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EPZM > SEC Filings for EPZM > Form 10-Q on 23-Oct-2013All Recent SEC Filings

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Form 10-Q for EPIZYME, INC.


23-Oct-2013

Quarterly Report


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

Forward-looking Information

This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. These statements may be identified by such forward-looking terminology as "anticipate," "believe," "estimate," "expect," "intend," "may," "plan," "predict," "project," "target," "potential," "will," "would," "could," "should," "continue," and similar statements or variations of such terms. Our forward-looking statements are based on a series of expectations, assumptions, estimates and projections about our company, are not guarantees of future results or performance and involve substantial risks and uncertainty. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in these forward-looking statements. Our business and our forward-looking statements involve substantial known and unknown risks and uncertainties, including the risks and uncertainties inherent in our statements regarding:

• our plans to develop and commercialize personalized therapeutics for patients with genetically defined cancers;

• our ongoing and planned clinical trials, including the timing of anticipated results;

• our ability to receive research funding and achieve anticipated milestones under our collaborations;

• the timing of and our ability to obtain and maintain regulatory approvals for our product candidates;

• the rate and degree of market acceptance and clinical utility of our products;

• our commercialization, marketing and manufacturing capabilities and strategy;

• our intellectual property position;

• our ability to identify additional products or product candidates with significant commercial potential that are consistent with our commercial objectives; and

• our estimates regarding expenses, future revenue, capital requirements and needs for additional financing.

All of our forward-looking statements are as of the date of this Quarterly Report on Form 10-Q only. In each case, actual results may differ materially from such forward-looking information. We can give no assurance that such expectations or forward-looking statements will prove to be correct. An occurrence of or any material adverse change in one or more of the risk factors or risks and uncertainties referred to in this Quarterly Report on Form 10-Q or included in our other public disclosures or our other periodic reports or other documents or filings filed with or furnished to the SEC could materially and adversely affect our business, prospects, financial condition and results of operations. Except as required by law, we do not undertake or plan to update or revise any such forward-looking statements to reflect actual results, changes in plans, assumptions, estimates or projections or other circumstances affecting such forward-looking statements occurring after the date of this Quarterly Report on Form 10-Q, even if such results, changes or circumstances make it clear that any forward-looking information will not be realized. Any public statements or disclosures by us following this Quarterly Report on Form 10-Q which modify or impact any of the forward-looking statements contained in this Quarterly Report on Form 10-Q will be deemed to modify or supersede such statements in this Quarterly Report on Form 10-Q.

Management Overview

We are a clinical stage biopharmaceutical company that discovers, develops and plans to commercialize innovative personalized therapeutics for patients with genetically defined cancers. We have built a proprietary product platform that we use to create small molecule inhibitors of a 96-member class of enzymes known as histone methyltransferases, or HMTs. Genetic alterations can result in changes to the activity of HMTs, making them oncogenic. Our therapeutic strategy is to inhibit oncogenic HMTs to treat the underlying causes of the associated genetically defined cancers. The three months ended September 30, 2013 and 2012 are referred to as the third quarter of 2013 and 2012, respectively. Unless the context indicates otherwise, all references herein to our company include our wholly-owned subsidiary.

Our management's discussion and analysis of our financial condition and results of operations are based upon our unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q, which have been prepared by us in accordance with accounting principles generally accepted in the United States of America, or GAAP, for interim periods and with Regulation S-X promulgated under the Securities Exchange Act of 1934, as amended. This discussion and analysis should


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be read in conjunction with these unaudited consolidated financial statements and the notes thereto as well as in conjunction with our Prospectus filed pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended, or the Securities Act, with the Securities and Exchange Commission, or SEC, on May 31, 2013, which we refer to as the Prospectus.

We commenced active operations in early 2008, and since inception, have incurred significant operating losses. As we are a clinical stage company, we expect to continue to incur significant expenses and operating losses over the next several years. Since our inception and through September 30, 2013, we have raised an aggregate of $291.8 million to fund our operations, of which $133.3 million was non-equity funding through our collaboration agreements, $82.5 million was from our initial public offering, or IPO, which we completed in June 2013, and $76.0 million was from the sale of redeemable convertible preferred stock, which automatically converted to common stock upon the closing of our initial public offering. Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity or debt financings and collaboration agreements.

We are a leader in the translation of the science of epigenetics into first-in-class personalized therapeutics for patients with genetically defined cancers and believe we are the first company to conduct a clinical trial of an HMT inhibitor. We are conducting both a Phase I clinical trial of our most advanced product candidate, EPZ-5676, an inhibitor targeting the DOT1L HMT, for the treatment of mixed lineage leukemia, or MLL-r, a genetically defined subtype of the two most common forms of acute leukemia, as well as a Phase I/II clinical trial of our second most advanced product candidate, EPZ-6438, an inhibitor targeting the EZH2 HMT, for the treatment of a genetically defined subtype of non-Hodgkin lymphoma. In 2014, we plan to pursue additional clinical studies for both EPZ-5676 and EPZ-6438 beyond the primary indications, including an expansion cohort for adult acute myeloid leukemia with a partial tandem duplication in the MLL gene, or MLL-PTD, for EPZ-5676, and an expansion cohort in synovial sarcoma and other INI1-deficient tumors for EPZ-6438. We also have a pipeline of other HMT inhibitors that are in preclinical development.

The clinical development plan for each of our therapeutic product candidates is directed towards patients with a particular genetically defined cancer. For each therapeutic product candidate, we intend to develop a companion diagnostic. We plan to include patients with the particular genetically defined cancer in our clinical trials beginning in Phase I with a view to assessing possible early evidence of potential therapeutic effect. As we are tailoring our personalized therapeutics for discrete patient populations with genetically defined cancers, we believe that many of our products may qualify for orphan drug designation in the United States and the European Union.

We have entered into strategic collaborations for certain of our therapeutic programs and corresponding companion diagnostics. Our three primary collaboration partners for our therapeutic programs are Celgene Corporation and Celgene International Sàrl, collectively, Celgene; Eisai Co., Ltd., or Eisai; and Glaxo Group Limited, an affiliate of GlaxoSmithKline, or GSK. We retain all product rights in the United States under the Celgene collaboration and an opt-in right to co-develop, co-commercialize and share profits as to licensed products in the United States under the Eisai collaboration.


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The following table summarizes key information about our two most advanced clinical programs, including the role of our collaboration partners:

                                           Indication          Stage of       Commercial      Diagnostic
Product Candidate     Description     (Genetic Alteration)    Development       Rights       Collaborator
    EPZ-5676        DOT1L inhibitor   MLL-r subtype of       Phase I         Epizyme:        Abbott
                                      acute myeloid          clinical        United States   Molecular
                                      leukemia, or AML,      trial ongoing   Celgene: Rest   Inc., or
                                      and acute                              of world        Abbott
                                      lymphoblastic
                                      leukemia, or ALL
                                      (Chromosomal
                                      translocation
                                      involving the MLL
                                      gene)

    EPZ-6438        EZH2 inhibitor    Non-Hodgkin lymphoma   Phase I/II      Eisai:          Roche
                                      and potentially        clinical        Worldwide       Molecular
                                      other solid tumors     trial ongoing   rights,         Systems,
                                      (Point mutation in                     subject to      Inc., or
                                      EZH2)                                  Epizyme's       Roche
                                                                             opt-in on
                                                                             50.0% of
                                                                             United States
                                                                             rights

Program highlights for the nine months ended September 30, 2013 include:

• For EPZ-5676, we are nearing completion of the dose escalation stage of our Phase I clinical trial without any dose-limiting toxicities to date and plan to disclose top-line dose escalation data in the fourth quarter of 2013. Based on the data from the dose escalation stage, we plan to initiate an expansion cohort stage of this trial in the fourth quarter of 2013 that will be limited to patients with MLL-r and is expected to provide an initial assessment of therapeutic effect in MLL-r patients. We added five clinical sites, bringing the total number of clinical sites participating in this study to six, were granted orphan drug designation in the United States and were issued a notice of allowance from the United States Patent and Trademark Office with respect to our patent application covering the composition of matter of EPZ-5676. Further, we initiated plans to expand our clinical evaluation of EPZ-5676 in 2014 to include a Phase I trial of EPZ-5676 in pediatric patients with MLL-r and a clinical study in adult AML patients with MLL-PTD. MLL-PTD accounts for an estimated 5 to 7% of adult AML cases, with an estimated annual incidence of MLL-PTD in all patients in the major pharmaceutical markets of approximately 2,300 patients.

• For EPZ-6438 (which Eisai refers to as E7438), we received notification that our clinical trial application was approved in France and are enrolling patients in a Phase I/II clinical trial without any dose-limiting toxicities observed to date. Based on the data from the dose escalation phase, we plan to initiate the Phase II portion of this study in 2014. Further, we initiated plans to expand our clinical evaluation of EPZ-6438 after the completion of the ongoing Phase I study in 2014 to include studies in patients with INI1-deficient tumors, such as synovial sarcoma and malignant rhabdoid tumors. In the major pharmaceutical markets, synovial sarcoma has an estimated annual incidence of approximately 1,700 patients, and other INI1-deficient tumors have an estimated annual incidence of 700 patients.

• For our discovery and preclinical stage product programs, we continued to progress the three target programs partnered with GSK as well as a number of other research programs directed to high priority HMTs in our pipeline.

Collaborations

The key terms of our primary collaboration agreements are as follows:

• Celgene

In April 2012, we entered into a collaboration and license agreement with Celgene, to discover, develop and commercialize, in all countries other than the United States, small molecule HMT inhibitors targeting DOT1L, including EPZ-5676, and any other HMT targets from our product platform for patients with genetically defined cancers, excluding targets already selected by our two other existing collaborations, which we refer to as the available targets.


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Agreement Structure

Under the terms of the agreement, we received a $65.0 million upfront payment and $25.0 million from the sale of our series C redeemable convertible preferred stock to an affiliate of Celgene, of which $3.0 million was considered a premium and included as collaboration arrangement consideration for a total upfront payment of $68.0 million. In addition, we are eligible to earn up to $60.0 million in clinical development milestone payments and up to $100.0 million in regulatory milestone payments related to DOT1L. We are also eligible to earn up to $65.0 million in payments, including a combination of clinical development milestone payments and an option exercise fee, and up to $100.0 million in regulatory milestone payments for each available target as to which Celgene exercises its option during an initial option period ending in July 2015. Celgene has the right to extend the option period until July 2016 by making a significant option extension payment. As to DOT1L and each available target as to which Celgene exercises its option, we retain all product rights in the United States and are eligible to receive royalties for each target at defined percentages ranging from the mid-single digits to the mid-teens on net product sales outside of the United States, subject to reductions in specified circumstances. Due to the uncertainty of pharmaceutical development and the high historical failure rates generally associated with pharmaceutical development, we may not receive any milestone or royalty payments from Celgene. The first potential milestone payment that we might be entitled to receive under this agreement is $25.0 million for achieving proof-of-concept, as defined in the agreement, for our DOT1L inhibitor.

We are obligated to conduct and solely fund research and development costs of the Phase I clinical trials for the DOT1L target and through the effectiveness of the first investigational new drug application for an HMT inhibitor directed to each available target selected by Celgene, after which Celgene and we will equally co-fund global development and each party will solely fund territory-specific development costs for its territory. In the third quarter of 2013, we recorded accounts receivable of $0.7 million related to non-Phase I global development costs subject to the co-funding provisions of this agreement. Co-funded amounts receivable from Celgene are recorded net in research and development expense.

Collaboration Revenue

Through September 30, 2013, in addition to amounts allocated to Celgene's purchase of shares of our series C redeemable convertible preferred stock, we had received a total of $68.0 million in upfront payments under the Celgene agreement, including a $3.0 million implied premium on Celgene's purchase of our series C redeemable convertible preferred stock. Through September 30, 2013, we have recognized $34.7 million of collaboration revenue in the consolidated statements of operations and comprehensive (loss) income related to this agreement, including $3.5 million and $10.8 million in the three and nine months ended September 30, 2013, respectively, and $6.7 million and $20.3 million in the three and nine months ended September 30, 2012, respectively. As of September 30, 2013 and December 31, 2012, we had deferred revenue of $33.3 million and $44.1 million, respectively, related to this agreement.

• Eisai

In April 2011, we entered into a collaboration and license agreement with Eisai under which we granted Eisai an exclusive worldwide license to our small molecule HMT inhibitors directed to EZH2, including EPZ-6438, while retaining an opt-in right to co-develop, co-commercialize and share profits with Eisai as to licensed products in the United States. Additionally, as part of the research collaboration, we agreed to provide research and development services related to the licensed compounds through December 31, 2014.

Agreement Structure

Under the terms of the agreement, we have recorded a $3.0 million upfront payment, $7.0 million in preclinical research and development milestone payments, a $6.0 million clinical development milestone payment and cash payments and accounts receivable totaling $16.5 million for research and development services through September 30, 2013. We are eligible to earn up to $25.0 million in additional clinical development milestone payments, up to $55.0 million in regulatory milestone payments and up to $115.0 million in sales-based milestone payments. We are also eligible to receive royalties at a percentage in the mid-single digits on any net product sales outside of the United States and at a percentage from the mid-single digits to low double-digits on any net product sales in the United States, subject to reduction in specified circumstances. Due to the uncertainty of pharmaceutical development and the high historical failure rates generally associated with pharmaceutical development, we may not receive any additional milestone payments or royalty or profit share payments from Eisai. The next potential milestone payment that we might be entitled to receive under this agreement is $10.0 million for the initiation of the Phase II portion the Phase I/II clinical trial.


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Eisai solely funds all research, development and commercialization costs for licensed compounds, except for the cost obligations that we will undertake if we exercise our opt-in right to co-develop, co-commercialize and share profits with Eisai as to licensed products in the United States. If we exercise our opt-in right as to a licensed compound, the licensed compound would become a shared product as to which Eisai's obligation to pay royalties to us as to such shared product in the United States will terminate; Eisai and we will share in net profits or losses with respect to such shared product in the United States; 25.0% of specified past development costs will become creditable by Eisai against future milestones or royalties due to us, subject to specified limitations; Eisai and we will share equally in subsequent development costs allocated to the United States; and all subsequent milestone payments that become payable by Eisai to us based on the shared product will be decreased by 50.0%.

Collaboration Revenue

Through September 30, 2013, we have recorded a total of $32.5 million in cash and accounts receivable and have recognized $30.5 million of collaboration revenue in the consolidated statements of operations and comprehensive (loss) income related to this agreement, including $1.9 million and $12.4 million in the three and nine months ended September 30, 2013, respectively, and $1.9 million and $9.3 million in the three and nine months ended September 30, 2012, respectively, with a $6.0 million clinical development milestone achieved recognized as collaboration revenue in the nine months ended September 30, 2013 and a $4.0 million research milestone achieved and recognized as collaboration revenue in the nine months ended September 30, 2012. As of September 30, 2013 and December 31, 2012, we had deferred revenue of $2.0 million and $3.2 million, respectively, related to this agreement.

• GSK

In January 2011, we entered into a collaboration and license agreement with GSK to discover, develop and commercialize novel small molecule HMT inhibitors directed to available targets from our product platform. Under the terms of the agreement, we granted GSK exclusive worldwide license rights to HMT inhibitors directed to three targets. Additionally, as part of the research collaboration provided for in the agreement, the Company agreed to provide research and development services related to the licensed targets pursuant to agreed upon research plans during a research term that ends January 8, 2015.

Agreement Structure

Under the agreement, we have received a $20.0 million upfront payment, $8.0 million in preclinical research and development milestone payments and $6.0 million of fixed research funding. We are eligible to receive up to $21.0 million in additional preclinical research and development milestone payments, up to $99.0 million in clinical development milestone payments, up to $240.0 million in regulatory milestone payments and up to $270.0 million in sales-based milestone payments. In addition, GSK is required to pay us royalties at percentages from the mid-single digits to the low double-digits, on a licensed product-by-licensed product basis, on worldwide net product sales, subject to reductions in specified circumstances. Due to the uncertainty of pharmaceutical development and the high historical failure rates generally associated with pharmaceutical development, we may not receive any additional milestone payments or royalty payments from GSK. The next potential milestone payment that we might be entitled to receive under this agreement is a research milestone. However, due to the varying stages of development of each licensed target, we are not able to determine the next milestone that might be achieved, if any.

For each selected target in the collaboration, we are primarily responsible for research until the selection of the development candidate, and GSK will be solely responsible for subsequent development and commercialization. GSK provided a fixed amount of research funding during the second and third years of the research term and is obligated to provide research funding equal to 100.0% of research and development costs, subject to specified limitations, for any research activities we conduct in the fourth year of the research term.


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Collaboration Revenue

Through September 30, 2013, we received a total of $34.0 million in payments under the GSK agreement and have recognized $18.7 million of collaboration revenue in the consolidated statements of operations and comprehensive (loss) income related to this agreement, including $3.0 million and $9.0 million in the three and nine months ended September 30, 2013, respectively, and $6.7 million in both the three and nine months ended September 30, 2012, with $4.0 million in preclinical research and development milestones achieved and recognized as collaboration revenue in the three and nine months ended September 30, 2012. As of September 30, 2013 and December 31, 2012, we had deferred revenue of $15.3 million and $22.0 million, respectively, related to this agreement.

Results of Operations

Collaboration Revenue

The following is a comparison of collaboration revenue for the three and nine months ended September 30, 2013 and 2012:

Three Months Ended September 30, Nine Months Ended September 30, 2013 2012 Decrease 2013 2012 Decrease

(In millions) (In millions)

Collaboration revenue $ 8.4 $ 15.3 $ (6.9 ) $ 32.2 $ 36.3 $ (4.1 )

Through September 30, 2013, our revenue consisted of collaboration revenue, including amounts recognized from deferred revenue related to upfront payments for licenses or options to obtain licenses in the future, research and development funding and milestone payments earned under collaboration and license agreements with our collaboration partners.

During the third quarter of 2013, collaboration revenue consisted of $6.3 million recognized from deferred revenue related to upfront payments for licenses and $2.1 million in research and development funding. This revenue compares to $9.3 million recognized from deferred revenue related to upfront payments for licenses, $4.0 million in milestone revenue and $2.0 million in research and development funding recognized in the third quarter of 2012.

Collaboration revenue recognized from deferred revenue in the third quarter of 2013 comprised $3.5 million under our Celgene agreement, $0.4 million under our Eisai agreement and $2.4 million under our GSK agreement, as compared to $6.7 million under our Celgene agreement, $0.4 million under our Eisai agreement and $2.2 million under our GSK agreement in the third quarter of 2012. Milestone revenue in the third quarter of 2012 represents $4.0 million in preclinical research and development milestone achieved under our GSK agreement. Collaboration revenue recognized for research and development services in the third quarter of 2013 comprised $1.5 million under our Eisai agreement and $0.6 million under our GSK agreement, as compared to $1.5 million under our Eisai agreement and $0.5 million under our GSK agreement in the third quarter of 2012.

During the nine months ended September 30, 2013, collaboration revenue consisted of $19.2 million recognized from deferred revenue related to upfront payments for licenses, $6.0 million in milestone revenue and $7.0 million in research and development funding. This revenue compares to $23.7 million recognized from deferred revenue related to upfront payments for licenses, $8.0 million in milestone revenue and $4.6 million in research and development funding recognized in the nine months ended September 30, 2012.

Collaboration revenue recognized from deferred revenue in the nine months ended September 30, 2013 comprised $10.8 million under our Celgene agreement, $1.2 million under our Eisai agreement and $7.2 million under our GSK agreement, as compared to $20.3 million under our Celgene agreement, $1.2 million under our Eisai agreement and $2.2 million under our GSK agreement in the same period of the prior year. Milestone revenue in the nine months ended September 30, 2013 represents a $6.0 million clinical development milestone achieved under our Eisai agreement, as compared to a $4.0 million preclinical research and development milestone achieved under Eisai agreement and $4.0 million in preclinical research and development milestones achieved under our GSK agreement in the same period of the prior year. Collaboration revenue recognized for research and development services in the nine months ended September 30, 2013 comprised $5.2 million under our Eisai agreement and $1.8 million under our GSK agreement, as compared to $4.1 million under our Eisai agreement and $0.5 million under our GSK agreement in the same period of the prior year.

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