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SNSS > SEC Filings for SNSS > Form 10-Q on 2-Aug-2013All Recent SEC Filings

Show all filings for SUNESIS PHARMACEUTICALS INC

Form 10-Q for SUNESIS PHARMACEUTICALS INC


2-Aug-2013

Quarterly Report


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

The following discussion and analysis of our financial condition as of June 30, 2013 and results of operations for the three and six months ended June 30, 2013 and 2012 should be read together with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and in our other Securities and Exchange Commission, or SEC, filings, including our Annual Report on Form 10-K for the year ended December 31, 2012, filed with the SEC on March 13, 2013.

This discussion and analysis contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the Private Securities Litigation Reform Act of 1995, which involve risks, uncertainties and assumptions. All statements, other than statements of historical facts, are "forward-looking statements" for purposes of these provisions, including without limitation any statements relating to our strategy, including our plans with respect to unblinding the VALOR trial, presenting clinical data and initiating clinical trials, our future research and development activities, including clinical testing and the costs and timing thereof, sufficiency of our cash resources, our ability to raise additional funding when needed, any statements concerning anticipated regulatory activities or licensing or collaborative arrangements, our research and development and other expenses, our operations and legal risks, and any statement of assumptions underlying any of the foregoing. In some cases, forward-looking statements can be identified by the use of terminology such as "anticipates," "believe," "continue," "estimates," "expects," "intend," "look forward," "may," "could," "seeks," "plans," "potential," or "will" or the negative thereof or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, there can be no assurance that such expectations or any of the forward-looking statements will prove to be correct, and actual results could differ materially from those projected or assumed in the forward-looking statements. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including but not limited to those set forth under "Risk Factors," and elsewhere in this report. We urge you not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. All forward-looking statements included in this report are based on information available to us on the date of this report, and we assume no obligation to update any forward-looking statements contained in this report.

In this report, "Sunesis," the "Company," "we," "us," and "our" refer to Sunesis Pharmaceuticals, Inc. and its wholly-owned subsidiaries, except where it is made clear that the term means only the parent company.

Overview

We are a biopharmaceutical company focused on the development and commercialization of new oncology therapeutics for the treatment of solid and hematologic cancers. Our efforts are currently focused primarily on the development of vosaroxin for the treatment of acute myeloid leukemia, or AML. In December 2010, we commenced enrollment of a Phase 3, multi-national, randomized, double-blind, placebo-controlled, pivotal trial of vosaroxin in combination with cytarabine in patients with relapsed or refractory AML, or the VALOR trial. The VALOR trial is designed to evaluate the effect of vosaroxin in combination with cytarabine, a widely used chemotherapy in AML, on overall survival as compared to placebo in combination with cytarabine, and is being conducted at more than 100 study sites in the U.S., Canada, Europe, South Korea, Australia and New Zealand.

In September 2012, following the recommendation of the trial's independent Data and Safety Monitoring Board, or DSMB, after the DSMB's completion of a single, pre-planned interim analysis of unblinded efficacy and safety data sets from the VALOR trial, we implemented a one-time, 225 patient sample size increase to the VALOR trial, bringing target enrollment to 712 patients. This pre-specified sample size increase is designed to maintain adequate statistical power over a broader range of survival outcomes. We anticipate reaching full enrollment of the VALOR trial in 2013, and unblinding in the first half of 2014, after reaching 562 events in the trial and locking the final database.

We are also preparing the final clinical study reports and manuscripts for two completed clinical trials of vosaroxin: (a) a Phase 1b/2 trial of vosaroxin in combination with cytarabine for the treatment of patients with relapsed or refractory AML, and (b) a Phase 2 trial in previously untreated patients age 60 years or older with AML, or REVEAL-1, which explored three dosing schedules of vosaroxin.

In March 2012, patient dosing commenced in the LI-1 trial, a Phase 2/3 randomized, controlled, multi-center trial evaluating novel treatment regimens against low-dose cytarabine, or LoDAC, in patients older than 60 years with AML or high-risk myelodysplastic syndrome, or MDS. In this trial sponsored by Cardiff University and conducted by the NCRI Haematological Oncology Study Group, several treatments, including two regimens containing vosaroxin, are being evaluated for the primary endpoints of overall survival, complete remission rate and duration of response. Treatment arms meeting efficacy criteria as determined by the Data Monitoring and Ethics Committee, or DMEC, at the first interim evaluation will be expanded initially from 50 to 100 patients per arm. A second interim evaluation will then take place, and for treatments showing promising survival trends, an additional 100 patients per arm will be enrolled, and the trial for these treatment arms will transition into a Phase 3 design with the primary endpoint of overall survival for an aggregate of 200 patients enrolled in each treatment arm versus 200 in the LoDAC control arm. In July 2013, we announced that the DMEC had completed its first planned interim evaluation of the trial's vosaroxin mono-therapy arm and recommended that enrollment in the mono-therapy arm be discontinued. Enrollment of the first 50 patients in the combination arm of vosaroxin and LoDAC is now near completion and the first interim evaluation of this arm is expected to take place before year end.


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In July 2013, we announced the initiation of a Phase 1/2 investigator-sponsored trial of vosaroxin in combination with decitabine in older patients with previously untreated AML and high-risk MDS. The trial is being conducted at the MD Anderson Cancer Center at the University of Texas under the direction of Naval Daver, M.D., Assistant Professor, Department of Leukemia and Farhad Ravandi, M.D., Professor of Medicine, Department of Leukemia and a principal investigator in the VALOR trial. The primary endpoints of the Phase 1 trial are to determine the safety, maximum tolerated dose, and dose limiting toxicity of vosaroxin in combination with decitabine in patients with high-risk MDS or AML who are elderly and/or unable or unwilling to receive standard cytarabine plus anthracycline based chemotherapy. The primary endpoint of the Phase 2 trial is to determine the efficacy of the combination based on achievement of complete remission, or CR, and CR with incomplete blood count recovery, or CRi. Secondary endpoints include safety, CR duration, leukemia-free survival, and overall survival.

Capital Requirements

We have incurred significant losses in each year since our inception. As of June 30, 2013, we had cash, cash equivalents and marketable securities of $49.6 million and an accumulated deficit of $464.9 million. We expect to continue to incur significant losses for the foreseeable future as we continue the development process and seek regulatory approvals for vosaroxin.

We believe that we currently have the resources to fund our operations through 2014. We will need to raise substantial additional capital to complete the development and potential commercialization of vosaroxin, and expect to finance our future cash needs primarily through equity issuances, debt arrangements, one or more possible licenses, collaborations or other similar arrangements with respect to development and/or commercialization rights to vosaroxin, or a combination of the above. However, we do not know whether additional funding will be available on acceptable terms, or at all. If we are unable to raise required funding on acceptable terms or at all, we will need to reduce operating expenses, enter into a collaboration or other similar arrangement with respect to development and/or commercialization rights to vosaroxin, outlicense intellectual property rights to vosaroxin, sell unsecured assets, or a combination of the above, or be forced to delay or reduce the scope of our vosaroxin development program, potentially including the VALOR trial, and/or limit or cease our operations.

Critical Accounting Policies and Significant Judgments and Estimates

There have been no significant changes during the six months ended June 30, 2013 to our critical accounting policies and significant judgments and estimates as disclosed in our management's discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2012.

Overview of Revenues

We have not generated, and do not expect to generate in the foreseeable future, any revenue from sales of commercial products. We cannot predict whether we will receive any milestone or royalty payments from licensing or collaboration agreements in the foreseeable future, or at all.

Overview of Operating Expenses

Research and Development expense. Research and development expense consists primarily of clinical trial costs, which include: payments for work performed by our contract research organizations, clinical trial sites, labs and other clinical service providers and for drug packaging, storage and distribution; drug manufacturing costs, which include costs for producing drug substance and drug product, and for stability and other testing; personnel costs for related permanent and temporary employees; other outside services and consulting costs; and payments under license agreements. We expense all research and development costs as they are incurred.

We are currently focused on the development of vosaroxin for the treatment of AML. Based on results of translational research, our own and investigator-sponsored trials, regulatory and competitive concerns and our overall financial resources, we anticipate that we will make determinations as to which indications to pursue and patient populations to treat in the future, and how much funding to direct to each indication, which will affect our research and development expense.

If we engage a development or commercialization partner for our vosaroxin program, or if, in the future, we acquire additional product candidates, our research and development expenses could be significantly affected. We cannot predict whether future licensing or collaborative arrangements will be secured, if at all, and to what degree such arrangements would affect our development plans and capital requirements.

Under the amended and restated agreement between Biogen Idec MA Inc., or Biogen Idec, and us, or the Restated Biogen Idec Agreement, and the license agreement between Millennium Pharmaceuticals, Inc., or Millennium, and us, or the Millennium Agreement, we have the right to participate in co-development and co-promotion activities for the related product candidates. If we were to exercise our option on one or more product candidates, our research and development expense would increase significantly.

General and Administrative expense. General and administrative expense consists primarily of personnel costs for the related employees, including non-cash stock-based compensation; professional service costs, including fees paid to outside legal advisors, marketing consultants and our independent registered public accounting firm; facilities expenses; and other administrative costs.


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Results of Operations

Revenue

Total revenue was $2.0 million and $4.0 million for the three and six months ended June 30, 2013, as compared to $1.5 million for each of the same periods in 2012. Revenue in each of the 2013 periods was due to deferred revenue related to the Revenue Participation Agreement, or Royalty Agreement, with RPI Finance Trust, or RPI, which was recognized in the related period. Revenue in the 2012 periods was due to the receipt of a payment of $1.5 million from Biogen Idec in June 2012 for the advancement of pre-clinical work under the Restated Biogen Idec Agreement. We expect revenue to be higher in 2013 than in 2012 due to continued recognition of deferred revenue under the Royalty Agreement.

Research and Development Expense

Research and development expense was $7.7 million and $15.1 million for the three and six months ended June 30, 2013, as compared to $8.1 million and $14.7 million for the same periods in 2012, substantially all relating to the vosaroxin development program in each period. The decrease between the comparable three month periods was primarily due to a decrease of $0.9 million in drug manufacturing costs, partially offset by an increase in clinical trial expenses of $0.5 million. The increase between the comparable six month periods was primarily due to increased clinical trial expenses.

General and Administrative Expense

General and administrative expense was $2.9 million and $5.3 million for the three and six months ended June 30, 2013, as compared to $2.2 million and $4.4 million for the same periods in 2012. The increases between the comparable three and six month periods were primarily due to an increase in personnel and professional service costs.

Interest Expense

Interest expense was $0.8 million and $1.6 million for the three and six months ended June 30, 2013, as compared to $0.3 million and $0.6 million for the same period in 2012. The increase in the 2013 periods was due to the draw-down of the second tranche from Oxford Finance LLC, Silicon Valley Bank and Horizon Technology Finance Corporation, or collectively, the Lenders, under the loan and security agreement, or the Loan Agreement, in September 2012.

Other Income (Expense), Net

Net other income was $1.2 million for the three ended June 30, 2013, as compared to $0.5 million for the same period in 2012. Net other expense was $1.8 million for the six months ended June 30, 2013, as compared to $4.3 million for the same period in 2012. The amounts for each period were primarily comprised of non-cash charges or credits for the revaluation of warrants issued in the 2010 Offering.

Liquidity and Capital Resources

Sources of Liquidity

Since our inception, we have funded our operations primarily through the issuance of common and preferred stock, debt financings, the receipt of funds from our collaboration partners and from research grants.

Our cash, cash equivalents and marketable securities totaled $49.6 million as of June 30, 2013, as compared to $71.2 million as of December 31, 2012. The decrease of $21.6 million was primarily due to $19.0 million of net cash used in operating activities and $2.8 million of principal payments against notes payable, offset by $0.2 million of proceeds from stock option and employee stock purchase plan exercises.

In August 2011, we entered into a Controlled Equity OfferingSM sales agreement, or the Sales Agreement, with Cantor Fitzgerald & Co., or Cantor, as agent and/or principal, pursuant to which we could issue and sell shares of our common stock having an aggregate gross sales price of up to $20.0 million. In April 2013, the Sales Agreement was amended to provide for an increase of $30.0 million in the aggregate gross sales price under the Sales Agreement. We will pay Cantor a commission of 3.0% of the gross proceeds from any common stock sold through the Sales Agreement, as amended. During the six months ended June 30, 2013, no shares of our common stock were sold under the Sales Agreement, as amended. As of June 30, 2013, $33.9 million of common stock remained available to be sold under this facility.

In October 2011, we entered into the Loan Agreement with the Lenders, and drew down the first tranche of $10.0 million from the Lenders. In September 2012, following the recommendation by the DSMB to increase the sample size for the VALOR trial, we drew the second tranche of $15.0 million from the Lenders. Payments under both tranches were interest-only until February 1, 2013, with the following 32 equal monthly payments of principal and interest being paid monthly in arrears through the scheduled maturity date of October 1, 2015. A final payment equal to 3.75% of the aggregate amount drawn will be due on October 1, 2015, or earlier under certain conditions.


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Cash Flows

Net cash used in operating activities was $19.0 million for the six months ended June 30, 2013, as compared to $15.1 million for the same period in 2012. Net cash used in the 2013 period resulted primarily from the net loss of $19.8 million and changes in operating assets and liabilities of $3.2 million (including $4.0 million related to recognition of deferred revenue under the Royalty Agreement), partially offset by net adjustments for non-cash items of $3.9 million (including expenses of $1.7 million for the revaluation of warrants issued in the 2010 Offering and $1.9 million of stock-based compensation). Net cash used in the 2012 period resulted primarily from the net loss of $22.5 million, partially offset by net adjustments for non-cash items of $5.6 million (including expenses of $4.1 million for the revaluation of warrants issued in the 2010 Offering and $1.1 million of stock-based compensation), and changes in operating assets and liabilities of $1.8 million (primarily as a result of an increase in accrued clinical expenses related to the VALOR trial).

Net cash provided by investing activities was $13.3 million for the six months ended June 30, 2013, as compared to $17.1 million for the same period in 2012. Net cash provided in both periods consisted primarily of proceeds from maturities of marketable securities, partially offset by purchases of marketable securities.

Net cash used in financing activities was $2.6 million for the six months ended June 30, 2013, as compared to $0.5 million provided by financing activities for the same period in 2012. Net cash used in the 2013 period resulted primarily from principal payments under the Loan Agreement. Net cash provided in the 2012 period was primarily from sales of our common stock through the Cantor facility.

Operating Capital Requirements

We expect to continue to incur substantial operating losses in the future. We will not receive any product revenue until a product candidate has been approved by the Food and Drug Administration, or FDA, or similar regulatory agencies in other countries, and has been successfully commercialized, if at all. We will need to raise substantial additional funding to complete the development and potential commercialization of vosaroxin. Additionally, we may evaluate in-licensing and acquisition opportunities to gain access to new drugs or drug targets that would fit with our strategy. Any such transaction would likely increase our funding needs in the future.

Our future funding requirements will depend on many factors, including but not limited to:

the rate of progress and cost of our clinical trials, including the VALOR trial in particular;

the need for additional or expanded clinical trials;

the timing, economic and other terms of any licensing, collaboration or other similar arrangement into which we may enter;

the costs and timing of seeking and obtaining FDA and other regulatory approvals;

the extent of our other development activities;

the costs associated with building or accessing commercialization and additional manufacturing capabilities and supplies;

the costs of acquiring or investing in businesses, product candidates and technologies, if any;

the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;

the effect of competing technological and market developments; and

the costs, if any, of supporting our arrangements with Biogen Idec and Millennium.

We believe that we currently have the resources to fund our operations through 2014. We will need to raise substantial additional capital to complete the development and potential commercialization of vosaroxin. Until we can generate a sufficient amount of licensing or collaboration or product revenue to finance our cash requirements, which we may never do, we expect to finance our future cash needs primarily through equity issuances, debt arrangements, one or more possible licenses, collaborations or other similar arrangements with respect to development and/or commercialization rights to vosaroxin, or a combination of the above.

Our failure to raise significant additional capital in the future would force us to delay or reduce the scope of our vosaroxin development program, potentially including the VALOR trial, and/or limit or cease our operations. Any one of the foregoing would have a material adverse effect on our business, financial condition and results of operations.


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Contractual Obligations

The following table summarizes our long-term contractual obligations as of
June 30, 2013 (in thousands):



                                                                 Payments Due by Period
                                                                                                             After
                                     Total         Less Than 1 Year        1-3 Years       3-5 Years        5 Years
Long-term debt obligations,
including interest(1)               $ 24,679      $           10,577      $    14,102      $       -       $      -
Operating lease obligations(2)      $    167      $              167      $        -       $       -       $      -

(1) Upon the occurrence of an event of default, as defined in the Loan Agreement, and following any applicable cure periods, a default interest rate of an additional 5% may be applied to the outstanding loan balances, and the Lenders may declare all outstanding obligations immediately due and payable and take such other actions as set forth in the Loan Agreement.

(2) Operating lease obligations relate solely to the lease of approximately 15,000 square feet of office space in a building at 395 Oyster Point Boulevard in South San Francisco, California, which is currently our corporate headquarters. The lease was entered into in December 2006, and was due to expire on April 30, 2013. In January 2013, we extended the lease to January 31, 2014.

The above amounts exclude potential payments under:

our 2003 license agreement with Dainippon, pursuant to which we are required to make certain milestone payments in the event we file new drug applications in the United States, Europe or Japan, and if we receive regulatory approvals in any of these regions, for cancer-related indications. If vosaroxin is approved for a non-cancer indication, an additional milestone payment becomes payable to Dainippon. We are also required to make royalty payments to Dainippon in the event that vosaroxin is commercialized.

our Royalty Agreement with RPI, pursuant to which we are required to make certain revenue participation payments in the event that vosaroxin is commercialized.

We also have agreements with contract research organizations, or CROs, clinical sites and other third party contractors for the conduct of our clinical trials. We generally make payments to these entities based upon the activities they perform related to the particular clinical trial. There are generally no penalty clauses for cancellation of these agreements if notice is duly given and payment is made for work performed by the third party under the related agreement.

Off-Balance Sheet Arrangements

Since our inception, we have not had any off-balance sheet arrangements or relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or variable interest entities, which are typically established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

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