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AVEO > SEC Filings for AVEO > Form 10-Q on 10-May-2013All Recent SEC Filings

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Form 10-Q for AVEO PHARMACEUTICALS INC


10-May-2013

Quarterly Report


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

Forward-Looking Information

The following discussion of our financial condition and results of operations should be read with our unaudited condensed consolidated financial statements and notes included in Part I. Item 1 of this Quarterly Report on Form 10-Q for the three months ended March 31, 2013, as well as the audited consolidated financial statements and notes and Management's Discussion and Analysis of Financial Condition and Results of Operations, included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed with the Securities and Exchange Commission, or SEC, on March 11, 2013. This Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations, estimates, forecasts, and projections and the beliefs and assumptions of our management and include, without limitation, statements with respect to our expectations regarding our research, development and commercialization plans and prospects, results of operations, general and administrative expenses, research and development expenses, and the sufficiency of our cash for future operations. Words such as "anticipate," "target," "project," "believe," "goals," "estimate," "potential," "predict," "may," "expect," "might," "could," "intend," variations of these terms or the negative of those terms and similar expressions are intended to identify these forward-looking statements. Readers are cautioned that these forward-looking statements are predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Among the important factors that could cause actual results to differ materially from those indicated by our forward-looking statements are those discussed under the heading "Risk Factors" in Item 1A of Part II and elsewhere in this report.

Recent Developments

On November 27, 2012, the U.S. Food and Drug Administration, or the FDA, accepted for filing our New Drug Application, or NDA, for tivozanib, our lead product candidate, with the proposed indication for the treatment of patients with advanced renal cell carcinoma, or RCC. On May 2, 2013, the FDA's Oncologic Drugs Advisory Committee, or ODAC, which provides the FDA with independent expert advice and recommendations, reviewed our NDA for tivozanib and voted 13 to 1 that the application for tivozanib did not demonstrate a favorable benefit/risk evaluation for the treatment of advanced RCC in an adequate and well-controlled trial. Furthermore, the ODAC's vote was consistent with the position taken by the FDA at the ODAC meeting. The FDA's review of the NDA is expected to be complete by no later than July 28, 2013 according to the timelines established by the Prescription Drug User Fee Act, or PDUFA.

Given the ODAC's determination and its 13 to 1 vote, as well as the position taken by the FDA at the ODAC meeting, it is now significantly more likely that the FDA will make an adverse determination with respect to our current NDA and there is an increased probability that the FDA will conclude that an additional trial or trials are needed before marketing approval for tivozanib can be granted, if at all. We are currently evaluating the effect of the ODAC's decision, and likely adverse FDA determination, on our strategic operating plan, including:

• evaluating the implementation of a strategy to maximize the value of our oncology programs and pipeline assets, which we expect to include a potential restructuring to conserve existing capital; and

• evaluating, with our tivozanib partner, Astellas Pharma, Inc., or Astellas, the clinical and regulatory path forward for tivozanib in RCC, including Astellas' decision as to whether to submit a Marketing Authorization Application, or MAA, for RCC to the European Medicines Agency, or EMA.

On May 9, 2013, a class action lawsuit was filed against us and certain of our officers in the United States District Court for the District of Massachusetts, captioned Paul Sanders v. Aveo Pharmaceuticals, Inc., et al., No. 1:13-cv-11157-JLT. The complaint purports to be brought on behalf of shareholders who purchased our common stock between January 3, 2012 and May 1, 2013. The complaint generally alleges that we and certain of our officers violated Sections 10(b) and/or 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by making allegedly false and/or misleading statements concerning the phase 3 trial design and results for the TIVO-1 study in an effort to lead investors to believe that the drug would receive approval from the FDA. The complaint seeks unspecified damages, interest, attorneys' fees, and other costs. We deny any allegations of wrongdoing and intend to vigorously defend against this lawsuit. However, there is no assurance that we will be successful in our defense or that insurance will be available or adequate to fund any settlement or judgment or the litigation costs of this action. Moreover, we are unable to predict the outcome or reasonably estimate a range of possible loss at this time.

Overview

We are a cancer therapeutics company, which does business as AVEO Oncology™, committed to discovering, developing and commercializing targeted cancer therapies to impact patients' lives. Our product candidates are directed against important mechanisms, or targets, known or believed to be involved in cancer. Our proprietary Human Response Platform™, a novel method of building preclinical models of human cancer, provides us with unique insights into cancer biology.


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We have announced detailed data from our global, phase 3 clinical trial comparing the efficacy and safety of tivozanib with Nexavar® (sorafenib), an approved therapy, for first-line treatment in advanced RCC, which we refer to as the TIVO-1 (Tivozanib Versus Sorafenib in 1st line Advanced RCC) study. The TIVO-1 study was conducted in patients with advanced clear cell RCC who had undergone a prior nephrectomy (kidney removal) and who had not received any prior VEGF- or mTOR-targeted therapy. In this trial, we measured, among other things, each patient's progression-free survival, or PFS, which refers to the period of time that began when a patient entered the clinical trial and ended when either the patient died or the patient's cancer had grown by a specified percentage or spread to a new location in the body. PFS was the primary endpoint in the TIVO-1 study. Secondary endpoints included overall survival, for which patients continue to be followed, and safety. Key data from the TIVO-1 study include:

• Tivozanib demonstrated a statistically significant improvement in PFS over Nexavar with a median PFS of 11.9 months for tivozanib compared to a median PFS of 9.1 months for Nexavar in the overall study population (HR=0.797, 95% confidence interval, or CI, 0.639-0.993; P=0.042).

• Tivozanib also demonstrated a statistically significant improvement in PFS with a median PFS of 12.7 months compared to a median PFS of 9.1 months for Nexavar in the pre-specified subpopulation of patients who received no prior systemic anti-cancer therapy for metastatic disease-a subpopulation that comprised approximately 70% of the total study population (HR=0.756, 95% CI 0.580-0.985; P=0.037).

• Tivozanib demonstrated a well-tolerated safety profile as evidenced by a lower rate of dose reductions (11.6% vs. 42.8%; p<0.001) and interruptions (17.8% vs. 35.4%; p<0.001) due to adverse events and discontinuations (4.2% vs. 5.4%; p=0.683) due to drug-related adverse events compared to Nexavar.

• The most commonly reported side effect for tivozanib was hypertension (44% for tivozanib vs. 34% for Nexavar), and for Nexavar was hand-foot syndrome (13% for tivozanib vs. 54% for Nexavar). Other side effects that are commonly associated with other VEGF receptor inhibitors included: diarrhea (22% for tivozanib vs. 32% for Nexavar), dysphonia, or hoarseness of voice (21% for tivozanib vs. 5% for Nexavar), fatigue (18% for tivozanib vs. 16% for Nexavar), and neutropenia, a condition of having a lower than normal number of white blood cells (10% for tivozanib vs. 9% for Nexavar).

• The final, protocol-specified analysis of overall survival, or OS, at 24 months since last patient enrolled showed a median OS of 28.8 months (95% CI: 22.5-NA) for the tivozanib arm versus a median OS of 29.3 months (95% CI: 29.3-NA) for the Nexavar arm. No statistical difference between the two arms (HR=1.245, p=0.105) was observed. A one-sided crossover for patients randomized to the Nexavar arm was offered pursuant to a separate, long-term treatment protocol to allow trial participants originally treated in the Nexavar arm to receive tivozanib upon disease progression. This resulted in a substantial difference in the use of subsequent therapies. Of 189 patients who discontinued their initial therapy on the tivozanib arm, 36% received some form of subsequent therapy, including 10% who received subsequent anti-VEGF therapy. Of 226 patients who discontinued their initial therapy on the Nexavar arm, 74% received some form of subsequent therapy, including 70% who received subsequent anti-VEGF therapy (98% of whom received tivozanib).

Although TIVO-1 met its primary endpoint of PFS, the ODAC advised us that due to the OS trend favoring the control arm, it believes that a favorable risk/benefit profile was not conclusively demonstrated. Please see "-Recent Development" for a further discussion of the ODAC's determination as to the TIVO-1 trial, and related positions taken by the FDA.

In addition to the TIVO-1 study, we are evaluating tivozanib in multiple clinical trials including our BATON (Biomarker Assessment of Tivozanib in ONcology) program, a series of clinical trials assessing biomarkers in solid tumors that may be predictive of clinical response to tivozanib in patients with advanced RCC, metastatic colorectal cancer, and locally recurrent or metastatic triple negative breast cancer. We also have an ongoing clinical study which we refer to as TAURUS (TivozAnib Use veRsUs Sutent in advanced RCC: Patient Preference), seeking to demonstrate patient preference of tivozanib compared to Sutent® (sunitinib) as first-line therapy in patients with advanced RCC. We expect that the results of all of our clinical trials will help to inform our clinical development plans for tivozanib as a monotherapy and in combination with other anti-cancer therapies in multiple cancer indications.

We acquired exclusive rights to develop and commercialize tivozanib worldwide outside of Asia pursuant to a license agreement we entered into with Kirin Brewery Co. Ltd. (now Kyowa Hakko Kirin), or KHK, in 2006. Under the license agreement, we obtained an exclusive license to research, develop, manufacture and commercialize tivozanib, pharmaceutical compositions thereof and associated biomarkers for the diagnosis, prevention and treatment of any and all human diseases and conditions outside of Asia. KHK has retained all rights to tivozanib in Asia. We have obligations to make milestone and royalty payments to KHK. The royalty rates range from the low to mid-teens as a percentage of our net sales of tivozanib. We are also obligated to pay a specified percentage of certain amounts we receive from any third-party sublicensees, including Astellas. As discussed below under the heading "Strategic Partnerships," we entered into a strategic collaboration with Astellas in which we have agreed to share responsibility, including all profits and losses, with Astellas for continued development and commercialization of tivozanib in the United States, Mexico and Canada, or North America, and Europe. Throughout the rest of the world, outside of North America, Europe and Asia, we granted Astellas an exclusive, royalty-bearing license to develop and commercialize tivozanib.

In addition to tivozanib, we have a pipeline of monoclonal antibodies derived from our proprietary Human Response Platform. Ficlatuzumab is an antibody which binds to hepatocyte growth factor, or HGF, thereby blocking its function. We intend to focus our


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efforts on further ficlatuzumab development through external collaborations. AV-203 is a monoclonal antibody that targets the ErbB3 receptor, which we have partnered outside of North America with Biogen Idec International GmbH, a subsidiary of Biogen Idec, Inc., and which we collectively refer to herein as Biogen Idec. In May 2012, we announced the initiation of a phase 1 clinical trial examining the safety, tolerability and preliminary efficacy of AV-203 along with exploratory biomarkers in patients with metastatic or advanced solid tumors.

Our proprietary Human Response Platform was designed to overcome many of the limitations of traditional approaches to modeling human cancer, as we use patented genetic engineering techniques to grow populations of spontaneous tumors in animals containing human-relevant, cancer-causing mutations and tumor variations akin to what is seen in populations of human tumors. Because we believe that these populations of tumors better replicate what is seen in human cancer, we believe that our Human Response Platform provides us with unique insights into cancer biology and mechanisms of drug response and resistance, and represents a significant improvement over traditional approaches. The identification and development of potential biomarkers through our Human Response Platform is a core component of our oncology drug development efforts.

We have devoted substantially all of our resources to our drug discovery efforts, including research and development, conducting clinical trials for our product candidates, protecting our intellectual property and supporting the general and administrative functions of these operations. We have generated no revenue from product sales through March 31, 2013, and have principally funded our operations through:

• $373.1 million of non-dilutive capital in the form of license fees, milestone payments and research and development funding received from our strategic partners;

• $169.6 million of funding from the sale of convertible preferred stock to investors prior to our initial public offering, including $77.5 million of equity sales to our strategic partners;

• $89.7 million of gross proceeds from the sale of common stock in connection with the completion of our initial public offering;

• $26.5 million of loan proceeds in connection with our loan agreement with Hercules Technology II, L.P. and Hercules Technology III, L.P.;

• $68.3 million of gross proceeds from unregistered private placements of our common stock; and

• $168.7 million of gross proceeds from the sale of common stock in connection with our public offerings of our common stock in June 2011 and January 2013.

We do not have a history of being profitable and, as of March 31, 2013, we had an accumulated deficit of $354.3 million. We anticipate that we will continue to incur significant operating costs over the next several years as we continue our planned development activities of tivozanib, ficlatuzumab, AV-203 and certain of our existing antibody programs. We will need additional financing to support our operating activities.

Strategic Partnerships

Kyowa Hakko Kirin

In December 2006, we entered into a license agreement with Kirin Brewery Co. Ltd. (now Kyowa Hakko Kirin) which we sometimes refer to as KHK, under which we obtained an exclusive license, with the right to grant sublicenses subject to certain restrictions, to research, develop, manufacture and commercialize tivozanib, pharmaceutical compositions thereof and associated biomarkers. Our exclusive license covers all territories in the world, except for Asia. KHK has retained rights to tivozanib in Asia. Under the license agreement, we obtained exclusive rights in our territory under certain KHK patents, patent applications and know-how related to tivozanib, to research, develop, make, have made, use, import, offer for sale, and sell tivozanib for the diagnosis, prevention and treatment of any and all human diseases and conditions. We and Kyowa Hakko Kirin each have access to and can benefit from the other party's clinical data and regulatory filings with respect to tivozanib and biomarkers identified in the conduct of activities under the license agreement.

Under the license agreement, we are obligated to use commercially reasonable efforts to develop and commercialize tivozanib in our territory, including meeting certain specified diligence goals. Prior to the first anniversary of the first post-marketing approval sale of tivozanib in our territory, neither we nor any of our subsidiaries has the right to conduct certain clinical trials of, seek marketing approval for or commercialize any other cancer product that also works by inhibiting the activity of the VEGF receptor.

Upon entering into the license agreement with KHK, we made a one-time cash payment in the amount of $5.0 million. In March 2010, we made a $10.0 million milestone payment to KHK in connection with the dosing of the first patient in our phase 3 clinical trial of tivozanib. We made a $22.5 million payment to KHK during the year ended December 31, 2011 related to the up-front license payment received under the collaboration and license agreement with Astellas which we entered into in February 2011. In December 2012, we made a $12.0 million milestone payment to KHK in connection with the acceptance by the FDA of our NDA filing for tivozanib.


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Under our license agreement with KHK, we may be required to:

• make future milestone payments upon the achievement of specified regulatory milestones in the United States;

• pay tiered royalty payments on net sales we make of tivozanib in our territory ranging from the low to mid-teens as a percentage of our net sales of tivozanib. The royalty rate escalates within this range during each calendar year based on increasing tivozanib sales during such calendar year. Our royalty payment obligations in a particular country in our territory begin on the date of the first commercial sale of tivozanib in that country, end on the later of 12 years after the date of first commercial sale of tivozanib in that country or expiration of the last-to-expire valid claim of the licensed patents covering tivozanib in that country, and are subject to offsets under certain circumstances; and

• pay 30% of certain amounts we receive under our collaboration and license agreement with Astellas, which we describe below, in connection with Astellas' development and commercialization activities outside of North America and Asia related to tivozanib (including a potential $4.5 million milestone payable to KHK in connection with the acceptance by the EMA of the filing of a MAA and $9.0 million to KHK in connection with the EMA granting marketing approval in Europe), other than amounts we receive in respect of research and development funding or equity investments, subject to certain limitations.

Astellas Pharma

In February 2011, we entered into a collaboration and license agreement with Astellas and certain of its indirect wholly-owned subsidiaries in connection with which we and Astellas plan to develop and seek to commercialize tivozanib for the treatment of a broad range of cancers, including RCC, breast and colorectal cancers. For a discussion of recent regulatory developments relating to the planned development and commercialization of tivozanib for its lead indication in advanced RCC, see "-Recent Development." In view of the FDA-related uncertainties described therein, we and Astellas are currently evaluating the clinical and regulatory path forward for tivozanib, including Astellas' decision as to whether to submit a MAA for RCC to the EMA.

Under the terms of the collaboration agreement, we and Astellas share responsibility for continued development and commercialization of tivozanib in North America and Europe under the joint development plan and joint commercialization plan, respectively. Throughout the rest of the world (which excludes North America, Europe and Asia), which we refer to as the royalty territory, Astellas has an exclusive, royalty-bearing license to develop and commercialize tivozanib. Our plan to commercialize tivozanib in collaboration with Astellas, as described herein, is subject to our and Astellas' receipt of necessary regulatory approvals from the FDA and foreign regulatory authorities based upon favorable results in clinical trials. There can be no assurance that such approvals will be obtained.

If tivozanib is approved by applicable regulatory agencies, we will hold all marketing authorizations in North America, including any NDA in the United States, and Astellas will hold all marketing authorizations in the rest of the world, other than Asia.

If tivozanib is approved by applicable regulatory agencies, we, as the lead commercialization party in North America, will have lead responsibility for formulating the commercialization strategy for North America under the joint commercialization plan, with each of us and Astellas responsible for conducting 50% of the sales efforts and medical affairs activities in North America. Astellas will have lead responsibility for commercialization activities in Europe under the joint commercialization plan, and we will be responsible for conducting 50% of the medical affairs activities in the major European countries. All costs associated with each party's conduct of development and commercialization activities (including clinical manufacturing and commercial manufacturing costs, if any) in North America (including any regulatory milestones and royalties associated with tivozanib in North America which may become payable by us to KHK under our license agreement with KHK), and any resulting profits or losses, are shared equally between the parties. All costs associated with each party's conduct of development and commercialization activities (including clinical manufacturing and commercial manufacturing costs, if any) in Europe, and any resulting profits or losses, are shared equally between the parties. As between the parties, we will remain responsible for complying with our sublicense revenue sharing obligations, if any, to KHK under our license agreement with KHK in connection with the development and commercialization of tivozanib outside of North America.

We are responsible for manufacturing, through our third-party manufacturer, all of Astellas' requirements for tivozanib pursuant to a clinical supply agreement which we have entered into with Astellas, and a commercial supply agreement for supply of tivozanib in Europe and the royalty territory which the parties are currently negotiating.

Each party is obligated to use commercially reasonable efforts to develop and commercialize tivozanib in North America, and to develop and commercialize tivozanib in each European country specified in the agreement. Astellas is also obligated to use commercially reasonable efforts to develop and commercialize tivozanib in each country in the royalty territory.

During the term of the agreement, neither party nor its controlled affiliates may commercialize anywhere in North America, Europe or the royalty territory any product that has a specified mechanism of action (as further defined in the collaboration agreement) for any oncology indication, except that Astellas may commercialize specified compounds for hematological cancer. We and Astellas may also commercialize products (other than tivozanib) in the royalty territory, on a country-by-country basis, after expiration of the applicable royalty term, and in North America and Europe after expiration of all valid claims under the licensed patents.


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In connection with the agreement, we received an initial cash payment of $125 million, comprised of a $75 million license fee and $50 million in research and development funding, both of which are non-creditable and non-refundable against any amounts due under the collaboration agreement. We retained net proceeds of approximately $97.6 million of the initial cash payment from Astellas, after payments to KHK and strategic, legal and financial advisors. In December 2012, we received a $15.0 million milestone payment from Astellas in connection with the acceptance by the FDA of our NDA filing for tivozanib. We are also eligible to receive an aggregate of approximately $1.3 billion in potential future milestone payments, comprised of (i) up to $85 million in substantive milestone payments upon achievement of specified clinical and development milestone events, (ii) up to $475 million in substantive milestone payments upon achievement of specified regulatory milestone events, including up to $75 million in milestone payments in connection with specified regulatory filings, and receipt of marketing approvals, for tivozanib to treat RCC in the United States and Europe, and (iii) up to approximately $780 million in milestone payments upon the achievement of specified commercial sales events. The first anticipated clinical and development milestone is due to us upon initiation of our next phase 3 clinical trial in RCC in combination with another therapeutic, or in breast cancer, colorectal cancer or another indication. The timing of this milestone is uncertain, as we have not finalized plans for our future trials. We have elected to recognize all milestone payments as revenue once the milestones have been triggered if the milestone is deemed to be substantive. A potential significant near-term regulatory milestone is acceptance by the EMA of the first filing of a MAA ($15 million), if Astellas elects to submit a MAA to the EMA. In addition, if tivozanib is successfully developed and launched in the royalty territory, Astellas will be required to pay to us tiered, double digit royalties on net sales of tivozanib in the royalty territory, if any, subject to offsets under certain circumstances. We are required to pay KHK low to mid-teen royalties on our net sales in North America, and 30% of certain amounts we may receive from Astellas in connection with Astellas' development and commercialization activities in Europe and the royalty territory, including up-front license fees, milestone payments and royalties.

We are accounting for the joint development and commercialization activities in North America and Europe as a joint risk-sharing collaboration in accordance with Accounting Standards Codification, or ASC, 808 Collaborative Arrangements. In addition, these activities were not deemed to be separate deliverables under the agreement with Astellas.

Payments from Astellas with respect to Astellas' share of research and development costs incurred by us are recorded as a reduction to expense due to the joint cost-sharing provisions of the agreement in North America and Europe. As a result of the cost-sharing provisions in our agreement with Astellas, we reduced research and development expense by $6.3 million and $8.0 million during the three months ended March 31, 2013 and 2012, respectively and general and administrative expense by $1.3 million and $0.6 million during the three months ended March 31, 2013 and 2012, respectively. The net amount due to us from Astellas pursuant to the cost-sharing provisions is $7.2 million at March 31, 2013.

Activities under the agreement with Astellas outside of the joint development and commercialization activities in North America and Europe were evaluated under ASC 605-25 Revenue Recognition-Multiple Element Arrangements, or ASC 605-25, to determine if they represented a multiple element revenue arrangement. The agreement with Astellas includes the following deliverables outside of the . . .

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