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IDRA > SEC Filings for IDRA > Form 10-Q on 9-Nov-2012All Recent SEC Filings

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Form 10-Q for IDERA PHARMACEUTICALS, INC.


9-Nov-2012

Quarterly Report


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

GENERAL

We are a clinical stage biotechnology company engaged in the discovery and development of novel synthetic DNA- and RNA- based drug candidates. We are developing drug candidates that are designed to modulate immune responses mediated through Toll-like Receptors, or TLRs. We believe that the modulation of immune responses through TLRs provides a rationale for the development of drug candidates to treat a broad range of diseases. We also have created gene silencing oligonucleotides, or GSOs, which inhibit the production of disease-associated proteins by targeting RNA. We believe that our GSO technology provides us with a platform from which drug candidates for diverse disease indications can be developed.

TLRs are specific receptors present in immune system cells. Using a chemistry-based approach, we have created synthetic DNA- and RNA-based compounds that are targeted to TLRs 3, 7, 8, and 9. A TLR agonist is a compound that stimulates an immune response through the targeted TLR. A TLR antagonist is a compound that blocks activation of an immune response through the targeted TLR. Drug candidates are compounds that we are developing and that have not been approved for any commercial use.

We are focusing our internal development efforts on IMO-3100 and IMO-8400, our two TLR-targeted candidates for autoimmune and inflammatory diseases. We are also collaborating with Merck Sharp & Dohme Corp. (formerly Merck & Co., Inc.), which is referred to herein as Merck, for the use of agonists of TLRs 7, 8, and 9 as vaccine adjuvants for cancer, infectious diseases, and Alzheimer's disease. We are seeking to enter into collaborative alliances with pharmaceutical companies to advance our TLR-targeted programs in oncology, infectious diseases, respiratory diseases, and the use of TLR3 agonists as vaccine adjuvants, as well as applications of our GSO technology platform.

We had cash and cash equivalents of $8,352,000 at September 30, 2012. We believe that our existing cash and cash equivalents, together with the proceeds raised from a private placement of our securities in November 2012, will be sufficient to fund our operations at least into the third quarter of 2013 based on our current operating plan, including the completion of our ongoing Phase 2 clinical trial of IMO-3100 in patients with psoriasis that we initiated in April 2012, the completion of the Phase 1 clinical trial of IMO-8400 in healthy subjects, which we expect to announce the initiation of in the fourth quarter of 2012, and preparations for the further advancement of our autoimmune disease program in at least two indications. We will need to raise additional funds in order to conduct any additional clinical development or to operate our business beyond such time. Additional financing may not be available to us in this time frame in the amounts that we need or on terms that are acceptable to us.


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Autoimmune and Inflammatory Disease Program. We have two drug candidates in clinical development in our autoimmune and inflammatory disease program. We are conducting a Phase 2 clinical trial of IMO-3100, an antagonist of TLR7 and TLR9 in adult patients with moderate to severe plaque psoriasis. We initiated the trial in the second quarter of 2012 and completed enrollment of the trial in October 2012 with a total enrollment of 44 patients. We anticipate that we will have top-line data for some of the endpoints in this Phase 2 study by the end of 2012 and complete data during the first quarter of 2013.

In addition, we have selected IMO-8400, an antagonist of TLRs 7, 8, and 9, as a second candidate for development in the treatment of autoimmune disease, with lupus as our initial indication. We submitted an Investigational New Drug application, or IND, for IMO-8400 to the United States Food and Drug Administration, or FDA, in the third quarter of 2012. We have received a safe-to-proceed notification from FDA to conduct a Phase 1 clinical trial of IMO-8400 in healthy subjects, which we expect to announce the initiation of in the fourth quarter of 2012. If the results of the Phase 1 study are favorable, then subject to obtaining the required funding, we would expect to initiate a Phase 2 clinical trial of IMO-8400 in patients with lupus. If we do not raise additional funding, we will not be able to initiate the planned Phase 2 trial of IMO-8400 in patients with lupus.

We have evaluated IMO-3100 and IMO-8400 in preclinical models of several autoimmune diseases including psoriasis, lupus, rheumatoid arthritis, and multiple sclerosis. In these models, treatment with IMO-3100 or IMO-8400 was associated with inhibition of Th1, Th17, and inflammasome pathways and improvement in a number of disease parameters.

Vaccine Adjuvant Collaboration. In January 2012, we announced that Merck had selected several of our novel agonists of TLR7, TLR8 or TLR9 for evaluation and use as vaccine adjuvant candidates in the fields of cancer, infectious diseases, and Alzheimer's disease.

Cancer Program. In November 2011, we reacquired rights to IMO-2055, an agonist of TLR9 in clinical development for the treatment of cancer, from Merck KGaA, Darmstadt, Germany, our former collaborator. We believe that IMO-2055 can be developed for use as an immune modifier in combination with targeted anticancer agents in certain cancer indications and are seeking to enter into collaborations with pharmaceutical companies to advance the use of IMO-2055 in the treatment of cancer.

Gene Silencing Oligonucleotide Technology Platform. Our GSOs are single-stranded RNA or DNA constructs that are complementary to targeted mRNA sequences of therapeutic interest. In preclinical studies, our GSOs have inhibited in vivo gene expression without requiring a delivery enhancement technology. We are seeking to enter into collaborations with pharmaceutical companies to advance applications of our GSO technology platform.

Additional Programs. In addition to our collaboration with Merck, our TLR programs in autoimmune and inflammatory diseases and cancer, and our GSO technology, we have identified TLR drug candidates for applications in the treatment of infectious diseases, respiratory diseases and hematological malignancies, and we have created TLR3 agonists for use as vaccine adjuvants. We are seeking to enter into collaborations with pharmaceutical companies to advance these additional applications.

At September 30, 2012, we had an accumulated deficit of $390.9 million. We expect to incur substantial operating losses in future periods. We do not expect to generate significant product revenue, sales-based milestones or royalties until we successfully complete development and obtain marketing approval for drug candidates, either alone or in collaborations with third parties, which we expect will take a number of years. In order to commercialize our drug candidates, we need to complete clinical development and to comply with comprehensive regulatory requirements. We expect that our research and development expenses in 2012 will be lower than our research and development expenses in 2011.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

This management's discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported


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amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments, including those related to revenue recognition, stock-based compensation and our Series D redeemable convertible preferred stock and related warrants. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We regard an accounting estimate or assumption underlying our financial statements as a "critical accounting estimate" where:

the nature of the estimate or assumption is material due to the level of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change; and

the impact of the estimates and assumptions on financial condition or operating performance is material.

Our significant accounting policies are described in Note 2 of the notes to our financial statements in our Annual Report on Form 10-K for the year ended December 31, 2011. Not all of these significant policies, however, fit the definition of critical accounting policies and estimates. We believe that our accounting policies relating to revenue recognition, stock-based compensation and our Series D redeemable convertible preferred stock and related warrants, as described under the caption "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates" in our Annual Report on Form 10-K for the year ended December 31, 2011, fit the description of critical accounting estimates and judgments. There were no changes in these policies during the nine months ended September 30, 2012.

RESULTS OF OPERATIONS

Three and Nine Months Ended September 30, 2012 and 2011

Alliance Revenue

Alliance revenue consisted of reimbursement by licensees of costs associated with patent maintenance, amounting to $3,000 and $4,000 in the three months ended September 30, 2012 and 2011, respectively, and $40,000 and $45,000 in the nine months ended September 30, 2012 and 2011, respectively. We did not recognize any revenue from collaborations in the three and nine months ended September 30, 2012 and 2011.

Research and Development Expenses

Research and development expenses decreased by $296,000, or 8%, from $3,574,000 for the three months ended September 30, 2011, to $3,278,000 for the three months ended September 30, 2012 and decreased by $1,674,000 or 14% from $12,269,000 for the nine months ended September 30, 2011 to $10,595,000 for the nine months ended September 30, 2012. In the following table, research and development expense is set forth in the following five categories which are discussed beneath the table:

                                          Three Months Ended                             Nine Months Ended
                                             September 30,           Percentage            September 30,           Percentage
                                            (in thousands)            Increase             (in thousands)           Increase
                                           2012          2011        (Decrease)          2012          2011        (Decrease)
IMO-3100 external development expense   $      761      $   463               64 %     $   1,809     $  1,543               17 %
IMO-2055 external development expense            1           -                -  %             5            4               25 %
IMO-2125 external development expense           72          466              (85 )%          223        2,233              (90 )%
Other drug development expense               1,255          869               44 %         4,439        2,958               50 %
Basic discovery expense                      1,189        1,776              (33 )%        4,119        5,531              (26 )%


                                        $    3,278      $ 3,574               (8 )%    $  10,595     $ 12,269              (14 )%


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IMO-3100 External Development Expenses. These expenses include external expenses that we have incurred in connection with IMO-3100 since November 2009, when we commenced clinical development of IMO-3100. These external expenses include payments to independent contractors and vendors for drug development activities conducted after the initiation of IMO-3100 clinical development but exclude internal costs such as payroll and overhead expenses. We incurred approximately $9,241,000 in external development expenses from November 2009 through September 30, 2012, including costs associated with our clinical trials, manufacturing and process development activities related to the production of IMO-3100, and additional nonclinical toxicology studies.

The increases in IMO-3100 expenses in the three and nine months ended September 30, 2012, as compared to the three and nine months ended September 30, 2011, were primarily attributable to costs incurred in the 2012 periods in connection with the preparation for and conduct of our ongoing Phase 2 clinical trial of IMO-3100 that we initiated in April 2012. These increases were partially offset by lower costs associated with nonclinical studies during the nine months ended September 30, 2011, costs incurred during the first quarter of 2011 for the manufacture of IMO-3100 drug supply, other costs incurred in the 2011 periods in preparation for a planned Phase 2 clinical trial and costs incurred in the 2011 periods in connection with data analysis of the Phase 1 clinical trials of IMO-3100 that we had conducted.

The ongoing Phase 2 trial of IMO-3100 is a randomized, double-blind, and placebo-controlled study in patients with psoriasis. The trial is designed to evaluate the safety and clinical activity of IMO-3100 as a monotherapy. In October 2012 we announced completion of patient enrollment in the trial. In accordance with the study protocol, 44 patients with moderate to severe plaque psoriasis were randomized on a 1:1:1 basis to receive IMO-3100 at 0.16 or 0.32 mg/kg or placebo by subcutaneous injection once weekly for four weeks. Assessments of safety will be performed throughout the treatment and four-week follow-up periods. The primary outcome measure in the trial is change in epidermal thickness from treatment initiation to the end of treatment as assessed in biopsy samples of psoriatic lesions. Secondary outcome measures of clinical activity include Psoriasis Area Severity Index (PASI), mean focal psoriasis severity, and Physician Global Assessment (PGA) scores. This trial is being conducted at multiple sites in the United States, and skin biopsies will be analyzed at a central laboratory. We anticipate that we will have top-line data for some of the endpoints from the Phase 2 study by the end of 2012 and complete data during the first quarter of 2013.

IMO-2055 External Development Expenses. These expenses include external expenses that we have incurred in connection with IMO-2055. These external expenses include payments to independent contractors and vendors for drug development activities conducted after the initiation of IMO-2055 clinical development, but exclude internal costs such as payroll and overhead expenses. We commenced clinical development of IMO-2055 in 2003 and from 2003 through September 30, 2012 we incurred approximately $19,879,000 in external development expenses, including costs associated with our clinical trials, manufacturing, process development activities related to the production of IMO-2055, additional nonclinical toxicology studies, and the cost of regaining our rights to IMO-2055 and follow-on compounds for use in the treatment of cancer, excluding cancer vaccines, under the termination agreement discussed below.

Under our collaboration with Merck KGaA, Merck KGaA was responsible for developing IMO-2055 for the treatment of cancer excluding vaccines. Merck KGaA refers to IMO-2055 as EMD 1201081. From December 2007 to March 2010, we conducted clinical trials of IMO-2055 under the collaboration and Merck KGaA reimbursed us. As of March 2010, Merck KGaA assumed sponsorship of all ongoing clinical trials of IMO-2055 for the treatment of cancer and responsibility for all further clinical development of IMO-2055 in the treatment of cancer. As a result of Merck KGaA's assumption of sponsorship of the trials, we did not incur significant expenses for IMO-2055 development during the three and nine months ended September 30, 2011.

On November 30, 2011, we entered into an agreement to terminate our collaboration with Merck KGaA and to regain rights for developing TLR9 agonists for the treatment of cancer. In connection with the termination agreement, we agreed to


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reimburse Merck KGaA for up to 1,816,000 ($2,336,000 using a September 30, 2012 exchange rate) of Merck KGaA's costs for the third party contract research organization that was coordinating Merck KGaA's Phase 2 trial of IMO-2055 in combination with cetuximab, payable in eleven installments commencing on March 1, 2012 including a final payment payable upon Merck KGaA's completion of certain specified activities. We also agreed to pay to Merck KGaA one-time 1,000,000 ($1,286,000 using a September 30, 2012 exchange rate) milestone payments upon the occurrence of each of the following milestones: (i) partnering of IMO-2055 with any third party, (ii) initiation of any Phase 2 or Phase 3 clinical trial for IMO-2055 and (iii) regulatory submission of IMO-2055 in any country. We recorded, in research and development expense during the three months ended December 31, 2011, 1,816,000 ($2,423,000 using a November 30, 2011 exchange rate) in installment payments which represents the cost of regaining our rights to IMO-2055 and our follow-on compounds for use in the treatment of cancer, excluding cancer vaccines. Under the agreement, Merck KGaA agreed to continue to conduct the Phase 2 trial of IMO-2055 in combination with cetuximab and other specified related activities and to complete and analyze all clinical trials that Merck KGaA had initiated or for which Merck KGaA had assumed sponsorship and to finalize clinical study reports. As a result, we did not incur significant expenses for IMO-2055 development during the three and nine months ended September 30, 2012. Any milestone payments will be recorded at the time that any milestones are achieved.

Merck KGaA conducted a Phase 1b clinical trial of IMO-2055 in combination with erlotinib and bevacizumab in patients with advanced non-small cell lung cancer. In the trial, progression-free survival was 5.6 months, median overall survival was 16 months, and the disease control rate, which is the percentage of patients who experience a response of stable disease or better, was 79%. The primary objective of the trial was to identify a recommended Phase 2 dosage of IMO-2055 for evaluation in combination with erlotinib and bevacizumab, which was established as 0.32 mg/kg/week. Data from this trial were reported in an abstract included in the 2012 American Society of Clinical Oncology Annual Meeting.

Merck KGaA conducted a Phase 1b clinical trial of IMO-2055 in combination with cetuximab and the chemotherapy regimen FOLFIRI in patients with advanced or metastatic colorectal cancer. The primary objective of this study was to determine the recommended Phase 2 dose of IMO-2055 when combined with cetuximab and FOLFIRI. Fifteen patients were enrolled in the dose escalation portion of the study and received IMO-2055 at 0.16, 0.32, or 0.48 mg/kg/week in combination with weekly cetuximab and FOLFIRI once every two weeks. The combination of IMO-2055, cetuximab, and FOLFIRI was generally well tolerated, and 0.48 mg/kg/week was identified as the recommended Phase 2 dose of IMO-2055 in this setting.

Merck KGaA conducted a Phase 2 clinical trial of IMO-2055 in combination with cetuximab in second-line cetuximab-nave patients with recurrent or metastatic squamous cell carcinoma of the head and neck, or SCCHN, who previously progressed on chemotherapy. The primary endpoint of the study was progression-free survival. In the study, the combination of IMO-2055 and cetuximab did not meet the primary endpoint. The median progression-free survival based on investigator assessments was 2.9 months in both arms; based on independent radiology review it was 1.9 months in the cetuximab arm and 1.5 months in the combination arm.

We are seeking to enter into a collaboration with one or more pharmaceutical companies to advance the use of IMO-2055 in the treatment of cancer.

IMO-2125 External Development Expenses. These expenses include external expenses that we have incurred in connection with IMO-2125. These external expenses include payments to independent contractors and vendors for drug development activities conducted after the initiation of IMO-2125 clinical development, but exclude internal costs such as payroll and overhead expenses. We commenced clinical development of IMO-2125 in May 2007 and from May 2007 through September 30, 2012 we incurred approximately $16,578,000 in external development, including costs associated with our clinical trials manufacturing, process development activities related to the production of IMO-2125, and additional nonclinical toxicology studies.

The decreases in IMO-2125 external development expenses in the three and nine months ended September 30, 2012, as compared to the corresponding 2011 periods, reflect our determination to discontinue further development of IMO-2125 in the treatment of chronic hepatitis C virus infection, or HCV, in the third quarter of 2011. IMO-2125 external development


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expenses during the three and nine months ended September 30, 2011 included costs associated with the conduct of nonclinical toxicology studies, costs associated with two Phase 1 clinical trials, and costs incurred during the first half of 2011 that were associated with preparation for a Phase 2 clinical trial. IMO-2125 external development expenses during the 2012 periods were related primarily to costs associated with the completion of nonclinical studies during the first half of 2012, costs associated with data analysis of a Phase 1 clinical trial, and costs associated with the maintenance of the clinical drug supply. We expect that IMO-2125 external development expenses will be lower in future periods.

Other Drug Development Expenses. These expenses include external expenses associated with preclinical development of identified compounds in anticipation of advancing these compounds into clinical development. In addition, these expenses include internal costs, such as payroll and overhead expenses, associated with preclinical development and products in clinical development. The external expenses associated with preclinical compounds include payments to contract vendors for manufacturing and the related stability studies, preclinical studies, including animal toxicology and pharmacology studies, and professional fees. Internal expenses associated with products in clinical development include costs associated with our Autoimmune Disease Scientific Advisory Board.

The increases in other drug development expenses in the three and nine months ended September 30, 2012, as compared to the corresponding 2011 periods, were primarily due to costs of preclinical studies and manufacturing activities to support the IND for IMO-8400, which we submitted to the FDA in the third quarter of 2012, and were partially offset by the cost of obtaining nonclinical and clinical trial data from studies conducted by our former collaborative partner of IMO-2134, a TLR9 agonist, which cost we accrued in the second quarter of 2011, costs associated with nonclinical studies and manufacturing of preclinical research compounds in 2011, and lower employee compensation during 2012.

Basic Discovery Expenses. These expenses include our internal and external expenses relating to our discovery efforts with respect to our TLR-targeted programs, including agonists and antagonists of TLRs 3, 7, 8 and 9, TLR antisense, and GSOs. These expenses reflect payments for laboratory supplies, external research, and professional fees, as well as payroll and overhead expenses. The decreases in basic discovery expenses in the three and nine months ended September 30, 2012, as compared to the corresponding 2011 periods, were primarily due to decreases in the cost of laboratory supplies and employee compensation reflecting reduced activity and reduced headcount resulting from our September 2011 re-assessment and prioritization of our drug development programs.

We do not know if we will be successful in developing any drug candidate from our research and development programs. At this time, without knowing the results of the ongoing Phase 2 clinical trial of IMO-3100 or the Phase 1 clinical trial of IMO-8400, which we expect to announce the initiation of in the fourth quarter of 2012, and without an established plan for future clinical tests of drug candidates, we cannot reasonably estimate or know the nature, timing, and costs of the efforts that will be necessary to complete the remainder of the development of, or the period, if any, in which material net cash inflows may commence from, any drug candidate from our research and development programs. Moreover, the clinical development of any drug candidate from our research and development programs is subject to numerous risks and uncertainties associated with the duration and cost of clinical trials, which vary significantly over the life of a project as a result of unanticipated events arising during clinical development.

General and Administrative Expenses

General and administrative expenses decreased by $471,000, or 24%, from $1,948,000 in the three months ended September 30, 2011, to $1,477,000 in the three months ended September 30, 2012 and decreased by $1,386,000, or 22%, from $6,400,000 in the nine months ended September 30, 2011 to $5,014,000 in the nine months ended September 30, 2012. General and administrative expenses consist primarily of salary expense, stock compensation expense, consulting fees and professional legal fees associated with our patent applications and maintenance, our corporate regulatory filing requirements, our corporate legal matters, and our business development initiatives. The decreases in general and administration expenses during the three and nine months ended September 30, 2012, as compared to the corresponding 2011 periods, were primarily due to lower legal costs associated with patent matters and lower employee compensation due to decreases in stock based compensation and the number of employees during the 2012 periods. These decreases were partially offset by higher corporate legal expenses associated with pursuing financing alternatives, including the financing arrangement we entered into with Cowen and Company LLC in April 2012.


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Decrease in Fair Value of Warrant Liability

During November 2011 we recorded a warrant liability reflecting the fair value of the warrants issued in our November 2011 financing. We determined the warrant to be a derivative instrument because it contains a specified anti-dilution provision that does not meet the "indexed to the company's own stock" exemption requirements in Accounting Standards Codification 815-40, "Derivatives and Hedging - Contracts in an Entity's own Stock." The warrant was classified as a liability, recorded at fair value as of the transaction date and is being marked to fair value through earnings each quarter. The fair value of the warrants decreased from $1,181,000 at June 30, 2012 to $1,072,000 at September 30, 2012 primarily due to decreases in the market price of our common stock and the . . .

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