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

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Form 10-Q for ENDOCYTE INC


13-Nov-2012

Quarterly Report


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

This quarterly report on Form 10-Q contains certain statements that are forward-looking statements within the meaning of federal securities laws. When used in this report, the words "may," "will," "should," "could," "would," "anticipate," "estimate," "expect," "plan," "believe," "predict," "potential," "project," "target," "forecast," "intend" and similar expressions are intended to identify forward-looking statements. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include the important risks and uncertainties that may affect our future operations as discussed in Part II
- Item 1A of this Quarterly Report on Form 10-Q and any other filings made with the Securities and Exchange Commission. Readers of this report are cautioned not to place undue reliance on these forward-looking statements. While we believe the assumptions on which the forward-looking statements are based are reasonable, there can be no assurance that these forward-looking statements will prove to be accurate. This cautionary statement is applicable to all forward-looking statements contained in this report.

Overview

We are a biopharmaceutical company developing targeted therapies for the treatment of cancer and inflammatory diseases. We use our proprietary technology to create novel small molecule drug conjugates, or SMDCs, and companion imaging diagnostics. Our SMDCs actively target receptors that are over-expressed on diseased cells, relative to healthy cells. This targeted approach is designed to enable the treatment of patients with highly active drugs at greater doses, delivered more frequently, and over longer periods of time than would be possible with the untargeted drug alone. We are also developing companion imaging diagnostics for each of our SMDCs that are designed to identify the patients whose disease over-expresses the target of the therapy and who are therefore more likely to benefit from treatment. This combination of an SMDC with its companion imaging diagnostic is designed to personalize the treatment of patients by delivering effective therapy, selectively to diseased cells, in the patients most likely to benefit.

Our lead SMDC candidate, vintafolide (EC145), targets the folate receptor, which is frequently over-expressed on cancer cells. We have chosen platinum-resistant ovarian cancer, or PROC, a highly treatment-resistant disease, as our lead indication for development of vintafolide because of the high unmet need in treating this patient population and the high percentage of ovarian cancer patients whose tumors over-express the targeted folate receptor. We conducted a multicenter, open-label randomized phase 2 clinical trial of vintafolide in 149 women with PROC, referred to as the PRECEDENT trial. Based upon our findings from the PRECEDENT trial, we initiated enrollment of our PROCEED trial, a phase 3 registration trial in women with PROC, in the first half of 2011. However, we suspended enrollment for several months due to global shortages of pegylated liposomal doxorubicin, or PLD (marketed in the United States, or U.S., under the brand name Doxil and outside the U.S. under the brand name Caelyx). We secured a sufficient supply of PLD to resume PROCEED enrollment in the U.S. and select sites in Europe. In October, Janssen Products, LP announced that full access to PLD supply in the U.S. is sufficient to bridge to the availability of new supply. This new supply solution is under expedited review by the FDA. Janssen Cilag International NV also announced in October the EU regulatory approval of a new supply solution. Sustainable commercial supply will not be available immediately so we will activate additional sites in Europe as supply allows. In 2012, we have been increasing the amount of time and resources, both financial and personnel, devoted to our vintafolide program in PROC.

We are planning to file marketing authorization applications to the European Medicines Agency, or EMA, for vintafolide for the treatment of PROC and etarfolatide (EC20) and folic acid for patient selection in the fourth quarter of 2012. These filings will be based on the results and supplemental analyses of our PRECEDENT trial. Our filings will be supported by four clinical studies: a Phase 1 study in solid tumors, two single agent, single-arm Phase 2 studies in ovarian cancer and non-small cell lung cancer, or NSCLC, and the PRECEDENT trial, a randomized study in PROC. The results of the PRECEDENT trial demonstrated a statistically significant delay in disease progression or death in the overall population, with the largest improvement observed in the FR(++) patient population, those with all tumors positive for the folate receptor. Women with FR(++) platinum resistant ovarian cancer who received vintafolide-based therapy experienced a 62 percent decrease in their risk of progression [HR 0.381, p= 0.018] compared to women receiving chemotherapy alone. Median progression free survival (PFS; the time without disease progressing) in the vintafolide based treatment arm was 5.5 months compared to 1.5 months of women who received chemotherapy alone. Tumor shrinkage (overall response rate) was observed in 17.3 percent of women receiving the vintafolide-based therapy compared to 6.7 percent in patients treated with chemotherapy alone.

In April 2012, we entered into a worldwide collaboration agreement with Merck Sharp & Dohme Research GmbH, a subsidiary of Merck & Co, Inc., or Merck, regarding the development and commercialization of vintafolide. The agreement grants Merck worldwide rights to develop and commercialize vintafolide. We received a non-refundable $120.0 million upfront payment in the second quarter of 2012 and are eligible for milestone payments of up to $880.0 million based on the successful achievement of development, regulatory and commercialization goals for vintafolide in a total of six different cancer indications. In addition, following regulatory approval and launch of vintafolide, we will split U.S. earnings under the collaboration arrangement on a 50/50 basis with Merck and will receive a double-digit percentage royalty on sales of the product in the rest of the world. We have retained the right (which we can opt out of) to co-promote vintafolide with Merck in the U.S. and Merck has the exclusive right to promote vintafolide in the rest of the world. We will be responsible for the majority of funding and completion of the ongoing Phase 3 clinical trial of vintafolide for the treatment of patients with PROC. We will be responsible for the execution of the TARGET trial of vintafolide for the treatment of second line non-small cell lung cancer, or NSCLC. Merck will be responsible for the costs of the TARGET trial and for all other development activities and costs and will have all decision rights with respect to the development and commercialization of vintafolide. We will remain responsible for the development, manufacture and commercialization worldwide of etarfolatide. Merck has the right to terminate the collaboration agreement on 90 days notice. Each party has the right to terminate the agreement due to the material breach or insolvency of the other party. We have the right to terminate the agreement in the event that Merck challenges an Endocyte patent right relating to vintafolide. Upon termination of the agreement, depending upon the circumstances, the parties have varying rights and obligations with respect to the continued development and commercialization of vintafolide and, in the case of termination for cause by Merck, certain royalty obligations and U.S. profit and loss sharing.

In addition to PROC, Merck will be pursuing clinical trials of vintafolide in other indications and we also plan to advance other SMDCs and companion imaging diagnostics through development as preclinical and clinical trial results merit and funding permits. We began enrollment in the TARGET trial, a randomized phase 2b trial of vintafolide and etarfolatide for the treatment of second line NSCLC in the second quarter of 2012.

We have never been profitable and have incurred significant net losses since our inception. As of September 30, 2012, we had a retained deficit of $155.0 million. We expect to continue to incur significant and increasing operating expenses for the next several years as we pursue the advancement of our SMDCs and companion imaging diagnostics through the research, development, regulatory and commercialization processes.

We expect that our current cash position of $204.7 million at September 30, 2012, which includes cash equivalents and investments, is sufficient to fund our current operating plan, including completion of PROCEED, the phase 3 clinical trial of vintafolide and etarfolatide, through the availability of final primary PFS data from that study which is anticipated to be in the first half of 2014, assuming the availability of PLD, the filing of applications to the EMA for conditional marketing authorization for vintafolide, etarfolatide and folic acid, and the advancement of our earlier stage pipeline. If we were to receive conditional marketing approval in Europe of vintafolide and etarfolatide prior to the completion of the PROCEED study, this could impact the enrollment timeline as patients to be enrolled in European sites would transition from clinical trials to commercial use. This could delay the availability of final data from the PROCEED trial. We may be able to mitigate this potential delay by adding clinical trial sites in locations where conditional marketing approval has not been granted. If we initiate significant investments in our earlier stage pipeline and commercial capabilities, we may require additional financing through public or private equity or debt financings or other sources, such as other strategic partnerships or licensing arrangements, to fund the additional activities. Such funding may not be available on favorable 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 strategies.

Critical Accounting Policies

While our significant accounting policies are described in more detail in our 2011 Annual Report on Form 10-K, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our condensed financial statements.

Revenue Recognition

We recognize revenues from license and collaboration agreements when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the fee is fixed or determinable, and there is reasonable assurance that the related amounts are collectible in accordance with the Financial Accounting Standards Board, or FASB, Accounting Standard Codification, or ASC, Topic 605, Revenue Recognition . Our license and collaboration agreements may contain multiple elements, including grants of licenses to intellectual property rights and agreement to provide research and development services. The deliverables under arrangements are evaluated under ASC Subtopic 605-25, Multiple-Element Arrangements. Effective January 1, 2011, we adopted an accounting standard update that amends the guidance on accounting for arrangements with multiple deliverables. Pursuant to the new standard, each required deliverable is evaluated to determine whether it qualifies as a separate unit of accounting based on whether the deliverable has "stand-alone value" to the customer. The arrangement's consideration that is fixed or determinable is then allocated to each separate unit of accounting based on the relative selling price of each deliverable. In general, the consideration allocated to each unit of accounting is recognized as the related goods or services are delivered, limited to the consideration that is not contingent upon future deliverables. When evaluating multiple element arrangements, we consider whether the components of the arrangement represent separate units of accounting. This evaluation requires subjective determinations and requires management to make judgments about the selling price of the individual elements and whether such elements are separable from the other aspects of the contractual relationship.

Upfront payments for licensing our intellectual property are evaluated to determine if the licensee can obtain stand-alone value from the license separate from the value of the research and development services and other deliverables in the arrangement to be provided by us. If we determine that the license does not have stand-alone value separate from the research and development services, the license and the services are combined as one unit of account and upfront payments are recorded as deferred revenue in the balance sheet and are recognized as revenue over the estimated performance period that is consistent with the term of the research and development obligations contained in the collaboration agreement. When stand-alone value is identified, the related consideration is recorded as revenue in the period in which the license or other intellectual property rights are issued.

In those circumstances where research and development services are combined with the license, and multiple services are being performed such that a common output measure to determine a pattern of performance cannot be discerned, we recognize amounts received on a straight line basis over the performance period. Such amounts are recorded as collaboration revenue. Subsequent reimbursement payments, which are contingent upon our future research and development expenditures, will be recorded as collaboration revenue and will be recognized on a straight-line basis over the performance period using the cumulative catch up method. The costs associated with these activities are reflected as a component of research and development expense in the statements of operations in the period incurred.

Milestone payments under collaborative arrangements are triggered either by the results of our research and development efforts or by specified sales results by a third-party collaborator. Milestones related to our development-based activities may include initiation of various phases of clinical trials, successful completion of a phase of development or results from a clinical trial, and applications and acceptance for product approvals by regulatory agencies. Due to the uncertainty involved in meeting these development-based milestones, the determination is made at the inception of the collaboration agreement whether the development-based milestones are considered to be substantial (i.e. not just achieved through passage of time). In addition, the amounts of the payments assigned thereto are considered to be commensurate with the enhancement of the value of the delivered intellectual property as a result of our performance. Our involvement is necessary to the achievement of development-based milestones. We would account for development-based milestones as revenue upon achievement of the substantive milestone events. Milestones related to sales-based activities may be triggered upon events such as the first commercial sale of a product or when sales first achieve a defined level. Under our collaboration agreement with Merck, Merck will take the lead in commercialization activities in certain territories and we have retained the right (which we can opt out of) to co-promote vintafolide in the U.S. with Merck. These sales-based milestones would be achieved after the completion of our development activities. We would account for the sales-based milestones in the same manner as royalties, with revenue recognized upon achievement of the milestone.

Results of Operations



Comparison of Three Months Ended September 30, 2011 and 2012



                                  Three Months Ended         Increase/
                                     September 30,           (Decrease)        %
                                   2011          2012
                                                  (In thousands)
Statement of operations data:
Collaboration Revenue           $        -     $ 12,415     $     12,415       100 %
Operating expenses:
Research and development             8,915        9,930            1,015        11 %
General and administrative           2,723        3,815            1,092        40 %

Total operating expenses            11,638       13,745            2,107        18 %

Loss from operations               (11,638 )     (1,330 )        (10,308 )      89 %
Interest income                         35           96               61       174 %
Interest expense                      (449 )         (1 )           (448 )     100 %
Other expense, net                     (18 )         (4 )            (14 )      78 %

Net loss                        $  (12,070 )   $ (1,239 )   $    (10,831 )      90 %

Revenue

Revenue of $12.4 million was recorded in the three months ended September 30, 2012 related to the collaboration with Merck. This revenue is related to an amortization of both the $120.0 million upfront license payment, $4.8 million in reimbursable development expenditures incurred in periods prior to the third quarter 2012 and $4.6 million of reimbursable development expenditures incurred in the third quarter 2012. The amortization for both the upfront license fee and ongoing research and development services will be recognized as revenue ratably over a performance period which began on April 27, 2012, and concludes at the end of 2014.

Research and Development

The increase in research and development expense for the three months ended September 30, 2012 compared to the three months ended September 30, 2011 was attributable to a $0.5 million increase in product development expenses and a $0.5 million increase in compensation expenses, including stock-based compensation expense, salaries expense and increase in bonus accrual. The increase in product development expenses was primarily due to an increase of $0.8 million in clinical trial expenses for the PROCEED and TARGET trials and $0.4 million in development costs for the earlier stage pipeline, partially offset by a $0.8 million decrease in expenses related to the anticipated regulatory filing with the EMA for vintafolide and etarfolatide, including process and method validations for vintafolide and etarfolatide which were performed in Q3 2011. Included in research and development expenses for the three months ended September 30, 2012 were $4.6 million of expenses that are reimbursable from Merck under the collaboration agreement for vintafolide.

Included in research and development expense were stock-based compensation charges of $293,000 and $458,000 for the three months ended September 30, 2011 and 2012, respectively.

Research and development expenses include expense of $172,000 and $189,000 for the three months ended September 30, 2011 and 2012, respectively, for company-funded research at Purdue University, the primary employer of our Chief Science Officer.

General and Administrative

The increase in general and administrative expenses in the three months ended September 30, 2012 compared to the three months ended September 30, 2011 was primarily attributable to an increase in legal fees associated with obtaining patent and trademark rights, expenses associated with being a public company, expenses attributable to establishing commercial capability and compensation expenses.

Included in general administrative expenses were stock-based compensation charges of $274,000 and $283,000 for the three months ended September 30, 2011 and 2012, respectively.

Interest Expense

The decrease in interest expense in the three months ended September 30, 2011 compared to the three month ended September 30, 2012 was due to our repayment in full and termination of our $15.0 million credit facility. Our average loan balances under the credit facility was $13.0 million for the three months ended September 30, 2011.

Comparison of Nine Months Ended September 30, 2011 Compared to Nine Months Ended
September 30, 2012



                                   Nine Months Ended         Increase/
                                     September 30,           (Decrease)        %
                                  2011          2012
                                                  (In thousands)
Statement of operations data:
Collaboration Revenue           $       -     $  20,228     $     20,228        100 %
Operating expenses:
Research and development           21,075        25,153            4,078         19 %
General and administrative          7,138        10,104            2,966         42 %

Total operating expenses           28,213        35,257            7,044         25 %

Loss from operations              (28,213 )     (15,029 )        (13,184 )       47 %
Interest income                        91           137               46         51 %
Interest expense                   (1,637 )        (628 )         (1,009 )       62 %
Other expense, net                    (19 )        (923 )            904       4758 %

Net loss                        $ (29,778 )   $ (16,443 )   $    (13,335 )       45 %

Revenue

Revenue of $20.2 million was recorded in the nine months ended 2012 related to the collaboration with Merck. This revenue is related to an amortization of both the $120.0 million upfront license payment, $1.7 million in reimbursable development expenditures incurred in periods prior to the nine months ended September 30, 2012 and $7.7 million of reimbursable development expenditures incurred in the nine months ended September 30, 2012. The amortization for both the upfront license fee and ongoing research and development services will be recognized as revenue ratably over the performance period.

Research and Development

The increase in research and development expense for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 was primarily due to a $2.5 million increase in product development expenses and a $1.6 million increase in compensation expenses. The increase in product development expenses was due to a $1.8 million increase in expenses related to the anticipated regulatory filing with the EMA for vintafolide and etarfolatide, including process and method validations for vintafolide and etarfolatide, and an increase in development costs for the earlier stage pipeline of $0.7 million. The increase in compensation expense included a $1.9 million increase in stock-based compensation expense, increased salary expense and an increase in bonus accrual, partially offset by a $0.3 million decrease due to severance compensation and related stock-based compensation expense recorded in the nine months ended September 30, 2011. Included in research and development expenses for the nine months ended September 30, 2012 are $7.7 million of expenses that were reimbursable from Merck under the collaboration agreement for vintafolide.

Included in research and development expense were stock-based compensation charges of $751,000 and $1,374,000 for the nine months ended September 30, 2011 and 2012, respectively, which for 2011 included a $133,000 charge relating to severance-related stock-based compensation.

Research and development expenses include expenses of $345,000 and $582,000 for the nine months ended September 30, 2011 and 2012, respectively, for company-funded research at Purdue University, the primary employer of our Chief Science Officer.

General and Administrative

The increase in general and administrative expenses in the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 was primarily attributable to an increase in legal fees associated with obtaining patent and trademark rights, expenses associated with being a public company, expenses attributable to establishing commercial capability and compensation expenses.

Included in general administrative expenses were stock-based compensation charges of $595,000 and $874,000 for the nine months ended September 30, 2011 and 2012, respectively.

Interest Expense

The increase in interest expense in the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 was due to the decreased borrowings under our credit facility and the interest payable on outstanding subordinated notes which were converted to common shares at the initial public offering. Our average loan balances were $15.6 million and $7.5 million for the nine months ended September 30, 2011 and 2012, respectively.

Other Income, Net

Other income, net increased in the nine months ended September 30, 2012 compared to September 30, 2011 due to loss on debt extinguishment of $1.0 million we recognized as a result of terminating our credit facility. The loss included a 5% prepayment fee on the outstanding balance of $0.6 million and the write off of unamortized deferred financing fees and discounts of $0.4 million.

Liquidity and Capital Resources

We have funded our operations principally through private placements of equity and debt securities, revenue from strategic collaborations, revenue from grants, loans, the two public offerings of common stock we completed in 2011 and the non-refundable $120.0 million upfront payment from Merck that we received in May 2012. As of September 30, 2012, we had cash, cash equivalents and investments of $204.7 million.

In June 2012, we paid the entire outstanding balance, terminated our $15.0 million credit facility, and recorded a loss on debt extinguishment of $1.0 million, which included a 5% prepayment fee of $0.6 and the write off of unamortized deferred financing fees and discounts of $0.4 million.

We expect that our cash position at September 30, 2012 is sufficient to fund our current operating plan, which includes completion of PROCEED, the phase 3 clinical trial of vintafolide and etarfolatide, through the availability of final primary PFS data from that study which is anticipated to be in the first half of 2014, assuming the availability of PLD, the filing of applications to the EMA for conditional marketing authorization for vintafolide, etarfolatide and folic acid, and the advancement of our earlier stage pipeline.

The following table sets forth the primary sources and uses of cash for each of the periods set forth below:

                                                         Nine Months Ended
                                                           September 30,
                                                        2011           2012
                                                           (In thousands)
Net cash provided by (used in) operating activities   $ (23,916 )   $   91,917
Net cash used in investing activities                   (72,603 )     (103,367 )
Net cash provided by (used in) financing activities     146,288        (13,177 )
Effect of exchange rate                                      (1 )            3

Net increase in cash and cash equivalents             $  49,768     $  (24,624 )

Operating Activities

The use of cash in 2011 primarily resulted from our net loss adjusted for non-cash items and changes in operating assets and liabilities. The increase in cash provided by operating activities for the nine months ended September 30, 2012 resulted from deferred revenue related to the portion of the $120.0 million upfront payment from Merck and the reimbursable research and development expenditures that will be recognized ratably over the performance period.

Investing Activities

The cash used in investing activities for each of the nine month periods was due primarily to the net result of maturities and sales of investments, and by capital expenditures for equipment of $199,000 in 2011 and $1.6 million in 2012.

Financing Activities

The cash used in financing activities in the nine months ended September 30, 2012 primarily consisted of the $13.5 million prepayment of our credit facility, which included a 5% prepayment fee of $0.6 million, which was partially offset by $0.4 million received from the exercise of stock options. The cash provided by financing activities in the nine months ended September 30, 2011 consisted of . . .

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