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TLON > SEC Filings for TLON > Form 10-Q on 15-May-2013All Recent SEC Filings

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Form 10-Q for TALON THERAPEUTICS, INC.


15-May-2013

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction with the unaudited condensed financial statements and the notes to those statements included elsewhere in this Quarterly Report on Form 10-Q. This discussion includes forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth under "Risk Factors" in Item 1A of Part I of the 2012 Form 10-K, our actual results may differ materially from those anticipated in these forward-looking statements .

Overview

We are a biopharmaceutical company dedicated to developing and commercializing new, differentiated cancer therapies designed to improve and enable current standards of care. We currently have one product and three product candidates in various stages of development:

· Marqibo® (vincristine sulfate liposome injection) is a novel, sphingomyelin/cholesterol liposome encapsulated formulation of vincristine, a microtubule inhibitor that is FDA-approved for acute lymphoblastic leukemia (ALL) and currently being developed for non-Hodgkin's lymphoma (NHL). Vincristine is widely used in combination regimens for treatment of adult and pediatric hematologic and solid tumor malignancies. On August 9, 2012, the FDA approved our NDA, granting accelerated approval of Marqibo for the treatment of Philadelphia chromosome negative adult ALL patients in second or greater relapse or whose disease has progressed following two or more prior lines of anti-leukemia therapy. In May 2012, we enrolled the first patient in a global Phase 3 confirmatory study of Marqibo in the treatment of patients 60 years of age and older with newly-diagnosed ALL, which is known as the HALLMARQ study. Marqibo is also being studied in a Phase 3 clinical trial (OPTIMAL>60) in elderly patients with newly-diagnosed NHL being conducted by the German High-Grade Lymphoma Study Group for which we are providing support. There are additional Phase 1 and Phase 2 clinical trials underway in adults and pediatrics.

· Menadione Topical Lotion (MTL) is a novel cancer supportive care product candidate being developed for the prevention and/or treatment of the skin toxicities associated with the use of epidermal growth factor receptor inhibitors, or EGFRIs, a type of anti-cancer agent used in the treatment of lung, colon, head and neck, pancreatic and breast cancer. In August 2011, we entered into an agreement with the Mayo Clinic pursuant to which the Mayo Clinic agreed to sponsor and conduct a randomized Phase 2 trial of MTL in patients taking biologic and small molecule EGFR inhibitors for anti-cancer therapy and will test the effectiveness of MTL in preventing skin toxicities associated with EGFR inhibitors. We agreed to provide supplies of MTL in connection with the Mayo Clinic study. In April 2013, the Mayo Clinic closed enrollment in the clinical trial after enrolling 27 subjects. The Mayo Clinic will perform analysis from data collected on the subjects enrolled during the trial.

· Brakiva™ (topotecan liposome injection) is a novel targeted Optisome™ encapsulated formulation product candidate of the FDA-approved anticancer drug topotecan. We have focused our capital resources to advance the development of Marqibo and Menadione Topical Lotion. Consequently, we have not recently allocated resources toward the development of Brakiva.

· Alocrest™ (vinorelbine liposome injection) is a novel targeted Optisome™ encapsulated formulation product candidate of the FDA-approved anticancer drug vinorelbine. We have focused our capital resources to advance the development of Marqibo and Menadione Topical Lotion. Consequently, we have not recently allocated resources toward the development of Alocrest.

Our Strategy

We are committed to developing and commercializing new, differentiated cancer therapies designed to improve and enable current standards of care. Key aspects of our strategy include:

· Pursue strategic transactions such as joint venture, merger and acquisition or commercial partnerships to develop and commercialize Marqibo and our product candidates in the United States, Europe, and other international regions. We are exploring strategic partnership opportunities or other transactions with pharmaceutical, biotechnology, or other companies to develop and commercialize our current products and product candidates, in the United States, Europe and other international regions. We believe this strategy will help us to mitigate our development and commercialization risk, reduce our capital expenditure requirements, and broaden the scope of our sales and marketing activities for our products within domestic and international markets. However, if we are unable to secure strategic transactions on terms we believe are in our best interests, then we will prepare to commercialize our products alone.

· Focus on developing innovative cancer therapies. We focus on oncology products and product candidates in order to capture efficiencies and economies of scale. We believe that drug development for cancer markets is particularly attractive because relatively small clinical trials can provide meaningful information regarding patient response and safety. Our main focus is the development of Marqibo, our lead product, for which the FDA recently granted accelerated approval for the treatment of Philadelphia chromosome negative adult ALL patients in second or greater relapse or whose disease has progressed following two or more prior lines of anti-leukemia therapy.

· Build a sustainable pipeline by employing multiple therapeutic approaches and disciplined decision criteria based on clearly defined proof of principle goals. We seek to build a sustainable product pipeline by employing multiple therapeutic approaches and by acquiring product candidates belonging to known drug classes. In addition, we employ disciplined decision criteria to assess product candidates. By pursuing this strategy, we seek to minimize our clinical development risk and accelerate the potential commercialization of current and future product candidates. For a majority of our product candidates, we intend to pursue regulatory approval in multiple indications.

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Products and Product Candidates

Marqibo® (vincristine sulfate liposome injection)

Marqibo is a novel, targeted Optisome™ encapsulated liposomal formulation product of the FDA-approved anticancer drug vincristine. We are primarily developing Marqibo for the treatment of adult ALL and adult NHL. Non-liposomal vincristine, a microtubule inhibitor, is FDA-approved for ALL and is widely used as a single agent and in combination regimens for treatment for hematologic malignancies such as lymphomas and leukemias. Our encapsulation formulation is designed to provide prolonged circulation of the drug in the blood and accumulation at the tumor site. These characteristics are intended to increase the effectiveness and potentially reduce the side effects of the encapsulated drug. On August 9, 2012, the FDA granted accelerated approval of Marqibo for the treatment of Philadelphia chromosome negative adult ALL patients in second or greater relapse or whose disease has progressed following two or more prior lines of anti-leukemia therapy.

In May 2011, a Phase 3 study of Marqibo in elderly patients with newly-diagnosed aggressive NHL was initiated by the German High-Grade Non-Hodgkin's Lymphoma Study Group. The study is expected to enroll approximately 1,000 patients (ages 61-80) with aggressive CD20+ B-cell NHL. The primary objectives of the study are to assess the effects of substituting conventional vincristine with Marqibo in the R-CHOP regimen. The first patient enrolled in the study in November 2011 and as of April 30, 2013, a total of 164 patients have been enrolled and 88 centers are open for enrollment. In 2013, if sufficient funds are available, we expect to spend between $1.5 million and $3 million in connection with this study.

In November 2011, we initiated our global Phase 3 confirmatory study of Marqibo, named HALLMARQ, in the treatment of patients 60 years of age or older with newly diagnosed ALL. HALLMARQ is an international, multicenter, open-label randomized, controlled trial with 2 arms that vary only in the administration of standard vincristine versus Marqibo. Eligible subjects will be randomized to combination chemotherapy containing either standard vincristine or Marqibo. We estimate that 350 - 400 total subjects will be enrolled and randomized in this study. All subjects will receive treatment until documentation of failure to achieve remission, relapse from remission, or for up to 24 months. Treatment will be composed of induction (one 4-week course), early intensification (two 4-week courses), interim maintenance (one 12-week course), late intensification (one 8-week course), and prolonged maintenance (4-week courses, repeated for up to 24 months after beginning induction) therapy. As of April 30, 2013, 17 sites in the United States are open for subject enrollment and 8 patients have been enrolled to date. In 2013, if sufficient funds are available, we expect to spend between $2 million and $3.5 million in connection with this study.

Additionally, in July 2011, the National Cancer Institute enrolled the first patient in an open-label Phase 1 dose-escalation trial of Marqibo in children and adolescents with solid tumors and hematologic malignancies, including ALL, being conducted at the NCI in Bethesda, MD. The primary objective of this Phase I clinical trial, which is an investigator-sponsored study, is to determine the maximum tolerated dose. As of April 30, 2013, 16 patients have been enrolled to date.

We are also conducting a Phase 2 study to assess the efficacy of Marqibo in patients with metastatic malignant uveal melanoma as determined by Disease Control Rate (CR, partial response or durable stable disease). Secondary objectives are to assess the safety and antitumor activity of Marqibo as determined by response rate, progression free survival and overall survival. In addition, patients undergo continuous electrocardiographic evaluation during the first dose of Marqibo exposure. The patient population is defined as adults with uveal melanoma and confirmed metastatic disease that is untreated. As of April 30, 2013, two sites in the United States are open for subject enrollment and 54 subjects have been enrolled to date. We plan to enroll up to a total of approximately 59 subjects in this clinical trial.

On March 2, 2012, we entered into an investigator-initiated clinical trial research agreement with The University of Texas M.D. Anderson Cancer Center, whereby we agreed to provide Marqibo to study the safety and efficacy of Marqibo in certain clinical trial research entitled "Hyper-CVAD with Liposomal Vincristine (Hyper-CMAD) in Acute Lymphoblastic Leukemia." The study is designed to evaluate whether intensive chemotherapy (Hyper-CVAD therapy) given in combination with Marqibo, in addition to rituximab for patients who are CD20 positive and/or imatinib or dasatinib for patients with the Philadelphia chromosome, can effectively treat ALL or lymphoblastic lymphoma.

Marqibo received a U.S. orphan drug designation in January 2007, as well as a European Commission orphan drug designation in June 2008 for the ALL indication. Marqibo also received a U.S. orphan drug designation in July 2008 for metastatic uveal melanoma. Marqibo received a fast track designation from the FDA in August 2007 for the treatment of adult ALL in second or greater relapse or that has progressed following two or more prior lines of anti-leukemia therapy. We met with the European Medicine Association in December 2011 and February 2012, seeking scientific advice regarding the appropriate approval path to pursue.

Menadione Topical Lotion (Supportive Care Product)

Menadione Topical Lotion, or MTL, which we licensed from the Albert Einstein College of Medicine, or AECOM, in October 2006, is a novel product candidate under development for the treatment and/or prevention of skin rash associated with the use of EGFR inhibitors in the treatment of certain cancers. EGFR inhibitors, which include Tarceva, Erbitux, Iressa, Tykerb and Vectibix, are currently approved to treat non-small cell lung cancer, pancreatic, colorectal, breast and head and neck cancer. EGFR inhibitors are associated with significant skin toxicities presenting as acne-like rash on the face, neck and upper-torso of the body in approximately 75% of patients. Fifty percent of patients who manifest skin toxicity experience significant discomfort. This results in discontinuation or dose reduction in at least 10% and up to 30% of patients that receive the EGFR inhibitor. Menadione, a small organic molecule, has been shown to activate the EGFR signaling pathway by inhibiting phosphatase activity which is an important enzyme in the EGFR pathway. In vivo studies have suggested that topically-applied menadione may restore EGFR signaling specifically in the skin of patients treated systemically with EGFR inhibitors. Currently, there are no FDA-approved products or therapies available to treat these skin toxicities.

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We completed enrollment of a Phase 1 clinical trial in cancer patients in 2010. The primary endpoints for the Phase 1 study included safety, tolerability and identification of a maximum tolerated dose. The results of the Phase 1 study demonstrated that MTL is generally safe and well-tolerated. A dose limiting toxicity of skin irritation and redness was observed primarily at the 0.2% lotion strength. The apparent maximum tolerated lotion strength is 0.1%. MTL applied twice daily at all strengths, including the highest lotion strength tested (0.2%) resulted in no appreciable systemic exposure.

In August 2011, we entered into an agreement with Mayo Clinic pursuant to which Mayo Clinic agreed to sponsor and conduct a Phase 2 clinical trial. The study is designed to enroll up to 40 patients taking biologic and small molecule EGFR inhibitors for anti-cancer therapy and will test the effectiveness of MTL in preventing skin toxicities associated with EGFR inhibitors. In April 2013, the Mayo Clinic closed enrollment in the clinical trial after enrolling 27 subjects. The Mayo Clinic will perform analysis from data collected on the subjects enrolled during the trial.

Alocrest™ (vinorelbine liposome injection)

Alocrest is a novel Optisomal encapsulated formulation product candidate of the FDA-approved drug vinorelbine, a microtubule inhibitor for use as a single agent or in combination with cisplatin for the first-line treatment of unresectable, advanced non-small cell lung cancer. In February 2008, we completed enrollment in a Phase 1 study of Alocrest. The trial enrolled 30 adult subjects with confirmed solid tumors refractory to standard therapy or for which no standard therapy was known to exist. The objectives of the Phase 1 clinical trial were:
(1) to assess the safety and tolerability of Alocrest; (2) to determine the maximum tolerated dose of Alocrest; (3) to characterize the pharmacokinetic profile of Alocrest; and (4) to explore preliminary efficacy of Alocrest. The study was conducted at the Cancer Therapy and Research Center and South Texas Accelerated Research Therapeutics (START), both located in San Antonio, Texas and at McGill University in Montreal. Reversible neutropenia, a low white blood cell count, was the dose-limiting toxicity. The results of this study revealed expected toxicity, and a 50% disease control rate was achieved across a range of doses in patients with previously treated, advanced cancers.

Brakiva™ (topotecan liposome injection)

Brakiva is our proprietary product candidate comprised of the anti-cancer drug topotecan encapsulated in Optisomes. Topotecan is FDA-approved for the treatment of metastatic carcinoma of the ovary after failure of initial or subsequent chemotherapy, and small cell lung cancer sensitive disease after failure of first-line chemotherapy. In November 2008, we initiated a Phase 1 dose-escalation clinical trial of Brakiva, which is primarily designed to assess the safety, tolerability and maximum tolerated dose. The primary objective is to evaluate the safety, tolerability and maximum tolerated dose of 2 different schedules of Brakiva administered intravenously as a 30 minute infusion in adult subjects with advanced solid tumors that have relapsed, are refractory to standard therapy, or for whom there is no standard therapy available. The study is conducted at South Texas Accelerated Research Therapeutics (START) in San Antonio, Texas and Karmanos Cancer Institute in Detroit, Michigan. This clinical trial has been on enrollment hold for a number of years for resource allocation reasons. As of April 30, 2013, 14 subjects have been enrolled in the study, with the goal of enrolling up to 50 subjects.

Revenues

We received accelerated approval from the FDA in August 2012 to market Marqibo for the treatment of Philadelphia chromosome negative adult ALL patients in second or greater relapse or whose disease has progressed following two or more prior lines of anti-leukemia therapy and we have not yet initiated a commercial launch of Marqibo. In January 2013, we announced that our Board of Directors authorized a review of strategic alternatives and that we had engaged a financial advisor in connection with that review. The review of strategic alternatives may lead to a possible transaction, including the merger, business combination, or sale of the Company, which would allow our partner in such a transaction to commercialize Marqibo. No decision has been made to enter into a transaction at this time and there can be no assurance that we will be able to consummate any such transaction. Alternatively, we may also determine to commercialize Marqibo ourselves. However, we would require as much as $25 million in 2013 to fund both the required commercialization activities and the ongoing HALLMARQ and German NHL Phase 3 studies. Our ability to obtain the capital necessary to fund those activities is highly uncertain. If we are unable to either consummate a strategic transaction or obtain the additional capital needed to commercialize Marqibo alone, we may not be able to generate any revenue in the future from the sales of Marqibo or any of our other product candidates.

Research and Development Expenses

Research and development, or R&D, expenses, which account for the bulk of our expenses, consist primarily of salaries and related personnel costs, fees paid to consultants and outside service providers for laboratory development, manufacturing, and other expenses relating to the acquiring, design, development, testing, and enhancement of Marqibo and our product candidates, including milestone payments for licensed technology. We expense research and development costs as they are incurred.

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While expenditures on current and future clinical development programs are expected to be substantial, particularly in light of our available resources, they are subject to many uncertainties, including the results of clinical trials and whether we develop Marqibo or 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 research and development projects or whether, when and to what extent we will generate revenues from the commercialization and sale of Marqibo or 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 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 Marqibo and our drug candidates; and

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

General and Administrative Expenses

General and administrative, or G&A, expenses consist primarily of salaries and related expenses for executive, finance, business development, commercial planning and other administrative personnel, recruitment expenses, professional fees and other corporate expenses, including accounting and general legal activities. Professional fees and related expenses incurred in connection with the development of our commercial infrastructure are also classified as G&A.

Share-Based Compensation

Share-based compensation expenses consist primarily of expensing the fair-market value of a share-based award over the vesting term. This expense is included in our operating expenses for each reporting period. As of March 31, 2013, we estimate that there is $3.6 million in total, unrecognized compensation costs related to non-vested share-based awards, which is expected to be recognized over a weighted average period of 2.9 years.

Review of Strategic Alternatives

In January 2013, we announced that our Board of Directors had authorized a review of strategic alternatives and that Goldman Sachs had been engaged to provide financial advisory services in connection with that review. The review of strategic alternatives may lead to a possible transaction, including the merger, business combination, or sale of the Company. No decision has been made to enter into a transaction at this time, and there can be no assurance that we will enter into a transaction in the future. We do not plan to disclose or comment on developments regarding the strategic review process until further disclosure is deemed appropriate.

Critical Accounting Policies

The accompanying discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. We believe there are certain accounting policies that are critical to understanding our financial statements, as these policies affect the reported amounts of expenses and involve management's judgment regarding significant estimates. We have reviewed our critical accounting policies and their application in the preparation of our financial statements and related disclosures with the Audit Committee of our Board of Directors. Our critical accounting policies and estimates are described below.

Use of Management's Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates based upon current assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Examples include provisions for deferred taxes, the valuation of the warrant liabilities, investors' rights to purchase shares of Series A Preferred (see Note 4 of our financial statements included elsewhere in this Form 10-Q), the computation of beneficial conversion feature and the cost of contracted clinical study activities and assumptions related to share-based compensation expense. Actual results may differ materially from those estimates.

Inventory

Inventories are stated at the lower of cost or market with cost determined using the first-in, first-out method. Inventory values are based upon standard costs, which approximate actual costs. We engage multiple contract manufacturing organizations and raw material suppliers to manufacture products for commercial sale and use in ongoing clinical trials. For products that have not been approved by the FDA, inventory used in clinical trials is expensed at the time of production and recorded as research and development expense. Products that have been approved by the FDA and prepared for sale but subsequently repurposed for clinical trial use are expensed at the time the inventory is packaged for the clinical trial.

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Our policy is to write down inventory that has become obsolete, inventory that has a cost basis in excess of its expected net realizable value and inventory in excess of expected requirements. The estimate of excess quantities is subjective and primarily dependent on our estimates of future demand for a particular product. If the estimate of future demand is significantly different than management's expectations, we may have to significantly increase the reserve for excess inventory for that product and record a charge to cost of sales. We provide an allowance for 100% of the standard cost of excess or obsolete inventory. We perform reviews of our inventory levels on a quarterly basis to assess the adequacy of our reserve. Expired inventory is disposed of and the related costs are written off to cost of sales.

Fair Value of Financial Instruments

Financial instruments include cash and cash equivalents, available-for-sale securities, accounts payable, and warrant liabilities. Available-for-sale securities are carried at fair value. Cash and cash equivalents and accounts payable are carried at cost, which approximates fair value due to the relative short maturities of these instruments. The fair value of our warrant liabilities is discussed in Notes 6 and 8 of our financial statements included elsewhere in this Form 10-Q. We have issued certain financial instruments, including warrants to purchase common stock and rights to purchase shares of Series A-3 Preferred (see Note 4 of our financial statements included elsewhere in this Form 10-Q), which have the characteristics of both equity and liabilities. These instruments were evaluated to be classified as liabilities at the time of issuance and are revalued at fair value from period to period with the resulting change in value included in other income (expense).

Debt Issuance Costs

Debt issuance costs relate to fees paid in the form of cash and warrants to secure a firm commitment to borrow funds. These fees are being amortized over the life of the related loan using the effective interest method.

Financial Instruments with Characteristics of Both Equity and Liabilities

We have issued certain financial instruments, including warrants to purchase common stock and rights to purchase shares of Series A-3 Preferred, which have the characteristics of both equity and liabilities. These instruments were evaluated to be classified as liabilities at the time of issuance and are revalued at fair value from period to period with the resulting change in value included in other income (expense).

Clinical Study Activities and Other Expenses from Third-Party Contract Research Organizations

A significant amount of our research and development activities related to clinical study activity are conducted by various third parties, including contract research organizations, which may also provide contractually defined administration and management services. Expense incurred for these contracted activities are based upon a variety of factors, including actual and estimated patient enrollment rates, clinical site initiation activities, labor hours and other activity-based factors. On a regular basis, our estimates of these costs are reconciled to actual invoices from the service providers and adjustments are made accordingly.

Share-Based Compensation

We account for share-based compensation in accordance with FASB ASC Topic 718, Compensation - Stock Compensation. We have adopted a Black-Scholes-Merton model to estimate the fair value of stock options issued and the resultant expense is recognized in the operating expense for each reporting period. Refer to Note 5 of our financial statements included elsewhere in this Form 10-Q for further information regarding the required disclosures related to share-based compensation.

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