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

Show all filings for NEWLINK GENETICS CORP

Form 10-Q for NEWLINK GENETICS CORP


8-Aug-2013

Quarterly Report


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

This Quarterly Report on Form 10-Q 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, and the Private Securities Litigation Reform Act of 1995, and such statements are subject to the "safe harbor" created by those sections. Forward-looking statements are based on our management's beliefs and assumptions and on information available to our management as of the date hereof. In some cases, you can identify forward-looking statements by terms such as "may," "will," "should," "could," "would," "expect," "plans," "anticipates," "believes," "estimates," "projects," "predicts," "potential" and similar expressions intended to identify forward-looking statements. Examples of these statements include, but are not limited to, statements regarding: our plans to develop and commercialize our product candidates; our ongoing and planned preclinical studies and clinical trials, including the timing for completion of enrollment and outcome of our Phase 3 clinical trial for our algenpantucel-L cancer immunotherapy; the timing of release of data from ongoing clinical studies; the timing of and our ability to obtain and maintain regulatory approvals for our product candidates; the clinical utility of our products; our plans to leverage our existing technologies to discover and develop additional product candidates; our ability to quickly and efficiently identify and develop product candidates; our commercialization, marketing and manufacturing capabilities and strategy; our intellectual property position; the potential benefits of strategic collaboration agreements and our ability to enter into strategic arrangements; our estimates regarding expenses, future revenues, capital requirements and needs for additional financing; and other risks and uncertainties, including those described in Part II, Item 1A, "Risk Factors" of this Quarterly Report and in our other periodic reports filed from time to time with the Securities and Exchange Commission, or SEC, including our Annual Report on Form 10-K for the year ended December 31, 2012. Our actual results could differ materially from those discussed in our forward-looking statements for many reasons, including those risks. 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. You should read this Quarterly Report on Form 10-Q completely. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

The following discussion and analysis should be read in conjunction with the unaudited financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Overview

We are a biopharmaceutical company focused on discovering, developing and commercializing novel immunotherapeutic products to improve treatment options for patients with cancer. Our portfolio includes biologic and small-molecule immunotherapy product candidates intended to treat a wide range of oncology indications. Our lead product candidate, HyperAcute Pancreas cancer immunotherapy (algenpantucel-L), or HyperAcute Pancreas, is being studied in two Phase 3 clinical trials; one in surgically-resected pancreatic cancer patients that is being performed under a Special Protocol Assessment, or SPA, with the United States Food and Drug Administration, or FDA, and one in locally advanced pancreatic cancer patients. We initiated these trials based on encouraging Phase 2 data that suggest improvement in both disease-free and overall survival. We have also received Fast Track and Orphan Drug designations from the FDA for this product candidate for the adjuvant treatment of surgically-resected pancreatic cancer and Orphan Medicinal Product designation for this product candidate from the European Commission. The primary endpoint for our IMPRESS (Immunotherapy for Pancreatic Resectable cancer Survival Study) Phase 3 trial with algenpantucel-L for patients with surgically-resected pancreatic cancer is overall survival and, as determined by the SPA, the first interim analysis will be conducted when 222 deaths are reported for the study. This triggering event for the first interim analysis has not yet occurred. We have three additional product candidates in clinical development, including our HyperAcute Lung cancer immunotherapy (tergenpumatucel-L), or HyperAcute Lung, our HyperAcute Melanoma cancer immunotherapy, or HyperAcute Melanoma and indoximod, our IDO pathway inhibitor. To date, our HyperAcute product candidates have been dosed in more than 500 cancer patients, either as a monotherapy or in combination with other therapies, and have demonstrated a favorable safety profile.

Our HyperAcute product candidates are based on our proprietary HyperAcute immunotherapy technology, which is designed to stimulate the human immune system. Our HyperAcute product candidates use allogeneic (non-patient specific) cells from previously established cell lines rather than cells derived from the patient. We believe our approach enables a simpler, more consistent and scalable manufacturing process than therapies based on patient specific tissues or cells. Our product candidates are designed to harness multiple components of the innate immune system to combat cancer, either as a monotherapy or in combination with current treatment regimens without incremental toxicity. We are also conducting small-molecule based research and development with an aim to produce new drugs capable of breaking the immune system's tolerance to cancer through inhibition of the indoleamine-(2,3)-dioxygenase, or IDO, pathway. We are currently studying our


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lead IDO pathway inhibitor product candidate, indoximod or 1-methyl-D-tryptophan (D-1MT), in multiple Phase 2 studies in breast cancer and prostate cancer. We believe that our immunotherapeutic technologies will enable us to discover, develop and commercialize multiple product candidates that can be used either alone or in combination to enhance or potentially replace current therapies to treat cancer with underserved patient populations and significant market potential.

BioProtection Systems Corporation, or BPS, was founded by us as a subsidiary in 2005 to research, develop and commercialize vaccines to control the spread of emerging lethal viruses and infectious diseases, improve the efficacy of existing vaccines and provide rapid-response prophylactic and therapeutic treatment for pathogens most likely to enter the human population through pandemics or acts of bioterrorism. BPS is based on three core technologies, each of which can be leveraged into the infectious disease or biodefense fields. The first is our HyperAcute immunotherapy technology, which is currently focused on enhancing vaccines for influenza. The second technology is based on a yellow fever virus. The third technology is a replication competent recombinant Vesicular Stomatitus Vaccine, or rVSV, an advanced vaccine technology developed for the Marburg and Ebola viruses.

We are a development stage company and have incurred significant losses since our inception. As of June 30, 2013, we had an accumulated deficit of $119.8 million. We incurred net losses of $7.1 million, $15.0 million, $6.3 million, $11.2 million, and $119.8 million, for the three and six months ended June 30, 2013, the three and six months ended June 30, 2012, and since inception, respectively. We expect our losses to increase over the next several years as we advance our products through late-stage clinical trials, pursue regulatory approval of our product candidates, and begin to build our commercialization activities in anticipation of one or more of our products receiving marketing approval.

On October 19, 2011, our board of directors approved a 2.1-for-one reverse split of our common stock which became effective upon filing of a Certificate of Amendment of the Restated Certificate of Incorporation with the Secretary of State of Delaware on October 25, 2011. All share and per share amounts have been retroactively restated in the accompanying financial statements and notes for all periods presented.

Financial Overview

Revenues

From our inception through June 30, 2013, we have not generated any revenue from product sales. We have generated $7.9 million in grant revenue from our inception through June 30, 2013, which is primarily attributable to research and development being performed by our subsidiary, BPS, under contracts and grants with the Department of Defense, or DOD, and the National Institutes of Health, or NIH.

In the future, we may generate revenue from a variety of sources, including product sales (if we develop products that are approved for sale), license fees, and milestone, research and development and royalty payments in connection with strategic collaborations or licenses of our intellectual property. We expect that any revenue we generate will fluctuate from quarter to quarter as a result of the timing and amount of license fees, research and development reimbursements, milestone and other payments we may receive under potential strategic collaborations, and the amount and timing of payments we may receive upon the sale of any products, if approved, to the extent any are successfully commercialized. We do not expect to generate revenue from product sales for several years, if ever. If we fail to complete the development of our product candidates in a timely manner or to obtain regulatory approval for them, our ability to generate future revenue, and our results of operations and financial position, would be materially adversely affected.

Research and Development Expenses

Research and development expenses consist of expenses incurred in connection
with the discovery and development of our product candidates. These expenses
consist primarily of:

         employee-related expenses, which include salaries, bonuses, benefits
          and share-based compensation;


         the cost of acquiring and manufacturing clinical trial materials,
          including equipment and supplies;


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


         facilities, depreciation of fixed assets and other allocated expenses,
          which include direct and allocated expenses for rent and maintenance of
          facilities and equipment related to research and development;


         license fees for and milestone payments related to in-licensed products
          and technology; and

costs associated with non-clinical activities and regulatory approvals.


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We expense research and development expenses as incurred.

Product candidates in late stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size, duration and complexity of later stage clinical trials. We plan to increase our research and development expenses for the foreseeable future as we seek to complete development of our most advanced product candidates, and to further advance our earlier-stage research and development projects. From our inception through June 30, 2013, we have incurred $89.5 million in research and development expenses. The following tables summarize our research and development expenses for the periods indicated:

                                   Research and Development Expenses by Product
                                                  (In thousands)
                                                   (unaudited)

                                                                                               Cumulative from
                                                                                                June 4, 1999
                                                                                                 (inception)
                                      Three Months Ended             Six Months Ended              through
                                           June 30,                      June 30,                 June 30,
                                       2013            2012          2013          2012             2013
HyperAcute immunotherapy
technology                       $    3,877         $  3,212     $    7,711     $  5,872     $          62,812
IDO pathway inhibitor technology        835            1,066          2,920        1,861                17,997
Other research and development          325              462            749          837                 8,727
Total research and development
expenses                         $    5,037         $  4,740     $   11,380     $  8,570     $          89,536



                                  Research and Development Expenses by Category
                                                  (In thousands)
                                                   (unaudited)

                                                                                               Cumulative from
                                                                                                June 4, 1999
                                                                                                 (inception)
                                      Three Months Ended             Six Months Ended              through
                                           June 30,                      June 30,                 June 30,
                                       2013            2012          2013          2012             2013
Compensation                     $    2,198         $  2,062     $    4,537     $  3,971     $          42,551
Equipment, supplies and
occupancy                             1,259            1,307          2,588        2,352                27,120
Outside clinical and other            1,580            1,371          4,255        2,247                19,865
Total research and development
expenses                         $    5,037         $  4,740     $   11,380     $  8,570     $          89,536

At this time, we cannot accurately estimate or know the nature, specific timing or costs necessary to complete clinical development activities for our product candidates. We are subject to the numerous risks and uncertainties associated with developing biopharmaceutical products including the uncertain cost and outcome of ongoing and planned clinical trials, the possibility that the FDA or another regulatory authority may require us to conduct clinical or non-clinical testing in addition to trials that we have planned, rapid and significant technological changes, frequent new product and service introductions and enhancements, evolving industry standards in the life sciences industry and our future need for additional capital. In addition, we currently have limited clinical data concerning the safety and efficacy of our product candidates. A change in the outcome of any of these variables with respect to the development of any of our product candidates could result in a significant change in the costs and timing of our research and development expenses.

General and Administrative Expenses

General and administrative expenses consist principally of salaries and related costs for personnel in executive, finance, business development, information technology, legal and human resources functions. Other general and administrative expenses include facility costs not otherwise associated with research and development expenses, intellectual property prosecution and defense costs and professional fees for legal, consulting, auditing and tax services.


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We anticipate that our general and administrative expenses will continue to increase over the next several years for, among others, the following reasons:

         as a result of increased payroll, expanded infrastructure and higher
          consulting, legal, auditing and tax services and investor relations
          costs, and director and officer insurance premiums associated with
          being a public company;


         to support our research and development activities, which we expect to
          expand as we continue to advance the clinical development of our
          product candidates;


         as a result of beginning to incur expenses related to the planned sales
          and marketing of one or more of our product candidates, before we
          receive regulatory approval, in anticipation of commercial launch, if
          any, of those product candidates.

Interest Income and Interest Expense

Interest income consists of interest earned on our cash and cash equivalents and certificates of deposit. The primary objective of our investment policy is capital preservation. We expect our interest income to increase as we invest the net proceeds from our offerings pending their use in our operations.

Interest expense consists primarily of interest and amortization of deferred financing costs associated with our notes payable and obligations under capital leases.

Tax Loss Carryforwards

The valuation allowance for deferred tax assets as of June 30, 2013 and December 31, 2012 was $27.3 million and $23.1 million, respectively. The net change in the total valuation allowance for the three months ended June 30, 2013 and 2012 was an increase of $4.2 million and $2.3 million, respectively. In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities, projected taxable income, and tax planning strategies in making this assessment. Valuation allowances have been established for the entire amount of the net deferred tax assets as of June 30, 2013 and December 31, 2012, due to the uncertainty of future recoverability.

As of June 30, 2013 and December 31, 2012, we had federal net operating loss carryforwards of $108.5 million and $94.5 million and federal research credit carryforwards of $4.1 million and $2.9 million, respectively, that expire at various dates from 2019 through 2033. Sections 382 and 383 of the Internal Revenue Code limit a corporation's ability to utilize its net operating loss carryforwards and certain other tax attributes (including research credits) to offset any future taxable income or tax if the corporation experiences a cumulative ownership change of more than 50% over any rolling three year period. State net operating loss carryforwards (and certain other tax attributes) may be similarly limited. An ownership change can therefore result in significantly greater tax liabilities than a corporation would incur in the absence of such a change and any increased liabilities could adversely affect the corporation's business, results of operations, financial condition and cash flow.

Based on a preliminary analysis, we believe that, from its inception through December 31, 2011, we experienced Section 382 ownership changes in September 2001 and March 2003 and our subsidiary experienced Section 382 ownership changes in January 2006 and January 2011. These ownership changes limit our ability to utilize federal net operating loss carryforwards (and certain other tax attributes) that accrued prior to our ownership changes and those of our subsidiary. Additional analysis will be required to determine whether changes in our ownership since December 31, 2011 and/or changes in our ownership that resulted from our follow-on offering have caused or will cause another ownership change to occur. Any such change could result in significant limitations on some or all of our net operating loss carryforwards and other tax attributes. Even if another ownership change has not occurred, additional ownership changes may occur in the future as a result of events over which we will have little or no control, including purchases and sales of our equity by our 5% stockholders, the emergence of new 5% stockholders, additional equity offerings or redemptions of our stock or certain changes in the ownership of any of our 5% stockholders.

Income tax expense was $0 for the three months ended June 30, 2013 and 2012. Income tax expense differs from the amount that would be expected after applying the statutory United States federal income tax rate primarily due to changes in the valuation allowance for deferred taxes.


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Critical Accounting Policies and Significant Judgments and Estimates

We have prepared our financial statements in accordance with United States generally accepted accounting principles. Our preparation of these financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, expenses and related disclosures at the date of the financial statements, as well as revenues and expenses during the reporting periods. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could therefore differ materially from these estimates under different assumptions or conditions.

Our Annual Report on Form 10-K for the year ended December 31, 2012, discusses our most critical accounting policies. Since December 31, 2012, there have been no material changes in the critical accounting policies discussed in the 2012 Annual Report.

Results of Operations

Comparison of the Three Months Ended June 30, 2013 and 2012

Revenues. Revenues for the three months ended June 30, 2013 were $232,000, decreasing from $590,000 for the same period in 2012. The decrease in revenue of $358,000 was due to decreased research by BPS under various DOD contracts and the completion of three grants in 2012.

Research and Development Expenses. Research and development expenses for the three months ended June 30, 2013 were $5.0 million, increasing from $4.7 million for the same period in 2012. The $300,000 increase was primarily due to an increase of $209,000 in clinical trial expense, accompanied by a $136,000 increase in personnel-related expenses. The increase in clinical trial expense is primarily attributable to higher levels of patient counts enrolled in our clinical trials and the increase in personnel-related expense is attributable to both increases in headcount and compensation levels.

General and Administrative Expenses. General and administrative expenses for the three months ended June 30, 2013 were $2.3 million, increasing from $2.2 million for the same period in 2012. The $100,000 increase was primarily due to an increase in consulting and dues and subscriptions, offset by decreases in recruiting and other expenses.

Interest Income and Expense. Interest expense for the three months ended June 30, 2013 was $10,000, compared to $12,000 for the same period in 2012. Interest income for the three months ended June 30, 2013 was $2,000, compared to $4,000 for the same period in 2012.

Comparison of the Six Months Ended June 30, 2013 and 2012

Revenues. Revenues for the six months ended June 30, 2013 were $534,000, decreasing from $1.1 million for the same period in 2012. The decrease in revenue of $527,000 was due to decreased research by BPS under various DOD contracts and the completion of three grants in 2012.

Research and Development Expenses. Research and development expenses for the six months ended June 30, 2013 were $11.4 million, increasing from $8.6 million for the same period in 2012. The $2.8 million increase was primarily due to an increase in outside clinical and other expenses, including a $908,000 increase in contract research and manufacturing, an increase of $896,000 in clinical trial expense, accompanied by a $566,000 increase in personnel-related expenses, an increase of $130,000 in consulting fees and other expenses and an increase in $66,000 in maintenance and repair and other expenses. The increase in contract research and manufacturing relates primarily to small-molecule based research and development. The increase in clinical trial expense is primarily attributable to higher levels of patient counts enrolled in our clinical trials and the increase in personnel-related expense is attributable to both increases in headcount and compensation levels.

General and Administrative Expenses. General and administrative expenses for the six months ended June 30, 2013 were $4.3 million, increasing from $3.6 million for the same period in 2012. The $700,000 increase was primarily due to a $265,000 increase in personnel-related expenses, accompanied by a $346,000 increase in professional fees, travel and other expenses.


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Interest Income and Expense. Interest expense for the six months ended June 30, 2013 was $18,000, compared to $20,000 for the same period in 2012. Interest income for the six months ended June 30, 2013 was $4,000, compared to $8,000 for the same period in 2012.

Other Income (Expense). Miscellaneous income (expense), net for the six months ended June 30, 2013 was $114,000, compared to ($21,000) for the same period in 2012. Miscellaneous income (expense), net for the six months ended June 30, 2013 was primarily attributable to a rebate from our clinical trial insurance carrier.

Liquidity and Capital Resources

We have funded our operations through the proceeds of our initial public offering, or IPO, completed in November 2011, the proceeds of our follow-on public offering, completed in February 2013, the private placement of equity securities, debt financing and interest income. As of June 30, 2013, we have received proceeds of $158.0 million from the issuance of common and convertible preferred stock and $8.2 million from debt financing. As of June 30, 2013, we had cash, cash equivalents and certificates of deposit of approximately $59.3 million. The following table sets forth the primary sources and uses of cash for each of the periods set forth below:

                             Sources and Uses of Cash
                                  (in thousands)

                                                           Six Months Ended
                                                               June 30,
                                                          2013          2012
  Net cash used in development activities              $ (11,477 )   $ (10,449 )
  Net cash provided by investing activities                  971           679
  Net cash provided by financing activities               49,295           607
  Net increase (decrease) in cash and cash equivalents $  38,789     $  (9,163 )

For the six months ended June 30, 2013 and 2012, we used cash of $11.5 million . . .

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