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PBYI > SEC Filings for PBYI > Form 10-Q on 12-Nov-2013All Recent SEC Filings

Show all filings for PUMA BIOTECHNOLOGY, INC.

Form 10-Q for PUMA BIOTECHNOLOGY, INC.


12-Nov-2013

Quarterly Report


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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the notes thereto included in Item 1 in this Quarterly Report on Form 10-Q. The following discussion should also be read in conjunction with our audited financial statements and the 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 year ended December 31, 2012.

Unless otherwise provided in this Quarterly Report, references to the "Company," "we," "us," and "our" refer to Puma Biotechnology, Inc., a Delaware corporation formed on April 27, 2007 and formerly known as Innovative Acquisitions Corp., together with its wholly-owned subsidiary, Puma Biotechnology Ltd, and all references to "Former Puma" refer to Puma Biotechnology, Inc., a privately held Delaware corporation formed on September 15, 2010 that merged with and into us on October 4, 2011. This transaction was accounted for as a reverse acquisition whereby Former Puma was deemed to be the acquirer for accounting and financial reporting purposes and we were deemed to be the acquired party. Consequently, our financial statements prior to the reverse merger transaction reflect the assets and liabilities and the historical operations of Former Puma from its inception on September 15, 2010 through the closing of the reverse merger transaction on October 4, 2011. Our financial statements after completion of the reverse merger transaction include the assets and liabilities of Former Puma and us and the operations of Former Puma and us.

Overview

We are a development-stage biopharmaceutical company based in Los Angeles, California with a focus on the acquisition, development and commercialization of innovative products to enhance cancer care. We aim to acquire proprietary rights to these products, by license or otherwise, fund their research and development and bring the products to market. Our efforts and resources to date have been focused primarily on acquiring and developing our pharmaceutical technologies, raising capital and recruiting personnel. As a development-stage company, we have had no product sales to date and we will have no product sales until we receive approval from the United States Food and Drug Administration, or FDA, or equivalent foreign regulatory bodies to begin selling our pharmaceutical candidates. Developing pharmaceutical products, however, is a lengthy and very expensive process. Assuming we do not encounter any unforeseen safety issues during the course of developing our product candidates, we do not expect to receive approval of a product candidate until approximately 2015.


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We currently license the rights to three drug candidates:

PB272 (neratinib (oral)), which we are developing for the treatment of advanced breast cancer patients, non-small cell lung cancer patients and patients with HER2 mutation-positive solid tumors;

PB272 (neratinib (intravenous)), which we are developing for the treatment of advanced cancer patients; and

PB357, which we believe can serve as a backup compound to PB272 and which we plan to evaluate for further development in 2013.

A large portion of our expenses to date have been related to the clinical development of our lead product candidate, PB272 (neratinib (oral)), and the transition of the neratinib program from Pfizer, Inc., or the Licensor. During this transition period, as we developed our infrastructure and assumed responsibility for the neratinib program, a duplication of effort took place that resulted in higher than normal operating expenses. We estimate the duplication of effort for the three months ended September 30, 2013 had an impact on research and development, or R&D, operating expense of approximately $0.2 million, which consisted mainly of data management and pharmacovigilance. We anticipate these costs to decline through the duration of the clinical trials for PB272 that were ongoing at the time we entered into the license agreement with the Licensor. We refer to these clinical trials as the legacy clinical trials.

The license agreement for PB272 established a limit for our expenses related to the legacy clinical trials. This capped our "out-of-pocket" costs incurred beginning January 1, 2012, in conducting these existing trials. We reached the cost cap during the fourth quarter of 2012 and have recorded a reduction in our R&D expenses, as the Licensor is responsible for such costs. The Licensor will continue to be responsible for these costs until the existing trials are completed. Additionally, our expenses to date have been related to hiring of staff and development of our corporate infrastructure. As we proceed with clinical development of PB272 (neratinib (oral)), and as we further develop PB272 (neratinib (intravenous)) and PB357, our second and third product candidates, respectively, we expect our R&D expenses and expenses related to our third-party contractors will increase.

To the extent we are successful in acquiring additional product candidates for our development pipeline, our need to finance R&D will increase. Accordingly, our success depends not only on the safety and efficacy of our product candidates, but also on our ability to finance product development. Our major sources of working capital have been proceeds from private sales and a public offering of our common stock.

R&D expenses include costs associated with services provided by consultants who conduct clinical services on our behalf, contract organizations for manufacturing of clinical materials, and clinical trials. During the nine months ended September 30, 2013, our R&D expenses consisted primarily of CRO costs, salaries and related personnel costs (including stock-based compensation expenses), and fees paid to other consultants. We expense our R&D costs as they are incurred.

General and administrative, or G&A, expenses consist primarily of salaries and related personnel costs (including stock-based compensation expense), professional fees, business insurance, rent, general legal activities, and other corporate expenses.

Critical Accounting Policies

We believe there have been no material changes to our critical accounting policies and estimates during the nine months ended September 30, 2013, as of the date of filing of this quarterly report, from our accounting policies at December 31, 2012, as reported in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

Emerging Growth Company

We are currently an "emerging growth company" as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. On June 28, 2013, our public float exceeded $700 million. As a result, beginning January 1, 2014, we will begin reporting as a large accelerated filer and will no longer be eligible to rely on the benefits afforded to emerging growth companies under the JOBS Act.

Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, for complying with new or revised accounting standards. We have irrevocably elected not to avail ourselves of this extended transition period for complying with new or revised accounting standards and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other companies; however, we have elected to take advantage of certain of the reduced disclosure obligations and may elect to take advantage of other reduced burdens in future filings. As a result, the information that we provide to our stockholders may be different from the information that you might receive from other public reporting companies in which you hold equity interests.


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Results of Operations

Three Months Ended September 30, 2013 Compared to Three Months Ended September 30, 2012

General and administrative expenses:

For the three months ended September 30, 2013, G&A expenses were approximately $2.3 million, compared to approximately $8.1 million for the three months ended September 30, 2012. G&A expenses for the three months ended September 30, 2013 and 2012 were as follows:

   General and administrative expenses       Three Months Ended September 30,
   in thousands ($000)                         2013                     2012
   Professional fees                     $            554         $            588
   Payroll and related costs                          644                      511
   Facility and equipment costs                       290                      212
   Employee stock-based compensation                  473                    6,575
   Other                                              302                      208

                                         $          2,263         $          8,094

The decrease in G&A expenses for the three months ended September 30, 2013, compared to the three months ended September 30, 2012, consisted primarily of a decrease in employee stock-based compensation of approximately $6.1 million. During the three months ended September 30, 2012, we recognized approximately $6.6 million in employee stock-based compensation expense that reflected the increase in the value of the outstanding anti-dilutive warrant held by our Chief Executive Officer and President. In October 2012, we closed a public offering of our common stock, which resulted in a final fair value determination for the warrant of $25.8 million. We recognized the increase in the fair value of the warrant, approximately $12 million, in the fourth quarter of 2012. Because the final fair value of the warrant was determined and recognized in 2012, there is no corresponding expense in the three months ended September 30, 2013, and we do not expect the 2012 level of stock-based compensation to repeat in the future. G&A expenses for the three months ended September 30, 2013 compared to the three months ended September 30, 2012, also included an increase in payroll and related costs of approximately $0.1 million due to an increase of two full-time employees. Additionally, facility and equipment costs increased approximately $0.1 million from the increase in our rented square footage for office space as well as the cost of maintaining two office locations. We expect facility and equipment costs should remain at least at comparable levels to the three months ended September 30, 2013 for the remainder of 2013. However, we are currently looking for additional office space to accommodate our increased headcount. While professional fees were consistent for the three months ended September 30, 2013 compared to the three months ended September 30, 2012, we expect an increase going forward as we are no longer eligible for the benefits afforded to emerging growth company under the JOBS Act and as such, are required to be fully compliant with the Sarbanes-Oxley Act, which we expect will increase our professional fees as our independent auditors will evaluate the effectiveness of our internal control over financial reporting.

Research and development expenses:

For the three months ended September 30, 2013, R&D expenses were approximately $12.1 million compared to approximately $17.8 million for the three months ended September 30, 2012. R&D expenses for the three months ended September 30, 2013 and 2012 were as follows:

Research and development expenses                        Three Months Ended September 30,
in thousands ($000)                                        2013                   2012
Outside CRO/Licensor services                         $         2,972        $        13,626
Outside other clinical development                              3,711                  1,852
Internal regulatory affairs and quality assurance               1,720                  1,083
Internal clinical development                                   2,132                    895
Internal chemical manufacturing                                   200                     75
Employee stock-based compensation                               1,333                    248

                                                      $        12,068        $        17,779

For the three months ended September 30, 2013, R&D expenses for our lead drug candidate consisted primarily of outside other clinical development costs that increased to approximately $3.7 million for the three months ended September 30, 2013, compared to approximately $1.9 million for the three months ended September 30, 2012. The increase of approximately $1.8 million is primarily due to an increase of approximately $1.4 million related to data management and biostatistics services, an increase of approximately $0.2 million for clinical services and consultants, and an increase of approximately $0.2 million for regulatory affairs and quality assurance. Outside CRO/Licensor services decreased to approximately $3.0 million compared to approximately $13.6 million for the three months ended September 30, 2012. The decrease in outside CRO/Licensor services is due to reaching the clinical trial cost cap in the fourth quarter of 2012 (see Note 2 to the Condensed Consolidated Financial Statements-Significant Accounting Policies: Research and Development Reimbursement). Additionally, Licensor services provided in maintaining and transitioning the legacy clinical trials have


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decreased dramatically and are expected to cease completely as the legacy trials are completed. Of the approximately $2.9 million in CRO/Licensor expenses incurred in the three months ended September 30, 2013, approximately $0.2 million is related to the Licensor legacy clinical trials with the remaining approximately $2.7 million related to the Company-initiated clinical trials. Because the Company initiated trials began in April 2013, we expect to continue to see an increase in CRO and supporting activities through 2014. The increase in internal regulatory affairs and quality assurance, internal clinical development and internal chemical manufacturing expenses is related to the increase in headcount required to support Company-initiated clinical trials. We expect to continue to hire additional employees focused on R&D activities during 2013 in support of additional Company-initiated clinical trials. The increase in employee stock-based compensation to approximately $1.3 million for the three months ended September 30, 2013, from approximately $0.2 million for the three months ended September 30, 2012, was due to the increase in employee headcount, and additional option grants to existing, eligible employees.

Interest income:

For the three months ended September 30, 2013, we recognized approximately $9,000 in interest income compared to approximately $14,000 for the three months ended September 30, 2012. This decrease in interest income is due to having moved funds from the money market account into short-term investments, such as corporate bonds. Based on market conditions, we placed our excess funds in money market accounts, "high yield" savings accounts and other marketable securities, per our investment policy.

Nine Months Ended September 30, 2013 Compared to Nine Months Ended September 30, 2012

General and administrative expenses:

For the nine months ended September 30, 2013, G&A expenses were approximately $6.8 million compared to approximately $11.1 million for the nine months ended September 30, 2012. G&A expenses for the nine months ended September 30, 2013 and 2012 were as follows:

   General and administrative expenses        Nine Months Ended September 30,
   in thousands ($000)                        2013                     2012
   Professional fees                     $         1,732         $           1,744
   Payroll and related costs                       1,825                     1,505
   Facility and equipment costs                      929                       610
   Employee stock-based compensation               1,354                     6,540
   Other                                             964                       750

                                         $         6,804         $          11,149

The decrease in G&A expenses for the nine months ended September 30, 2013, compared to the nine months ended September 30, 2012, consisted primarily of a decrease in employee stock-based compensation of approximately $5.2 million. During the nine months ended September 30, 2012, we recognized approximately $6.5 million in employee stock-based compensation expense that reflected the increase in the value of the outstanding anti-dilutive warrant held by our Chief Executive Officer and President. In October 2012, we closed a public offering of our common stock, which resulted in a final fair value determination for the warrant of $25.8 million. We recognized the increase in the fair value of the warrant, approximately $12 million, in the fourth quarter of 2012. Because the final fair value of the warrant was determined and recognized in 2012, there is no corresponding expense in the nine months ended September 30, 2013, and we do not expect the 2012 level of stock-based compensation to repeat in the future. G&A expenses for the nine months ended September 30, 2013, compared to the nine months ended September 30, 2012, also included an increase in payroll and related costs of approximately $0.3 million due to two additional employees hired. Additionally, facility and equipment costs increased approximately $0.3 million from an increase in our rented square footage for office space from approximately 13,250 square feet in the first nine months of 2012 to approximately 24,250 square feet in the first nine months of 2013. We expect facility and equipment costs should remain at least at comparable levels to the nine months ended September 30, 2013. However, we are currently looking for additional office space to accommodate our increased headcount. While professional fees were consistent for the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012, we expect an increase going forward as we are no longer eligible for the benefits afforded to an emerging growth company under the JOBS Act and as such, are required to be fully compliant with the Sarbanes-Oxley Act, which we expect will increase our professional fees as our independent auditors will evaluate the effectiveness of our internal control over financial reporting.


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Research and development expenses: For the nine months ended September 30, 2013, R&D expenses were approximately $32.0 million compared to approximately $41.4 million for the nine months ended September 30, 2012. R&D expenses for the nine months ended September 30, 2013 and 2012 were as follows:

Research and development expenses                         Nine Months Ended September 30,
in thousands ($000)                                         2013                  2012
Outside CRO/Licensor services                          $         8,801       $        32,069
Outside other clinical development                              10,464                 2,389
Internal regulatory affairs and quality assurance                4,396                 3,603
Internal clinical development                                    4,886                 2,518
Internal chemical manufacturing                                    421                   245
Employee stock-based compensation                                3,072                   530

                                                       $        32,040       $        41,354

For the nine months ended September 30, 2013, R&D expenses consisted primarily of outside other clinical development costs that increased to approximately $10.5 million for the nine months ended September 30, 2013, compared to approximately $2.4 million for the nine months ended September 30, 2012. The increase of approximately $8.1 million is primarily due to increases of approximately $3.0 million related to chemical manufacturing, such as testing and validation of the active pharmaceutical ingredient of our lead drug candidate, $1.8 million for clinical services and consultants, $1.6 million for data management and biostatistics services, $0.9 million for regulatory and quality assurance and approximately $0.8 million for drug safety and pharmacovigilance services. Outside CRO/Licensor services decreased to approximately $8.8 million compared to approximately $32.1 million for the nine months ended September 30, 2012. This decrease in outside CRO/Licensor services is due to reaching the clinical trial cost cap (see Note 2 to the Condensed Consolidated Financial Statements-Significant Accounting Policies: Research and Development Reimbursement). Additionally, Licensor services provided in maintaining and transitioning the legacy clinical trials have decreased dramatically and are expected to cease completely as the legacy trials are completed. Of the approximately $8.8 million of CRO/Licensor expense in the nine months ended September 30, 2013, approximately $0.5 million is related to the Licensor legacy clinical trials with the remaining approximately $8.3 million related to the Company-initiated clinical trials. Because the Company-initiated trials began in April 2013, we expect to continue to see an increase in CRO and supporting activities through 2014. The increases in internal regulatory affairs and quality assurance, internal clinical development and internal chemical manufacturing expenses are related to the increase in headcount from a limited number of employees during the nine months ended September 30, 2012 to a full staff during the nine months ended September 30, 2013. We expect to continue to hire additional employees focused on R&D activities during 2013 and in 2014. The increase in employee stock-based compensation to approximately $3.1 million for the nine months ended September 30, 2013, from approximately $0.5 million for the nine months ended September 30, 2012, was due to the increase in employee headcount, and additional option grants to existing, eligible employees.

While expenditures on current and future clinical development programs, particularly our PB272 program, are expected to be substantial and to increase, they are subject to many uncertainties, including the results of clinical trials and whether we develop any of our drug candidates with a partner or independently. As a result of such uncertainties, we cannot predict with any significant degree of certainty the duration and completion costs of our research and development projects or whether, when and to what extent we will generate revenues from the commercialization and sale of any of our product candidates. The duration and cost of clinical trials may vary significantly over the life of a project as a result of unanticipated events arising during clinical development and a variety of other factors, including:

the number of trials and studies in a clinical program;

the number of patients who participate in the trials;

the number of sites included in the trials;

the rates of patient recruitment and enrollment;

the duration of patient treatment and follow-up;

the costs of manufacturing our drug candidates; and

the costs, requirements, timing of, and ability to secure regulatory approvals.

Interest income:

We recognized approximately $128,000 in interest income during the nine months ended September 30, 2013, compared to approximately $62,600 for the nine months ended September 30, 2012. This increase in interest income is due to having a larger total balance resulting from the October 2012 equity placement prior to moving funds from the money market account into short-term investments.


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Liquidity and Capital Resources

The following table summarizes our liquidity and capital resources as of
September 30, 2013, and is intended to supplement the more detailed discussion
that follows:



Liquidity and capital resources (in thousands ($000)    September 30, 2013        December 31, 2012
Cash and cash equivalents                              $             51,261      $           137,408
Marketable securities                                                44,377                       -
Working capital                                                      91,350                  127,271
Stockholders' equity                                                 94,760                  128,909

                                                        Nine Months Ended         Nine Months Ended
                                                        September 30, 2013       September 30, 2012
Cash provided by (used in):
Operating activities                                   $            (41,469 )    $           (19,203 )
Investing activities                                                (44,824 )                   (832 )
Financing activities                                                    146                       -

Increase (decrease) in cash                            $            (86,147 )    $           (20,035 )

Operating Activities:

For the nine months ended September 30, 2013 and the nine months ended September 30, 2012, we reported net loss of approximately $38.7 million and $52.4 million, respectively, and cash flows used in operating activities of approximately $41.5 million and $19.2 million, respectively. Our net loss from Former Puma's date of inception, September 15, 2010, through September 30, 2013 amounted to approximately $123.3 million, while negative cash flow from operating activities amounted to approximately $87.3 million for the same period.

For the nine months ended September 30, 2013, the net cash used in operating activities, noted above, consisted of approximately $38.7 million of net loss excluding non-cash items, an increase in Licensor receivable of approximately $0.7 million and an increase of approximately $4.4 million in prepaid expenses and other assets. Accrued expenses and accounts payable decreased $2.5 million during the nine months ended September 30, 2013, due to the payments made during 2013 mainly related to the Licensor legacy clinical trials. The increase in Licensor receivable (see Note 2-Significant Accounting Policies: Research and Development Reimbursement) represents external charges for services provided by third parties pertaining to the legacy clinical trials. We received payments of approximately $14.6 million (including offsetting amounts to Licensor payables) related to legacy clinical trials from the Licensor. We anticipate continuing to receive payments for the remaining outstanding amounts in accordance with the terms of the license agreement. Per the license agreement, the Licensor has 60 days to review the invoices and supporting documentation. However, the Licensor review process and payment has been taking approximately 90 to 105 days. The increase in prepaid expenses and other assets of approximately $3.9 million reflects advance payments to our CROs and other service providers or suppliers as we ramp up our Phase II and Phase III trials while the remaining $0.5 million relates to insurance and other miscellaneous prepayments.

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