license fees, milestone payments if specified objectives are achieved, and/or royalties on product sales. We recognize revenue from upfront payments over the period of significant involvement under the related agreements unless the fee is in exchange for products delivered or services rendered that represent the culmination of a separate earnings process and no further performance obligation exists under the contract. We recognize milestone payments as revenue upon the achievement of specified milestones only if (1) the milestone payment is non-refundable, (2) substantive effort is involved in achieving the milestone, (3) the amount of the milestone is reasonable in relation to the effort expended or the risk associated with achievement of the milestone, and (4) the milestone is at risk for both parties. If any of these conditions are not met, we defer the milestone payment and recognize it as revenue over the estimated period of performance under the contract.

We have not earned any revenues from the commercial sale of any drug candidate.

Our research and development expenses consist primarily of salaries and related personnel costs, fees paid to consultants and outside service providers for clinical and laboratory development, facilities-related and other expenses relating to the design, development, manufacture, testing, and enhancement of our drug candidates and technologies, as well as expenses related to in-licensing of new product candidates. We expense our research and development costs as they are incurred.

Our general and administrative expenses consist primarily of salaries and related expenses for executive, finance and other administrative personnel, recruitment expenses, professional fees and other corporate expenses, including investor relations, legal activities and facilities-related expenses.

Our results of operations include non-cash compensation expense as a result of the grants of stock options and restricted stock. Compensation expense for awards of options and restricted stock granted to employees and directors represents the fair value of the award recorded over the respective vesting periods of the individual awards. The expense is included in the respective categories of expense in the consolidated statements of operations. We expect to continue to incur significant non-cash compensation expenses.

For awards of options and restricted stock to consultants and other third-parties, compensation expense is determined at the "measurement date." The expense is recognized over the vesting period of the award. Until the measurement date is reached, the total amount of compensation expense remains uncertain. We record compensation expense based on the fair value of the award at the reporting date. The awards to consultants and other third-parties are then revalued, or the total compensation is recalculated based on the then current fair value, at each subsequent reporting date. This results in a change to the amount previously recorded in respect of the equity award grant, and additional expense or a reversal of expense may be recorded in subsequent periods based on changes in the assumptions used to calculate fair value, such as changes in market price, until the measurement date is reached and the compensation expense is finalized.

In addition, certain options and restricted stock issued to employees, consultants and other third-parties vest upon the achievement of certain milestones, therefore the total expense is uncertain until the milestone is met.

Our ongoing clinical trials are lengthy and expensive. Even if these trials show that our current, and any future, drug candidate is effective in treating certain diseases or conditions, there is no guarantee that we will be able to record commercial sales of any drug candidate in the near future. In addition, we expect losses to continue as we continue to fund in-licensing and development of new drug candidates. As we continue our development efforts, we may enter into additional third-party collaborative agreements and may incur additional expenses, such as licensing fees and milestone payments. In addition, we may need to build inventory, as well as establish the commercial infrastructure required to manufacture, market and sell our drug candidate(s) following approval, if any, by the FDA, European Medicines Agency, or EMA, or regulatory authorities of other countries, which would result in us incurring additional expenses. As a result, our quarterly results may fluctuate and a quarter-by-quarter comparison of our operating results may not be a meaningful indication of our future performance.

RESULTS OF OPERATIONS

Three months ended September 30, 2012 and September 30, 2011

Non-Cash Compensation Expense (Research and Development). Non-cash compensation expense (research and development) related to equity incentive grants increased by $9,000 to $161,000 for the three months ended September 30, 2012, as compared to $152,000 for the three months ended September 30, 2011. The increase in non-cash compensation expense in the three months ended September 30, 2012, as compared to September 30, 2011, was primarily related to the recording of the fair value of equity awards granted to research and development personnel, which are expensed over the vesting periods of the individual awards.

Other Research and Development Expenses. Other research and development expenses decreased by $4,852,000 to $3,768,000 for the three months ended September 30, 2012, as compared to $8,620,000 for the three months ended September 30, 2011. The decrease in other research and development expenses was due primarily to a $3,856,000 decrease in research and development expenses related to KRX-0401 following the termination of the clinical development program and license agreement for KRX-0401 in May 2012. The decrease was also due to a $691,000 decrease in research and development expenses related to our Zerenex Phase 3 clinical program that is expected to be completed in the fourth quarter of 2012. We expect our other research and development expenses in the fourth quarter of 2012 to remain at a comparable level to the third quarter of 2012.

Non-Cash Compensation Expense (General and Administrative). Non-cash compensation expense (general and administrative) related to equity incentive grants increased by $64,000 to $384,000 for the three months ended September 30, 2012, as compared to $320,000 for the three months ended September 30, 2011. The increase in non-cash compensation expense in the three months ended September 30, 2012, as compared to September 30, 2011, was primarily related to the recording of the fair value of equity awards granted to general and administrative personnel and directors, which are expensed over the vesting periods of the individual awards.

Other General and Administrative Expenses. Other general and administrative expenses decreased by $50,000 to $1,213,000 for the three months ended September 30, 2012, as compared to $1,263,000 for the three months ended September 30, 2011. The decrease was due primarily to decreased miscellaneous general and administrative expenses. We expect our other general and administrative expenses to remain at a comparable level in the fourth quarter of 2012.

Interest and Other Income, Net. Interest and other income, net, decreased by $57,000 to $51,000 for the three months ended September 30, 2012, as compared to $108,000 for the three months ended September 30, 2011. The decrease was due to a lower level of invested funds in our investment portfolio.

Nine months ended September 30, 2012 and September 30, 2011

License Revenue.There was no license revenue for the nine months ended September 30, 2012. License revenue for the nine months ended September 30, 2011 was $5.0 million due to the recognition of a non-refundable milestone payment received in April 2011 from JT and Torii for their commencement of a Phase 3 clinical program in Japan. We do not expect our license revenue to have a material impact on our financial results in the fourth quarter of 2012.

Non-Cash Compensation Expense (Research and Development). Non-cash compensation expense (research and development) related to equity incentive grants decreased by $104,000 to $512,000 for the nine months ended September 30, 2012, as compared to $616,000 for the nine months ended September 30, 2011. The decrease in non-cash compensation expense in the nine months ended September 30, 2012, as compared to September 30, 2011, was primarily related to the recording of the fair value of equity awards granted to research and development personnel, which are expensed over the vesting periods of the individual awards.

Other Research and Development Expenses. Other research and development expenses decreased by $4,917,000 to $14,616,000 for the nine months ended September 30, 2012, as compared to $19,533,000 for the nine months ended September 30, 2011. The decrease in other research and development expenses was due primarily to a $5,827,000 decrease in research and development expenses related to the completion in April 2012 of the KRX-0401 Phase 3 study in metastatic colorectal cancer and subsequent termination of the clinical development program and license agreement for KRX-0401 in May 2012. The decrease was partially offset by a $1,156,000 increase in research and development expenses related to our Zerenex Phase 3 clinical program. We expect our other research and development expenses in the fourth quarter of 2012 to remain at a comparable level to the third quarter of 2012.

Non-Cash Compensation Expense (General and Administrative). Non-cash compensation expense (general and administrative) related to equity incentive grants increased by $169,000 to $1,117,000 for the nine months ended September 30, 2012, as compared to $948,000 for the nine months ended September 30, 2011. The increase in non-cash compensation expense in the nine months ended September 30, 2012, as compared to September 30, 2011, was primarily related to the recording of the fair value of equity awards granted to general and administrative personnel and directors, which are expensed over the vesting periods of the individual awards.

Other General and Administrative Expenses. Other general and administrative expenses increased by $205,000 to $4,156,000 for the nine months ended September 30, 2012, as compared to $3,951,000 for the nine months ended September 30, 2011. The increase was due primarily to increased miscellaneous general and administrative expenses, including market research initiatives. We expect our other general and administrative expenses to remain at a comparable level in the fourth quarter of 2012.

Interest and Other Income, Net. Interest and other income, net, increased by $1,369,000 to $1,669,000 for the nine months ended September 30, 2012, as compared to $300,000 for the nine months ended September 30, 2011. The increase was due to the award of $1.5 million in compensatory damages, net of fees and legal expenses, relating to the statement of claim we filed with FINRA against an SEC registered broker-dealer for damages arising from that broker-dealer's recommendations and purchases of auction rate securities for our cash management account.

Extraordinary Gain. For the nine months ended September 30, 2012, we recorded a non-cash extraordinary gain of $2,639,000 relating to a write-off of the contingent equity rights liability following the termination of the license agreement for KRX-0401 in May 2012.

LIQUIDITY AND CAPITAL RESOURCES

Our major sources of cash have been proceeds from various private placements of equity securities, option and warrant exercises, public offerings of our common stock, interest income, and from the upfront and milestone payments from our sublicense agreement with JT and Torii and miscellaneous payments from our other prior licensing activities. We have not yet commercialized a drug candidate and cannot be sure if we will ever be able to do so. Even if we commercialize a drug candidate, we may not become profitable. Our ability to achieve profitability depends on a number of factors, including our ability to obtain regulatory approval for our drug candidate, successfully complete any post-approval regulatory obligations and successfully commercialize our drug candidate alone or in partnership. We may continue to incur substantial operating losses even if we begin to generate revenues from our drug candidate.

As of September 30, 2012, we had $20.2 million in cash, cash equivalents, interest receivable, and investment securities, a decrease of $19.2 million from December 31, 2011. We currently anticipate that our cash, cash equivalents and investment securities as of September 30, 2012, exclusive of our anticipated milestone payments from JT and Torii and investment in inventory, are sufficient to fund our anticipated operating cash requirements for approximately 12 to 15 months from September 30, 2012. The actual amount of cash that we will need to operate is subject to many factors, including, but not limited to, the timing, design and conduct of clinical trials for our drug candidate, the timing and expenditures associated with building inventory, and the timing and expenditures associated with the build-out of our own commercial infrastructure to manufacture, market and sell our drug candidate. We are dependent upon significant financing to provide the cash necessary to execute our current operations, including the commercialization of any drug candidate.

In accordance with the licensing arrangement with JT and Torii, we may receive payments upon the achievement of pre-specified milestones, with the next milestone for the filing for marketing approval of ferric citrate in Japan.

Upon positive results from our long-term Phase 3 study for Zerenex, we expect to begin building inventory of Zerenex in 2013 to ensure an adequate supply of Zerenex for commercialization upon regulatory approval. In October 2012, we issued a purchase order for inventory to be manufactured in 2013. This purchase order is cancelable at any time at our discretion.

On January 3, 2011, we filed with the SEC a shelf registration statement on Form S-3 (File No. 333-171517), which the SEC declared effective on January 28, 2011, providing for the offering of up to $100 million of our common stock and warrants to purchase our common stock. There remains approximately $67 million of our common stock and warrants available for sale under this shelf registration statement.

We may offer the securities under our shelf registration statement from time to time in response to market conditions or other circumstances if we believe such a plan of financing is in our best interests and the best interests of our stockholders. We believe that this shelf registration statements provide us with the flexibility to efficiently raise additional capital to finance our operations as needed.

Cash used in operating activities for the nine months ended September 30, 2012 was $19.2 million, as compared to $15.2 million for the nine months ended September 30, 2011. This increase in net cash used in operating activities was primarily due to the $5.0 million non-refundable milestone payment received from JT and Torii in April 2011.

For the nine months ended September 30, 2012, net cash provided by investing activities was $4.2 million, as compared to $9.2 million used in investing activities for the nine months ended September 30, 2011. The change was primarily due to the timing of our investments in, and maturities of, held-to-maturity short-term securities.

For the nine months ended September 30, 2012, there was no net cash provided by financing activities, as compared to $33.8 million for the nine months ended September 30, 2011. The decrease was primarily related to net proceeds of $30.7 million received from the underwritten registered offering in May 2011.

OFF-BALANCE SHEET ARRANGEMENTS

We have not entered into any transactions with unconsolidated entities whereby we have financial guarantees, subordinated retained interests, derivative instruments or other contingent arrangements that expose us to material continuing risks, contingent liabilities, or any other obligations under a variable interest in an unconsolidated entity that provides us with financing, liquidity, market risk or credit risk support, or engages in leasing, hedging, or research and development services on our behalf.

CRITICAL ACCOUNTING POLICIES

The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities and related disclosure of contingent assets and liabilities at the date of our financial statements and the reported amounts of revenues and expenses during the applicable period. Actual results may differ from these estimates under different assumptions or conditions.

We define critical accounting policies as those that are reflective of significant judgments and uncertainties and which may potentially result in materially different results under different assumptions and conditions. In applying these critical accounting policies, our management uses its judgment to determine the appropriate assumptions to be used in making certain estimates. These estimates are subject to an inherent degree of uncertainty. Our critical accounting policies include the following:

Stock Compensation. We have granted stock options and restricted stock to employees, directors and consultants, as well as warrants to other third parties. For employee and director grants, the value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model. The Black-Scholes model takes into account volatility in the price of our stock, the risk-free interest rate, the estimated life of the option, the closing market price of our stock and the exercise price. We base our estimates of our stock price volatility on the historical volatility of our common stock and our assessment of future volatility; however, these estimates are neither predictive nor indicative of the future performance of our stock. For purposes of the calculation, we assumed that no dividends would be paid during the life of the options and warrants. The estimates utilized in the Black-Scholes calculation involve inherent uncertainties and the application of management judgment. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those equity awards expected to vest. As a result, if other assumptions had been used, our recorded stock-based compensation expense could have been materially different from that reported. In addition, because some of the options and warrants issued to employees, consultants and other third-parties vest upon the achievement of certain milestones, the total expense is uncertain.

Total compensation expense for options and restricted stock issued to consultants is determined at the "measurement date." The expense is recognized over the vesting period for the options and restricted stock. Until the measurement date is reached, the total amount of compensation expense remains uncertain. We record stock-based compensation expense based on the fair value of the equity awards at the reporting date. These equity awards are then revalued, or the total compensation is recalculated based on the then current fair value, at each subsequent reporting date. This results in a change to the amount previously recorded in respect of the equity award grant, and additional expense or a reversal of expense may be recorded in subsequent periods based on changes in the assumptions used to calculate fair value, such as changes in market price, until the measurement date is reached and the compensation expense is finalized.

Accruals for Clinical Research Organization and Clinical Site Costs. We make estimates of costs incurred in relation to external clinical research organizations, or CROs, and clinical site costs. We analyze the progress of clinical trials, including levels of patient enrollment, invoices received and contracted costs when evaluating the adequacy of the amount expensed and the related prepaid asset and accrued liability. Significant judgments and estimates must be made and used in determining the accrued balance and expense in any accounting period. We review and accrue CRO expenses and clinical trial study expenses based on work performed and rely upon estimates of those costs applicable to the stage of completion of a study. Accrued CRO costs are subject to revisions as such trials progress to completion. Revisions are charged to expense in the period in which the facts that give rise to the revision become known. With respect to clinical site costs, the financial terms of these agreements are subject to negotiation and vary from contract to contract. Payments under these contracts may be uneven, and depend on factors such as the achievement of certain events, the successful recruitment of patients, the completion of portions of the clinical trial or similar conditions. The objective of our policy is to match the recording of expenses in our financial statements to the actual services received and efforts expended. As such, expense accruals related to clinical site costs are recognized based on our estimate of the degree of completion of the event or events specified in the specific clinical study or trial contract.

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