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

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Form 10-Q for ENDOCYTE INC


9-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 certain statements that are forward-looking statements within the meaning of federal securities laws. When used in this report, the words "may," "will," "should," "could," "would," "anticipate," "estimate," "expect," "plan," "believe," "predict," "potential," "project," "target," "forecast," "intend" and similar expressions are intended to identify forward-looking statements. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include the important risks and uncertainties that may affect our future operations as discussed in Part II
- Item 1A of this Quarterly Report on Form 10-Q and any other filings made with the Securities and Exchange Commission. Readers of this report are cautioned not to place undue reliance on these forward-looking statements. While we believe the assumptions on which the forward-looking statements are based are reasonable, there can be no assurance that these forward-looking statements will prove to be accurate. This cautionary statement is applicable to all forward-looking statements contained in this report.

Overview

We are a biopharmaceutical company developing targeted therapies for the treatment of cancer and inflammatory diseases. We use our proprietary technology to create novel small molecule drug conjugates, or SMDCs, and companion imaging diagnostics. Our SMDCs actively target receptors that are over-expressed on diseased cells, relative to healthy cells. This targeted approach is designed to enable the treatment of patients with highly active drugs at greater doses, delivered more frequently, and over longer periods of time than would be possible with the untargeted drug alone. We are also developing companion imaging diagnostics for each of our SMDCs that are designed to identify the patients whose disease over-expresses the target of the therapy and who are therefore more likely to benefit from treatment. This combination of an SMDC with its companion imaging diagnostic is designed to personalize the treatment of patients by delivering effective therapy, selectively to diseased cells, in the patients most likely to benefit.

Our lead SMDC candidate, vintafolide, targets the folate receptor, which is frequently over-expressed on cancer cells. We have chosen platinum-resistant ovarian cancer, or PROC, a highly treatment-resistant disease, as our lead indication for development of vintafolide because of the high unmet need in treating this patient population and the high percentage of ovarian cancer patients whose tumors over-express the targeted folate receptor. We conducted a multicenter, open-label randomized phase 2 clinical trial of vintafolide in 149 women with PROC, referred to as the PRECEDENT trial. Based upon our findings from the PRECEDENT trial, we initiated enrollment of our PROCEED trial, a phase 3 registration trial in women with PROC, in the first half of 2011. PROCEED is a randomized, double-blinded trial of vintafolide in combination with pegylated liposomal doxorubicin, or PLD (marketed in the U.S. under the brand name DOXIL® and in Europe under the brand name CAELYX®), compared to PLD plus placebo. In the first quarter of 2013, we announced our decision to amend the PROCEED trial design. We have incorporated a progression free survival, or PFS, analysis on 250 FR(100%) patients (patients in which 100 percent of their target lesions over-expressed the folate receptor as determined by an etarfolatide scan) to be evaluated by the Data and Safety Monitoring Board, or DSMB. We expect the data for this analysis to be available in the first half of 2014. The DSMB may select one of three alternatives based on that analysis: 1) stop the trial if the PFS endpoint has not been met, 2) stop the trial because the PFS endpoint has been met and it would be unethical to continue because of demonstrated patient benefit or 3) add 100 FR(100%) patients to expand the overall survival, or OS, analysis. If the PFS endpoint is achieved, we believe that it is mostly likely the DSMB will elect to add 100 FR(100%) patients. We expect to enroll a total of 500 patients to reach the goal of 250 FR(100%) patients. Assuming we enroll the additional 100 patients, which we expect could take an additional nine to ten months to enroll, PROCEED will be a 600 patient study. The primary endpoint will be PFS in FR(100%) patients. The secondary endpoint will be OS in this same population. During 2013, we have been increasing and expect to continue to increase the amount of time and resources, both financial and personnel, devoted to our vintafolide program in PROC.

We are also developing vintafolide for use in non-small cell lung cancer, or NSCLC. Based on results of our single-arm, single agent phase 2 clinical trial of vintafolide in patients with second line NSCLC, in 2012 we began enrollment in TARGET, a randomized phase 2b trial. The trial is designed to enroll up to 200 patients with adenocarcinoma and squamous cell carcinoma of the lung who have failed one prior line of therapy. Patients are selected based on etarfolatide scan results and only FR(100%) patients are included. The trial design is intended to evaluate the safety and efficacy of vintafolide in second line NSCLC as a single agent and in combination with docetaxel, a commonly used second line chemotherapy approved by the U.S. Food and Drug Administration, or the FDA. The study has three arms: docetaxel alone; vintafolide alone; and vintafolide plus docetaxel. The primary outcome measure will be PFS with secondary measures of OS, tumor response and duration of response. We have completed enrollment in the TARGET trial, and we expect PFS data from the TARGET trial to be available in the first half of 2014.

In April 2012, we entered into a worldwide collaboration agreement with Merck Sharp & Dohme Research GmbH, a subsidiary of Merck & Co, Inc., or Merck, regarding the development and commercialization of vintafolide. The agreement grants Merck worldwide rights to develop and commercialize vintafolide. We received a non-refundable $120.0 million upfront payment and a $5.0 million milestone payment in 2012 and are eligible for additional milestone payments of up to $875.0 million based on the successful achievement of development, regulatory and commercialization goals for vintafolide in a total of six different cancer indications. In the event that there is regulatory approval and launch of vintafolide, we will split U.S. earnings under the collaboration arrangement on a 50/50 basis with Merck and will receive a double-digit percentage royalty on sales of the product in the rest of the world. We have retained the right (which we can opt out of) to co-promote vintafolide with Merck in the U.S. and Merck has the exclusive right to promote vintafolide in the rest of the world. We are responsible for the majority of funding and completion of the ongoing PROCEED trial. Merck will pay a portion of PROCEED trial costs and will pay 75 percent of the incremental costs of enrolling an additional 100 FR(100%) patients in the event the DSMB makes that election. We will be responsible for the execution of the TARGET trial of vintafolide for the treatment of second line NSCLC. Merck will be responsible for the costs of the TARGET trial and for all other development activities and costs and will have all decision rights with respect to the development and commercialization of vintafolide. We will remain responsible for the development, manufacture and commercialization worldwide of etarfolatide, the companion imaging diagnostic for vintafolide. Merck has the right to terminate the collaboration agreement on 90 days notice. Each party has the right to terminate the agreement due to the material breach or insolvency of the other party. We have the right to terminate the agreement in the event that Merck challenges an Endocyte patent right relating to vintafolide. Upon termination of the agreement, depending upon the circumstances, the parties have varying rights and obligations with respect to the continued development and commercialization of vintafolide and, in the case of termination for cause by Merck, certain royalty obligations and U.S. profit and loss sharing. In addition to PROC and NSCLC, Merck has announced its intention to initiate a randomized trial for vintafolide in folate-receptor positive, triple negative breast cancer, expected to begin in the fourth quarter of 2013. Merck also will be pursuing clinical trials of vintafolide in other indications and we also plan to advance other SMDCs and companion imaging diagnostics through development as preclinical and clinical trial results merit and funding permits.

In November 2012, the European Medicines Agency, or the EMA, accepted our applications for conditional marketing authorization for vintafolide for the treatment of PROC and etarfolatide and folic acid for patient selection. These applications are supported by four clinical studies: a Phase 1 study in solid tumors, two single agent, single-arm Phase 2 studies in ovarian cancer and NSCLC and the results and supplemental analyses of the PRECEDENT trial. We expect to receive a decision from the EMA on our applications in late 2013. The results of the PRECEDENT trial demonstrated a statistically significant delay in disease progression or death in the overall population, with the largest improvement observed in the FR(100%) patient population, those with all tumors positive for the folate receptor. Women with FR(100%) PROC who received vintafolide based therapy experienced a 62 percent decrease in their risk of progression [HR 0.381, p= 0.018] compared to women receiving chemotherapy alone. Median progression free survival (PFS; the time without disease progressing) in the vintafolide-based treatment arm was 5.5 months compared to 1.5 months of women who received chemotherapy alone. Tumor shrinkage (overall response rate) was observed in 17.3 percent of women receiving the vintafolide-based therapy compared to 6.7 percent in patients treated with chemotherapy alone. The PRECEDENT trial was not designed to be sufficiently powered for OS analysis and those results were inconclusive.

We have never been profitable and have incurred significant net losses since our inception. As of June 30, 2013, we had a retained deficit of $168.0 million. We expect to continue to incur significant and increasing operating expenses for the next several years as we pursue the advancement of our SMDCs and companion imaging diagnostics through the research, development, regulatory and commercialization processes.

We expect that our current cash position of $169.8 million at June 30, 2013, which includes cash equivalents and investments, is sufficient to fund our current operating plan, including completion of the PROCEED trial with or without the enrollment of 100 additional FR(100%) patients and the advancement of our earlier stage pipeline. If we were to receive conditional marketing approval in Europe of vintafolide and etarfolatide prior to the completion of the PROCEED study, this could impact the enrollment timeline as patients to be enrolled in European sites would transition from clinical trials to commercial use. This could delay the availability of final data from the PROCEED trial. If we significantly increase investments in our earlier stage pipeline and commercial capabilities, we may require additional financing through public or private equity or debt financings or other sources, such as other strategic partnerships or licensing arrangements, to fund the additional activities. Such funding may not be available on favorable terms, or at all. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategies.

Critical Accounting Policies

While our significant accounting policies are described in more detail in our 2012 Annual Report on Form 10-K, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our condensed consolidated financial statements.

Revenue Recognition

We recognize revenues from license and collaboration agreements when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the fee is fixed or determinable, and there is reasonable assurance that the related amounts are collectible in accordance with the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 605, Revenue Recognition. Our license and collaboration agreements may contain multiple elements, including grants of licenses to intellectual property rights and agreement to provide research and development services. The deliverables under arrangements are evaluated under ASC Subtopic 605-25, Multiple-Element Arrangements. Effective January 1, 2011, we adopted an accounting standard update that amends the guidance on accounting for arrangements with multiple deliverables. Pursuant to the new standard, each required deliverable is evaluated to determine whether it qualifies as a separate unit of accounting based on whether the deliverable has "stand-alone value" to the customer. The arrangement's consideration that is fixed or determinable is then allocated to each separate unit of accounting based on the relative selling price of each deliverable. In general, the consideration allocated to each unit of accounting is recognized as the related goods or services are delivered, limited to the consideration that is not contingent upon future deliverables. When evaluating multiple element arrangements, we consider whether the components of the arrangement represent separate units of accounting. This evaluation requires subjective determinations and requires management to make judgments about the selling price of the individual elements and whether such elements are separable from the other aspects of the contractual relationship.

Upfront payments for licensing our intellectual property are evaluated to determine if the licensee can obtain stand-alone value from the license separate from the value of the research and development services and other deliverables in the arrangement to be provided by us. If we determine that the license does not have stand-alone value separate from the research and development services, the license and the services are combined as one unit of account and upfront payments are recorded as deferred revenue in the balance sheet and are recognized as revenue over the estimated performance period that is consistent with the term of the research and development obligations contained in the collaboration agreement. When stand-alone value is identified, the related consideration is recorded as revenue in the period in which the license or other intellectual property rights are delivered.

In those circumstances where research and development services are combined with the license, and multiple services are being performed such that a common output measure to determine a pattern of performance cannot be discerned, we recognize amounts received on a straight line basis over the performance period. Such amounts are recorded as collaboration revenue. Subsequent reimbursement payments, which are contingent upon our future research and development expenditures, will be recorded as collaboration revenue and will be recognized on a straight-line basis over the performance period using the cumulative catch up method. The costs associated with these activities are reflected as a component of research and development expense in the statements of operations in the period incurred.

Milestone payments under collaborative arrangements are triggered either by the results of our research and development efforts or by specified sales results by a third-party collaborator. Milestones related to our development-based activities may include initiation of various phases of clinical trials and applications and acceptance for product approvals by regulatory agencies. Due to the uncertainty involved in meeting these development-based milestones, the determination is made at the inception of the collaboration agreement whether the development-based milestones are considered to be substantive (i.e. not just achieved through passage of time). In addition, the amounts of the payments assigned thereto are considered to be commensurate with the enhancement of the value of the delivered intellectual property as a result of our performance. Because our involvement is necessary to the achievement of development-based milestones, we would account for development-based milestones as revenue upon achievement of the substantive milestone events. Milestones related to sales-based activities may be triggered upon events such as the first commercial sale of a product or when sales first achieve a defined level. Under our collaboration agreement with Merck, Merck will take the lead in commercialization activities for vintafolide in certain territories and we have retained the right (which we can opt out of) to co-promote vintafolide in the U.S. with Merck. These sales-based milestones would be achieved after the completion of our development activities. We would account for the sales-based milestones in the same manner as royalties, with revenue recognized upon achievement of the milestone.

Royalties based on reported sales of licensed products will be recognized based on contract terms when reported sales are reliably measurable and collectability is reasonably assured. To date, none of the Company's products have been approved and therefore the Company has not earned any royalty revenue from product sales. In territories where the Company and the collaborator will share profit, the revenue will be recorded in the period earned.

We often are required to make estimates regarding drug development and commercialization timelines for compounds being developed pursuant to a collaboration agreement. Because the drug development process is lengthy and our collaboration agreements typically cover activities over several years, this approach often results in the deferral of significant amounts of revenue into future periods. In addition, because of the many risks and uncertainties associated with the development of drug candidates, our estimates regarding the period of performance may change in the future. Any change in our estimates could result in substantial changes to the period over which the revenues are recognized.

Results of Operations



Comparison of Three Months Ended June 30, 2012 to Three Months Ended June 30,
2013



                                  Three Months Ended         Increase/
                                       June 30,              (Decrease)        %
                                   2012          2013
                                                  (In thousands)
Statement of operations data:
Collaboration Revenue           $    7,813     $ 16,483     $      8,670       111 %
Operating expenses:
Research and development             8,806       18,607            9,801       111 %
General and administrative           3,195        6,211            3,016        94 %

Total operating expenses            12,001       24,818           12,817       107 %

Loss from operations                (4,188 )     (8,335 )          4,147        99 %
Interest income                         28          126               98       350 %
Interest expense                      (280 )          -             (280 )     100 %
Other income (expense), net           (994 )        (18 )           (976 )      98 %

Net loss                        $   (5,434 )   $ (8,227 )   $      2,793        51 %

Revenue

All of our revenue of $16.5 million recorded in the three months ended June 30, 2013 related to the collaboration with Merck. Of this revenue, $13.4 million related to the amortization of the $120.0 million upfront license payment, a milestone payment and reimbursable research and development expenditures incurred prior to the second quarter of 2013. The remaining $3.1 million of revenue related to the amortization of reimbursable research and development expenditures that we incurred during the second quarter of 2013. The amortization for both the upfront license payment and ongoing reimbursable research and development expenditures will be recognized as revenue ratably over the performance period.

Research and Development

The increase in research and development expense for the three months ended June 30, 2013 compared to the three months ended June 30, 2012 was attributable to an $8.9 million increase in product development expenses and a $0.9 million increase in compensation expenses, including stock-based compensation expense, salaries expense and increase in bonus accrual. The increase in product development expenses was primarily due to an increase of $8.7 million in clinical trial expenses for the PROCEED and TARGET trials and an increase of $0.5 million in development costs for the earlier stage pipeline, partially offset by lower contract manufacturing costs for vintafolide and etarfolatide. Included in research and development expense for the three months ended June 30, 2013 were $6.6 million of expenses that are reimbursable from Merck under the collaboration agreement for vintafolide.

Included in research and development expense were stock-based compensation charges of $470,000 and $884,000 for the three months ended June 30, 2012 and 2013, respectively.

Research and development expense included expense of $220,000 and $206,000 for the three months ended June 30, 2012 and 2013, respectively, for company-funded research at Purdue University, the primary employer of our Chief Science Officer.

General and Administrative

The increase in general and administrative expense in the three months ended June 30, 2013 compared to the three months ended June 30, 2012 was primarily attributable to an increase in expenses related to establishing commercial capability and an increase in compensation expenses. Included in general and administrative expense for the three months ended June 30, 2013 were $0.4 million of expenses that are reimbursable from Merck under the collaboration agreement for vintafolide relating to patent and trademark costs.

Included in general and administrative expense were stock-based compensation charges of $257,000 and $641,000 for the three months ended June 30, 2012 and 2013, respectively.

Interest Income

The increase in interest income in the three months ended June 30, 2013 compared to the three months ended June 30, 2012 resulted from an increase in investments in longer term maturities that earn higher rates of return.

Interest Expense

The decrease in interest expense in the three months ended June 30, 2013 compared to the three months ended June 30, 2012 was due to the decreased borrowings under our now terminated credit facility. Our average loan balance under the credit facility was $10.2 million for the three months ended June 30, 2012.

Other Expense, net

Other expense, net decreased in the three months ended June 30, 2013 compared to June 30, 2012 due to a loss on debt extinguishment of $1.0 million that we recognized in the three months ended June 30, 2012 as a result of terminating our credit facility in June 2012. The loss included a 5% prepayment fee on the outstanding balance of approximately $0.6 million and the write off of unamortized deferred financing fees and discounts of approximately $0.4 million.

Comparison of Six Months Ended June 30, 2012 to Six Months Ended June 30, 2013



                                   Six Months Ended          Increase/
                                       June 30,              (Decrease)        %
                                  2012          2013
                                                  (In thousands)
Statement of operations data:
Collaboration Revenue           $   7,813     $  30,997     $     23,184       297 %
Operating expenses:
Research and development           15,223        30,866           15,643       103 %
General and administrative          6,289        12,467            6,178        98 %

Total operating expenses           21,512        43,333           21,821       101 %

Loss from operations              (13,699 )     (12,336 )         (1,363 )      10 %
Interest income                        41           266              225       549 %
Interest expense                     (627 )          (1 )           (626 )     100 %
Other income (expense), net          (919 )         (18 )           (901 )      98 %

Net loss                        $ (15,204 )   $ (12,089 )   $     (3,115 )      20 %

Revenue

All of our revenue of $31.0 million recorded in the six months ended June 30, 2013 related to the collaboration with Merck. Of this revenue, $26.0 million was related to the amortization of the upfront license payment, a milestone payment, and reimbursable research and development expenditures incurred prior to the six months ended June 30, 2013. The remaining $5.0 million of revenue related to the amortization of reimbursable research and development expenditures that we incurred during the six months ended June 30, 2013. The amortization for both the upfront license payment and ongoing reimbursable research and development expenditures will be recognized as revenue ratably over the performance period.

Research and Development

The increase in research and development expense for the six months ended June 30, 2013 compared to the six months ended June 30, 2012 was attributable to a $14.3 million increase in product development expenses and a $1.3 million increase in compensation expenses, including stock-based compensation expense, salaries expense and increase in bonus accrual. The increase in product development expenses was primarily due to an increase of $13.5 million in clinical trial expenses for the PROCEED and TARGET trials and an increase of $0.9 million in development costs for the earlier stage pipeline. Included in research and development expense for the six months ended June 30, 2013 were $10.9 million of expenses that are reimbursable from Merck under the collaboration agreement for vintafolide.

Included in research and development expense were stock-based compensation charges of $0.9 million and $1.5 million for the six months ended June 30, 2012 and 2013, respectively.

Research and development expense included expenses of $393,000 and $413,000 for the six months ended June 30, 2012 and 2013, respectively, for company-funded research at Purdue University, the primary employer of our Chief Science Officer.

General and Administrative

The increase in general and administrative expense in the six months ended June 30, 2013 compared to the six months ended June 30, 2012 was primarily attributable to an increase in expenses related to establishing commercial capability and an increase in compensation expenses. Included in general and administrative expense for the six months ended June 30, 2013 were $0.5 million of expenses that are reimbursable from Merck under the collaboration agreement for vintafolide relating to patent and trademark costs.

Included in general and administrative expense were stock-based compensation charges of $0.6 million and $1.1 million for the six months ended June 30, 2012 and 2013, respectively.

Interest Income

The increase in interest income in the six months ended June 30, 2013 compared to the six months ended June 30, 2012 resulted from an increase in investments in longer term maturities that earn higher rates of return.

Interest Expense

The decrease in interest expense during the six months ended June 30, 2013 compared to the six months ended June 30, 2012 was due to the decreased borrowings under our now terminated credit facility. Our average loan balance under the credit facility was $10.9 million for the six months ended June 30, 2012.

Other Expense, Net

Other expense, net decreased in the six months ended June 30, 2013 compared to June 30, 2012 due to a loss on debt extinguishment of $1.0 million that we recognized in the six months ended June 30, 2012 as a result of terminating our credit facility in June 2012. The loss included a 5% prepayment fee on the outstanding balance of approximately $0.6 million and the write off of . . .

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