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PBYI > SEC Filings for PBYI > Form 10-K on 1-Apr-2013All Recent SEC Filings

Show all filings for PUMA BIOTECHNOLOGY, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-K for PUMA BIOTECHNOLOGY, INC.


1-Apr-2013

Annual Report


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

This Annual Report on Form 10-K contains forward-looking statements within the meanings of the federal securities laws. These statements are subject to risks and uncertainties that could cause actual results and events to differ materially from those expressed or implied by such forward-looking statements. For a detailed discussion of these risks and uncertainties, see the "Risk Factors" section in Item 1A of Part I of this Form 10-K. We caution the reader not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date of this Form 10-K. We undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this Form 10-K.

Overview

We are a development stage biopharmaceutical company based in Los Angeles, California with a focus on the acquisition, development and commercialization of innovative products to enhance cancer care. We aim to acquire proprietary rights to these products, by license or otherwise, fund their research and development and bring the products to market. Our efforts and resources to date have been focused primarily on acquiring and developing our pharmaceutical technologies, raising capital and recruiting personnel. As a development stage company, we have had no product sales to date and we will have no product sales until we receive approval from the United States Food and Drug Administration, or FDA, or equivalent foreign regulatory bodies to begin selling our pharmaceutical candidates. Developing pharmaceutical products, however, is a lengthy and very expensive process. Assuming we do not encounter any unforeseen safety issues during the course of developing our product candidates, we do not expect to receive approval of a product candidate until approximately 2015.

We currently license the rights to three drug candidates:

PB272 (neratinib (oral)), which we are developing for the treatment of advanced breast cancer patients and non-small cell lung cancer patients;

PB272 (neratinib (intravenous)), which we are developing for the treatment of advanced cancer patients; and

PB357, which we believe can serve as a backup compound to PB272, and which we plan to evaluate for further development in 2013.

A large portion of our expenses to date have been related to the clinical development of our lead product candidate, PB272 (neratinib (oral)), and the transition of the neratinib program from the licensor. During this transition period, as we built up our infrastructure and assumed responsibility for the neratinib program, a duplication of effort took place that resulted in higher than normal operating expenses. We estimate the duplication of effort had an impact on research and development, or R&D, operating expense for the year ended December 31, 2012, of approximately $5.1 million.

The license agreement for PB272 established a limit for the Company's expenses related to the Pfizer initiated clinical trials for PB272 that were on-going at the time of the agreement. This capped our "out-of-pocket" costs incurred in conducting these existing trials beginning January 1, 2012. The Company reached the cost cap during the fourth quarter of 2012, which resulted in a reduction of our R&D expenses for the fourth quarter of 2012. The licensor will continue to be responsible for these expenses until the existing trials are completed. Additionally, our expenses to date have been related to hiring staff and the build out of our corporate infrastructure. As we proceed with clinical development of PB272 (neratinib (oral)), and as we further develop PB272 (neratinib (intravenous)), and PB357, our second and third product candidates, respectively, we expect our R&D expenses and expenses related to our third-party contractors will increase.

To the extent we are successful in acquiring additional product candidates for our development pipeline, our need to finance R&D will increase. Accordingly, our success depends not only on the safety and efficacy of our product


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candidates, but also on our ability to finance product development. Our major sources of working capital have been proceeds from a public offering of our common stock and sales of our common stock in private placements.

R&D expenses include costs associated with services provided by consultants who conduct clinical services on our behalf, contract organizations for manufacturing of clinical materials and clinical trials. During the year ended December 31, 2012, our R&D expenses consisted primarily of transition costs, as clinical trial responsibilities shifted from the licensor to us and our outside clinical research organization, or CRO; fees paid to other consultants; salaries and related personnel costs; and facility costs. We expense our R&D costs as they are incurred.

General and administrative, or G&A, expenses consist primarily of salaries and related personnel costs, including stock-based compensation expense, professional fees, business insurance, rent, general legal activities, and other corporate expenses. Stock-based compensation expense for the year ended December 31, 2012, included approximately $18.2 million of stock-based compensation related to an anti-dilutive warrant issued to our Founder and Chief Executive Officer in 2011, of which the exercise price and the number of underlying shares were established in 2012. We do not expect to incur such additional expense for this warrant in the future.

Emerging Growth Company

We are and will remain an "emerging growth company," as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, until the earliest to occur of (i) the last day of the fiscal year during which our total annual gross revenues equal or exceed $1 billion (subject to adjustment for inflation);
(ii) the last day of our fiscal year following the fifth anniversary of the date of the first sale of our common equity securities pursuant to an effective registration statement under the Securities Act, which such fifth anniversary will occur in 2017; (iii) the date on which we have issued more than $1 billion in non-convertible debt during the previous three-year period; or (iv) the date on which we are deemed a large accelerated filer under the Exchange Act.

Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, for complying with new or revised accounting standards. We have irrevocably elected not to avail ourselves of this extended transition period for complying with new or revised accounting standards, and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other companies; however, we have elected to take advantage of certain of the reduced disclosure obligations and may elect to take advantage of other reduced burdens in future filings. As a result, the information we provide to our stockholders may be different than the information provided to stockholders of other public reporting companies in which you hold equity interests.

Results of Operations

Results of Operations for Fiscal 2012 Compared to Fiscal 2011

General and administrative expenses:

Total G&A expenses for the years ended December 31, 2012 and 2011, were approximately $24.8 million and $9.3 million, respectively, and include employee stock-based compensation expense of $18.7 million and $7.6 million, respectively. G&A expenses for the fiscal years ended December 31, 2012 and 2011, were as follows:

              General and administrative expenses     2012        2011
              in thousands ($000)
              Professional fees                     $  1,961     $   871
              Payroll and related costs                2,026         478
              Business taxes and licenses                293           1
              Facility and equipment costs               603          66
              Employee stock-based compensation       18,707       7,615
              Other                                    1,224         300

                                                    $ 24,814     $ 9,331


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In connection with the closing of a public offering on October 24, 2012, the exercise price and number of shares underlying the anti-dilutive warrant issued to the Company's Chief Executive Officer were established (see Note 5 in the accompanying notes to the consolidated financial statements), and accordingly, the final value of the warrant became fixed. The final valuation of the warrant based on the Black-Scholes Option Pricing Method, was approximately $25.8 million and resulted in an adjustment to the fair value of the warrant of $18.2 million, which is included in G&A expenses for 2012, compared to the $7.6 million estimated fair value of the warrant recorded in 2011. We do not anticipate having a similar equity instrument grant in the near future, if ever. The remaining employee stock-based compensation represents the fair value of stock option grants to employees applicable to the reporting period.

Excluding the impact of employee stock-based compensation expense, G&A expenses increased primarily as a result of a $1.1 million increase in professional fees and a $1.5 million increase in payroll and related costs. Major expenses incurred in professional fees were legal fees for SEC filings, intellectual property review, contract review and general legal support. We expect to continue to incur significant legal fees in the future. Payroll and related expenses for 2012 reflect a full year of operations compared to only three months of operations for 2011. We do not anticipate our payroll costs to increase significantly during the next year. The major portion of our business taxes and licenses is Delaware Franchise Tax, which is based on the number of shares of our common stock authorized and outstanding. We expect facility expenses to increase as we entered into a lease for satellite office space in the San Francisco area in November 2012 (see Note 8 in the accompanying notes to the consolidated financial statements) and modified our Los Angeles office lease to include additional office space.

All other costs, which include expenses for IT support, travel, recruiting, office supplies and postage, were approximately $1.2 million for 2012 and reflect a full year of operations compared to only three months of operations for 2011.

Research and development expenses:

For the fiscal year ended December 31, 2012, R&D expenses were approximately $49.6 million compared to $0.8 million for fiscal 2011. R&D expenses for the fiscal years ended December 31, 2012 and 2011, were as follows:

        Research and development expenses                     2012       2011
        in thousands ($000)
        Outside CRO/licensor services                       $ 34,774     $  -
        Outside other clinical development                     6,344        47
        Internal regulatory affairs and quality assurance      4,007       605
        Internal clinical development                          3,279        72
        Internal chemical manufacturing                          308        64
        Employee stock-based compensation                        924        38

                                                            $ 49,636     $ 826

Outside CRO and licensor service expenses of approximately $34.8 million were incurred during 2012. The majority of these expenses, approximately $31.5 million, were associated with the on-going clinical trials that we assumed from the licensor and which we refer to as our licensor legacy clinical trials. This included approximately $5.1 million of duplicate costs from contracting a CRO to take over the management of our licensor legacy clinical trials. We expect nominal duplicate charges for the management of these trials during the first two quarters of 2013. Outside other clinical development expenses, which include costs for data management, outside consultants, contract manufacturing and other clinical services, of approximately $6.3 million were incurred during 2012, as we became responsible for expenses and services related to maintaining and managing the licensor legacy clinical trials.


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The license agreement contained a cap on the external costs associated with the licensor legacy clinical trials for which we are responsible. We reached this cost cap in the fourth quarter of 2012 and the above table reflects the outside services incurred by us net of the excess cost billed back to the licensor. As a result of our reaching the cap, we expect our outside CRO/licensor service costs and other outside clinical development costs pertaining to the licensor legacy clinical trials to decrease significantly though we will continue to experience some additional costs for these trials. With the initiation of our Phase III trials of PB272 in HER2-positive metastatic breast cancer in patients who failed multiple prior treatments and Phase II trials of PB272 in non-small cell lung cancer, we will begin to incur increased outside CRO and other clinical development costs on an increasing basis partially offsetting these decreases during the coming year.

Internal expenses, which include all employee-related costs such as payroll, benefits and travel, were approximately $4.0 million for regulatory affairs and quality assurance, approximately $3.3 million for clinical development, and approximately $0.3 million for internal chemical manufacturing for the year ended December 31, 2012. Employee stock-based compensation included in R&D expenses for the year ended December 31, 2012, was approximately $0.9 million and reflects the increase in the number of employees. We expect our internal expenses to continue to grow as we anticipate hiring approximately 17 additional employees devoted to clinical activities and six additional employees to support our regulatory and quality assurance function as we commence the additional trials.

While expenditures on current and future clinical development programs, particularly our PB272 program, are expected to be substantial and to increase in 2013, they are subject to many uncertainties, including the results of our clinical trials and whether we develop any of our drug candidates with a partner or independently. As a result of such uncertainties, we cannot predict with any significant degree of certainty the duration and completion costs of our R&D projects or whether, when and to what extent we will generate revenues from the commercialization and sale of any of our product candidates. The duration and cost of clinical trials may vary significantly over the life of a project as a result of unanticipated events arising during clinical development and a variety of other factors, including:

the number of trials and studies in a clinical program;

the number of patients who participate in the trials;

the number of sites included in the trials;

the rates of patient recruitment and enrollment;

the duration of patient treatment and follow-up;

the costs of manufacturing our drug candidates; and

the costs, requirements, timing of, and ability to secure regulatory approvals.

Interest income:

For the year ended December 31, 2012, we recognized approximately $98,000 in interest income. We recognized $4,000 of interest income for the year ended December 31, 2011. The increase in interest income reflects excess cash invested in money market accounts and "high yield" savings accounts for a full year and cash invested from a public offering of our common stock completed in October 2012 (see Note 5 in the accompanying notes to consolidated financial statements).


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Results of Operations for Fiscal 2011 Compared to Fiscal 2010

General and administrative expenses:

For the fiscal year ended December 31, 2011 and for the period from inception (September 15, 2010) to December 31, 2010, G&A expenses were approximately $9.3 million and $7,000, respectively. G&A expenses for the fiscal year ended December 31, 2011 and for the period from inception (September 15, 2010) to December 31, 2010, were as follows:

               General and administrative expenses    2011       2010
               in thousands ($000)
               Professional fees                     $   871     $   7
               Payroll and related costs                 478        -
               Facility and equipment costs                1        -
               Business taxes and licenses                66        -
               Employee stock-based compensation       7,615        -
               Other                                     300        -

                                                     $ 9,331     $   7

Our G&A expenses for the year ended December 31, 2011, were primarily attributable to employee stock-based compensation of approximately $7.6 million associated with the valuation of the outstanding anti-dilutive warrant held by our Chief Executive Officer and President. Major expenses included in professional fees of approximately $0.9 million were legal fees for SEC filings, intellectual property review, contract review and general legal support. Payroll and related costs were approximately $0.5 million for the year ended December 31, 2011. Included in this expense is salary, bonus accrual and benefit costs for employees within the G&A group. G&A expenses for the year ended December 31, 2011, are not indicative of on-going expenses as most of the function became operational, on a limited basis, in the fourth quarter of 2011. Business taxes and licenses incurred in 2011 were approximately $66,000 compared to $0 for 2010. All other costs such as IT support, travel, recruiting and postage were approximately $0.3 million for the year ended December 31, 2011.

Research and development expenses:

For the fiscal year ended December 31, 2011 and for the period from inception (September 15, 2010) to December 31, 2010, R&D expenses were approximately $0.8 million and $0, respectively. R&D expenses for the fiscal years ended December 31, 2011 and 2010, were as follows:

         Research and development expenses                   2011      2010
         in thousands ($000)
         Outside other clinical development                  $  47     $  -
         Internal regulatory affairs and quality assurance     605       -
         Internal clinical development                          72       -
         Internal chemical manufacturing                        64       -
         Employee stock-based compensation                      38       -

                                                             $ 826     $  -

Outside other clinical development expenses, which include costs for data management, outside consultants, contract manufacturing and other clinical services, totaled approximately $47,000 for the year ended December 31, 2011. Internal expenses, which include employee-related costs such as payroll, benefits and travel, were approximately $605,000 for regulatory affairs and quality assurance; approximately $72,000 for clinical development; and approximately $64,000 for internal chemical manufacturing. Employee stock-based compensation included in R&D expenses for the year ended December 31, 2011, was approximately $38,000. These expenses are not indicative of on-going expenses, as most of these functions became operational, on a limited base, in the fourth quarter of 2011.


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Interest income:

For the year ended December 31, 2011, we recognized approximately $4,000 in interest income compared to $0 in interest income for the period from inception (September 15, 2010) to December 31, 2010.


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Adjusted Statement of Operations:

The following tables present our operating results, as calculated in accordance the accounting principles generally accepted in the United States, or GAAP, as adjusted to remove the impact of employee stock-based compensation and the outside CRO/licensor services and outside clinical development costs associated with the licensor legacy clinical trials that we are in the process of completing. The major component of the stock-based compensation is the valuation of an anti-dilutive warrant issued to Mr. Auerbach, our President and Chief Executive Officer. These non-GAAP financial measures are not, and should not be viewed as, substitutes for GAAP reporting measures. We believe these non-GAAP measures enhance understanding of our financial performance, are more indicative of our operational performance and facilitate a better comparison among fiscal periods. The issuance of the anti-dilutive warrant was a onetime occurrence and the full value of the warrant has been recorded in our consolidated financial statements. The majority of the cost associated with the licensor legacy clinical trials related to external costs that we were responsible for but that were subject to a cap. Having reached the cap, the licensor is responsible for all external costs associated with the licensor legacy clinical trials going forward and we expect to have only limited costs associated with our managing these trials through to completion.

           Reconciliation of GAAP and Non-GAAP Financial Information

                 (in thousands except share and per share data)




                                       GAAP                      Expense adjustments                    Non-GAAP
                                      Measure                                                            Measure
                                    (Reported)                                                         (Adjusted)
                                    Year Ended                                   Licensor              Year Ended
                                   December 31,          Stock-based              legacy              December 31,
                                       2012             compensation          clinical trials             2012
2012 Operating expense:
General and administrative         $      24,814        $     (18,706 )      $              -         $       6,108
Research and development                  49,636                 (924 )                (37,892 )             10,820

Loss from operations                     (74,450 )             19,630                   37,892              (16,928 )
Other income (expense):
Interest income                               98                   -                        -                    98
Other expense                                 -                    -                        -                    -

Totals                                        98                   -                        -                    98

Net loss                           $     (74,352 )      $      19,630        $          37,892        $     (16,830 )

Net loss applicable to common
stock                              $     (74,352 )      $      19,630        $          37,892        $     (16,830 )

Net loss per common
share-basic and diluted            $       (3.42 )      $        0.90        $            1.74        $       (0.77 )

Weighted-average common shares
outstanding-basic and diluted         21,725,986           21,725,986               21,725,986           21,725,986



                                       GAAP                      Expense adjustments                    Non-GAAP
                                      Measure                                                            Measure
                                    (Reported)                                                         (Adjusted)
                                    Year Ended                                   Licensor              Year Ended
                                   December 31,          Stock-based              legacy              December 31,
                                       2011             compensation          clinical trials             2011
2011 Operating expense:
General and administrative         $       9,331        $      (7,615 )      $              -         $       1,716
Research and development                     826                  (38 )                     -                   788

Loss from operations                     (10,157 )              7,653                       -                (2,504 )
Other income (expense):
Interest income                                4                   -                        -                     4
Other expense                                (80 )                 -                        -                   (80 )

Totals                                       (76 )                 -                        -                   (76 )

Net loss                           $     (10,233 )      $       7,653        $              -         $      (2,580 )

Net loss applicable to common
stock                              $     (10,233 )      $       7,653        $              -         $      (2,580 )

Net loss per common
share-basic and diluted            $       (1.32 )      $        0.99        $              -         $       (0.33 )

Weighted-average common shares
outstanding-basic and diluted          7,746,259            7,746,259                7,746,259            7,746,259


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