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CCXI > SEC Filings for CCXI > Form 10-Q on 13-Nov-2012All Recent SEC Filings

Show all filings for CHEMOCENTRYX, INC.

Form 10-Q for CHEMOCENTRYX, INC.


13-Nov-2012

Quarterly Report


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

The following discussion and analysis should be read in conjunction with our financial statements and accompanying notes included in this Quarterly Report on Form 10-Q and the financial statements and accompanying notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, filed with the Securities and Exchange Commission, or SEC, on March 30, 2012.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as "may," "could," "will," "would," "should," "expect," "plan," "anticipate," "believe," "estimate," "intend," "predict," "seek," "contemplate," "potential" or "continue" or the negative of these terms or other comparable terminology. These forward-looking statements include, but are not limited to, statements about:

• the initiation, timing, progress and results of our preclinical studies and clinical trials, and our research and development programs;

• our ability to advance drug candidates into, and successfully complete, clinical trials;

• our collaborator's exercise of its license option;

• the commercialization of our drug candidates;

• the implementation of our business model, strategic plans for our business, drug candidates and technology;

• the scope of protection we are able to establish and maintain for intellectual property rights covering our drug candidates and technology;

• estimates of our expenses, future revenues, capital requirements and our needs for additional financing;

• the timing or likelihood of regulatory filings and approvals;

• our ability to maintain and establish collaborations or obtain additional government grant funding;

• our financial performance; and

• developments relating to our competitors and our industry.

These statements relate to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors that may cause actual results to differ materially from current expectations include, among other things, those included in "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, filed with the SEC on March 30, 2012 and in our Quarterly Report on Form 10-Q for the three month period ended March 31, 2012, filed with the SEC on May 10, 2012.

Any forward-looking statement in this Quarterly Report on Form 10-Q reflects our current views with respect to future events and is subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, industry and future growth. Given these uncertainties, you should not place undue reliance on these forward-looking statements. For all forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

ChemoCentryx®, the ChemoCentryx logo, Traficet™ and Traficet-EN™ are our trademarks in the United States, the European Community, Australia and Japan. EnabaLink ® and RAM® are our trademarks in the United States. Each of the other trademarks, trade names or service marks appearing in this Quarterly Report on Form 10-Q belongs to its respective holder.

Unless the context requires otherwise, in this Quarterly Report on Form 10-Q the terms "ChemoCentryx," "we," "us" and "our" refer to ChemoCentryx, Inc., a Delaware corporation, and our subsidiary taken as a whole.


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Overview

ChemoCentryx is a biopharmaceutical company focused on discovering, developing and commercializing orally-administered therapeutics to treat autoimmune diseases, inflammatory disorders and cancer. We currently have four drug candidates in clinical development, and expect to advance at least one additional drug candidate into clinical development in 2012. Our drug candidates include:

• Traficet-EN (CCX282, GSK1605786 or recent USAN accepted name - vercirnon), a CCR9 inhibitor and our most advanced drug candidate, currently in four pivotal Phase III clinical trials being conducted by our partner Glaxo Group Limited, or GSK, an affiliate of GlaxoSmithKline, for the treatment of patients with moderate-to-severe Crohn's disease;

• CCX140, a CCR2 inhibitor and our lead independent drug candidate, which successfully completed a Phase II clinical trial in type 2 diabetics and is currently in two Phase II clinical trials in patients with diabetic nephropathy, a form of kidney disease;

• CCX354 (GSK2941266), which successfully completed a Phase II proof-of-concept clinical trial for the treatment of rheumatoid arthritis, or RA and was subsequently exclusively licensed to GSK, now solely responsible for further clinical development;

• CCX168, currently in a Phase II proof-of-concept clinical trial for the treatment of anti-neutrophil cytoplasmic antibody, or ANCA, associated vasculitis;

• CCX872, our independent next generation CCR2 inhibitor for the treatment of metabolic diseases, currently expected to enter a Phase I clinical trial by the end of 2012;

• CCX507, our independent next generation CCR9 inhibitor for the treatment of inflammatory bowel disease, currently expected to enter a Phase I clinical trial by the end of 2012 or first quarter 2013; and

• CCX662/CCX650, our independent drug candidates for the treatment of glioblastoma multiforme, or GBM, and other cancers.

CCX140, CCX872, CCX507 and CCX662 are wholly owned and are being developed independently by us, while Traficet-EN, CCX354 and CCX168 are subject to our collaboration agreement with GSK. In December 2009 and November 2011, GSK exercised its options to obtain exclusive licenses for the further development and commercialization of Traficet-EN and CCX354, respectively. Upon exercise of these options, GSK assumed sole responsibility for the further development and commercialization of these drug candidates and each of their two respective back-up compounds. We are also advancing several additional independent drug candidates through preclinical development. In addition, our strategy has been to identify next generation compounds related to our drug candidates. All of our drug candidates, including those under our collaboration agreement with GSK, have been internally discovered.

In August 2006, we entered into our strategic alliance with GSK. We have received over $250 million from GSK, of which approximately $82 million was in the form of equity investments, and the balance from up-front and milestone payments, research funding and option exercise fees. Under the terms of our agreement with GSK, we are responsible for the discovery and development of small molecule antagonists targeting four defined chemokine and chemo-attractant receptor targets (CCR9, CCR1, C5aR and ChemR23) and for advancing them through clinical proof-of-concept. If we demonstrate successful clinical proof-of-concept, GSK is entitled to options to exclusively license drug candidates that are subject to the collaboration and two defined back-up compounds for each drug candidate for further development and commercialization on a worldwide basis. Upon exercising any of its options to drug candidates under the collaboration, GSK is solely responsible for all further clinical development and commercialization expenditures worldwide with respect to that drug candidate and its two designated back-up compounds. In exchange for the rights granted to GSK upon the exercise of its options, we are also entitled to receive regulatory and commercial milestone payments, as earned under the terms of our agreement, and royalties on the net sales of licensed drugs. The agreement contemplated up to six drug options, each of which covers a drug candidate against the four defined targets, including Traficet-EN (CCR9), CCX354 (CCR1), CCX168 (C5aR) and CCX832 (ChemR23), and their associated back-up compounds. The other two drug options were for second generation drug candidates and their associated back-up compounds. However, we and GSK chose not to nominate second generation drug candidates against any of the four defined targets during the agreement's research term, which has expired. In addition, based on unblinded data from a recently completed Phase I clinical trial of CCX832, in February 2012, we and GSK determined not to further advance the development of CCX832 or its two designated back-up compounds. CCX832 was our drug candidate that we intended to develop for certain skin inflammatory diseases. GSK has already exercised its options to Traficet-EN and CCX354 and each of their two respective defined back-up compounds. Thus, GSK's only remaining option is to CCX168 and its associated back-up compounds. If GSK does not exercise its option to CCX168, we will evaluate our alternatives for further development of this drug candidate, which may entail internally developing it or identifying other collaboration partners for its development.

Since commencing our operations in 1997, our efforts have focused on research, development and the advancement of our drug candidates into and through clinical trials. As a result, we have incurred significant losses. We have funded our operations primarily


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through the sale of convertible preferred and common stock, contract revenue under our collaborations, government contracts and grants and borrowings under equipment financing arrangements. In February 2012, we completed our initial public offering, or IPO, pursuant to which we received net proceeds of $45.0 million, after underwriting discounts, commissions and offering expenses. We also received gross proceeds of $12.0 million from concurrent private placements of common stock at the IPO price of $10.00 per share. In addition, the outstanding principal amount of $10.0 million and accrued interest under a convertible note we had issued to Techne Corporation, or Techne, one of our principal stockholders, automatically converted into shares of our common stock in connection with our IPO at a conversion price equal to the IPO price. As of September 30, 2012, we had an accumulated deficit of $124.4 million. We expect to continue to incur net losses as we develop our drug candidates, expand clinical trials for our drug candidates currently in clinical development, expand our research and development activities, expand our systems and facilities, seek regulatory approvals and engage in commercialization preparation activities in anticipation of Food and Drug Administration, or FDA, approval of our drug candidates. In addition, if a product is approved for commercialization, we will need to expand our organization. Significant capital is required to launch a product and many expenses are incurred before revenues are received. We are unable to predict the extent of any future losses or when we will become profitable, if at all.

Critical Accounting Policies and Significant Judgments and Estimates

There have been no material changes in our critical accounting policies during the nine months ended September 30, 2012, as compared to those disclosed in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Significant Judgments and Estimates" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, filed with the SEC on March 30, 2012.

JOBS Act

In April 2012, the JOBS Act was enacted. Section 107 of the JOBS Act provides that an emerging growth company can utilize the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for implementing new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to delay such adoption of new or revised accounting standards, and as a result, we may not implement new or revised accounting standards on the relevant dates on which adoption of such standards is required for other companies.

Subject to certain conditions set forth in the JOBS Act, as an emerging growth company, we intend to rely on certain of these exemptions, including without limitation, providing an auditor's attestation report on our system of internal controls over financial reporting pursuant to Section 404 and implementing any requirement that may be adopted regarding mandatory audit firm rotation or a supplement to the auditor's report providing additional information about the audit and the financial statements (auditor discussion and analysis). These exemptions will apply for a period of five years following the completion of our initial public offering although if the market value of our common stock that is held by nonaffiliates exceeds $700 million as of any June 30th before that time, we would cease to be an emerging growth company as of the following December 31st.

Results of Operations

Revenue

We have not generated any revenue from product sales. For the three and nine
months ended September 30, 2012, our revenue was derived from the recognition of
up-front payments received from GSK. Total revenues for the period, as compared
to the same period in the prior year, were as follows (in thousands):



                                         Three Months Ended          Nine Months Ended
                                            September 30,              September 30,
                                         2012           2011         2012          2011
    GSK:
    Contract revenue                   $      -        $   534     $     -        $ 2,900
    Recognition of up-front payments       1,128           907        3,274         2,721

    Total revenues                     $   1,128       $ 1,441     $  3,274       $ 5,621

    Dollar decrease                    $    (313 )                 $ (2,347 )
    Percentage decrease                      (22 )%                     (42 )%


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The decreases in revenue from 2011 to 2012 for both the three and nine month periods were primarily due to lower funding of clinical support from GSK for CCX354 and CCX168 partially offset by a slight increase in revenue relating to the upfront payment from GSK following our decision not to advance CCX832, thereby shortening the term of our performance obligation.

Research and development expenses

Research and development expenses represent costs incurred to conduct research into the discovery and development of our understanding of the chemokine system; the discovery and development of novel small molecule therapeutics, such as Traficet-EN and CCX140; the development of our suite of proprietary drug discovery technologies, known collectively as EnabaLink, which includes our proprietary Reverse Activation of Migration, or RAM, screening technology and preclinical studies and clinical trials of our drug candidates. We expense all research and development expenses as they are incurred. These expenses consist primarily of salaries and related benefits, including stock-based compensation, third-party contract costs relating to research, formulation, manufacturing, preclinical study and clinical trial activities, laboratory consumables, and allocated facility costs. Total research and development expenses for the period, as compared to the same period in the prior year, were as follows (in thousands):

                                          Three Months Ended          Nine Months Ended
                                             September 30,              September 30,
                                          2012           2011         2012          2011
    Research and development expenses   $   8,746       $ 8,321     $ 25,349      $ 22,914
    Dollar increase                     $     425                   $  2,435
    Percentage increase                         5 %                       11 %

The increases in expense from 2011 to 2012 for both the three and nine month periods were primarily due to an increase in expenses relating to patient enrollment in our Phase II trials of CCX140 in diabetic nephropathy and an increase in expenses associated with advancing our independent next-generation drug candidates into the clinic. These increases were partially offset by a decrease in expense associated with the completion of our Phase II clinical trial of CCX354 in rheumatoid arthritis in 2011 and the subsequent transfer of CCX354 to GSK following GSK's exercise of its option to CCX354 in November 2011. In addition, CCX168 associated expenses were lower in 2012, as 2011 included the recognition of Phase II study start-up expenses which were not recurring in 2012. We track specific project expenses that are directly attributable to our clinical development candidates and preclinical candidates that have been nominated and selected for further development. Such project specific expenses include third-party contract costs relating to formulation, manufacturing, preclinical studies and clinical trial activities. Unlike our early stage research and drug discovery programs, we allocate research and development salaries, benefits or indirect costs to our development candidates and we have included such costs in the project specific expenses. All remaining research and development expenses are reflected in "Other" which represents early stage drug discovery programs. Such expenses include allocated employee salaries and related benefits, stock-based compensation, consulting and contracted services to supplement our in-house laboratory activities, laboratory consumables and allocated facility costs associated with these earlier stage programs.

At any given time, we typically have several active early stage research and drug discovery projects. Our internal resources, employees and infrastructure are not directly tied to any individual research or drug discovery project and are typically deployed across multiple projects. As such, we do not maintain information regarding these costs incurred for our early stage research and drug discovery programs on a project specific basis. The following table summarizes our research and development expenses by project (in thousands):

                                                    Three Months Ended            Nine Months Ended
                                                      September 30,                 September 30,
                                                    2012           2011          2012           2011
Development Candidate (Target)
CCX140 (CCR2)                                    $    3,503       $ 3,294      $   9,837      $  6,271
CCX872 (CCR2)                                           673            -           2,528            -
CCX507 (CCR9)                                           475            -           2,722            -
CCX662 (CXCR7)                                          387           216          2,591           795
CCX168 (C5aR)                                         1,210         1,055          1,993         3,304
CCX354 (CCR1)                                            -            703            109         3,430
CCX832 (ChemR23)(1)                                      13           435            158         1,507
Other (CCR2 3G, CCR6, CCR4, CXCR6, other)             2,485         2,618          5,411         7,607

Total research and development                   $    8,746       $ 8,321      $  25,349      $ 22,914

(1) In February 2012, we and GSK determined not to further advance the development of CCX832 or its two designated back-up compounds.


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We expect our research and development expenses to increase as we advance our development programs further and increase the number and size of our clinical trials. The process of conducting preclinical studies and clinical trials necessary to obtain regulatory approval is costly and time consuming. We or our partners may never succeed in achieving marketing approval for any of our drug candidates. The probability of success for each drug candidate may be affected by numerous factors, including preclinical data, clinical data, competition, manufacturing capability and commercial viability. For the remaining product option covered under our strategic alliance with GSK, for which we receive milestone payments, we are responsible for development through clinical proof-of-concept, after which time GSK has an option to an exclusive license on a compound by compound basis. Our strategy includes entering into additional partnerships with third parties for the development and commercialization of some of our independent drug candidates that are not subject to our alliance with GSK.

Most of our product development programs are at an early-to-mid-stage; therefore the successful development of our drug candidates is highly uncertain and may not result in approved products. Completion dates and completion costs can vary significantly for each drug candidate and are difficult to predict for each product. Given the uncertainty associated with clinical trial enrollments and the risks inherent in the development process, we are unable to determine the duration and completion costs of the current or future clinical trials of our drug candidates or if, or to what extent, we will generate revenues from the commercialization and sale of any of our drug candidates. We anticipate we will make determinations as to which programs to pursue and how much funding to direct to each program on an ongoing basis in response to the scientific and clinical success of each drug candidate, as well as ongoing assessment as to each drug candidate's commercial potential. We will need to raise additional capital or may seek additional strategic alliances in the future in order to complete the development and commercialization of our drug candidates, including CCX140, our lead independent drug candidate.

General and administrative expenses

Total general and administrative expenses were as follows (in thousands):

                                           Three Months Ended          Nine Months Ended
                                              September 30,              September 30,
                                           2012           2011         2012          2011
   General and administrative expenses   $   2,619       $ 1,772     $   7,654      $ 5,721
   Dollar increase                             847                       1,933
   Percentage increase                          48 %                        34 %

General and administrative expenses consist primarily of salaries and related benefits, including stock-based compensation and travel expenses, in executive, finance, business and corporate development and other administrative functions. Other general and administrative expenses include allocated facility-related costs not otherwise included in research and development expenses, legal costs of pursuing patent protection of our intellectual property, and professional fees for accounting, tax, and legal services.

The increases from 2011 to 2012 for both the three and nine month periods were primarily due to increased stock based compensation expense for 2012 stock option grants in addition to higher professional service fees relating to fulfilling our reporting obligations as a public company. We expect that general and administrative expenses will increase in the future as we expand our operating activities and incur additional costs associated with being a public company. These public company related increases will likely include legal fees, accounting fees, directors' and officers' liability insurance premiums and investor relations related fees.

Interest income (expense)

Interest income (expense), primarily consists of interest income earned on our marketable securities and interest expense incurred on our equipment financing obligations and convertible note. Total interest income (expense), net, as compared to prior years was as follows (in thousands):

                                                 Three Months Ended               Nine Months Ended
                                                    September 30,                   September 30,
                                                 2012             2011           2012             2011
Interest income                               $      141         $   95        $    411          $  319
Interest expense                                     (20 )         (117 )          (776 )          (170 )
Other Income                                          -              16              -               16

Total interest income (expense) and other
income, net                                   $      121         $   (6 )      $   (365 )        $  165

Dollar increase (decrease)                    $      127                       $   (530 )
Percentage increase (decrease)                     2,117 %                         (321 )%


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Interest expense for the three months ended September 30, 2012 was primarily related to our interest expense due on our equipment lines of credit. Interest expense increased from 2011 to 2012 for the nine month period primarily due to the change in fair value of the convertible note we issued to Techne in September 2011 which was automatically converted into common stock as a result of our IPO in February 2012. In addition, interest income increased for both the three and nine month periods ended September 30, 2012 due to increased cash and investment balances following our IPO in February 2012.

Liquidity and Capital Resources

As of September 30, 2012, we had approximately $128.2 million in cash, cash
equivalents and investments. The following table shows a summary of our cash
flows for the nine months ended September 30, 2012 and 2011 (in thousands).



                                                Nine Months Ended
                                                  September 30,
                                               2012           2011
                Cash provided by (used in)
                Operating activities         $ (24,736 )    $ (12,904 )
                Investing activities           (59,230 )       (3,295 )
                Financing activities            56,926         11,484

Operating activities. Net cash used in operating activities was $24.7 million for the nine months ended September 30, 2012, compared to net cash used of $12.9 million for the same period in 2011. This change was primarily due to receipt of . . .

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