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AGIO > SEC Filings for AGIO > Form 10-Q on 5-Sep-2013All Recent SEC Filings

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Form 10-Q for AGIOS PHARMACEUTICALS INC


5-Sep-2013

Quarterly Report


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

Forward-looking Information

The following discussion of our financial condition and results of operations should be read with our unaudited consolidated financial statements and notes included in Part I. Item 1 of this Quarterly Report on Form 10-Q for the three and six months ended June 30, 2013, as well as the audited consolidated financial statements and notes and Management's Discussion and Analysis of Financial Condition and Results of Operations, included in our Prospectus filed with the SEC pursuant to Rule 424(b)(4) on July 24, 2013, which we refer to as the "Prospectus". This Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations, estimates, forecasts, and projections and the beliefs and assumptions of our management and include, without limitation, statements with respect to our expectations regarding our research, development and commercialization plans and prospects, results of operations, general and administrative expenses, research and development expenses, and the sufficiency of our cash for future operations. Words such as "anticipate," "believe," "estimate," "expect," "intend," "may," "plan," "predict," "project," "target," "potential," "will," "would," "could," "should," "continue," and similar statements or variations of these terms or the negative of those terms and similar expressions are intended to identify these forward-looking statements. Readers are cautioned that these forward-looking statements are predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Among the important factors that could cause actual results to differ materially from those indicated by our forward-looking statements are those discussed under the heading "Risk Factors" in Item 1A of Part II and elsewhere in this report.

Overview

We are a biopharmaceutical company passionately committed to applying our scientific leadership in the field of cellular metabolism to transform the lives of patients with cancer and inborn errors of metabolism, or IEMs, which are a subset of orphan genetic metabolic diseases. Metabolism is a complex biological process involving the uptake and assimilation of nutrients in cells to produce energy and facilitate many of the processes required for cellular division and growth. We believe that dysregulation of normal cellular metabolism plays a crucial role in many diseases, including certain cancers and IEMs. We singularly focus our efforts on using cellular metabolism, an unexploited area of biological research with disruptive potential, as a platform for developing potentially transformative small molecule medicines for cancer and IEMs. The lead product candidates in our most advanced programs are aimed at druggable targets which have undergone rigorous validation processes. Our most advanced cancer product candidates, AG-221 and AG-120, which target mutant IDH2 and IDH1, respectively, have demonstrated strong proof of concept in preclinical models. In August 2013, we initiated a phase 1 study for AG-221 in patients with advanced hematologic malignancies with an IDH2 mutation. AG-120 is expected to enter the clinic in early 2014. The lead candidate in our IEM program, AG-348, targets pyruvate kinase and is expected to commence clinical development in 2014. We filed an investigational new drug application, or IND, for AG-221 with the FDA on June 20, 2013, which was accepted by the FDA on July 19, 2013. To date, we have not filed any other INDs, and we have not commenced clinical trials for any of our other product candidates.

Our initial therapeutic area of focus is cancer. We are leveraging our expertise in metabolic pathways to discover, validate, develop and commercialize a pipeline of novel drug candidates. In April 2010, we entered into a collaboration agreement with Celgene Corporation ("Celgene") focused on cancer metabolism. Under the collaboration, we are leading discovery, preclinical and early clinical development for all cancer metabolism programs. The discovery phase of the collaboration expires in April 2014, subject to Celgene's option to extend the discovery phase for up to two additional years. Celgene has the option to obtain exclusive rights for the further development and commercialization of certain of these programs, and we will retain rights to the others. For the programs that Celgene chooses to license, we may elect to participate in a portion of sales activities for the medicines from such programs in the United States. For certain of these programs, we may elect to retain full rights to develop and commercialize medicines from these programs in the United States. Through June 30, 2013, we have received approximately $141.2 million in payments from Celgene and $37.5 million in equity investments. We are also eligible to receive extension payments, payments upon the successful achievement of specified milestones, reimbursements for certain development expenses and royalties on any product sales.

Since inception, our operations have focused on organizing and staffing our company, business planning, raising capital, assembling our core capabilities in cellular metabolism, identifying potential product candidates, undertaking preclinical studies and conducting a clinical trial. To date, we have financed our operations primarily through funding received from our collaboration agreement with Celgene, private placements of our preferred stock, and the initial public offering, or IPO, of our common stock and concurrent private placement of common stock to an affiliate of Celgene, completed on July 29, 2013. Substantially all of our revenue to date has been collaboration revenue. Since our inception, and through June 30, 2013, we have raised an aggregate of approximately $261.2 million to fund our operations, of which approximately $141.2 million was through upfront and extension payments related to our collaboration agreement with Celgene and approximately $120.0 million was from the issuance of preferred stock.


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Since inception, we have incurred significant operating losses. Our net losses were $8.6 million, $5.5 million, $15.8 million and $10.1 million for the three months ended June 30, 2013 and 2012 and for the six months ended June 30, 2013 and 2012, respectively. As of June 30, 2013, we had an accumulated deficit of $89.9 million. We expect to continue to incur significant expenses and operating losses over the next several years. Our net losses may fluctuate significantly from quarter to quarter and from year to year. We anticipate that our expenses will increase significantly as we commence the planned IND-enabling and clinical development activities for our lead programs AG-221, AG-120, and AG-348; continue to discover, validate and drug additional novel product candidates; expand and protect our intellectual property portfolio; and hire additional personnel. In addition, we expect to incur additional costs associated with operating as a public company.

Recent Developments

On July 29, 2013, we closed an IPO of our common stock, which resulted in the sale of 6,772,221 shares of our common stock at a public offering price of $18.00 per share, before underwriting discounts, including 883,333 shares of common stock issued upon the exercise in full by the underwriters of their option to purchase additional shares at the public offering price to cover over-allotments. We received net proceeds from the IPO of approximately $111.1 million after deducting underwriting discounts, commissions, and estimated expenses payable by us. Additionally, an affiliate of Celgene purchased 708,333 shares of common stock in a separate private placement concurrent with the completion of the offering at a purchase price of $18.00 per share for aggregate proceeds of $12.8 million.

In August 2013, we initiated a phase 1 study for AG-221 in patients with advanced hematologic malignancies with an IDH2 mutation. The purpose of this phase 1, multi-center study is to evaluate the safety, pharmacokinetics, pharmacodynamics and clinical activity of AG-221 in patients with advanced hematologic malignancies that harbor an IDH2 mutation. The first portion of the study is a dose escalation phase where cohorts of patients will receive ascending oral doses of AG-221 to determine maximum tolerated dose and/or the recommended phase 2 dose.

Financial Operations Overview

Revenue

To date, we have not generated any revenue from product sales and do not expect to generate any revenue from the sale of products in the near future. All of our revenue to date has been derived from our collaboration with Celgene and funding from research grant agreements. Under our Celgene collaboration we are recognizing revenue related to the upfront license fee of $121.2 million, the implied premium of $3.1 million paid on the purchase of $8.8 million of series B convertible preferred stock and the $20.0 million extension payment received in October 2011 to extend the discovery phase until April 2014, ratably over the period over which we expect to fulfill our performance obligations, which we refer to as the performance period. As of June 30, 2013, we have not received any milestone or royalty payments under the Celgene collaboration. We expect that any revenue we generate from our collaboration agreement will fluctuate from quarter to quarter as a result of the uncertain timing and amount of milestone payments, royalties and other payments.

In the future, we will seek to generate revenue from a combination of product sales and extension payments, milestone payments, and royalties on future product sales in connection with Celgene, or other strategic relationships.

Research and Development Expenses

Research and development expenses consist primarily of costs incurred for our research activities, including our drug discovery efforts, and the development of our product candidates, which include:

employee-related expenses including salaries, benefits, and stock-based compensation expense;

expenses incurred under agreements with third parties, including contract research organizations, or CROs, that conduct research and development and both preclinical and clinical activities on our behalf and the cost of consultants;

the cost of lab supplies and acquiring, developing, and manufacturing preclinical study materials; and

facilities, depreciation, and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, insurance, and other operating costs.

Research and development costs are expensed as incurred. Nonrefundable advance payments for goods or services to be received in the future for use in research and development activities are deferred and capitalized. The capitalized amounts are expensed as the related goods are delivered or the services are performed.


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The following summarizes our most advanced current research and development programs.

AG-221: Lead IDH2 Program

AG-221 is an orally available, selective, potent inhibitor of the mutated IDH2 protein, making it a highly targeted therapeutic candidate for the treatment of patients with cancers that harbor IDH2 mutations. In September 2012, AG-221 successfully completed the development candidate requirements pursuant to our Celgene collaboration. We believe AG-221 has demonstrated a clear pre-clinical safety profile to advance into human clinical trials. In August 2013, we initiated our first phase 1 study for AG-221 in patients with advanced hematologic malignancies with an IDH2 mutation. Celgene has the exclusive option to license worldwide development and commercial rights to AG-221, and if Celgene elects this option it would be responsible for all future development and commercialization costs.

AG-120: Lead IDH1 Program

AG-120 is an orally available, selective, potent inhibitor of the mutated IDH1 protein, making it a highly targeted therapeutic candidate for the treatment of patients with cancers that harbor IDH1 mutations. In March 2013, AG-120 successfully completed the development candidate requirements pursuant to our Celgene collaboration and has initiated IND-enabling studies. We expect to enter the clinic in early 2014. Celgene has the exclusive option to license development and commercialization rights to AG-120, in which case, we have the option to retain U.S. development and commercialization rights. If Celgene exercises such option and we elect to retain U.S. rights, we and Celgene will equally fund the global development costs of AG-120 that are not specific to any particular region or country, Celgene will be responsible for development and commercialization costs specific to countries outside the United States, and we will be responsible for development and commercialization costs specific to the United States.

AG-348: Pyruvate Kinase Deficiency Program

Our lead IEM program relates to certain genetic defects of the pyruvate kinase enzyme causing a form of hemolytic anemia known as pyruvate kinase deficiency, or PK deficiency. AG-348 is an orally available, potent small molecule activator of the PKR enzyme, an isoform of PK that when mutated leads to PK deficiency, making AG-348 a highly targeted therapeutic candidate for the treatment of patients with PK deficiency. In May 2013, AG-348 successfully completed our internal development candidate requirements, which include two species of exploratory safety studies, and we have initiated IND-enabling studies. We expect to enter the clinic in 2014. We have retained worldwide development and commercial rights to AG-348 and expect to fund the future development and commercialization costs related to this program.

Other Research and Platform Programs

Other research and platform programs include activities related to exploratory efforts, target validation, lead optimization for our earlier validated programs and our proprietary metabolomics platform.

We began tracking our internal and external research and development costs on a program-by-program basis in 2011. As such, we do not have historical research and development expenditures by program prior to January 1, 2011. We use our employee and infrastructure resources across multiple research and development programs, and we allocate internal employee-related and infrastructure costs, as well as certain third party costs, to each of these programs based on the personnel resources allocated to such program. Our research and development expenses, by major program for the three and six months ended June 30, 2012 and 2013, are outlined in the table below:

                                             Three Months Ended          Six Months Ended
                                                  June 30,                   June 30,
 (in thousands)                               2013          2012         2013         2012
 IDH2 (AG-221)                             $    3,063     $  2,575     $  5,549     $  4,902
 IDH1 (AG-120)                                  2,573        2,796        5,267        5,719
 PK deficiency (AG-348)                         1,406        1,251        2,609        2,430
 Other research and platform programs           5,916        3,841       10,995        6,963

 Total research and development expenses   $   12,958     $ 10,463     $ 24,420     $ 20,014


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The successful development of our product candidates is highly uncertain. As such, at this time, we cannot reasonably estimate or know the nature, timing and estimated costs of the efforts that will be necessary to complete the remainder of the development of these product candidates. We are also unable to predict when, if ever, material net cash inflows will commence from AG-221, AG-120, or AG-348. This is due to the numerous risks and uncertainties associated with developing medicines, including the uncertainty of:

establishing an appropriate safety profile with IND-enabling toxicology studies;

successful enrollment in, and completion of clinical trials;

receipt of marketing approvals from applicable regulatory authorities;

establishing commercial manufacturing capabilities or making arrangements with third-party manufacturers;

obtaining and maintaining patent and trade secret protection and regulatory exclusivity for our product candidates;

launching commercial sales of the products, if and when approved, whether alone or in collaboration with others; and

a continued acceptable safety profile of the products following approval.

A change in the outcome of any of these variables with respect to the development of any of our product candidates would significantly change the costs and timing associated with the development of that product candidate.

Research and development activities are central to our business model. 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 research and development costs to increase significantly for the foreseeable future as our product candidate development programs progress. However, we do not believe that it is possible at this time to accurately project total program-specific expenses through commercialization. There are numerous factors associated with the successful commercialization of any of our product candidates, including future trial design and various regulatory requirements, many of which cannot be determined with accuracy at this time based on our stage of development. Additionally, future commercial and regulatory factors beyond our control will impact our clinical development programs and plans.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and other related costs, including stock-based compensation, for personnel in executive, finance, accounting, business development, legal and human resources functions. Other significant costs include facility costs not otherwise included in research and development expenses, legal fees relating to patent and corporate matters and fees for accounting and consulting services.

We anticipate that our general and administrative expenses will increase in the future to support continued research and development activities, potential commercialization of our product candidates and increased costs of operating as a public company. These increases will likely include increased costs related to the hiring of additional personnel and fees to outside consultants, lawyers and accountants, among other expenses. Additionally, we anticipate increased costs associated with being a public company including expenses related to services associated with maintaining compliance with exchange listing and Securities and Exchange Commission requirements, insurance, and investor relations costs.

Critical Accounting Policies and Estimates

Our critical accounting policies are those policies which require the most significant judgments and estimates in the preparation of our consolidated financial statements. Management has determined that our most critical accounting policies are those relating to revenue recognition, income taxes, accrued research and development expenses and stock-based compensation. There have been no significant changes to our critical accounting policies discussed in the Prospectus.

Results of Operations

Comparison of Three Months Ended June 30, 2013 and 2012

The following table summarizes our results of operations for the three months
ended June 30, 2013 and 2012, together with the changes in those items in
dollars and as a percentage:



                                Three Months Ended
                                     June 30,
 (in thousands)                 2013           2012         Dollar Change        % Change
 Total revenue                $   6,268      $  6,288      $           (20 )          (0.3 )%
 Operating expenses:
 Research and development        12,958        10,463                2,495            23.8
 General and administrative       1,836         1,948                 (112 )          (5.7 )

 Loss from operations            (8,526 )      (6,123 )             (2,403 )          39.2


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                                              Three Months Ended
                                                   June 30,
(in thousands)                               2013            2012          Dollar Change        % Change
Interest income                                    5             22                   (17 )         (77.3 )
(Benefit) provision for income taxes              99           (588 )                 687          (116.8 )

Net loss $ (8,620 ) $ (5,513 ) $ (3,107 ) 56.4 %

Revenue. We recorded revenue of $6.3 million for the three months ended June 30, 2013 and 2012 associated with the Celgene agreement.

Research and development expense. Research and development expense increased by $2.5 million to $13.0 million for the three months ended June 30, 2013 from $10.5 million for the three months ended June 30, 2012, an increase of 24%. The increase in research and development expenses was attributable to an increase of $1.2 million in external services. The increase in external services during the three months ended June 30, 2013 was primarily attributable to the following:

approximately $0.6 million for external drug discovery efforts, primarily chemistry optimization and pharmacology, for our glutaminase research program;

approximately $0.3 million for external IND-enabling preclinical studies and manufacturing activities for our lead product candidate targeting IDH2;

approximately $0.2 million of costs related to development candidate-enabling preclinical pharmacology and toxicology studies for our lead product candidates targeting PK deficiency and IDH1; and

approximately $0.1 million of costs related to other early research and platform programs.

No such external expenses were incurred during the three months ended June 30, 2012 due to each program's early stage of research. In addition, we incurred approximately $1.3 million of additional internal research expenses related to the following:

additional personnel costs of $0.4 million primarily from additional hires, increasing our internal headcount by 13%; and

an increase of $0.4 million for milestone payments payable under a collaboration agreement, $0.3 million for facilities related expenses and $0.2 million for research materials related to our expanded research efforts.

General and administrative expense. General and administrative expenses decreased by $0.1 million to $1.8 million for the three months ended June 30, 2013 from $1.9 million for the three months ended June 30, 2012, a decrease of 6%. The decrease in general and administrative expenses was primarily attributable to decreased external legal costs of $0.1 million.

Interest income. Interest income decreased by $17,000 to $5,000 for the three months ended June 30, 2013, from $22,000 for the three months ended June 30, 2012, a decrease of 77%, due to a decrease in the average investment balance and a decrease in interest rates earned on investments.

(Benefit) provision for income tax. The (benefit) provision for income taxes increased by $0.7 million to $0.1 million for the three months ended June 30, 2013, from $(0.6) million for the three months ended June 30, 2012, an increase of 117%. The increase in the (benefit) provision for income taxes for the three months ended June 30, 2013 was primarily attributable to penalties and interest accrued for the non-payment of U.S. federal income taxes. For the three months ended June 30, 2012, we elected to carry back a portion of our deferred tax assets, including net operating losses, generated in the three months ended June 30, 2012, resulting in a reduction of our 2011 income tax liability and a benefit for income taxes of $0.6 million.

Comparison of Six Months ended June 30, 2013 and 2012

The following table summarizes our results of operations for the six months
ended June 30, 2013 and 2012, together with the changes in those items in
dollars and as a percentage:



                                              Six Months Ended
                                                  June 30,
(in thousands)                             2013             2012            Dollar Change         % Change
Total revenue                            $  12,536        $  12,556        $           (20 )           (0.2 )%
Operating expenses:
Research and development                    24,420           20,014                  4,406             22.0
General and administrative                   3,688            3,930                   (242 )           (6.2 )

Loss from operations                       (15,572 )        (11,388 )               (4,184 )           36.7
Interest income                                 13               48                    (35 )          (72.9 )
(Benefit) provision for income taxes           289           (1,196 )                1,485           (124.2 )

Net loss                                 $ (15,848 )      $ (10,144 )      $        (5,704 )           56.2 %


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Revenue. We recorded revenue of $12.5 million for the six months ended June 30, 2013 and 2012 associated with the Celgene agreement.

Research and development expense. Research and development expense increased by $4.4 million to $24.4 million for the six months ended June 30, 2013 from $20.0 million for the six months ended June 30, 2012, an increase of 22%. The increase in research and development expenses was primarily attributable to an increase of $2.2 million in external services. The increase in external services during the six months ended June 30, 2013 was primarily attributable to the following:

approximately $1.1 million for external drug discovery efforts, primarily chemistry optimization and pharmacology, for our glutaminase research program;

approximately $0.5 million for external IND-enabling preclinical studies and manufacturing activities for our lead product candidate targeting IDH2;

approximately $0.4 million of costs related to development candidate-enabling preclinical pharmacology and toxicology studies for our lead product candidates targeting PK deficiency and IDH1; and

approximately $0.2 million of costs related to other early research and platform programs.

No such external expenses were incurred during the six months ended June 30, 2012 due to each program's early stage of research. In addition, we incurred approximately $2.2 million of additional internal research expenses related to the following:

additional personnel costs of $1.0 million primarily from additional hires, increasing our internal headcount by 13%; and

an increase of $0.4 million for milestone payments payable under a . . .

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