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KBIO > SEC Filings for KBIO > Form 10-Q on 14-May-2013All Recent SEC Filings

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Form 10-Q for KALOBIOS PHARMACEUTICALS INC


14-May-2013

Quarterly Report


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

Forward-Looking Statements

The following discussion and analysis should be read in conjunction with our financial statements and accompanying notes included in this Quarterly Report on Form 10-Q and the financial statements and accompanying notes thereto 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 29, 2013. This discussion contains "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Such forward looking statements involve risks and uncertainties. We use words such as "may," "will," "expect," "anticipate," "estimate," "intend," "plan," "predict," "potential," "believe," "should" and similar expressions to identify forward-looking statements. Although we believe the expectations reflected in these forward-looking statements are reasonable, such statements are inherently subject to risk and we can give no assurances that our expectations will prove to be correct. These statements appearing throughout this Quarterly Report on Form 10-Q are statements regarding our intent, belief, or current expectations, primarily regarding our operations. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q. As a result of many factors, such as those set forth under "Risk Factors" under Item 1A of Part II below, and elsewhere in this Quarterly Report on Form 10-Q, our actual results may differ materially from those anticipated in these forward-looking statements. We undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date of this report or to reflect actual outcomes.

Overview

We are a biopharmaceutical company focused on monoclonal antibody therapeutics for diseases that are a significant burden to society and patients and their families. We have a portfolio of patient-targeted, first-in-class antibodies using our Humaneered® antibody technology to treat serious medical conditions with a primary clinical focus on respiratory diseases and cancer. Our principal pharmaceutical product candidates at the clinical development stage are:

• KB001-A, a Humaneered®, PEGylated, anti-PcrV Fab' antibody that is being developed for the prevention and treatment of Pa infections in mechanically ventilated patients and CF patients with chronic Pa infections;

• KB003, a Humaneered® anti-GM-CSF monoclonal antibody that is being developed for the treatment of severe asthma inadequately controlled by corticosteroids; and

• KB004, a Humaneered® anti-EphA3 monoclonal antibody that has the potential to offer a novel approach to treating both hematologic malignancies and solid tumors.

In January 2010, we entered into an agreement with Sanofi pursuant to which we granted to Sanofi an exclusive worldwide license to develop, manufacture, and commercialize antibodies directed against the PcrV protein of Pa (including KB001-A) for all indications, and Sanofi is solely responsible for research, development, manufacturing, and commercialization. As part of this agreement, we retained the right to develop and promote KB001-A for Pa in CF or bronchiectasis patients. Sanofi is focusing its clinical development on prevention of Pa VAP. Pursuant to the agreement, we received an initial upfront payment of $35 million and an additional $5 million payment in August 2011 that were recognized as revenue through June 30, 2012. We have the potential to receive additional contingent payments aggregating up to $250 million upon achievement by Sanofi of certain clinical, regulatory and commercial events, together with tiered royalties based upon global net sales of licensed products. However, there can be no assurances that Sanofi will continue to further develop KB001-A or achieve the events that will trigger the contingent payments. As a result, we may not recognize any additional revenue from this arrangement. We are conducting a Phase 2 clinical trial in CF patients with chronic Pa infections. As part of Sanofi's clinical development plan for Pa VAP, Sanofi is conducting a Phase 1 clinical study in healthy volunteers to evaluate higher doses than those that we previously tested. We understand that the Phase 1 study will be followed, after completion of manufacturing process development and scale-up, by a Phase 2b intravenous study in late 2014 to determine the safety and efficacy of KB001-A in preventing Pa VAP and then based on results from their clinical trial Sanofi plans to conduct a subsequent Phase 3 study. We also understand that the Phase 2b and Phase 3 trials are being designed as pivotal studies and are intended to serve as a basis for registration of KB001-A for the prevention of Pa VAP.


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We initiated a 180 patient randomized, double-blind, placebo-controlled monthly-dosed, intravenous Phase 2 clinical trial of KB001-A in CF patients with chronic Pa infections in January 2013. In August 2012, we initiated a 150 patient, randomized, double-blind, placebo-controlled, monthly-dose, intravenous Phase 2 clinical trial of KB003 in patients with severe asthma inadequately controlled by corticosteroids. KB004 is in Phase 1 clinical testing for hematological malignancies. We believe the net proceeds from our initial public offering, together with our cash, cash equivalents, and marketable securities, and our borrowing capacity pursuant to the loan and security agreement we entered into with MidCap Financial in September 2012, will be sufficient to complete our KB001-A and KB003 Phase 2 clinical trials as currently projected. If the KB001-A or KB003 Phase 2 clinical trials are successful, we will need to raise additional capital in order to further advance our product candidates towards regulatory approval.

We licensed our proprietary Humaneered® antibody technology to Novartis in 2007 on a non-exclusive basis and received a license fee of $30 million. We are not currently actively pursuing the license of our Humaneered® technology to third parties and we are not expecting to receive future revenue from additional licenses to this technology.

From the date we commenced our operations through 2006, our efforts focused primarily on research, development, and the advancement of our Humaneered® antibody technology. In 2006, we commenced our first clinical trial. We have incurred significant losses to date and, as of March 31, 2013, we had an accumulated deficit of $106.8 million. We have funded our operations primarily through private placements of our equity securities, contract revenue in connection with our collaborations, and grants and borrowings under equipment financing arrangements and our loan and security agreement. As of March 31, 2012, we had cash, cash equivalents, and marketable securities of $76.9 million. On February 5, 2013, we closed our initial public offering of 8,750,000 shares of common stock at an offering price of $8.00 per share, resulting in net proceeds of approximately $61.5 million, after deducting underwriting discounts, commissions and offering expenses. We expect to continue to incur net losses as we develop our drug candidates, expand clinical trials for our drug candidates currently in clinical development, expand our research and development activities, expand our systems and facilities, seek regulatory approvals, and engage in commercialization preparation activities in anticipation of FDA approval of our drug candidates. Specifically, we have incurred, and we expect to continue to incur, substantial expenses in connection with our Phase 2 clinical trials for KB003 in severe asthma patients inadequately controlled by cortiscosteroids and for KB001-A in CF patients with chronic Pa infections. In addition, if a product is approved for commercialization, we will need to expand our organization. Significant capital is required to launch a product and many expenses are incurred before revenue is received. We are unable to predict the extent of any future losses or when we will become profitable, if at all.

In December 2012, our board of directors approved a 1-for-3.56147 reverse split of our issued and outstanding capital stock which became effective on January 15, 2013. Upon the effectiveness of the reverse stock split, (i) every 3.56147 shares of issued and outstanding common stock and convertible preferred stock was decreased to one share of common stock or convertible preferred stock, as applicable, (ii) the number of shares of common stock into which each outstanding option to purchase common stock is exercisable was proportionally decreased on a 1-for-3.56147 basis and the number of shares of convertible preferred stock into which each outstanding warrant is exercisable was proportionally decreased on a 1-for-3.56147 basis and, (iii) the exercise price of each outstanding option to purchase common stock and warrant to purchase convertible preferred stock was proportionately increased. All of the share numbers, share prices, exercise prices and other per share information have been adjusted within this Quarterly Report on Form 10-Q, on a retroactive basis, to reflect this 1-for-3.56147 reverse stock split

Critical Accounting Policies and Use of Estimates

Our management's discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (GAAP). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the reporting periods. We base our estimates on historical experience and on various other factors that we believe to be reasonable under the circumstances and review our estimates on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions.


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We are an emerging growth company under the JOBS Act. Emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to avail ourselves of this exemption from new or revised accounting standards and, therefore, we may not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

There have been no significant and material changes in our critical accounting policies during the three months ended March 31, 2013, as compared to those disclosed in "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Use of Estimates" in our Annual Report on Form 10-K (File No. 001-35798), filed with the Securities and Exchange Commission (SEC) on March 29, 2013.

Results of Operations

General

We have not generated any net income from operations, except for the year ended December 31, 2007, during which we recognized a one-time license payment from Novartis. At March 31, 2013, we had an accumulated deficit of $106.8 million primarily as a result of research and development and general and administrative expenses. While we may in the future generate revenue from a variety of sources, including license fees, milestone payments, and research and development payments in connection with strategic partnerships, our product candidates are at an early stage of development and may never be successfully developed or commercialized. Accordingly, we expect to continue to incur substantial losses from operations for the foreseeable future, and there can be no assurance that we will ever generate significant revenue or profits.

Contract Revenue

Our recent revenue is comprised primarily of collaboration agreement-related revenue. Collaboration agreement-related revenue includes license fees, payments for research and development services, and milestone and other contingent payments.

Research and Development Expenses

Conducting research and development is central to our business model. We expense both internal and external research and development costs as incurred. We currently track the external research and development costs incurred for each of our KB001-A, KB003, and KB004 projects. We have not tracked our external costs by project since inception. We began tracking our external costs by project beginning January 1, 2008. Our external research and development expenses consist primarily of:

• expenses incurred under agreements with contract research organizations, investigative sites, and consultants that conduct our clinical trials and a substantial portion of our preclinical activities;

• the cost of acquiring and manufacturing clinical trial and other materials; and

• other costs associated with development activities, including additional studies.


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Internal research and development costs consist primarily of salaries and related fringe benefit costs for our employees (such as workers compensation and health insurance premiums), stock-based compensation charges, travel costs, lab supplies, and overhead expenses. Internal costs generally benefit multiple projects and are not separately tracked per project. The following table shows our total research and development expenses for the three and three months ended March 31, 2013 and 2012:

                                              Three               For the Period from
                                          Months Ended            January 1, 2008 to
                                            March 31,               March 31, 2013
                                       2013          2012
    External costs:
    KB001-A                          $   1,149     $     543     $              21,444
    KB003                                2,457           400                    25,282
    KB004                                1,135           642                    20,690
    Internal costs                       1,579         1,635                    48,150

    Total research and development   $   6,320     $   3,220     $             115,566

We expect to continue to incur substantial expenses related to our development activities for the foreseeable future as we continue product development including continuing our Phase 2 clinical trial for our KB003 severe asthma program, our Phase 2 clinical trial for our KB001-A CF program and our Phase 1 clinical trial for our KB004 oncology program. As 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 expect that our research and development expenses will increase in the future. In addition, if our product development efforts are successful, we expect to incur substantial costs to prepare for potential clinical trials and activities beyond the Phase 2 trial for KB001-A, the Phase 2 trial for KB003 and Phase 1 trial for KB004.

General and Administrative Expenses

General and administrative expenses consist principally of personnel-related costs, professional fees for legal, consulting, audit and tax services, rent and other general operating expenses not otherwise included in research and development. We anticipate general and administrative expenses will increase in future periods, reflecting an expanding infrastructure and increased professional fees associated with being a public reporting company.

Comparison of Three Months Ended March 31, 2013 and 2012



                                              Three Months
                                            Ended March 31,              Variance
     (in thousands)                      2013             2012
     Contract revenue                 $        16      $     3,018      $    (3,002 )
     Operating expenses:
     Research and development               6,320            3,220            3,100
     General and administrative             2,019              945            1,074

     Loss from operations                  (8,323 )         (1,147 )         (7,176 )
     Interest income (expense), net          (252 )              6             (258 )
     Other income (expense), net                1               10               (9 )

     Net loss                         $    (8,574 )    $    (1,131 )    $    (7,443 )


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Contract revenue in each period related solely to our arrangement with Sanofi in which we licensed the KB001-A program to Sanofi in 2010. Contract revenue decreased $3.0 million, from $3.0 million for the three months ended March 31, 2012 to $16,000 for the three months ended March 31, 2013. This decrease was mainly attributable to the completion of our substantive performance obligations under our agreement with Sanofi in mid 2012. We expect future contract revenue from Sanofi to remain at a minimal level in future periods unless we receive contingent payments or royalties under our agreement.

Research and development expenses increased $3.1 million, from $3.2 million for the three months ended March 31, 2012 to $6.3 million for the three months ended March 31, 2013. The increase was primarily attributed to a $2.7 million increase in spending for clinical trial expenses for our KB003 severe asthma program, increased spending for our KB001-A CF program, and KB004 program for hematological malignancies, as well as increased consulting expenses of $0.4 million. We began enrollment of patients in the severe asthma program of KB003 in the third quarter of 2012 and began enrollment in a Phase 2 clinical trial in CF patients with chronic Pa infections in the quarter ended March 31, 2013, and as a result, we expect these expenses to increase significantly.

General and administrative expenses increased $1.1 million, from $0.9 million for the three months ended March 31, 2013 to $2.0 million for the three months ended March 31, 2013 due to increases in legal, accounting and consulting fees of $0.7 million related to being a public reporting company and a $0.4 million increase in payroll related expenses.

Interest income (expense), net decreased $0.3 million for the three months ended March 31, 2013, primarily as a result of the interest expense related to our loan and security agreement entered into in September 2012.

Liquidity and Capital Resources

Since our inception, we have financed our operations primarily through our IPO, private placements of our equity securities, debt financing, interest income earned on cash, and cash equivalents, and marketable securities, lines of credit, and payments under agreements with Sanofi and Novartis. On February 5, 2013, we closed our initial public offering of 8,750,000 shares of common stock at an offering price of $8.00 per share, resulting in net proceeds of approximately $61.5 million, after deducting underwriting discounts, commissions and offering expenses. At March 31, 2013, we had cash and cash equivalents of $70.0 million and marketable securities of $6.9 million, totaling $76.9 million.

We expect to incur substantial expenditures in the foreseeable future for the development and potential commercialization of our product candidates. Specifically, we have incurred and we expect to continue to incur substantial expenses in connection with our Phase 2 clinical trials for KB003 in severe asthma patients inadequately controlled by corticosteroids and for KB001-A in CF patients with chronic Pa infections.

We believe our existing cash, cash equivalents, and marketable securities, including the net proceeds from our initial public offering and our access to funds through the loan and security agreement we entered into with MidCap Financial in September 2012, will be sufficient to sustain operations for at least the next 12 months based on our existing business plan and enable us to complete our KB001-A and KB003 Phase 2 clinical trials as currently projected. If the KB001-A and KB003 Phase 2 clinical trials are successful, we will need to raise additional capital in order to further advance our product candidates towards regulatory approval.

We will continue to require additional financing to develop our products and fund operating losses. We will seek funds through equity or debt financings, collaborative or other arrangements with corporate sources, or through other sources of financing. Adequate additional funding may not be available to us on acceptable terms or at all. Our failure to raise capital as and when needed could have a negative impact on our financial condition and our ability to pursue our business strategies. We anticipate that we will need to raise substantial additional capital, the requirements of which will depend on many factors, including:

• the type, number, costs, and results of the product candidate development programs which we are pursuing or may choose to pursue in the future;

• the scope, progress, expansion, costs, and results of our clinical trials;

• the timing of and costs involved in obtaining regulatory approvals;

• our ability to establish and maintain development partnering arrangements;


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• the timing, receipt and amount of contingent, royalty, and other payments from Sanofi or any of our future development partners;

• the emergence of competing technologies and other adverse market developments;

• the costs of maintaining, expanding, and protecting our intellectual property portfolio, including potential litigation costs and liabilities;

• the resources we devote to marketing, and, if approved, commercializing our product candidates;

• the scope, progress, expansion, and costs of manufacturing our product candidates;

• our ability to draw funds from our loan and security agreement;

• the amount of funds we receive in our proposed initial public offering, if consummated; and

• the costs associated with being a public company.

If we are unable to raise additional funds when needed, we may be required to delay, reduce, or terminate some or all of our development programs and clinical trials. We may also be required to sell or license to others technologies or clinical product candidates or programs that we would prefer to develop and commercialize ourselves.

The following table sets forth the primary sources and uses of cash and cash equivalents for each of the periods presented below:

                                                          Three Months
                                                        Ended March 31,
                                                       2013          2012
         Net cash used in operating activities       $ (7,801 )    $ (3,446 )
         Net cash provided by investing activities      2,390         4,685
         Net cash provided by financing activities     64,413            21

         Net increase in cash and cash equivalents   $ 59,002      $  1,260

Net cash used in operating activities was $7.8 million and $3.5 million for the three months ended March 31, 2013 and 2012, reflecting our net loss adjusted for noncash items. The increase relating to our increasing net loss was partially offset by changes in operating assets and liabilities including significant increases in accounts payable in 2013 attributed to development and clinical activities.

Net cash provided by investing activities was $2.4 million for the three months ended March 31, 2013, primarily related to proceeds from maturities of investments. Net cash provided by investing activities was $4.7 million for the three months ended March 31, 2012, primarily related to proceeds from maturities of investments, net of cash used for the purchase of investments.

Net cash provided by financing activities was $64.4 million and $21,000 for the three months ended March 31, 2013 and 2012, respectively. The cash provided by financing activities of $64.4 million in the 2013 period related to the net proceeds from our IPO. Cash provided by financing activities during the three months ended March 31, 2012, was due to cash proceeds from exercises of stock options.

We expect to incur substantial expenditures in the foreseeable future for the research, development and potential commercialization of our product candidates. We will continue to require additional financing to develop our products and fund operating losses. We will seek funds through equity or debt financings, collaborative or other arrangements with corporate sources, or through other sources of financing. Adequate additional funding may not


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be available to us on acceptable terms or at all. Our failure to raise capital as and when needed could have a negative impact on our financial condition and our ability to pursue our business strategies. If adequate funds are not available to us, we may be required to delay, reduce, or eliminate research and development programs or enter into collaborative or other arrangements for technologies that we would otherwise seek to develop ourselves or on terms that are less attractive than they might otherwise be.

Contractual Obligations and Commitments

As of March 31, 2013, there were no significant and material changes to our contractual obligations from those set forth in in our Annual Report on Form 10-K (File No. 001-35798), filed with the Securities and Exchange Commission (SEC) on March 29, 2013.

Off-Balance Sheet Arrangements

We currently have no off-balance sheet arrangements, such as structured finance, special purpose entities or variable interest entities.

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