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TSRO > SEC Filings for TSRO > Form 10-Q on 26-Apr-2013All Recent SEC Filings

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Form 10-Q for TESARO, INC.


26-Apr-2013

Quarterly Report


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

The following information should be read in conjunction with the unaudited financial information and the notes thereto included in this Quarterly Report on Form 10-Q and the audited financial information and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2012.

Except for the historical information contained herein, the matters discussed in this Quarterly Report on Form 10-Q may be deemed to be forward-looking statements that involve risks and uncertainties. We make such forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. In this Quarterly Report on Form 10-Q, words such as "may," "will," "expect," "anticipate," "estimate," "intend," and similar expressions (as well as other words or expressions referencing future events, conditions or circumstances) are intended to identify forward-looking statements.

Examples of forward looking statements contained in this report include statements regarding the following: our expectation that research and development and general and administrative expenses will increase in the future; our expectations regarding our development plans for rolapitant, niraparib and TSR-011; our plans not to develop backup compounds to which we currently have rights; our estimate of the earliest date at which we might commercialize any of our products; our anticipated royalty payments; and the forecast of the period of time through which our financial resources will be adequate to support our operations.

Our actual results and the timing of certain events may differ materially from the results discussed, projected, anticipated or indicated in any forward-looking statements. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may differ materially from the forward-looking statements contained in this Quarterly Report. In addition, even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate are consistent with the forward-looking statements contained in this Quarterly Report, they may not be predictive of results or developments in future periods.

The following information and any forward-looking statements should be considered in light of factors discussed elsewhere in this Quarterly Report on Form 10-Q, including those risks identified in the Prospectus that forms a part of our Registration Statement on Form S-1 (File No. 333-186753), which Prospectus was filed with the SEC pursuant to Rule 424 on February 27, 2013.

We caution readers not to place undue reliance on any forward-looking statements made by us, which speak only as of the date they are made. We disclaim any obligation, except as specifically required by law and the rules of the SEC, to publicly update or revise any such statements to reflect any change in our expectations or in events, conditions or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements.

Overview

We are an oncology-focused biopharmaceutical company dedicated to improving the lives of cancer patients. We were founded in March 2010 by former executives of MGI


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PHARMA, Inc., or MGI PHARMA, an oncology and acute-care focused biopharmaceutical company. We have in-licensed and are currently developing three oncology-related product candidates, rolapitant, niraparib and TSR-011:

Rolapitant - a potent and long-acting neurokinin-1, or NK-1, receptor antagonist currently in Phase 3 clinical trials for the prevention of chemotherapy induced nausea and vomiting, or CINV.

Niraparib - formerly known as MK-4827, an orally active and potent poly (ADP-ribose) polymerase, or PARP, inhibitor that has undergone a Phase 1 clinical trial in cancer patients as a monotherapy. We intend to evaluate niraparib for the treatment of patients with platinum sensitive ovarian cancer in a Phase 3 clinical study, which we expect to commence during 2013. Additionally, we intend to initiate a Phase 3 clinical study using niraparib to treat breast cancer during the second half of 2013. Further, we may also evaluate niraparib for the treatment of gastric, lung, sarcoma and prostate cancer.

TSR-011 - an orally available anaplastic lymphoma kinase, or ALK, inhibitor (targeted anti-cancer agent) currently in a Phase 1/2 dose escalation clinical trial in cancer patients.

Development Stage Operations. We commenced business operations in May 2010. Our operations to date have been limited to organizing and staffing our company, business planning, raising capital, acquiring and developing product candidates, identifying potential product candidates and undertaking preclinical studies and clinical trials of our product candidates. To date, we have not generated any revenues and have financed our operations with net proceeds from public offerings of our common stock and private placements of our preferred stock.

As of March 31, 2013, we had a deficit accumulated during the development stage of $106.0 million. Our net losses were $18.9 million, $61.8 million, $16.4 million and $9.0 million for the three months ended March 31, 2013, the years ended December 31, 2012 and 2011 and for the period from March 26, 2010 (inception) to December 31, 2010, respectively. We expect to incur significant expenses and increasing operating losses for the foreseeable future. We expect our expenses to increase in connection with our ongoing activities, particularly as we continue the development and clinical trials of, and seek regulatory approval for, our product candidates. If we obtain regulatory approval for any of our product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. Furthermore, we expect to incur additional costs associated with operating as a public company. Accordingly, we will seek to fund our operations through additional private or public equity or debt offerings, and may seek additional capital through arrangements with strategic partners or from other sources. Adequate additional financing may not be available to us on acceptable 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 strategy. We expect that research and development expenses will increase as we continue the development of our product candidates and general and administrative costs will increase as we grow and operate as a public company. We will need to generate significant revenues to achieve profitability, and we may never do so.

Rolapitant. In December 2010, we entered into a license agreement with OPKO Health, Inc., or OPKO, to obtain exclusive worldwide rights to research, develop, manufacture, market and sell rolapitant. The license agreement also extended to an additional, backup compound, SCH900978, to which we have the same rights and obligations as rolapitant, but which we are not currently advancing. In consideration


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for this license, we paid OPKO $6.0 million upon signing the agreement and issued 1,500,000 shares of our Series O preferred stock. At the time of this transaction, the fair value of our Series O preferred stock was determined to be approximately $0.6 million. We are also required to make milestone payments to OPKO of up to an aggregate of $30.0 million if specified regulatory and initial commercial sales milestones are achieved. In addition, we are required to make additional milestone payments to OPKO of up to an aggregate of $85.0 million if specified levels of annual net sales of rolapitant are achieved. If commercial sales of rolapitant commence, we are required to pay OPKO tiered royalties on the amount of annual net sales achieved in the United States and Europe at percentage rates that range from the low teens to the low twenties, which we expect will result in an effective royalty rate in the low teens. The royalty rate on annual net sales outside of the United States and Europe is slightly above the single digits. We will pay royalties on rolapitant until the later of the date that all of the patent rights licensed from OPKO and covering rolapitant expire, are invalidated or are not enforceable and twelve years from the first commercial sale of the product, in each case, on a country-by-country and product-by-product basis. If we elect to develop and commercialize rolapitant in Japan through a third-party licensee we will share equally with OPKO all amounts received by us in connection with such activities under our agreement with such third party, subject to certain exceptions and deductions. OPKO also retains an option to become the exclusive distributor of such products in Latin America, provided that OPKO exercises that option within a defined period following specified regulatory approvals in the United States.

We are responsible for all preclinical, clinical, regulatory and other activities necessary to develop and commercialize rolapitant. There were no ongoing clinical trials for rolapitant or SCH900978 at the time of our acquisition of these rights.

Niraparib. In May 2012, we entered into a license agreement with Merck Sharp & Dohme Corp., a subsidiary of Merck, under which we obtained exclusive, worldwide rights to certain patents and non-exclusive rights to certain Merck know-how, to research, develop, manufacture, market and sell niraparib and a backup compound, MK-2512, for all therapeutic and prophylactic uses in humans. We are not currently advancing MK-2512. Under the terms of the license agreement, we made an up-front payment to Merck of $7.0 million in June 2012. We are also required to make milestone payments to Merck of up to $57.0 million in development and regulatory milestones for the first indication, up to $29.5 million in development and regulatory milestones for each successive indication, and up to $87.5 million in one-time sales milestones based on the achievement of annual sales objectives. If commercial sales of niraparib commence, we will pay Merck tiered royalties at percentage rates in the low teens based on worldwide annual net sales, until the later of the expiration of the last patent licensed from Merck covering or claiming niraparib, or the tenth anniversary of the first commercial sale of niraparib, in either case, on a country-by-country basis.

We are responsible for all clinical, regulatory and other activities necessary to develop and commercialize niraparib. At the time of the license transaction, niraparib had completed a Phase 1 clinical trial in cancer patients as a monotherapy. We intend to evaluate niraparib for the treatment of patients with platinum sensitive ovarian cancer in a Phase 3 clinical study, which we expect to commence during 2013. Additionally, we intend to initiate a Phase 3 clinical study using niraparib to treat breast cancer during the second half of 2013. Further, we may also evaluate niraparib for the treatment of gastric, lung, sarcoma and prostate cancer. None of the assets to which we acquired rights have alternative future uses, nor have they reached a stage of technological feasibility. We have accounted for this transaction as an asset acquisition because we did not acquire any processes or activities in addition to the license. Accordingly, we recorded the entire purchase price of $7.0 million to acquired in-process research and


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development expense.

ALK Program. In March 2011, we entered into a license agreement with Amgen, Inc., or Amgen, to obtain exclusive worldwide rights to research, develop, manufacture, market and sell certain licensed ALK inhibitor compounds. To date, under the terms of the license agreement, we have made up-front and milestone payments to Amgen of $1.5 million. We are also required to make additional milestone payments to Amgen of up to an aggregate of $137.0 million if specified clinical development, regulatory, initial commercialization and annual net product sales milestones are achieved. If commercial sales of a product commence, we will pay Amgen tiered royalties at percentage rates ranging from the mid-single digits to slightly above the single digits based on cumulative worldwide net sales until the later of the last patent licensed from Amgen covering the product, the loss of regulatory exclusivity for the product, or the tenth anniversary of the first commercial sale of the product, in all cases, on a country-by-country and product-by-product basis.

We are responsible for all preclinical, clinical, regulatory and other activities necessary to develop and commercialize the ALK product candidates. At the time of the license transaction, ALK was a preclinical compound. We accounted for this transaction as an asset acquisition because we did not acquire any processes or activities in addition to the license. We recorded the entire purchase price of $0.5 million to acquired in-process research and development expense. During the fourth quarter of 2012, we announced that our IND application for TSR-011 had become effective and that we had dosed the first patient in a Phase 1/2 dose escalation clinical study in cancer patients. We have currently dosed patients at the fifth dose level in this trial.

Private Placements of Securities and Public Offerings of Common Stock. As of March 31, 2013, our principal source of liquidity was cash and cash equivalents, which totaled $198.6 million. Since our inception on March 26, 2010, we have funded our operations primarily through public offerings of our common stock and the private placement of our equity securities. In July 2012, we completed an initial public offering of our common stock whereby we sold 6,430,183 shares of our common stock at a price to the public of $13.50 per share and received approximately $78.0 million in proceeds, net of underwriting discounts and commissions and offering expenses. In March 2013, we completed a public offering of our common stock whereby we sold an additional 5,428,000 shares of our common stock at a price to the public of $18.00 per share and received approximately $91.3 million in proceeds, net of underwriting discounts and commissions and offering expenses. Prior to our initial public offering, we had received $120.4 million in net proceeds from the issuance of preferred stock.

Financial Operations Overview

Research and development expenses consist primarily of costs incurred for the development of our product candidates, which include:

license fees related to the acquisition of in-licensed products, which are reported on our statements of operations as acquired in-process research and development;

employee-related expenses, including salaries, bonuses, benefits, travel and stock-based compensation expense;

expenses incurred under agreements with contract research organizations, or CROs, and investigative sites that conduct our clinical trials and preclinical studies;

the cost of acquiring, developing and manufacturing active pharmaceutical ingredients and


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clinical trial materials;

facilities, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, insurance and other supplies; and

costs associated with other preclinical activities and regulatory operations.

Research and development costs are expensed as incurred. License fees and milestone payments related to in-licensed products and technology are expensed if it is determined that they have no alternative future use. Costs for certain development activities, such as clinical trials, are recognized based on an evaluation of the progress to completion of specific tasks using data such as patient enrollment, clinical site activations or information provided to us by our vendors.

Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We plan to increase our research and development expenses for the foreseeable future. Our costs associated with rolapitant will increase as we continue to enroll our Phase 3 clinical trials and continue the development of both the oral and intravenous formulations. We also expect that we will incur increasing costs and expenses associated with the niraparib development program as we continue to progress toward, and initiate, phase 3 clinical trials. We expect costs associated with TSR-011 to increase as we continue clinical development activities for this program.

We cannot determine with certainty the duration and completion costs of the current or future clinical trials of our product candidates or if, when, or to what extent we will generate revenues from the commercialization and sale of any of our product candidates that obtain regulatory approval. We may never succeed in achieving regulatory approval for any of our product candidates. The duration, costs and timing of clinical trials and development of our product candidates will depend on a variety of factors, including the uncertainties of future clinical and preclinical studies, uncertainties in clinical trial enrollment rate and significant and changing government regulation. In addition, the probability of success for each product candidate will depend on numerous factors, including competition, manufacturing capability and commercial viability. We will determine which programs to pursue and how much to fund each program in response to the scientific and clinical success of each product candidate, as well as an assessment of each product candidate's commercial potential.

The following table identifies research and development expenses and acquired in-process research and development expenses on a program-specific basis for our product candidates in-licensed through March 31, 2013. Personnel-related costs, depreciation and stock-based compensation are not allocated to a program, as they are deployed across multiple projects under development and, as such, are separately classified as personnel and other expenses in the table below (in thousands):


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                                                 Three Months Ended     (Inception) to
                                                     March 31,             March 31,
                                                  2012         2013          2013

Rolapitant Expenses
Acquired in-process research and development   $        -    $      -   $         6,630
Research and development                            5,926      11,314            56,893

Rolapitant total                                    5,926      11,314            63,523

Niraparib Expenses
Acquired in-process research and development            -           -             7,000
Research and development                                -       1,732             2,411

Niraparib total                                         -       1,732             9,411

TSR-011 Expenses
Acquired in-process research and development            -           -             1,500
Research and development                              958         471             4,225

TSR-011 total                                         958         471             5,725

Personnel and Other Expenses                        1,266       2,986            11,988

Total                                          $    8,150    $ 16,503   $        90,647

General and Administrative Expenses

General and administrative expenses consist principally of salaries and related costs for personnel, including stock-based compensation and travel expenses, in executive and other administrative functions. Other general and administrative expenses include facility related costs, communication expenses and professional fees for legal, patent review, consulting and accounting services.

We anticipate that our general and administrative expenses will increase in the future in support of continued research and development activities, potential commercialization of our product candidates and continued costs of operating as a public company. These increases will likely include increased costs related to the hiring of additional personnel and payments to outside consultants, lawyers and accountants, among other expenses. Additionally, if and when we believe a regulatory approval of the first product candidate appears likely, we anticipate an increase in payroll and expense as a result of our preparation for commercial operations, especially as it relates to the sales and marketing of our product candidates.

Other Income and Expense

Other income and expense consists primarily of interest income earned on cash and cash equivalents.


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Results of Operations



Comparison of the Three Months Ended March 31, 2012 and 2013



                                                   Three Months Ended March 31,        Increase/
                                                     2012               2013           (Decrease)
                                                                  (in thousands)
Expenses:
Research and development                        $        8,150    $         16,503    $      8,353
General and administrative                               1,199               2,400           1,201
Acquired in-process research and development                 -                   -               -
Total expenses                                           9,349              18,903           9,554

Loss from operations                                    (9,349 )           (18,903 )        (9,554 )
Other income (expense), net                                 20                  34              14

Net loss                                        $       (9,329 )  $        (18,869 )  $     (9,540 )

Research and Development Expenses. Research and development expenses were $16.5 million for the three months ended March 31, 2013, compared to $8.2 million for the three months ended March 31, 2012, an increase of $8.3 million. The increase was primarily due to higher expenses related to the development of our in-licensed product candidates, rolapitant and niraparib, partially offset by lower expenses associated with the development of our in-licensed product candidate, TSR-011. Significant 2013 activities causing the increase in expense included:

an increase of $5.4 million in costs associated with the rolapitant development program, including the Phase 3 and other ongoing clinical trials, drug substance and drug product development, clinical supply manufacturing and distribution;

an increase of $1.7 million associated with niraparib product development activities, offset by a decrease of $0.5 million associated with TSR-011 product development activities, and;

an increase of $1.7 million for salaries, benefits and other personnel costs to support the growth of our development activities.

Expenses related to the TSR-011 program decreased in the three months ended March 31, 2013 versus the same period in the prior year primarily as a result of lower drug substance development and non-clinical activities offset by higher clinical costs associated with the ongoing Phase 1/2 study which began in the fourth quarter of 2012.

General and Administrative Expenses. General and administrative expenses for the three months ended March 31, 2013 were $2.4 million compared to $1.2 million for the three months ended March 31, 2012, an increase of $1.2 million. The increase was due primarily to an increase of $0.8 million in salaries, benefits and other personnel related costs and $0.4 million in professional and


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consulting fees and other expenses to support corporate operational activities including certain additional costs associated with public company operations.

Other Income (expense), Net. Other income is primarily comprised of interest income earned on cash and cash equivalents.

Liquidity and Capital Resources

Sources of Liquidity

To date, we have not generated any revenue. As of March 31, 2013, our principal source of liquidity was cash and cash equivalents, which totaled $198.6 million. Since our inception on March 26, 2010, we have funded our operations primarily through public offerings of our common stock and the private placement of our equity securities. In July 2012, we completed an initial public offering of our common stock whereby we sold 6,430,183 shares of our common stock at a price to the public of $13.50 per share and received approximately $78.0 million in proceeds, net of underwriting discounts and commissions and offering expenses. In February 2013, we completed a public offering of our common stock whereby we sold an additional 5,428,000 shares of our common stock at a price to the public of $18.00 per share and received approximately $91.3 million in proceeds, net of underwriting discounts and commissions and offering expenses.

Prior to July 2012, we had received $120.4 million in net proceeds from the private placement of our preferred stock. This amount includes net proceeds of approximately $58.3 million that we received in March 2012 upon the issuance of 26,884,442 shares of our Series B preferred stock to certain existing investors in connection with the Series B Purchase Agreement.

Cash Flows



The following table sets forth the primary sources and uses of cash for each of
the periods below (in thousands):



                                               Three Months Ended March 31,
                                                 2012               2013

Net cash provided by (used in):
Operating activities                        $       (8,453 )  $        (17,854 )
Investing activities                                   (30 )              (308 )
Financing activities                                57,302              91,361

Net increase in cash and cash equivalents           48,819              73,199


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Cash Flows from Operating Activities.

The use of cash in both the three months ended March 31, 2012 and 2013 resulted primarily from our net losses adjusted for non-cash charges and favorable changes in components of working capital. The increase of $9.4 million in cash used in operating activities for the three months ended March 31, 2013 compared to the three months ended March 31, 2012 is primarily due to an increase in research and development expenses as we continued to progress the rolapitant, niraparib and TSR-011 development programs. This increase included increased . . .

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