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KBIO > SEC Filings for KBIO > Form 10-Q on 19-Aug-2013All Recent SEC Filings

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Form 10-Q for KALOBIOS PHARMACEUTICALS INC


19-Aug-2013

Quarterly Report


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

Forward-Looking Statements

The following discussion and analysis should be read in conjunction with our financial statements and accompanying notes included in this Quarterly Report on Form 10-Q and the financial statements and accompanying notes thereto 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 29, 2013. This discussion contains "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Such forward looking statements involve risks and uncertainties. We use words such as "may," "will," "expect," "anticipate," "estimate," "intend," "plan," "predict," "potential," "believe," "should" and similar expressions to identify forward-looking statements. Although we believe the expectations reflected in these forward-looking statements are reasonable, such statements are inherently subject to risk and we can give no assurances that our expectations will prove to be correct. These statements appearing throughout this Quarterly Report on Form 10-Q are statements regarding our intent, belief, or current expectations, primarily regarding our operations. 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. As a result of many factors, such as those set forth under "Risk Factors" under Item 1A of Part II below, and elsewhere in this Quarterly Report on Form 10-Q, our actual results may differ materially from those anticipated in these forward-looking statements. We undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date of this report or to reflect actual outcomes.

Overview

We are a biopharmaceutical company focused on monoclonal antibody therapeutics for diseases that are a significant burden to society and patients and their families. We have a portfolio of patient-targeted, first-in-class antibodies using our Humaneered® antibody technology to treat serious medical conditions with a primary clinical focus on respiratory diseases and cancer. Our principal pharmaceutical product candidates at the clinical development stage are:

• KB003, a Humaneered® anti-granulocyte macrophage colony-stimulating factor (anti-GM-CSF) monoclonal antibody that is being developed for the treatment of severe asthma inadequately controlled by corticosteroids;

• KB001-A, a Humaneered®, PEGylated, anti-PcrV modified antibody fragment (Fab') antibody that is being developed for the prevention and treatment of Pa infections in mechanically ventilated patients and CF patients with chronic Pa infections; and

• KB004, a Humaneered® anti-EphA3 monoclonal antibody that has the potential to offer a novel approach to treating both hematologic malignancies and solid tumors.

In January 2010, we entered into an agreement with Sanofi pursuant to which we granted to Sanofi an exclusive worldwide license to develop, manufacture, and commercialize antibodies directed against the PcrV protein of Pa (including KB001-A) for all indications, and Sanofi is solely responsible for research, development, manufacturing, and commercialization. As part of this agreement, we retained the right to develop and promote KB001-A for Pa in CF or bronchiectasis patients. Sanofi is focusing its clinical development on prevention of Pa VAP. Pursuant to the agreement, we received an initial upfront payment of $35 million and an additional $5 million payment in August 2011 that were recognized as revenue through June 30, 2012. We have the potential to receive additional contingent payments aggregating up to $250 million upon achievement by Sanofi of certain clinical, regulatory and commercial events, together with tiered royalties based upon global net sales of licensed products. However, there can be no assurances that Sanofi will continue to further develop KB001-A or achieve the events that will trigger the contingent payments. As a result, we may not recognize any additional revenue from this arrangement. We are conducting a Phase 2 clinical trial in CF patients with chronic Pa infections. As part of Sanofi's clinical development plan for Pa ventilator associated pneumonia (VAP), Sanofi has conducted a Phase 1 clinical safety study in healthy volunteers to evaluate higher doses than those that we previously tested. We understand that, if deemed successful, the Phase 1 study will be followed, after completion of manufacturing process development and scale-up, by a Phase 2b intravenous study to begin in late 2014 to determine the safety and efficacy of KB001-A in preventing Pa VAP. Based on results from this clinical trial, Sanofi plans to conduct a subsequent Phase 3 study. We also understand that the Phase 2b and Phase 3 trials are being designed as pivotal studies and are intended to serve as a basis for registration of KB001-A for the prevention of Pa VAP.

We initiated a 180 patient randomized, double-blind, placebo-controlled monthly-dosed, intravenous Phase 2 clinical trial of KB001-A in CF patients with chronic Pa infections in January 2013. In August 2012, we initiated a 150 patient, randomized, double-blind, placebo-controlled, monthly-dose, intravenous Phase 2 clinical trial of KB003 in patients with severe asthma inadequately controlled by corticosteroids. KB004 is in Phase 1 clinical testing for hematological malignancies. We believe our available capital and our borrowing capacity pursuant to the loan and security agreement we entered into with MidCap Financial in September 2012 and amended in June 2013, will be sufficient to sustain operations for at least the next 12 months. If the KB001-A or KB003 Phase 2 clinical trials are successful, we will need to raise additional capital in order to further advance our product candidates towards regulatory approval.


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We licensed our proprietary Humaneered® antibody technology to Novartis in 2007 on a non-exclusive basis and received a license fee of $30 million. We are not currently actively pursuing the license of our Humaneered® technology to third parties and we are not expecting to receive future revenue from additional licenses to this technology.

From the date we commenced our operations through 2006, our efforts focused primarily on research, development, and the advancement of our Humaneered® antibody technology. In 2006, we commenced our first clinical trial. We have incurred significant losses to date and, as of June 30, 2013, we had an accumulated deficit of $118.7 million. We have funded our operations primarily through private placements of our equity securities, contract revenue in connection with our collaborations, and grants and borrowings under equipment financing arrangements and our loan and security agreement. As of June 30, 2013, we had cash, cash equivalents, and marketable securities of $63.7 million. On February 5, 2013, we closed our initial public offering of 8,750,000 shares of common stock at an offering price of $8.00 per share, resulting in net proceeds of approximately $61.5 million, after deducting underwriting discounts, commissions and offering expenses. We expect to continue to incur net losses as we develop our drug candidates, expand clinical trials for our drug candidates currently in clinical development, expand our research and development activities, expand our systems and facilities, seek regulatory approvals, and engage in commercialization preparation activities in anticipation of Food and Drug Administration (FDA) approval of our drug candidates. Specifically, we have incurred, and we expect to continue to incur, substantial expenses in connection with our Phase 2 clinical trials for KB003 in severe asthma patients inadequately controlled by corticosteroids and for KB001-A in CF patients with chronic Pa infections. In addition, if a product is approved for commercialization, we will need to expand our organization. Significant capital is required to launch a product and many expenses are incurred before revenue is received. We are unable to predict the extent of any future losses or when we will become profitable, if at all.

In December 2012, our board of directors approved a 1-for-3.56147 reverse split of our issued and outstanding capital stock which became effective on January 15, 2013. Upon the effectiveness of the reverse stock split, (i) every 3.56147 shares of issued and outstanding common stock and convertible preferred stock was decreased to one share of common stock or convertible preferred stock, as applicable, (ii) the number of shares of common stock into which each outstanding option to purchase common stock is exercisable was proportionally decreased on a 1-for-3.56147 basis and the number of shares of convertible preferred stock into which each outstanding warrant is exercisable was proportionally decreased on a 1-for-3.56147 basis and, (iii) the exercise price of each outstanding option to purchase common stock and warrant to purchase convertible preferred stock was proportionately increased. All of the share numbers, share prices, exercise prices and other per share information have been adjusted within this Quarterly Report on Form 10-Q, on a retroactive basis, to reflect this 1-for-3.56147 reverse stock split

Critical Accounting Policies and Use of Estimates

Our management's discussion and analysis of our financial condition and results of operations is based on our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (GAAP). The preparation of our financial statements in conformity with GAAP requires our management to make estimates and assumptions that affect the amounts and disclosures reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates. Our management believes judgment is involved in determining revenue recognition, the fair value-based measurement of stock-based compensation, accruals and warrant valuations. Our management evaluates estimates and assumptions as facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ from these estimates and assumptions, and those differences could be material to the consolidated financial statements. If our assumptions change, we may need to revise our estimates, or take other corrective actions, either of which may also have a material adverse effect on our statements of operations, liquidity and financial condition.

We are an emerging growth company under the JOBS Act. Emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to avail ourselves of this exemption from new or revised accounting standards and, therefore, we may not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

There have been no significant and material changes in our critical accounting policies and use of estimates during the six months ended June 30, 2013, as compared to those disclosed in "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Use of Estimates" in our Annual Report on Form 10-K (File No. 001-35798), filed with the Securities and Exchange Commission (SEC) on March 29, 2013.

Results of Operations

General

We have not generated any net income from operations, except for the year ended December 31, 2007, during which we recognized a one-time license payment from Novartis. At June 30, 2013, we had an accumulated deficit of $118.7 million primarily as a result of research and development and general and administrative expenses. While we may in the future generate revenue from a variety of sources, including license fees, milestone payments, and research and development payments in connection with strategic partnerships, our product candidates are at an early stage of development and may never be successfully developed or commercialized. Accordingly, we expect to continue to incur substantial losses from operations for the foreseeable future, and there can be no assurance that we will ever generate significant revenue or profits.


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Contract Revenue

Our recent revenue is comprised primarily of collaboration agreement-related revenue. Collaboration agreement-related revenue includes license fees, payments for research and development services, and milestone and other contingent payments.

Research and Development Expenses

Conducting research and development is central to our business model. We expense both internal and external research and development costs as incurred. We currently track the external research and development costs incurred for each of our KB001-A, KB003, and KB004 projects. We have not tracked our external costs by project since inception. We began tracking our external costs by project beginning January 1, 2008. Our external research and development expenses consist primarily of:

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

• the cost of acquiring and manufacturing clinical trial and other materials; and

• other costs associated with development activities, including additional studies.

Internal research and development costs consist primarily of salaries and related fringe benefit costs for our employees (such as workers compensation and health insurance premiums), stock-based compensation charges, travel costs, lab supplies, and overhead expenses such as rent and utilities. Internal costs generally benefit multiple projects and are not separately tracked per project. The following table shows our total research and development expenses for the three and six months ended June 30, 2013 and 2012 and for the period from January1, 2008 to June 30, 2013:

                                          For the Three            For the Six           For the Period from
                                          Months Ended             Months Ended          January 1, 2008 to
                                            June 30,                 June 30,               June 30, 2013
                                        2013        2012         2013        2012
External costs:
KB001-A                                $ 2,150     $   425     $  3,299     $   968     $              23,594
KB003                                    3,398       1,159        5,855       1,559                    28,680
KB004                                    1,190       1,118        2,325       1,760                    21,880
Internal costs                           2,908       1,528        4,487       3,163                    51,058

Total research and development         $ 9,646     $ 4,230     $ 15,966     $ 7,450     $             125,212

We expect to continue to incur substantial expenses related to our development activities for the foreseeable future as we continue product development including continuing our Phase 2 clinical trial for our KB003 severe asthma program, our Phase 2 clinical trial for our KB001-A CF program and our Phase 1 clinical trial for our KB004 oncology program. As product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later stage clinical trials, we expect that our research and development expenses will increase in the future. In addition, if our product development efforts are successful, we expect to incur substantial costs to prepare for potential clinical trials and activities beyond the Phase 2 trial for KB001-A, the Phase 2 trial for KB003 and Phase 1 trial for KB004.

During our review of the second quarter research and development expenses and accruals, we identified certain out-of-period costs primarily related to clinical trial and related expenses. The cumulative adjustment for these out-of-period costs that we recorded in the quarter ended June 30, 2013 is $1.3 million. We analyzed and assessed the effect of these adjustments in the annual and interim periods in which they should have been recorded, as well as the effect that these errors had, both individually and in the aggregate, on our reported financial results during the annual and interim periods in which they occurred. This analysis also included their impact on disclosed financial trends and on our "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the affected 2012 Annual Report on Form 10-K, and the first and second 2013 quarterly reports on Form 10-Q. Following this analysis and taking into account both quantitative and qualitative factors, we believe that the uncorrected out-of-period costs that we disclosed in our reports are not material to the respective periods in which the errors occurred.

General and Administrative Expenses

General and administrative expenses consist principally of personnel-related costs, professional fees for legal, consulting, audit and tax services, rent and other general operating expenses not otherwise included in research and development. We anticipate general and administrative expenses will increase in future periods, reflecting an expanding infrastructure and increased professional fees associated with being a public reporting company.


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Comparison of Three Months Ended June 30, 2013 and 2012



                                            Three Months Ended
                                                 June 30,              Variance
         (in thousands)                     2013           2012
         Contract revenue                 $      15      $  2,992      $  (2,977 )
         Operating expenses:
         Research and development             9,646         4,230          5,416
         General and administrative           1,940           875          1,065

         Loss from operations               (11,571 )      (2,113 )       (9,458 )
         Interest income (expense), net        (236 )          12           (248 )
         Other income (expense), net             (2 )          21            (23 )

         Net loss                         $ (11,809 )    $ (2,080 )    $  (9,729 )

Contract revenue in each period related solely to our arrangement with Sanofi in which we licensed the KB001-A program to Sanofi in 2010. Contract revenue decreased $3.0 million, from $3.0 million for the three months ended June 30, 2012 to $15,000 for the three months ended June 30, 2013. This decrease was mainly attributable to the completion of our substantive performance obligations under our agreement with Sanofi in mid-2012. We expect future contract revenue from Sanofi to remain at a minimal level in future periods unless we receive contingent payments or royalties under our agreement.

Research and development expenses increased $5.4 million, from $4.2 million for the three months ended June 30, 2012 to $9.6 million for the three months ended June 30, 2013. The increase was primarily attributed to a $4.4 million increase in spending for clinical trial expenses for our KB003 severe asthma program, increased spending for our KB001-A CF program, and KB004 program for hematological malignancies. We began enrollment of patients in the severe asthma program of KB003 in the third quarter of 2012 and began enrollment in a Phase 2 clinical trial in CF patients with chronic Pa infections in the quarter ended March 31, 2013, and as a result, we expect these expenses to increase significantly. We also had an increase in personnel and consulting expenses of $1.0 million due to increased headcount.

General and administrative expenses increased $1.1 million, from $0.8 million for the three months ended June 30, 2012 to $1.9 million for the three months ended June 30, 2013 due to increases $0.6 million increase in payroll related expenses and $0.5 million increase in legal, accounting and consulting fees related to being a public company.

Interest income (expense), net decreased $0.2 million for the three months ended June 30, 2013, primarily as a result of the interest expense related to our loan and security agreement entered into in September 2012.

Comparison of Six Months Ended June 30, 2013 and 2012



                                             Six Months Ended
                                                 June 30,              Variance
         (In thousands)                     2013           2012
         Contract revenue                 $      31      $  6,011      $  (5,980 )
         Operating expenses:
         Research and development            15,966         7,450          8,516
         General and administrative           3,959         1,820          2,139

         Loss from operations               (19,894 )      (3,259 )      (16,635 )
         Interest income (expense), net        (488 )          19           (507 )
         Other income (expense), net             (1 )          30            (31 )

         Net loss                         $ (20,383 )    $ (3,210 )    $ (17,173 )

Contract revenue in each period is related solely to our arrangement with Sanofi in which we licensed the KB001-A program to Sanofi in 2010. Contract revenue decreased $6.0 million, from $6.0 million for the six months ended June 30, 2012 to $31,000 for the six months ended June 30, 2013. This decrease was mainly attributable to the completion of our substantive performance obligations under our agreement with Sanofi in mid 2012. We expect future contract revenue from Sanofi to remain at a minimal level in future periods unless we receive contingent payments or royalties under our agreement.


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Research and development expenses increased $8.5 million, from $7.5 million for the six months ended June 30, 2012 to $16.0 million for the six months ended June 30, 2013. The increase was primarily attributed to a $6.9 million increase in spending for clinical trial expenses for our KB003 severe asthma program, increased spending for our KB001-A CF program, and KB004 program for hematological malignancies, as well as increased personnel and consulting expenses of $1.6 million. We began enrollment of patients in the severe asthma program of KB003 in the third quarter of 2012 and began enrollment in a Phase 2 clinical trial in CF patients with chronic Pa infections in the quarter ended March 31, 2013, and as a result, we expect these expenses to increase significantly.

General and administrative expenses increased $2.1 million, from $1.8 million for the six months ended June 30, 2012 to $4.0 million for the three months ended June 30, 2013 due to increases in personnel related expense of $0.8 million, as well as an increase in legal, accounting and consulting fees of $1.1 million related to being a public reporting company.

Interest income (expense), net decreased $0.5 million for the six months ended June 30, 2013, primarily as a result of the interest expense related to our loan and security agreement entered into in September 2012.

Liquidity and Capital Resources

Since our inception, we have financed our operations primarily through proceeds from our initial public offering (IPO), private placements of our equity securities, debt financing, interest income earned on cash, and cash equivalents, and marketable securities, lines of credit, and payments under agreements with Sanofi and Novartis. At June 30, 2013, we had cash and cash equivalents of $19.5 million and marketable securities of $44.2 million, totaling $63.7 million.

We expect to incur substantial expenditures in the foreseeable future for the development and potential commercialization of our product candidates. Specifically, we have incurred and we expect to continue to incur substantial expenses in connection with our Phase 2 clinical trials for KB003 in severe asthma patients inadequately controlled by corticosteroids and for KB001-A in CF patients with chronic Pa infections.

We believe our available capital and our borrowing capacity pursuant to the loan and security agreement we entered into with MidCap Financial in September 2012 and amended in June 2013, will be sufficient to sustain operations for at least the next 12 months. If the KB001-A or KB003 Phase 2 clinical trials are successful, we will need to raise additional capital in order to further advance our product candidates towards regulatory approval.

We will continue to require additional financing to develop our products and fund operations. We will seek funds through equity or debt financings, collaborative or other arrangements with corporate sources, or through other sources of financing. Adequate additional funding may not be available to us on acceptable 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. We anticipate that we will need to raise substantial additional capital, the requirements of which will depend on many factors, including:

• the type, number, costs, and results of the product candidate development programs which we are pursuing or may choose to pursue in the future;

• the scope, progress, expansion, costs, and results of our clinical trials;

• the timing of and costs involved in obtaining regulatory approvals;

• our ability to establish and maintain development partnering arrangements;

• the timing, receipt and amount of contingent, royalty, and other payments from Sanofi or any of our future development partners;

• the emergence of competing technologies and other adverse market developments;

• the costs of maintaining, expanding, and protecting our intellectual property portfolio, including potential litigation costs and liabilities;

• the resources we devote to marketing, and, if approved, commercializing our product candidates;

• the scope, progress, expansion, and costs of manufacturing our product candidates;

• our ability to draw funds from our current or any future loan and security agreement; and

• the costs associated with being a public company.

If we are unable to raise additional funds when needed, we may be required to delay, reduce, or terminate some or all of our development programs and clinical trials. We may also be required to sell or license to others technologies or clinical product candidates or programs that we would prefer to develop and commercialize ourselves.


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The following table sets forth the primary sources and uses of cash and cash equivalents for each of the periods presented below:

                                                        Six Months Ended
                                                            June 30,
                                                       2013           2012
         Net cash used in operating activities       $ (20,404 )    $ (8,736 )
. . .
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