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ASTX > SEC Filings for ASTX > Form 10-Q on 9-Aug-2013All Recent SEC Filings




Quarterly Report

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

You should read the following discussion together with our consolidated financial statements and related notes included elsewhere in this report. The results discussed below are not necessarily indicative of the results to be expected in any future periods. Our disclosure and analysis in this section of the report also contain forward-looking statements. When we use the words "anticipate," "estimate," "project," "intend," "expect," "plan," "believe," "should," "likely," "may," "continue," and similar expressions, we are making forward-looking statements. Forward-looking statements provide our current expectations or forecasts of future events. In particular, these statements include statements such as: our statements regarding our strategy to mitigate the increased licensure pressure; our estimates about profitability or losses and the factors affecting such; the percentage and amount of royalties we expect to earn on Dacogen sales, and the amount of any contingent payments we may receive, under our agreement with Eisai; our forecasts regarding our operating expenses; our expectations about the research and development expenses related to our Phase II clinical trial programs; our expectations about the timing of regulatory reviews; statements regarding the amortization of intangible assets and goodwill; statements regarding the effects of recent accounting pronouncements; our expectations regarding our exposure to interest rate market risk; our statements regarding the sufficiency of our cash to meet our operating needs; our expectations to pay the remaining balance on the deferred consideration to former ATL stockholders; our expectations to retain future earnings; and our need and ability to obtain future funding. Our actual results could differ materially from those predicted in the forward-looking statements as a result of risks and uncertainties including, but not limited to: the commercial success of Dacogen, particularly in the EU and in other areas outside the United States; the approval by regulatory agencies of expanded applications for Dacogen; delays and risks associated with conducting and managing our clinical trials; developing products and obtaining regulatory approval; our ability to launch and commercialize products; the stability of our stock price for purposes of measuring impairment of goodwill; our ability to establish and maintain collaborative relationships; competition; our ability to obtain funding; our ability to protect our intellectual property in the United States and abroad; the success of the Pyramid drug discovery platform; our dependence on third party suppliers and manufacturers; risks associated with the hiring and loss of key personnel; and adverse changes in the specific markets for our products. Certain unknown or immaterial risks and uncertainties can also affect our forward-looking statements. Consequently, no forward-looking statement can be guaranteed and you should not rely on these forward-looking statements. For a discussion of the known and material risks that could affect our actual results, please see the "Risk Factors" section of this report. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. Readers should carefully review the Risk Factors section as well as other reports or documents we file from time to time with the Securities and Exchange Commission.


We are a pharmaceutical company dedicated primarily to the discovery and development of novel small molecule therapeutics with a focus on oncology. We believe we are developing a proprietary pipeline of novel medicines for partnership with leading pharmaceutical companies. We believe we are a leader in the application of fragment-based drug discovery and development of small-molecule therapeutics. Fragment-based drug discovery is considered by many in our sector to be one of the most important advances in discovery chemistry in the last 20 years.

On July 20, 2011, we completed the acquisition of all of the outstanding shares of Astex Therapeutics Limited ("ATL"), a privately held UK-based biotechnology company with particular expertise in fragment-based drug discovery. We agreed to pay deferred consideration of $30 million in stock, cash, or a combination of stock and cash, to be determined at the discretion of the Company, no later than 30 months after the closing of the acquisition (January 2014). We made the first payment of $10 million in cash in February 2012, paid the second installment of $2.3 million in cash in August 2012, and paid the third installment of $2.9 million in cash in February 2013.

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ATL discovers and develops novel small molecule therapeutics. Using its fragment-based drug discovery platform, Pyramid™, ATL has built a pipeline of molecularly-targeted drugs for large pharmaceutical partners and internal development that are at various stages of clinical, pre-clinical and early discovery development.

Our founding strategy was to in-license late-stage clinical products and commercialize these products by executing selective developmental and commercialization strategies that might allow these products to come into the market and be utilized by the widest possible patient populations. However, the competition for late-stage compounds that can be obtained through licensure or acquisition, that have shown initial efficacy in humans, has increased significantly with most major pharmaceutical companies and emerging biotechnology companies taking positions in this market. We believe that our current strategy attempts to mitigate the competitive risk of in-licensure and positions us to out-license selective products to our licensing competitors or other pharmaceutical companies. Our primary objective is to become a leading developer and seller or licensor of medicines for patients suffering from cancer.

We currently receive development and license revenue from partnered programs and royalty revenues relating to sales of Dacogen® (decitabine) for Injection, a product approved by the FDA for the treatment of patients with myelodysplastic syndrome ("MDS"), which is licensed to Eisai under an exclusive worldwide license. In 2006, Eisai executed an agreement to sublicense Dacogen to Cilag Gmbh International ("Cilag"), a Johnson & Johnson company, granting exclusive development and commercialization rights in all territories outside North America. Cilag is responsible for conducting regulatory and commercial activities related to Dacogen in all territories outside North America, while Eisai retains all commercialization rights and responsibility for all activities in the United States, Canada and Mexico. We are entitled to receive a royalty on worldwide net sales of Dacogen starting at 20% and escalating to a maximum of 30%. We recognize royalty revenue when the royalty statement is received from Eisai because we do not have sufficient ability to accurately estimate Dacogen sales prior to that time. As a result of both the original agreement with Eisai and the sublicense with Cilag, we may receive up to $12.5 million in future contingent payments dependent upon achievements for Dacogen globally. In September 2012, the European Commission approved the marketing authorization for Dacogen for the treatment of adult patients (age 65 years and above) with newly diagnosed de novo or secondary acute myeloid leukemia ("AML"), according to the World Health Organization classification, who are not candidates for standard induction chemotherapy. Dacogen was also granted a 10-year Orphan Drug designation in Europe for the treatment of elderly AML. Dacogen's orphan drug status in the United States expired in early May 2013. A generic competitor entered the market in July 2013, and we expect to see a decrease in royalty revenues from North America in the second half of 2013. We expect this decrease will be only partially offset by an increase in Dacogen royalty revenues in Europe and other areas outside the United States, but we cannot predict the amount or timing of any such increase.

All of our current products, other than Dacogen, are in the development or clinical trial stage, and will require substantial additional investments in research and development, clinical trials, regulatory and sales and marketing activities to commercialize these product candidates. Conducting clinical trials is a lengthy, time-consuming, and expensive process involving inherent uncertainties and risks, and our studies may be insufficient to demonstrate safety and efficacy to support FDA approval of any of our product candidates.

As a result of our substantial research and development expenditures and minimal product revenues, we have incurred cumulative losses of $330.2 million through June 30, 2013, and have not consistently generated enough funds through our operations to support our business. Although we were profitable in the last three years, we expect to have operating losses over the next few years and we may never achieve sustained profitability.

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Ultimately, our ability to sustain profitability will depend upon a variety of factors, including seeking and receiving regulatory approvals of our products, the timing of the introduction and market acceptance of our products and competing products, Eisai's success in selling Dacogen in North America, the degree of market-share lost by competition from lower-cost generic products against Dacogen, Cilag's success in commercializing Dacogen in Europe, obtaining the necessary reimbursement authorizations to penetrate controlled markets, the success of our various collaborative, research and license arrangements, whether our partners exercise their options to further develop and commercialize any of the compounds resulting from the joint development efforts, the launch of new products, the success of the Pyramid drug development platform, and our ability to control our ongoing costs and operating expenses. If our drug discovery and research efforts are not successful, or if the results from our clinical trials are not positive and do not support further development or approval, we may not be able to get sufficient funding to continue our trials or conduct new trials, and we would be forced to scale down or cease our business operations. Moreover, if our products are not approved or commercially accepted we will remain unprofitable for longer than we currently anticipate. As a result, we might be forced to substantially scale down our operations or sell certain of our assets, and it is likely the price of our stock would decline precipitously.

Critical Accounting Policies

Our management discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and reported disclosures. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, valuation of investments and stock-based compensation. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Our significant accounting policies are more fully disclosed in Note 1 to our consolidated financial statements included in our 2012 Annual Report on Form 10-K. However, some of our accounting policies are particularly important to the portrayal of our financial position and results of operations and require the application of significant judgment by our management. We believe the following critical accounting policies, among others, affect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements.

Stock-Based Compensation

We account for stock-based compensation at the fair value estimated on the measurement date using the Black-Scholes option-pricing model based on assumptions for volatility, risk-free interest rates, expected life of the option, and dividends (if any). Expected volatility is determined based on a blend of historical volatility and implied volatility of our common stock based on the period of time corresponding to the expected life of the stock options. The expected life of our stock options is based on our historical data and represents the period of time that stock options granted are expected to be outstanding. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant commensurate with the expected life assumption.

We are using the straight-line attribution method to recognize stock-based compensation expense. The amount of stock-based compensation recognized during a period is based on the value of the portion of the awards that are ultimately expected to vest, including awards that vest based on certain performance criteria. We estimate forfeitures at the time of grant and revise them, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The term "forfeitures" is distinct

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from "cancellations" or "expirations" and represents only the unvested portion of the surrendered option. This analysis is re-evaluated quarterly and the forfeiture rate is adjusted as necessary based upon historical data. Ultimately, the actual expense recognized over the vesting period will only be for those shares that vest.

As of June 30, 2013, there was $5.4 million of total unrecognized compensation cost related to unvested stock-based awards that vest based upon service conditions or vest based upon performance conditions and are probable of vesting. This cost is expected to be recognized over a weighted average period of 2.18 years.

Revenue Recognition

Eisai is required to pay us royalties starting at 20% and escalating to a maximum of 30% of net worldwide Dacogen sales within 45 days after the end of each calendar quarter. During the six month period ended June 30, 2013, we recorded royalty revenue of $38.7 million. Because we do not have sufficient ability to accurately estimate Dacogen sales, we recognize royalty revenue when we receive the royalty statement from Eisai. In accordance with our license agreement with Eisai, we are entitled to receive 50% of any payments Eisai receives as a result of any sublicenses.

Revenues associated with substantive, at-risk milestones pursuant to ATL's collaborative agreements will be recognized upon achievement of the milestones through option exercise by the collaboration partner. We consider a milestone to be substantive at the inception of the arrangement if it is (a) commensurate with either our performance to achieve the milestone or the enhancement of the value of the delivered item as a result of a specific outcome resulting from our performance to achieve the milestone, (b) it relates solely to past performance, and (c) it is reasonable relative to all of the deliverables and payment terms within the arrangement. Non-refundable contingent future amounts receivable in connection with future events specified in the collaboration agreement that are not considered milestones will be recognized as revenue when payments are earned from our collaborators through completion of any underlying performance obligations, the amounts are fixed or determinable, and collectibility is reasonably assured.

Intangible Assets and Goodwill

The fair value of the identified intangible assets recorded in the acquisition of ATL was estimated by using income or cost replacement approaches. The acquisition of ATL also created goodwill as the purchase price exceeded the fair value of the identifiable assets acquired net of the liabilities assumed. The value assigned to developed technology is being amortized over seven years and the value assigned to the non-active collaboration agreements is being amortized over five years, the estimated useful lives of the assets. The in-process research and development and trademark intangibles, as well as the goodwill, are deemed to have indefinite lives. The indefinite lived intangible assets will not be amortized but instead will be tested for impairment at least annually (more frequently if certain indicators are present) until the completion or abandonment of the associated research and development efforts.

Impairment of Investments in Financial Instruments

Investments in financial instruments are carried at fair value based on quoted market prices, with unrealized gains and losses included in accumulated other comprehensive income or loss in stockholders' equity. Our investment portfolio includes equity securities that could subject us to material equity market risk and corporate and U.S. government (or U.S. governmental agency) obligations that subject us to varying levels of credit risk. An other-than-temporary decline in fair value of a financial instrument will be subject to a write-down resulting in a charge against earnings. The determination of whether a decline in fair value is other-than-temporary requires significant judgment,

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and could have a material impact on our balance sheet and results of operations. Our management reviews the securities within our portfolio for other than temporary declines in value on a regular basis. The prices of some of our marketable equity securities are subject to considerable volatility.

Equity investments in securities without readily determinable fair value for which we own less than 20% of the outstanding shares and for which we have no significant influence in the entity consist of investments in privately held companies and are carried at adjusted cost. As of June 30, 2013, we held two such non-marketable securities, which have been included in other assets in the condensed consolidated balance sheets. We periodically review these investments and evaluate whether an impairment of value has occurred. We monitor the liquidity and financing activities of the issuers of these securities and evaluate, among other factors, the financial condition and business outlook of the issuers, including key operational and cash flow metrics and current market conditions, as well as our intent and ability to retain the investments.

Recent Accounting Pronouncements

In July 2012, the Financial Accounting Standards Board ("FASB") modified existing rules to allow entities to use a qualitative approach to test indefinite-lived intangible assets for impairment. The revised standard allows an entity the option to first assess qualitatively whether it is more likely than not (that is, a likelihood of more than 50 percent) that an indefinite-lived intangible asset is impaired. An entity is not required to calculate the fair value of an indefinite-lived intangible asset and perform the quantitative impairment test unless the entity determines that it is more likely than not that the asset is impaired. This guidance became effective for the Company in 2013. Adoption of this standard has not had a material impact on our results of operations, cash flows, or financial position.

In February 2013, the FASB issued new guidance which requires disclosure of information about significant reclassification adjustments from accumulated other comprehensive income in a single note or on the face of the financial statements. This guidance is effective for the Company in 2013. Adoption of this standard, which is related to disclosure only, has not had an impact on the Company's consolidated financial position, results of operations, or cash flows.

In March 2013, the FASB issued a new accounting standard on foreign currency matters that clarifies the guidance of a parent company's accounting for the cumulative translation adjustment upon derecognition of certain subsidiaries or groups of assets within a foreign entity or of an investment in a foreign entity. Under this new standard, a parent company that ceases to have a controlling financial interest in a foreign subsidiary or group of assets within a foreign entity shall release any related cumulative translation adjustment into net income only if a sale or transfer results in complete or substantially complete liquidation of the foreign entity. This standard shall be applied prospectively and will become effective for the Company on January 1, 2014. The Company expects that the adoption of this standard will not have a material effect on its consolidated financial statements.

In July 2013, the FASB issued a new accounting standard on the financial statement presentation of unrecognized tax benefits. The new standard provides that a liability related to an unrecognized tax benefit would be presented as a reduction of a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. The new standard becomes effective for the Company on January 1, 2014 and it should be applied prospectively to unrecognized tax benefits that exist at the effective date with retrospective application permitted. The Company is currently assessing the impacts of this new standard.

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Results of Operations

Three months ended June 30, 2013 compared to three months ended June 30, 2012:

                                          Three months ended
                                               June 30,                Change
      Revenues                             2013         2012      Dollar    Percent
                                             (Dollars in thousands)
      Royalty revenue                    $   16,615   $ 14,441   $  2,174       15.1 %
      Development and license revenue             -      5,439     (5,439 )   (100.0 )

The increase in royalty revenue from 2012 to 2013 is due to higher Dacogen product sales as reported by Eisai. Eisai is required to pay us royalties starting at 20% and escalating to a maximum of 30% of net worldwide Dacogen sales within 45 days after the end of each calendar quarter. Because we do not have sufficient ability to accurately estimate Dacogen sales, we recognize royalty revenue when we receive the royalty statements from Eisai. Therefore, royalty revenues recognized in the second quarters of 2013 and 2012 relate to worldwide Dacogen sales for the first quarters of 2013 and 2012, respectively. Details of Dacogen sales and related royalty revenues were as follows (in thousands):

                                                Three months ended
                                                     June 30,
                                                 2013         2012
                 Net Dacogen product sales:
                 North America                 $   63,475   $ 57,025
                 Rest of the world                 15,923     12,711

                 Total                         $   79,398   $ 69,736

                 Royalty revenue               $   16,615   $ 14,441

Dacogen's orphan drug status in the United States expired in early May 2013. A generic competitor entered the market in July 2013, and we expect to see a decrease in royalty revenues from North America in the second half of 2013. We expect this decrease will be only partially offset by an increase in Dacogen royalty revenues in Europe and other areas outside the United States, but we cannot predict the amount or timing of any such increase.

There was no development and license revenue in the second quarter of 2013. Development and license revenue in 2012 represents recognition of $5,439,000 relating to a collaboration agreement with Janssen Pharmaceutica NV, triggered upon clearance to commence a Phase I clinical trial of an FGFR kinase inhibitor.

                                         Three months ended
                                              June 30,                Change
         Operating expenses               2013         2012     Dollar    Percent
                                            (Dollars in thousands)
         Research and development       $   18,153   $ 15,394   $ 2,759       17.9 %
         General and administrative          3,691      3,650        41        1.1
         Amortization of intangibles         1,883      1,941       (58 )     (3.0 )
         Gain on sale of products                -       (700 )    (700 )   (100.0 )

The increase in research and development expenses was primarily due to higher product development and clinical trial costs associated with our prioritized clinical compounds SGI-110 and AT13387. We expect that research and development expenses for 2013 will continue to increase over the prior year reflecting the increased clinical trial activity related to our various Phase II clinical trial programs.

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The increase in general and administrative expenses from 2012 to 2013 relates primarily to higher administrative salaries and facilities costs.

Amortization of intangibles relates to the intangible assets that were part of the acquisition of ATL in July 2011. Definite-lived intangible assets are being amortized over their estimated useful lives. The value assigned to developed technology is being amortized over seven years and the value assigned to the non-active collaboration agreements is being amortized over five years. Our indefinite-lived intangible assets are not amortized but instead are tested for impairment at least annually (or more frequently if certain indicators are present) until the completion or abandonment of the associated research and development efforts.

During the three month period ended June 30, 2012 we received $700,000, representing the fifth and final installment payment from Mayne/Hospira related to the sale of the remaining worldwide Nipent rights. No further payments are expected under this transaction.

                                             Three months ended
                                                  June 30,                Change
     Other income (expense)                   2013         2012     Dollar    Percent
                                                (Dollars in thousands)
     Interest income                        $      28     $    45   $   (17 )     37.8 %
     Foreign currency remeasurement loss          (78 )       (16 )      62      387.5
     Other income (expense)                        47         (15 )      62      413.3
     Income tax benefit                         2,932       1,630     1,302       79.9

The decline in interest income was due primarily to lower interest rates for the three months ended June 30, 2013 compared to the comparable period in 2012.

Foreign currency remeasurement loss for the three months ended June 30, 2013 related primarily to the remeasurement of foreign-denominated transactions and . . .

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