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GEVA > SEC Filings for GEVA > Form 10-K on 14-Mar-2013All Recent SEC Filings

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Form 10-K for SYNAGEVA BIOPHARMA CORP


14-Mar-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

This discussion of our financial condition and results of operations should be read together with the consolidated financial statements and notes contained elsewhere in this report. Certain statements in this section are forward-looking. While we believe these statements are accurate, our business is dependent on many factors, some of which are discussed in the sections entitled "Risk Factors" and "Business". Many of these factors are beyond our control and any of these and other factors could cause actual results to differ materially from the forward-looking statements made in this report. We undertake no obligation to release publicly the results of any revisions to the statements contained in this report to reflect events or circumstances that occur subsequent to the date of this report.

Overview

We are a clinical stage biopharmaceutical company focused on the discovery, development, and commercialization of therapeutic products for patients with life-threatening rare diseases and unmet medical needs. Our management team is experienced in the development and commercialization of drugs for diseases with small patient populations, including clinical and translational research, working with payors to establish reimbursement, and designing and building commercial organizations to reach highly specialized physicians to facilitate patient identification. We have several protein therapeutics in our pipeline, including two enzyme replacement therapies for lysosomal storage disorders and additional programs for life-threatening genetic conditions for which there are currently no approved treatments. Our lead program, sebelipase alfa, is a recombinant human lysosomal acid lipase ("LAL") currently under global clinical investigation for the treatment of patients with early and late onset LAL deficiency ("LAL Deficiency"), which is a rare, devastating genetic disease that causes significant morbidity and mortality. We currently evaluate sebelipase alfa in global clinical trials and sebelipase alfa has been granted orphan designations by the U.S. Food and Drug Administration ("FDA"), the European Medicines Agency, and the Japanese Ministry of Health, Labour and Welfare. Additionally, sebelipase alfa received Fast Track Designation by the FDA. We have not yet received approval to market this product and we are not currently commercializing any other products.

Basis of Presentation (Fiscal 2011 and prior periods)

As described in Item 6, on November 2, 2011, Synageva BioPharma Corp., a privately held Delaware corporation ("Private Synageva") closed the a merger transaction (the "Reverse Merger") with Trimeris, Inc. ("Trimeris") As of November 2, 2011, after giving effect to the Reverse Merger the former stockholders of Private Synageva collectively owned approximately 75% and the stockholders of Trimeris prior to the Reverse Merger ("Pre-Merger Trimeris") owned approximately 25% of our outstanding common stock.

The Reverse Merger was accounted for as a reverse acquisition. As such, the financial statements of Private Synageva are treated as our historical financial statements, with the results of Trimeris being included from November 2, 2011. Immediately following the closing of the Reverse Merger, Private Synageva designees to our Board of Directors represented a majority of our directors, Private Synageva's senior management represented our entire senior management and the operations formerly conducted by Private Synageva were our only continuing development efforts. For periods prior to the closing of the Reverse Merger, therefore, our discussion below relates to the historical business and operations of Private Synageva. Certain portions of this Annual Report on Form 10-K may contain information that relates to Pre-Merger Trimeris' previous operations, which are no longer material to our business. Any comparison of Pre-Merger Trimeris' revenues and operations with ours may not be helpful to an understanding of our results for the years ended December 31, 2011, 2012 or future periods.

Financial Operations Overview

General

Our future operating results will depend on the progress of drug candidates currently in our research and development pipeline. The results of our operations will vary significantly from year to year and quarter to quarter and will depend largely on, among other factors, the cost and outcome of any preclinical development or clinical trials then being conducted.


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A discussion of certain risks and uncertainties that could affect our liquidity, capital requirements and ability to raise additional funds is set forth under the section entitled "Risk Factors" in this report.

Revenue

Royalty Revenue

Royalty revenue relates to amounts earned from the sale of FUZEON by F. Hoffman-La Roche Ltd. ("Roche"). The FUZEON royalty stream was acquired in the Reverse Merger in the fourth quarter of fiscal 2011.

Collaboration and License Revenue

Collaboration and license revenue primarily relates to our collaboration agreements with Mitsubishi Tanabe Pharma Corporation ("Mitsubishi Tanabe") whereby we utilize our proprietary expression technology in two development programs, in exchange for upfront license payments, funded development, and the potential for additional payments upon the successful completion of the development programs. Under the first program, which was entered into in August 2011, we received an upfront license payment of $3.0 million, on-going funding of development costs, and the potential for an additional payment of $3.0 million due upon the successful completion of the initial development. Additionally, we entered into a second agreement in March 2012, where we received an upfront license payment of $9.0 million, on-going funding of development costs, and the potential for an additional payment of $3.0 million due upon the successful completion of the initial development stage of the second program. Under both agreements, Mitsubishi Tanabe has an option to obtain an exclusive royalty-bearing license, with the right to grant sublicenses, to further develop and commercialize the licensed compound. If Mitsubishi Tanabe exercises its option, the parties intend to negotiate a follow-on collaboration and license agreement that may include potential future development and commercial sales based milestone payments, and potential royalty payments.

Other Revenue

Other revenues relate to a National Institutes of Health ("NIH") grant, which was completed in the first quarter of fiscal 2012.

Research and Development

We expense research and development costs as incurred. Research and development expense consists of costs incurred to discover, research and develop drug candidates, including personnel and facility-related expenses, outside contracted services including clinical trial costs, manufacturing and process development costs, research costs, outside consulting services and other external costs. Research and development expense includes any costs associated with generating collaboration or grant revenue.

General and Administrative

General and administrative expense consists primarily of salaries, stock-based compensation expense and other related costs for personnel in executive, business development, commercial, finance, human resource, legal, information technology, and support personnel functions. We also expense patent costs and expenses associated with maintaining our intellectual property as incurred. Other costs include facility costs not otherwise included in research and development expense, insurance, and professional fees for legal, accounting and commercial services.

Amortization of Developed Technology

We provide for the cost of amortization of developed technology, computed using an accelerated method based on the undiscounted cash flows received from the FUZEON royalty stream, in proportion to the estimated total undiscounted cash flows.

Interest Income (expense), net

Interest income relates to interest earned on our cash equivalent and short-term investment balances.


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Results of Operations

Years Ended December 31, 2012 and 2011



Revenues



The following table presents total revenue for the years ended December 31, 2012
and 2011, respectively (in thousands):



                                            Year Ended
                                            December,
                                         2012        2011       $ Change        % Change
   Royalty revenue                     $  7,023     $ 1,083     $   5,940             548 %
   Collaboration and license revenue      7,875         640         7,235           1,131
   Other revenue                             56         376          (320 )           (85 )

   Total revenue                       $ 14,954     $ 2,099     $  12,855             612 %

Total revenues increased by approximately $12.9 million for the year ended December 31, 2012, as compared to the comparable period of the prior year. The increase in revenues was primarily the result of higher FUZEON royalty revenue and higher collaboration revenue.

Royalty revenues of $7.0 million relate to the royalty payment earned from Roche, based on total worldwide net sales of FUZEON. We did not have any royalty revenue from FUZEON until after the Reverse Merger, which occurred in the fourth quarter of fiscal 2011. Collaboration and license revenue for the year ended December 31, 2012 relates to revenue recognized from development programs with Mitsubishi Tanabe. For the year ended December 31, 2012, we recognized $1.9 million and $6.0 million related to the first and second Mitsubishi Tanabe programs, respectively. For the year ended December 31, 2011, collaboration and license revenue totaled $0.6 million primarily related to revenue recognized related to the first Mitsubishi Tanabe program. Other revenues relate to an NIH Grant, and totaled approximately $0.1 million and $0.4 million for the years ended December 31, 2012 and 2011, respectively.

We expect FUZEON royalty revenues to decrease over time, from the levels experienced in fiscal 2012. Royalty revenue increased in 2012 as compared to 2011, due to the inclusion of a full year of FUZEON royalty revenue in our results of operations. Additionally, as of December 31, 2012, our deferred revenue balance related to both of the Mitsubishi Tanabe collaboration agreements, totaled $5.4 million. We expect to recognize both the upfront development payments, which are included in deferred revenue, and the additional funded development payments related to both arrangements over the next year, in proportion to our performance under the arrangements.

Research and Development Expenses



Research and development expenses for the years ended December 31, 2012 and 2011
are summarized as follows (in thousands):



                                                       Year Ended
                                                      December 31,
                                                   2012           2011         $ Change      % Change
Compensation and benefits-related                $ 10,339       $  5,947       $   4,392            74 %
Clinical trials and manufacturing                  17,383          6,126          11,257           184
Other development related external services         4,384          2,992           1,392            47
Facilities and related                              3,465          2,050           1,415            69
Stock-based compensation expense                    1,432            231           1,201           520
Acquired in-process research and development          344              -             344             -

Total research and development expense           $ 37,347       $ 17,346       $  20,001           115 %

Research and development expense increased by approximately $20.0 million, or 115%, to $37.3 million for the year ended December 31, 2012 as compared to $17.3 million for the comparable prior year period. The increase in total research and development expense is due to increased clinical trial costs and manufacturing fees, as well as other


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development related external services, associated with on-going development of sebelipase alfa and our pipeline programs and higher compensation expense from hiring additional staff to move the sebelipase alfa and pipeline programs forward. Additionally, in fiscal 2012, research and development expense includes $1.4 million of stock-based compensation expense and $0.3 million related to acquired in-process research and development. We expect research and development expense to continue to increase as development activities for sebelipase alfa and our other pipeline programs continue.

General and Administrative Expenses



General and administrative expenses for the year ended December 31, 2012 and
2011 are summarized as follows (in thousands):



                                                Year Ended
                                               December 31,
                                             2012        2011        $ Change      % Change
Compensation and benefits-related          $  7,537     $ 4,187     $    3,350            80 %
External and professional services            5,545       4,167          1,378            33
Facilities related and other                    775         512            263            51
Stock-based compensation expense              3,539         402          3,137           780

Total general and administrative expense   $ 17,396     $ 9,268     $    8,128            88 %

General and administrative expense increased by approximately $8.1 million, or 88%, to $17.4 million for the year ended December 31, 2012 as compared to $9.3 million for the comparable prior year period. The increase was primarily due to higher compensation-related expenses of $3.4 million and increased stock-based compensation expense of $3.1 million, resulting from hiring additional staff to support expanded operations and the increasing financial and legal costs associated with public company requirements and commercial preparations. Additionally, external fees and professional service costs increased $1.4 million period over period, primarily a result of higher commercial related spending, higher public company costs, including insurance expense and higher professional service fees. We expect general and administrative expense to continue to increase in the future as our business grows.

Amortization of Developed Technology

Costs recognized for the amortization of developed technology for the year ended December 31, 2012 and 2011 are summarized as follows (in thousands):

Year Ended December 31, 2012 2011 $ Change % Change Amortization of developed technology 3,232 504 2,728 541 %

In fiscal 2012, we recognized $3.2 million of amortization related to the developed technology acquired in the Reverse Merger, compared to $0.5 million in the prior year. The increase was due to the inclusion of a full year of FUZEON royalty revenue, and therefore, the related amortization, in our results of operations.

Other (Expense) Income, Net

In 2011, we recognized $0.3 million of other expense associated with the revaluation of preferred stock warrants that were exercised in fiscal 2011. All preferred stock warrants have been exercised. We did not have any activity in other expense (income) in fiscal 2012.

Years Ended December 31, 2011 and 2010

Revenues

Total revenues increased by approximately $1.5 million, or 252%, to $2.1 million, for the year ended December 31, 2011, as compared to $0.6 million for the year ended December 31, 2010. The increase in revenues was


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the result of the addition of FUZEON royalty revenue following the completion of the Reverse Merger, higher collaboration revenues and higher grant revenues as compared to the prior year. Royalty revenues of $1.1 million represent the royalty payment earned from Roche based on total worldwide net sales of FUZEON since the closing of the Reverse Merger in November 2011. Collaboration and license revenue totaled approximately $0.6 million and $0.3 million for the years ended December 31, 2011 and 2010, respectively. Grant revenues relate to an NIH Grant, and totaled approximately $0.4 million and $0.3 million for the years ended December 31, 2011 and 2010, respectively.

Research and Development Expenses



Research and development expenses are summarized as follows:



                                                    Year Ended
                                                   December 31,
                                                 2011         2010         $ Change        % Change
Compensation and benefits-related              $  5,947      $ 3,674      $    2,273              62 %
Clinical trials and manufacturing                 6,126        1,378           4,748             345
Other development related external services       2,992        3,286            (294 )            (9 )
Facilities related                                2,050        1,483             567              38
Non-cash stock-based compensation                   231           45             186             413

Total research and development expense         $ 17,346      $ 9,866      $    7,480              76 %

Research and development expenses increased by approximately $7.5 million, or 76%, to $17.3 million for the year ended December 31, 2011 as compared to $9.9 million for the year ended December 31, 2010. The increase is primarily attributable to increased spending related to our lead program sebelipase alfa. The increase included clinical trial costs and manufacturing fees associated with our on-going sebelipase alfa development as well as higher compensation expense from the hiring of additional staff to move the sebelipase alfa program forward. As part of these activities, we also incurred additional facilities expense resulting from the opening of our corporate headquarters and laboratory facilities in Lexington, Massachusetts in September 2010. Increases were partially off-set by lower pre-clinical expenses for 2011 as compared to the prior year.

General and Administrative Expenses

General and administrative expenses increased by approximately $5.4 million to $9.3 million for the year ended December 31, 2011 as compared to $3.9 million for the year ended December 31, 2010. This increase was primarily due to higher external services costs of $3.3 million, including legal and accounting fees as well as commercial activities, and higher compensation expense of $2.0 million, resulting from hiring additional staff to support public company requirements as well as commercial preparations. In 2011, we incurred approximately $1.1 million in transaction related fees related to the Reverse Merger with Trimeris. As part of these activities, we also incurred additional facilities expense of $0.2 million resulting from the opening of our corporate headquarters and laboratory facilities in Lexington, Massachusetts in September 2010.

Amortization of Developed Technology

We recognized $0.5 million of costs related to the amortization of developed technology in fiscal 2011. Amortization of developed technology is computed using an accelerated method based on the undiscounted cash flows received from the FUZEON royalty stream (post Reverse Merger), in proportion to the estimated total undiscounted cash flows.

Other (Expense) Income, Net

Other (expense) income, net decreased by approximately $2.6 million to ($0.3) million for the year ended December 31, 2011 as compared to $2.3 million for the year ended December 31, 2010. The decrease was due to the receipt of a tax grant related to the approval of our applications for the Qualifying Therapeutic Discovery Project program during 2010. For 2011, this grant program was not available. In 2011, we recognized other expense associated with the revaluation of preferred stock warrants.


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Liquidity and Capital Resources

Sources of Liquidity

We have financed our operations to date primarily through the placement of our equity and debt securities and debt financings, and, to a lesser extent, license and royalty fees, upfront cash payments and research and development funding from collaborators, government grants and licensors. In November 2011, we acquired $50.1 million in cash as a result of the Reverse Merger with Trimeris. On January 10, 2012, we announced the closing of a $90.0 million underwritten public offering of approximately 3.6 million shares of our common stock at a price of $25.18. We received net proceeds of approximately $84.6 million from this offering. In addition, on July 13, 2012, we announced the closing of a $115.0 million, second underwritten public offering of approximately 2.8 million shares of common stock at a price of $41.20. We received net proceeds of approximately $108.1 million. On January 9, 2013, we announced the closing of a $117.5 million underwritten public offering of approximately 2.5 million shares of common stock at a price of $47.53. We received net proceeds of approximately $111.1 million from this offering. We intend to use the net proceeds from these offerings for general corporate purposes, which may include working capital, capital expenditures, research and development expenditures, preclinical and clinical trial expenditures, commercial expenditures, acquisitions of new technologies or businesses that are complementary to our current technologies and business focus and investments.

We do not expect to generate any revenue from the direct sale of products currently in development for several years, if ever. As a result of our acquisition of Trimeris, we now receive royalties from the sale of FUZEON by Roche, which we expect to decrease over time. A significant portion of our revenues for the foreseeable future will be quarterly royalty payments from Roche based on sales of FUZEON, up-front license payments and funded research and development that we may receive under existing or new collaboration agreements, if any.

As of December 31, 2012, our principal sources of liquidity consisted of cash and cash equivalents and short-term investments of approximately $219.0 million. Our cash equivalents are highly liquid investments with a maturity of three months or less at date of purchase and consist of investments in money market funds.

Cash Flows

The use of our cash flows for operations has primarily consisted of salaries and wages for our employees, facility and facility-related costs for our office, laboratory, and manufacturing facilities, fees paid in connection with preclinical studies, clinical studies, outsourced manufacturing, laboratory supplies, consulting fees, commercial fees and legal fees. We expect that costs associated with clinical studies and manufacturing costs as well as commercial planning costs will increase in future periods as sebelipase alfa advances into further stages of clinical testing and our other preclinical candidates move forward in development.

Net cash used in operating activities was $30.9 million, $16.6 million and $10.6 million for the years ended December 31, 2012, 2011 and 2010, respectively.

Net cash used in operating activities was $30.9 million for the year ended December 31, 2012 and was primarily the result of a net loss of $43.4 million, which is discussed in further detail in "Results of Operations." In addition, non-cash items and changes in certain operating assets and liabilities affected operating cash during fiscal 2012. Non-cash items partially offsetting net loss include depreciation of fixed assets of $1.0 million, amortization of developed technology of $3.2 million, stock-based compensation of $5.0 million, amortization of discount on available for sale investments of $0.3 million and in-process research and development of $0.3 million. Changes in operating assets and liabilities resulted in a net source of cash of $2.9 million, which was primarily the result of increased deferred revenue of $2.7 million from December 31, 2011. The increase in deferred revenue in the period was primarily the result of the upfront license fees related to the second Mitsubishi Tanabe development program. Other significant sources of cash included increased accounts payable and accrued expenses of $1.2 million from December 31, 2011, which was offset by a use of cash of $1.3 million related to prepaid expenses and other current assets and $0.4 million related to increased accounts receivable.

Net cash used in operating activities for the year ended December 31, 2011 was primarily the result of a net loss of $25.3 million, as discussed in further detail in "Results of Operations." In addition, changes in certain operating assets and liabilities and non-cash items affected operating cash during the year ended December 31, 2011. Changes in


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operating assets and liabilities that partially offset the cash impact of our net loss include $1.1 million from a net decrease in accounts receivable, prepaid expenses and other current assets, primarily due to receipt of royalty receivables that were recorded as part of the Reverse Merger in fiscal 2011; increased accounts payable and accrued expenses of $2.9 million as a result of an increased level of research and development spending related to our lead program and increased compensation and related costs; and, an increase in deferred revenue of approximately $2.7 million from the receipt of an upfront license payment related to the collaboration arrangement with Mitsubishi Tanabe. Non-cash items partially offsetting our net loss include depreciation and amortization of fixed assets of $1.0 million, stock-based compensation of $0.6 million, and $0.3 million from the revaluation of preferred stock warrants. Amortization related to the developed technology intangible asset contributed $0.5 million to depreciation and amortization expense for fiscal 2011, accounting for the majority of the year-over-year increase from fiscal 2010.

We expect to continue to use cash in operations as we continue to seek to advance our orphan drug programs through clinical development and preclinical testing. In addition, in the future, we may owe royalties and other contingent payments to our licensors based on the achievement of developmental milestones, product sales, and other specified objectives.

Net cash used in investing activities totaled $199.5 million in fiscal 2012, and was primarily a result of the purchase of available-for-sale investments of $195.4 million. Our investment portfolio includes short-term treasury securities, and was funded from our cash and cash equivalents balance in the fourth quarter of fiscal 2012. We had not received proceeds from either the sale of maturity of investments as of December 31, 2012. Other uses of cash for investing activities included $3.7 million for capital expenditures and $0.4 million for the purchase of certain IP rights and other long-term assets. We . . .

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