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DYAX > SEC Filings for DYAX > Form 10-Q on 1-Nov-2013All Recent SEC Filings

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Form 10-Q for DYAX CORP


1-Nov-2013

Quarterly Report


Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Note Regarding Forward-Looking Statements

This quarterly report on Form 10-Q contains forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on current expectations, estimates and projections about our industry, management's beliefs, and certain assumptions made by our management and may include, but are not limited to, statements about:

? the potential benefits and commercial potential of KALBITOR for its approved indication and any additional indications;

? our commercialization of KALBITOR, including revenues and costs, and the potential benefits of new sales initiatives, and the impact of product discounts and allowances;

? the potential for market approval for KALBITOR in markets outside the United States;

? plans and anticipated timing for pursuing additional indications and uses for ecallantide and other product candidates, including DX-2930, to address PKM angioedemas;

? plans to enter into additional collaborative and licensing arrangements for ecallantide and for other compounds in development;

? estimates of potential markets for our products and product candidates;

? prospects for future milestone payments and/or royalties under the licenses included in the LFRP;

? the sufficiency of our cash, cash equivalents and short-term investments;

? the impact of the expiration of certain of our phage display patents under the LFRP; and

? expected future revenues and operating results and cash flows.

Statements that are not historical facts are based on our current expectations, beliefs, assumptions, estimates, forecasts and projections for our business and the industry and markets in which we compete. We often use the words or phrases of expectation or uncertainty like "guidance," "believe," "anticipate," "plan," "expect," "intend," "project," "future," "may," "will," "could," "would" and similar words to help identify forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties, and assumptions that are difficult to predict; therefore, actual results may differ materially from those expressed or forecasted in any such forward-looking statements. Such risks and uncertainties include, but are not limited to, those discussed later in this report under the section entitled "Risk Factors". Unless required by law, we undertake no obligation to update publicly any forward-looking statements, whether because of new information, future events or otherwise. However, readers should carefully review the risk factors set forth in other reports or documents we file from time to time with the Securities and Exchange Commission.


BUSINESS OVERVIEW

We are a biopharmaceutical company focused on:

? Hereditary Angioedema and Other Plasma-Kallikrein-Mediated Disorders

The principal focus of our efforts is to develop and commercialize treatments for hereditary angioedema and to identify other disorders that are mediated by plasma kallikrein.

We developed KALBITOR on our own, and since 2010, we have been selling it in the United States for the treatment of acute attacks of HAE. Outside of the United States, we have established partnerships to obtain regulatory approval for and to commercialize KALBITOR in certain markets and we are evaluating opportunities in others.

We are also developing:

? DX-2930, a fully human monoclonal antibody inhibitor of plasma kallikrein, which could be a candidate to treat PKM angioedemas prophylactically. In August 2013, we commenced dosing of the first subject in a Phase 1 clinical study evaluating the safety and tolerability of a single subcutaneous administration of DX-2930 in healthy volunteers.

? A biomarker assay that will assist in verifying the activation of plasma kallikrein in patient blood. We intend to use this assay to expedite the development of DX-2930 and to potentially identify other PKM disorders.

? Phage Display Licensing and Funded Research Program

We leverage our proprietary phage display technology through the LFRP. This program has provided a portfolio of product candidates being developed by our licensees, which currently includes 13 product candidates in various stages of clinical development, including three in Phase 3 trials, for which we are eligible to receive future royalties and/or milestone payments. To the extent that our licensees commercialize some of the Phase 3 product candidates, our revenues under the LFRP are expected to experience growth beginning in 2014.

HEREDITARY ANGIOEDEMA AND OTHER PKM DISORDERS

We are focused on identifying and developing treatments for patients who experience PKM angioedema. Using our phage display technology, we discovered ecallantide, a compound shown in vitro to be a high affinity, high specificity inhibitor of human plasma kallikrein. Plasma kallikrein, an enzyme found in blood, produces bradykinin, a protein that causes blood vessels to enlarge or dilate, which can cause swelling known as angioedema. Plasma kallikrein is believed to be a key component in the regulation of inflammation and contact activation pathways. Excess plasma kallikrein activity is thought to play a role in a number of inflammatory diseases, including PKM angioedemas such as HAE and idiopathic angioedema.

We have three key areas of activity in our PKM angioedema portfolio:

? HAE and KALBITOR. In 2010, we began selling KALBITOR in the United States for treatment of acute attacks of HAE in patients 16 years of age and older. We are selling KALBITOR on our own in the United States. Working with international partners, we intend to seek approval for and commercialize KALBITOR for HAE and other angioedema indications in markets outside of the United States. We have entered into agreements for others to develop and commercialize subcutaneous ecallantide for the treatment of HAE and other angioedema indications in Japan, China, Latin America and the Middle East.


? DX-2930 - Antibody for PKM angioedemas. Based on our knowledge of angioedema and the kallikrein-kinin pathway, we are investigating the use of a fully human monoclonal antibody that is an inhibitor of plasma kallikrein and which could be a candidate to prophylactically treat HAE and other PKM angioedemas. After completing a series of pharmacokinetic, tolerability and preclinical studies in animals, we believe DX-2930 may be effective for prophylactically treating these indications. In August 2013, the Company commenced the dosing of the first subject in a Phase 1 clinical study evaluating the safety and tolerability of a single subcutaneous administration of DX-2930 in healthy volunteers.

? Identification of PKM disorders. In order to expand our PKM angioedema portfolio, we are currently validating a biomarker assay to verify the role of plasma kallikrein activation in HAE patient blood samples. We anticipate that confirmation of the role of plasma kallikrein in HAE will enable us to better understand the contact activation pathway and explore other disorders that result in inflammation and pain. These disorders may include other PKM angioedemas, Crohn's disease, psoriasis, rheumatoid arthritis and various mast cell disorders.

HAE AND KALBITOR

HAE is a rare, genetic disorder characterized by severe, debilitating and often painful swelling, which can occur in the abdomen, face, hands, feet and airway. HAE is caused by a deficiency of C1-INH activity, a naturally occurring molecule that inhibits plasma kallikrein, a key mediator of inflammation, and other serine proteases in the blood. It is estimated that HAE affects between 1 in 10,000 to 1 in 50,000 people around the world. Based upon HAE patient association registries, we estimate there is an addressable target population of approximately 6,500 patients in the United States.

Our product, ecallantide, was approved by the FDA under the brand name KALBITOR for treatment of HAE in patients 16 years of age and older regardless of anatomic location. KALBITOR, a potent, selective and reversible plasma kallikrein inhibitor, was the first subcutaneous HAE treatment approved in the United States.

United States Sales and Marketing

We have a commercial organization to support sales of KALBITOR in the United States, including a field-based team of approximately 30 professionals, consisting of sales representatives, market access and field advocates and corporate account directors. At this time, our commercial organization is sized to market KALBITOR in the United States, where patients are treated primarily by a limited number of specialty physicians, consisting mainly of allergists and immunologists.

KALBITOR Access®

To facilitate access to KALBITOR in the United States, we have established the KALBITOR Access program. This program, managed by Sonexus Health, is designed as a one-stop point of contact for information about KALBITOR. This program offers treatment support services for patients with HAE and their healthcare providers. KALBITOR case managers provide comprehensive product and disease information, treatment site coordination, financial assistance for qualified patients and reimbursement facilitation services.

Distribution

In 2013, we elected to open our distribution network to include a limited number of additional specialty pharmacies. KALBITOR is currently distributed through a network of wholesale and specialty pharmacy arrangements. This network includes Walgreens Infusion Services which also provides eligible HAE patients with on-demand nursing services for the home administration of KALBITOR by healthcare professionals, as well as treatment at Walgreens' infusion centers. This agreement has a term through December 2013 and will renew annually unless amended or terminated by the parties.


In addition to these agreements, we may enter into other arrangements, as appropriate, to provide HAE patients with broader opportunities to access KALBITOR.

Post-Marketing Commitment

In February 2010, we initiated a four-year, Phase 4 observational study, which was scheduled to enroll 200 HAE patients over a three year period, to evaluate immunogenicity and hypersensitivity with exposure to KALBITOR for treatment of acute attacks of HAE. Although the enrollment target was not met, the FDA allowed us to maintain the original three-year enrollment schedule, which ended in February 2013. A final report will be provided to the FDA in 2014.

Manufacturing

We have established a commercial supply chain, consisting of third parties to manufacture, test and transport KALBITOR. All third party manufacturers involved in the KALBITOR manufacturing process are required to comply with current good manufacturing practices, or cGMPs.

To date, ecallantide drug substance used in the production of KALBITOR has been manufactured in the United Kingdom by Fujifilm Diosynth Biotechnologies (UK) Ltd. (Fujifilm). Under our agreement with Fujifilm, they have committed to be available to manufacture bulk drug substance through 2020.

The shelf-life of our frozen ecallantide drug substance is four years. Ecallantide drug substance is filled, labeled and packaged into the final form of KALBITOR drug product by Jubilant Hollister-Stier (JHS) Contract Manufacturing Services at its facilities in Spokane, Washington under a commercial supply agreement. This process is known in the industry as the "fill and finish" process. KALBITOR in its "filled and finished" form has additional refrigerated shelf-life of four years. Our commercial supply agreement with JHS runs through 2018 and may be terminated with two years prior notice.

Our current inventory of filled drug product, together with drug substance inventory, when filled, is sufficient to supply all ongoing studies relating to ecallantide and to meet anticipated KALBITOR market demand into 2018.

Single-Injection KALBITOR Formulation

We are currently in the process of developing a more convenient formulation of ecallantide, which is intended to allow for a single subcutaneous injection of KALBITOR instead of the current formulation which requires three subcutaneous injections. We completed a bioequivalence clinical study, which successfully demonstrated bioequivalence between the current formulation and the new single-injection formulation. We are also conducting ongoing stability testing of the new formulation. While stability testing and the regulatory review process are ongoing, we continue to assess the commercial path forward for this program.

Ecallantide Outside of the United States

In markets outside of the United States, we intend to work with international partners to seek approval and commercialize ecallantide for HAE and other angioedema indications. We have entered into license or collaboration agreements with several such companies, which have regulatory capabilities, distribution systems and sales capabilities in their designated territories.

CMIC - In Japan, we have an agreement with CMIC Co., Ltd to develop and commercialize subcutaneous ecallantide for the treatment of HAE and other angioedema indications. Under the terms of the agreement, we received a $4.0 million upfront payment. We will also be eligible to receive up to $102 million in development and sales milestones for ecallantide in HAE and other angioedema indications and royalties of 20%-24% of net product sales. CMIC is solely responsible for all costs associated with development, regulatory activities, and commercialization of ecallantide for all angioedema indications in Japan. CMIC will purchase drug product from us on a cost-plus basis for clinical and commercial supply.


CMIC has a clinical development plan that was established in consultation with the Japanese regulatory authorities. CMIC has completed a twelve patient pharmacokinetic study and, to fulfill submission requirements, CMIC is required to complete an open-label study of ten patients, which commenced in the second half of 2012.

CVie - In February 2013, we entered into a strategic partnership with CVie Therapeutics (CVie), a subsidiary of Lee's Pharmaceutical Holdings Ltd., to develop and commercialize KALBITOR for the treatment of HAE and other angioedema indications in China.

Under the terms of the exclusive license agreement, we received a $1.0 million upfront payment and are eligible to receive future development, regulatory and sales milestones. We are also eligible to receive royalties on net product sales. CVie is solely responsible for all costs associated with development, regulatory activities, and the commercialization of KALBITOR in their licensed territories. Additionally, CVie will purchase drug product from us on a cost-plus basis for commercial supply. CVie is presently evaluating regulatory and commercial options for their territory.

Novellus - In January 2013, we entered into a strategic partnership with Novellus Biopharma AG to develop and commercialize KALBITOR for the treatment of HAE and other angioedema indications in select countries in Latin America, including Argentina, Brazil, Chile, Colombia, Mexico and Venezuela.

Under the terms of the exclusive license agreement, we will receive upfront payments and are eligible to receive future regulatory and sales milestones. We are also eligible to receive royalties on net product sales. Novellus is solely responsible for all costs associated with development, regulatory activities, and the commercialization of KALBITOR in their licensed territories. Additionally, Novellus will purchase drug product from us on a cost-plus basis for commercial supply. Novellus is presently evaluating regulatory and commercial options for their territory.

Taiba - In May 2012, we granted exclusive distribution rights to taiba ME (referred to as Taiba), under which they will obtain registration and reimbursement approval and commercialize ecallantide for HAE in certain countries in the Middle East. Under the terms of the agreement, we will provide Taiba with drug supply at a price equal to 60% of net sales within the licensed territory. The initial supply of drug to Taiba was made in January 2013.

Sigma-Tau - In March 2013, we terminated our agreement with Sigma-Tau Rare Diseases S.A. As a result of this termination Sigma-Tau has returned to us all of the rights to develop and commercialize KALBITOR in all their licensed territories.

DX-2930

We are currently developing DX-2930, a potent and specific fully human monoclonal antibody that is an inhibitor of plasma kallikrein which is a candidate to prophylactically treat HAE and other PKM angioedemas. DX-2930 has the potential for a subcutaneous formulation, with a half-life which could enable less frequent dosing than currently available prophylactic therapies and an advantageous immunogenicity profile. We have completed a series of preclinical pharmacokinetic and tolerability studies and found DX-2930 to have relevant activity in animal models. In August 2013, we commenced dosing of the first subject in a Phase 1 clinical study evaluating the safety and tolerability of a single subcutaneous administration of DX-2930 in healthy volunteers.

LICENSING AND FUNDED RESEARCH PROGRAM

We leverage our proprietary phage display technology and libraries through our LFRP licenses and collaborations. To date, we have recognized more than $185 million of revenue under the LFRP, primarily related to license fees and milestones. The LFRP has the potential for substantially greater revenues if and when product candidates that are discovered by our licensees receive marketing approval and are commercialized.


LFRP Product Development

Currently there are 13 revenue-generating product candidates within our LFRP portfolio that are in clinical development, including three in Phase 3 and four in Phase 2 trials. Furthermore, our licensees and collaborators have additional product candidates in various stages of preclinical development. Our licensees and collaborators are responsible for all costs associated with development of these product candidates. To the extent that our licensees commercialize some of the Phase 3 product candidates, our revenues under the LFRP are expected to experience growth beginning in 2014.

The chart below, which is based on information publicly disclosed by our licensees, provides a summary of the clinical stage product candidates under the LFRP for which we are eligible to receive future milestones and/or royalties to the extent these candidates are developed and commercialized. Certain of these product candidates are in multiple clinical trials for various indications.

[[Image Removed: Graphic]]

*denotes future milestones only

The types of licenses and collaborations that we have entered into under the LFRP have one of three distinct structures:

? Library Licenses. Under our library license program, we grant our licensees rights to use our phage display libraries in connection with their internal discovery and therapeutic development programs. These libraries are protected by a patent portfolio in which the last patent is scheduled to expire in 2024. We also provide these licensees with related materials and training so that they may rapidly identify compounds that bind with high affinity to therapeutic targets. The period during which our licensees may use our libraries is typically limited to a 4 to 5 year term. Library license agreements contain up-front license fees, annual maintenance fees, milestone payments based on successful product development, and royalties based on any future product sales.

? Funded Research. Under our funded research program, we have performed funded research for various collaborators using our phage display libraries to identify, characterize and optimize antibodies that bind to disease targets provided by the collaborators. Funded research agreements provide for fees, technical and development milestones, and royalties based on any future product sales.

? Patent Licenses. Under our patent license program, we previously granted other biopharmaceutical and pharmaceutical companies non-exclusive licenses to use certain of our phage display patents to discover and develop biologic compounds for use in specified fields. The core patents in this portfolio expired in November 2012 and we do not anticipate entering into future agreements for this patent portfolio. In addition, certain existing patent licenses will no longer have a royalty obligation. We do not expect the expiration of these patents to have a material impact on our LFRP business.


RESULTS OF OPERATIONS

Three Months Ended September 30, 2013 and 2012

Revenues. Total revenues for the three months ended September 30, 2013 (the 2013 Quarter) were $13.7 million, compared with $13.1 million for the three months ended September 30, 2012 (the 2012 Quarter).

Product Sales. We began commercializing KALBITOR in the United States in 2010 for treatment of acute attacks of HAE in patients 16 years of age and older. We sell KALBITOR to our distributors, and we recognize revenue when title and risk of loss have passed to the distributor, typically upon delivery. Due to the specialty nature of KALBITOR, the limited number of patients and limited return rights, we anticipate that distributors will carry inventory that is in line with their forecasted business needs. Although fluctuations can occur due to the acute nature of HAE attacks, the aggregate amount of inventory held by our distributors generally does not exceed 60 days of anticipated demand. As of September 30, 2013, inventory held by our distributors was estimated to be approximately 43 days of anticipated demand, which represents a reduction from the approximately 52 days estimated as of June 30, 2013.

We record product sales allowances and accruals related to trade prompt pay discounts, government rebates, patient financial assistance programs, product returns and other applicable allowances. For the 2013 Quarter, product sales of KALBITOR were $10.8 million, net of product discounts and allowances of $1.7 million. During the 2012 Quarter, product sales were $10.8 million, net of product discounts and allowances of $789,000. There was no change in net sales between the 2013 and 2012 Quarters due to several offsetting factors:

? Distributor channel adjustments reduced comparable 2013 Quarter net sales by approximately $1.6 million,

? Sales represented by patient demand units increased in the 2013 Quarter by approximately $1.1 million, an 11% increase over the 2012 Quarter,

? A KALBITOR price increase, offset by higher gross to net sales adjustments, increased the 2013 Quarter's net sales by approximately $500,000.


During the three months ended September 30, 2013 and 2012, provisions for product sales allowances reduced gross product sales as follows (in thousands):

                                                                   2013         2012

Gross product sales                                             $ 12,453     $ 11,603

Prompt pay and other discounts                                  $   (849 )   $   (382 )
Government rebates and chargebacks                                  (790 )       (279 )
Returns                                                              (42 )       (128 )
Product sales allowances                                        $ (1,681 )   $   (789 )
Product sales, net                                              $ 10,772     $ 10,814

Product sales allowances, as a percent of gross product sales       13.5 %        6.8 %

Product sales allowances in the 2013 Quarter increased as a percentage of gross product sales due to higher distributor discounts and higher government rebates resulting from price increases and a change in the Medicaid patient mix.

Development and License Fees. We derive revenues from licensing, funded research and development fees and milestone payments from our licensees and collaborators, in amounts that fluctuate from period to period due to the timing of the clinical activities of our collaborators and licensees. This revenue was $2.9 million in the 2013 Quarter compared to $2.3 million in the 2012 Quarter.

Cost of Product Sales. Cost of product sales includes the manufactured product and the cost of testing, filling, packaging and distributing KALBITOR, as well as a royalty due on net sales of KALBITOR. We incurred $720,000 of costs associated with product sales during the 2013 Quarter and $493,000 of costs associated with product sales during the 2012 Quarter.

Costs associated with the manufacture of KALBITOR prior to FDA approval were previously expensed when incurred, and accordingly are not included in the cost of product sales during the 2012 Quarter. Utilizing the average cost per unit of KALBITOR manufactured after regulatory approval, cost of product sales with these manufacturing costs included for the 2012 Quarter would have approximated $690,000.

In the 2013 Quarter, the cost of product sales reflects the full KALBITOR manufacturing cost.

Research and Development. Our research and development expenses are summarized as follows (in thousands):

                                                                Three Months Ended
                                                                  September 30,
                                                               2013           2012

KALBITOR development costs                                   $   2,196      $ 3,513
Other research and development expenses, including DX-2930       4,130        2,405
LFRP pass-through fees                                           1,779          240
Total                                                        $   8,105      $ 6,158

Our research and development expenses arise primarily from compensation and other related costs for our personnel dedicated to research, development, medical and pharmacovigilence activities, costs of post-approval studies and commitments and KALBITOR life cycle management, as well as fees paid and costs reimbursed to outside parties to conduct research and clinical trials.

The higher research and development expenses during the 2013 Quarter were primarily due to additional costs associated with the development of DX-2930, our candidate to prophylactically treat HAE and higher LFRP pass-through fees. These increases were partially offset by lower KALBITOR development costs in 2013, primarily associated with post-marketing commitments.


Selling, General and Administrative. Our selling, general and administrative expenses consist primarily of the sales and marketing costs of commercializing KALBITOR, costs of our management and administrative staff, as well as expenses related to business development, protecting our intellectual property, administrative occupancy, professional fees and the reporting requirements of a public company. Selling, general and administrative expenses for the 2013 and 2012 Quarters were $8.5 million and $9.1 million, respectively, including costs for patient services of $667,000 and $412,000, respectively. The lower selling, . . .

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