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CYCC > SEC Filings for CYCC > Form 10-Q on 16-Nov-2012All Recent SEC Filings

Show all filings for CYCLACEL PHARMACEUTICALS, INC.

Form 10-Q for CYCLACEL PHARMACEUTICALS, INC.


16-Nov-2012

Quarterly Report


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

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, including, without limitation, Management's Discussion and Analysis of Financial Condition and Results of Operations, contains "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). We intend that the forward-looking statements be covered by the safe harbor for forward-looking statements in the Exchange Act. The forward-looking information is based on various factors and was derived using numerous assumptions. All statements, other than statements of historical fact, that address activities, events or developments that we intend, expect, project, believe or anticipate will or may occur in the future are forward-looking statements. Such statements are based upon certain assumptions and assessments made by our management in light of their experience and their perception of historical trends, current conditions, expected future developments and other factors they believe to be appropriate. These forward-looking statements are usually accompanied by words such as "believe," "anticipate," "plan," "seek," "expect," "intend" and similar expressions.

Forward-looking statements necessarily involve risks and uncertainties, and our actual results could differ materially from those anticipated in the forward looking statements due to a number of factors, including those set forth in Part I, Item 1A, entitled "Risk Factors," of our Annual Report on Form 10-K for the year ended December 31, 2011, as updated and supplemented by Part II, Item 1A, entitled "Risk Factors," of our Quarterly Reports on Form 10-Q, and elsewhere in this report. These factors as well as other cautionary statements made in this Quarterly Report on Form 10-Q, should be read and understood as being applicable to all related forward-looking statements wherever they appear herein. The forward-looking statements contained in this Quarterly Report on Form 10-Q represent our judgment as of the date hereof. We encourage you to read those descriptions carefully. We caution you not to place undue reliance on the forward-looking statements contained in this report. These statements, like all statements in this report, speak only as of the date of this report (unless an earlier date is indicated) and we undertake no obligation to update or revise the statements except as required by law. Such forward-looking statements are not guarantees of future performance and actual results will likely differ, perhaps materially, from those suggested by such forward-looking statements. In this report, "Cyclacel," the "Company," "we," "us," and "our" refer to Cyclacel Pharmaceuticals, Inc.

Overview

We are a development-stage biopharmaceutical company dedicated to the development and commercialization of small-molecule drugs that target the various phases of the cell cycle for the treatment of cancer and other serious diseases, particularly those of high unmet medical need.

Our core area of expertise is in cell cycle biology and we focus primarily on the development of orally-available anticancer agents that target the cell cycle with the aim of slowing the progression or shrinking the size of tumors, and enhancing the quality of life and improving survival rates of cancer patients. We have generated several families of anticancer drugs that act on the cell cycle including nucleoside analogues, cyclin dependent kinase, or CDK, inhibitors and Aurora kinase/Vascular Endothelial Growth Factor Receptor 2 or AK/VEGFR 2 inhibitors and Plk inhibitors. Although a number of pharmaceutical and biotechnology companies are currently attempting to develop nucleoside analogues, CDK inhibitor and AK inhibitor drugs, we believe that our drug candidates are differentiated in that they are orally-available and interact with unique target profiles and mechanisms. For example we believe that our sapacitabine is the only orally-available nucleoside analogue presently being tested in a Phase 3 trial in AML and in Phase 2 for acute myeloid leukemia ("AML"), myelodysplastic syndromes ("MDS") and non-small cell lung cancer ("NSCLC") and seliciclib is the most advanced orally-available CDK inhibitor currently in Phase 2 trials. Our resources are primarily directed towards advancing our lead drug candidate sapacitabine through in-house development activities although we are also progressing our earlier stage novel drug series through working with external collaborators but with limited investment by us.


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We have worldwide rights to commercialize sapacitabine and seliciclib and our business strategy is to enter into selective partnership arrangements with these programs. Taken together, our pipeline covers all four phases of the cell cycle, which we believe will improve the chances of successfully developing and commercializing novel drugs that work on their own or in combination with approved conventional chemotherapies or with other targeted drugs to treat human cancers.

Sapacitabine is being evaluated in the SEAMLESS Phase 3 trial being conducted under a Special Protocol Assessment agreement with the US Food and Drug Administration ("FDA") for the front-line treatment of AML in the elderly and in Phase 2 studies for MDS, lung cancer and chronic lymphocytic leukaemia. Additionally, sapacitabine has been shown to have increased activity in cancer cells with BRCA- or Homologous Recombinant repair-deficient backgrounds, including ovarian cancer cell lines. In June, we reported new data at the American Society of Clinical Oncology Annual Meeting from an on-going multicenter Phase 2 randomized trial of oral sapacitabine capsules, in older patients with MDS after treatment failure of front-line hypomethylating agents, such as azacitidine (Vidaza®) and/or decitabine (Dacogen®). Median overall survival to date for all patients is 252 days or approximately 8.4 months. We will initiate regulatory discussions regarding an appropriate registration plan in this setting after a dosing schedule is selected.

We have ongoing clinical programs in development awaiting further data. Once data becomes available and is reviewed, we will determine the feasibility of pursuing further development and/or partnering these assets, including sapacitabine in combination with seliciclib and seliciclib in NSCLC and nasopharyngeal cancer, or NPC. In addition, we marketed directly in the United States Xclair® Cream for radiation dermatitis and Numoisyn® Liquid and Numoisyn® Lozenges for xerostomia. However, the distribution agreements for the promotion and sale of these products terminated effective September 30, 2012.

From our inception in 1996 through September 30, 2012, we have devoted substantially all our efforts and resources to our research and development activities. We have incurred significant net losses since inception. As of September 30, 2012, our accumulated deficit during the development stage was $265.5 million. We expect to continue incurring substantial losses for the next several years as we continue to develop our clinical and pre-clinical drug candidates. Our operating expenses are comprised of research and development expenses and general and administrative expenses.

To date, we have not generated significant product revenue but have financed our operations and internal growth through private placements, registered direct financings, licensing revenue, collaborations, interest on investments, government grants and research and development tax credits. We have recognized revenues from continuing operations from inception through September 30, 2012, totaling $6.8 million, which consists of $3.1 million of fees under collaborative agreements and $3.7 million of grant revenue from various United Kingdom and European government grant awards. We have also recognized $19.2 million in research and development tax credits from inception through September 30, 2012, which are reported as income tax benefits on the consolidated statements of operations, from the United Kingdom's tax authority, H.M. Revenue & Customs since inception. In addition, we have recognized revenue from discontinued operations from inception through September 30, 2012 of approximately $3.6 million from sales of commercial products.

Recent Developments

Reverse Stock Split

On August 24, 2012, we effected a 1-for-7 reverse stock split of shares of common stock in order to increase the per share trading price of our shares of common stock to satisfy the $1.00 minimum bid requirement for continued listing on the NASDAQ Global Market. We received notification from NASDAQ that as of September 11, 2012, we evidenced a closing bid of our common stock price in excess of the $1.00 minimum requirement for at least 10 consecutive trading days. Accordingly, we have regained compliance with Listing Rule 5450(a)(1). All share and per share information presented gives effect to the reverse stock split, which occurred on August 24, 2012.


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Termination and Settlement Agreement

On August 10, 2012, we entered into an agreement with Sinclair Pharmaceuticals Limited ("Sinclair") to terminate, effective September 30, 2012, the distribution agreements relating to the promotion and sale of Xclair®, Numoisyn® Lozenges and Numoisyn® Liquid. The agreement includes a minimum royalty arrangement based on future net revenues, under which Sinclair will pay us a minimum of approximately $1.0 million in quarterly installments over the next three years ending on September 30, 2015. The operating results associated with the promotion and sale of Xclair®, Numoisyn® Liquid and Numoisyn® Lozenges are classified within Income (loss) from discontinued operations, net of tax in the consolidated statements of operations for all periods presented, and the associated assets and liabilities are classified within current and long-term assets of discontinued operations and current liabilities of discontinued operations, as appropriate, in the consolidated balance sheets for all applicable periods presented.

Preferred Stock Dividend

On September 12, 2012, our Board of Directors decided not to declare a quarterly cash dividend on our 6% Convertible Exchangeable Preferred Stock ("Preferred Stock") with respect to the third quarter of 2012 that would have otherwise been payable on November 1, 2012.

Subsequent Developments

Grant Award

In November 2012, we were awarded a grant of approximately $1.9 million from the UK Government's Biomedical Catalyst to complete an Investigational New Drug ("IND") directed preclinical development of CYC065, a novel orally available, second generation, CDK inhibitor.

Results of Operations

Three Months Ended September 30, 2011 and 2012

Results of Continuing Operations

Revenues

The following table summarizes the components of our revenues for the three months ended September 30, 2011 and 2012:

Three months ended September 30, 2011 2012 Difference Difference

                         ($000s)                %
Grant revenue       -     38           38            -
Total revenue       -     38           38            -

We recognized approximately $38,000 in grant revenue for the three months ended September 30, 2012 in connection with an award from the European Union to study ovarian cancer therapies. We had no grant revenue for the three months ended September 30, 2011.

We may also recognize, from time to time, revenue from collaboration and research and development. We had no collaboration and research and development revenue for each of the three months periods ended September 30, 2011 and 2012.

The future

We expect to recognize approximately $0.1 million in grant revenue over the next twelve to eighteen months from the European Union and approximately $1.9 million in grant revenue over the next two years from the UK Government's Biomedical Catalyst.


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Research and development expenses

We expense all research and development expenses as they are incurred. Research and development expenses primarily include:

†          clinical trial and regulatory-related costs;

†

†          payroll and personnel-related expenses, including consultants and
contract research;

†

†          preclinical studies and laboratory supplies and materials;

†

†          technology license costs; and

†

†          rent and facility expenses for our laboratories.

The following table provides information with respect to our research and development expenditure for the three months ended September 30, 2011 and 2012:

                                             Three months ended September 30,
                                          2011    2012    Difference   Difference
                                                   ($000s)                 %
Sapacitabine                              1,848   1,424         (424 )        (23 )
Other research and development costs        218     108         (110 )        (50 )
Total research and development expenses   2,066   1,532         (534 )        (26 )

Total research and development expenses represented 53% and 43% of our operating expenses for the three months ended September 30, 2011 and 2012, respectively.

Research and development expenditures decreased by $0.5 million from $2.1 million for the three month period ended September 30, 2011 to $1.5 million for the three month period ended September 30, 2012. The decrease was primarily due to a $0.2 million decrease in clinical supply costs, $0.1 million decrease in clinical trial costs and $0.1 million decrease in employment costs.

The future

We expect to continue to concentrate our resources on the development of sapacitabine. We anticipate that overall research and development expenditures, excluding contractual milestone payments for the year ended December 31, 2012 to be similar compared to the year ended December 31, 2011 as we increase enrollment on the randomized portion of the SEAMLESS pivotal Phase 3 trial.


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General and administrative expenses

General and administrative expenses include costs for sales and marketing and administrative personnel, legal and other professional expenses and general corporate expenses. The following table summarizes the general and administrative expenses for the three months ended September 30, 2011 and 2012:

                                               Three months ended September 30,
                                            2011    2012    Difference   Difference
                                                     ($000s)                 %
Total general and administrative expenses   1,814   2,028          214           12

Total general and administration expenses represented 47% and 57% of our operating expenses for the three months ended September 30, 2011 and 2012, respectively.

Our general and administrative expenditure increased by approximately $0.2 million to $2.0 million for the three months ended September 30, 2012, from $1.8 million for the three months ended September 30, 2011. The increase in expenses was primarily attributable to a net increase in professional and consultancy costs of $0.6 million, offset by a $0.1 million reduction in stock compensation charges, $0.1 million reduction in employment costs, and $0.2 million in other general and administrative costs.

The future

We expect our general and administrative expenditures for the year ended December 31, 2012 to be higher than our expenditures for the year ended December 31, 2011 as a result of an expected increase in professional and consultancy costs.

Other income (expense)

The following table summarizes other income (expense) for the three months ended September 30, 2011 and 2012:

                                                  Three months ended September 30,
                                            2011        2012      Difference    Difference
                                                       ($000s)                      %
Change in valuation of Economic Rights           -         (63 )         (63 )           -
Change in valuation of other
liabilities measured at fair value             440           1          (439 )        (100 )
Foreign exchange gains (losses)                 28           6           (22 )         (79 )
Interest income                                  9           5            (4 )         (44 )
Other income                                     -           1             1             -
Total other income (expense)                   477         (50 )        (527 )        (110 )

Total other income and expense, net, decreased by $0.5 million, from income of approximately $0.5 million for the three months ended September 30, 2011, to expense of $0.1 million for the three months ended September 30, 2012. The decrease was primarily due to the change of valuation of other liabilities measured at fair value of $0.4 million and change in valuation of Economic Rights of $0.1 million.

The change in valuation of Economic Rights relates to the change in the fair value of contractual rights issued as part of a financing agreement entered into in March 2012. These collective rights are classified as liabilities and are marked to market each reporting period. For the three months ended September 30, 2012, we recognized expense of approximately $0.1 million due to the change in the value of Economic Rights.

The change in valuation of other liabilities measured at fair value relates to the issue of warrants to purchase shares of our common stock under the registered direct financing completed in February 2007 and our liability under an agreement with the Scottish Enterprise, ("SE") that would potentially require us to make a payment to SE should staffing levels in Scotland fall below prescribed minimum levels. The warrants and agreement are classified as liabilities. The value of the warrants is being marked to market


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each reporting period as a gain or loss. Such gains or losses will continue to be reported for the warrants until they are exercised or expired. Gains or losses on the SE Agreement will be reported until the agreement expires in July 2014. For the three months ended September 30, 2011 and 2012, the change in the valuation of other liabilities measured at fair value was a decrease of $0.4 million and approximately $1,000, respectively.

Foreign exchange gains (losses) decreased by $22,000 to a gain of $6,000 for the three months ended September 30, 2012, compared to a gain of approximately $28,000 for the three months ended September 30, 2011. Foreign exchange gains (losses) are reported in the consolidated statement of operations as a separate line item within other income (expense).

The future

The valuation of the Economic Rights, warrants liability, and SE Agreement will continue to be re-measured at the end of each reporting period. The change in valuation of the Economic Rights is dependent on a number factors, including our stock price, and certain management assumptions, including, the probability of success of the underlying litigation, amount of award or settlement, discount rate, royalty rate, and timing of cash flows, and may fluctuate significantly, which may have a significant impact on our statement of operations. The valuation of the warrants is dependent upon many factors, including our stock price, interest, and remaining term of the instrument and may fluctuate significantly, which may have a significant impact on our statement of operations. The valuation of the SE Agreement is dependent on a number of factors, including our stock price and the probability of the occurrence of certain events that would give rise to a payment. We do not expect the valuation of fair value of the SE Agreement to fluctuate significantly.

As the nature of funding advanced through intercompany loans is that of a long-term investment in nature, future unrealized foreign exchange gains and losses on such funding will be recognized in other comprehensive income until repayment of the intercompany loan becomes foreseeable.

Income tax benefit

Credit is taken for research and development tax credits, which are claimed from the United Kingdom's revenue and customs authority, or HMRC, in respect of qualifying research and development costs incurred.

The following table summarizes research and development tax credits for the three months ended September 30, 2011 and 2012:

Three months ended September 30, 2011 2012 Difference Difference ($000s) % Total income tax benefit 126 419 293 233

Research and development tax credits recoverable increased $0.3 million to $0.4 million for the three months ended September 30, 2012 from $0.1 million for the three months ended September 30, 2011. The level of tax credits recoverable is linked directly to qualifying research and development expenditure incurred in any one year. In 2011 the tax credit was also restricted to the payroll taxes paid by us to HMRC in that year. However, in July 2012, legislation was passed to eliminate this restriction for the year ended December 31, 2012. As a result, an adjustment of approximately $0.3 million was recorded for the three months ended September 30, 2012.

The future

We expect to continue to be eligible to receive United Kingdom research and development tax credits for the foreseeable future and will elect to do so. In July 2012, legislation was passed, effective for the year ended December 31, 2012, that eliminates the restriction of the amount recoverable to the payroll taxes paid in a period. Historically, our qualifying research and development expenditure has exceeded payroll taxes


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and, as we expect this to continue, the amount of tax credits we will be able to recover will increase for the year ended December 31, 2012.

Results of Discontinued Operations



Income (loss) from discontinued operations, net of tax



                                                Three months ended September 30,
                                          2011        2012      Difference    Difference
                                                     ($000s)                      %
Discontinued operations                     (168 )        71           239          (142 )
Gain on termination of distribution
agreements                                     -       1,192         1,192             -
Income (loss) from discontinued
operations, net of tax of $0 for all
periods presented                           (168 )     1,263         1,431           852

We entered into a termination and settlement agreement to terminate, effective September 30, 2012, our license to distribute the ALIGN products, after which we will no longer generate product revenue. Income (loss) from discontinued operations, net of tax increased $1.4 million from a loss of $0.2 million for the three months ended September 30, 2011, to a gain of $1.3 million for the three months ended September 30, 2012. The increase is the result of a $1.2 million gain on termination of the distribution agreements, which represents the $0.9 million present value of the $1.0 million we will receive over the next three years as part of a minimum royalty arrangement included in our termination agreement with Sinclair and the recognition of $0.3 million associated with a $0.3 million product returns provision liability for which an offsetting asset has been recorded based on our rights under the termination and settlement agreement.

The future

We have ceased operations associated with the ALIGN products effective September 30, 2012 and do not expect significant activity beyond the year ended December 31, 2012. We may earn additional income from discontinued operations over the next three years if certain sales targets are met by a successor distributor according to the termination agreement with Sinclair.

Nine Months Ended September 30, 2011 and 2012

Results of Continuing Operations

Revenues

The following table summarizes the components of our revenues for the nine months ended September 30, 2011 and 2012:

Nine months ended September 30, 2011 2012 Difference Difference

                        ($000s)                %
Grant revenue      -     64           64            -
Total revenue      -     64           64            -

We recognized approximately $64,000 in grant revenue for the nine months ended September 30, 2012 in connection with an award from the European Union to study ovarian cancer therapies. We had no grant revenue for the nine months ended September 30, 2011.

We may also recognize, from time to time, revenue from collaboration and research and development and from grant awards. We had no collaboration and research and development revenue or grant revenue for each of the nine months periods ended September 30, 2011 and 2012.

The future

We expect to recognize approximately $0.1 million in grant revenue over the next twelve to eighteen from the European and approximately $1.9 million in grant revenue over the next two years from the UK Government's Biomedical Catalyst.


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Research and development expenses

We expense all research and development expenses as they are incurred. Research and development expenses primarily include:

† clinical trial and regulatory-related costs;

† payroll and personnel-related expenses, including consultants and contract research;

† preclinical studies and laboratory supplies and materials;

† technology license costs; and

† rent and facility expenses for our laboratories.

The following table provides information with respect to our research and development expenditure for the nine months ended September 30, 2011 and 2012:

                                              Nine months ended September 30,
                                          2011    2012    Difference   Difference
                                                   ($000s)                 %
Sapacitabine                              6,579   4,488       (2,091 )        (32 )
Other research and development costs        426     108         (318 )        (75 )
Total research and development expenses   7,005   4,596       (2,409 )        (34 )

. . .

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