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AVEO > SEC Filings for AVEO > Form 10-Q on 8-Aug-2013All Recent SEC Filings

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Form 10-Q for AVEO PHARMACEUTICALS INC


8-Aug-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 and six months ended June 30, 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.

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.

In 2006, we acquired exclusive rights to develop and commercialize tivozanib, our lead product candidate, worldwide outside of Asia pursuant to a license agreement we entered into with Kirin Brewery Co. Ltd. (now Kyowa Hakko Kirin), or KHK. Under the license agreement, we obtained an exclusive license outside of Asia 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. 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 Pharma, Inc., or 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 the 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 connection with the receipt of a Complete Response Letter from the U.S. Food and Drug Administration, or the FDA, on June 10, 2013 informing us that the FDA will not approve in its present form our New Drug Application for tivozanib, our lead product candidate, for the treatment of patients with advanced renal cell carcinoma, or RCC, and our subsequent decision not to pursue tivozanib development in RCC, we recently announced a strategic restructuring, which has been substantially completed with the elimination of 120 of approximately 140 positions to be eliminated across the organization. This strategic restructuring will refocus our efforts on the on-going clinical development of tivozanib in colorectal and breast cancer and on the advancement of key pipeline and preclinical assets.

We and our partner Astellas are continuing to evaluate tivozanib in the BATON phase 2 clinical trials of tivozanib in colorectal and breast cancer. The BATON (Biomarker Assessment of Tivozanib in ONcology) program is a series of clinical trials assessing biomarkers in solid tumors that may be predictive of clinical response to tivozanib. Patient enrollment was completed earlier this year for BATON-CRC, a phase 2 clinical trial being conducted by Astellas evaluating tivozanib in combination with modified FOLFOX6 (mFOLFOX6) compared to Avastin® (bevacizumab) in combination with mFOLFOX6 as first-line therapy in patients with advanced metastatic colorectal cancer, or CRC. Results are expected in 2014. BATON-BC, a phase 2 clinical trial evaluating the efficacy and safety of tivozanib in combination with paclitaxel compared to placebo in combination with paclitaxel in patients with locally recurrent or metastatic triple negative breast cancer, is currently enrolling patients, and data results are expected in late 2014 or early 2015. Both BATON-CRC and BATON-BC incorporate pre-specified biomarker analyses.

In addition to tivozanib, we have a pipeline of monoclonal antibodies derived from our proprietary Human Response Platform. The Human Response Platform was designed to overcome many of the limitations of traditional approaches to modeling human


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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.

AV-203, which is derived from our Human Response Platform, is our clinical-stage ERBB3 (HER3) inhibitory antibody candidate, which we have partnered outside of North America with Biogen Idec International GmbH, a subsidiary of Biogen Idec, Inc. (which we collectively refer to herein as Biogen Idec). ERBB3 is believed to be an important receptor regulating cancer cell growth and survival. It is frequently over-expressed in human breast, ovarian, prostate, colorectal, pancreatic, gastric and head and neck cancers. High ERBB3 levels have been shown to correlate with poor prognoses in several tumor types. In 2012, we initiated a phase 1 clinical trial examining the safety, tolerability and preliminary efficacy of AV-203 in patients with metastatic or advanced solid tumors, with expansion cohorts in specific biomarker-defined patient populations.

Ficlatuzumab, which was also derived from our Human Response Platform, binds to hepatocyte growth factor, or HGF, thereby blocking its function. HGF is the sole known ligand of the c-Met receptor which is believed to trigger many activities that are involved in cancer development and metastasis. We have completed two phase 1 clinical studies and a phase 2 clinical study, and upon further analysis of the data from the phase 2 clinical study, we are currently exploring development options for ficlatuzumab.

Using our Human Response Platform, we have identified a number of other promising targets that appear to be potent drivers of tumor growth. Genetic screens conducted using the Human Response Platform have demonstrated that activation of the Notch signaling pathway plays an important role in tumor formation and the maintenance of cancer stem cell populations in tumors. We have identified Notch 1 and Notch 3 receptors and are seeking to partner this program. Work in our Human Response Platform has also identified Fibroblast Growth Factor ligands and receptors, specifically FGFR2 and FGFR3, as powerful drivers of tumor growth in a variety of tumor models and implicated the activation of the pathway in tumor development. We are seeking to partner this program as well. In 2012, we also initiated a program focusing on cachexia, a serious and common complication of advanced cancer and a number of chronic diseases and which is characterized by symptoms of unintentional weight loss, progressive muscle wasting, and a loss of appetite. In connection with this program, we have in-licensed certain patents and patent applications from St. Vincent's Hospital in Sydney, Australia.

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 June 30, 2013, and have principally funded our operations through:

• $380.9 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., affiliates of Hercules Technology Growth (which we refer to collectively as Hercules);

• $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 public offerings of our common stock in June 2011 and January 2013.

We do not have a history of being profitable and, as of June 30, 2013, we had an accumulated deficit of $386.3 million. We anticipate that we will continue to incur significant operating costs over the next several years as we continue our planned development activities for tivozanib, AV-203, ficlatuzumab, our program focusing on cachexia, 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 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


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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 KHK 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 for the treatment of patients with advanced RCC. 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 for the treatment of patients with advanced RCC.

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, 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 made plans to develop and seek to commercialize tivozanib for the treatment of a broad range of cancers, including RCC, breast and colorectal cancers. Astellas has informed us that it no longer intends to submit a Marketing Authorization Application, or MAA, to the European Medicines Agency, or EMA, for tivozanib for the treatment of patients with advanced RCC and that it does not intend to fund any future trial(s) in RCC under its strategic collaboration with us. We and Astellas are continuing to evaluate tivozanib in colorectal and triple negative breast cancer, as part of the BATON program.

Under the terms of the collaboration agreement, we and Astellas share responsibility for continued development and commercialization of tivozanib in the United States, Canada and Mexico, or 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.


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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 expect to enter into prior to any commercialization of tivozanib.

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.

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 for the treatment of patients with advanced RCC. We are also eligible to receive an aggregate of approximately $1.2 billion in potential future milestone payments, comprised of
(i) up to $65 million in substantive milestone payments upon achievement of specified clinical and development milestone events, (ii) up to $325 million in substantive milestone payments upon achievement of specified regulatory milestone events, and (iii) up to approximately $788 million in milestone payments upon the achievement of specified commercial sales events. The first anticipated clinical and development milestone will become due to us upon initiation of a phase 3 clinical trial, if any, 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, and we need to complete further trials, including our phase 2 trials, which do not result in any milestone payments coming due, prior to initiating any further phase 3 clinical 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. 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 joint development and commercialization 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 $6.4 million and $7.4 million during the three months ended June 30, 2013 and 2012, respectively, and by $12.7 million and $15.3 million during the six months ended June 30, 2013 and 2012, respectively. We also reduced general and administrative expense by $1.0 million and $0.9 million during the three months ended June 30, 2013 and 2012, respectively, and by $2.3 million and $1.5 million during the six months ended June 30, 2013 and 2012, respectively as a result of the cost-sharing provisions in our agreement with Astellas. The net amount due to us from Astellas pursuant to the cost-sharing provisions is $7.3 million at June 30, 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 joint development and commercialization activities in North America and Europe:
a co-exclusive license to develop and commercialize tivozanib in North America and Europe; a royalty-bearing license to develop and commercialize tivozanib in the royalty territory, which includes our obligation to provide access to clinical and regulatory information resulting from the activities in North America and Europe to Astellas for its development and commercialization of tivozanib in the royalty territory; and our obligation to supply clinical material to Astellas for development of tivozanib in the royalty territory. The co-exclusive license in North America and Europe is not sublicensable. Astellas has the right to sublicense the exclusive royalty-bearing license to develop and commercialize tivozanib in the royalty territory. Our obligation to provide access to clinical and regulatory information as part of the royalty territory deliverable includes the obligation to provide access, upon request, to all clinical data, regulatory filings, safety data and manufacturing data to Astellas for use in the development and commercialization of tivozanib in the royalty territory. The


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obligation to supply clinical material to Astellas for development in the royalty territory includes supplying such clinical material in accordance with current good manufacturing practices applicable to clinical materials and other relevant regulatory authority requirements, upon request, for the development of tivozanib in the royalty territory. All of these deliverables were deemed to have stand-alone value and to meet the criteria to be accounted for as separate units of accounting under ASC 605-25. ASC 605-25 establishes a selling price hierarchy for determining the selling price of a deliverable, which includes:
(1) vendor-specific objective evidence if available; (2) third-party evidence if vendor-specific objective evidence is not available; and (3) estimated selling price if neither vendor-specific objective evidence nor third-party evidence is available. We allocated the up-front consideration of $125 million to the deliverables based on our best estimate of selling price of each deliverable using the relative selling price method as we did not have vendor specific objective evidence or third-party evidence for such deliverables. Our best estimate of selling price considered discounted cash flow models, the key assumptions of which included the market opportunity for commercialization of tivozanib in North America and Europe and in the royalty territory, the development costs and market opportunity for the expansion of tivozanib into other solid tumor types, and the time to commercialization of tivozanib for all potential oncology indications. We allocated $120.2 million of the up-front consideration from Astellas to the co-exclusive license in North America and Europe and $4.8 million of the up-front consideration from Astellas to the combined deliverable representing a royalty-bearing license to develop and commercialize tivozanib in the royalty territory along with our obligation to provide access to clinical and regulatory information resulting from the activities in North America and Europe to Astellas for its use in the royalty territory. The relative selling price for our obligation to supply clinical material to Astellas for development in the royalty territory had de minimis value.

We recorded the $120.2 million relative selling price of the co-exclusive license granted in North America and Europe as collaboration revenue during the three months ended March 31, 2011 upon delivery of the license, and deferred approximately $4.8 million of revenue representing the relative selling price of the royalty-bearing license to develop and commercialize tivozanib in the royalty territory along with our obligation to provide access to clinical and regulatory information resulting from the activities in North America and Europe to Astellas for its use in the royalty territory. We are recording the $4.8 million ratably over the period of our performance through April 2022, the remaining patent life of tivozanib. We estimated the period of performance considering that we plan to develop tivozanib with Astellas in several . . .

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