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EPZM > SEC Filings for EPZM > Form 10-K on 28-Feb-2014All Recent SEC Filings

Show all filings for EPIZYME, INC.

Form 10-K for EPIZYME, INC.


28-Feb-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Our management's discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements included in this Annual Report on Form 10-K, which have been prepared by us in accordance with accounting principles generally accepted in the United States of America, or GAAP, and with Regulation S-X promulgated under the Securities Exchange Act of 1934, as amended. This discussion and analysis should be read in conjunction with these consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in Part I, Item 1A. Risk Factors of this Annual Report on Form 10-K, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

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.

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 currently have two HMT inhibitors in clinical development for the treatment of patients with genetically defined cancers. We believe we are the first company to conduct a clinical trial of an HMT inhibitor. We are conducting a Phase 1 clinical trial of our most advanced product candidate, EPZ-5676, an inhibitor targeting the DOT1L HMT, being developed for the treatment of acute leukemias with genetic alterations of the MLL gene, referred to as MLL-r and MLL-PTD. We are also conducting a Phase 1/2 clinical trial of our second most advanced product candidate, EPZ-6438, an inhibitor targeting the EZH2 HMT, being developed for the treatment of a genetically defined subtype of non-Hodgkin lymphoma and solid tumors including INI1-deficient tumors such as synovial sarcoma and malignant rhabdoid tumors, or MRT.

In 2014, we plan to have four clinical trials ongoing that are intended to assess the proof-of-concept of our product candidates in the following five genetically defined cancer patient groups:

The expansion stage of our ongoing Phase 1 clinical trial of EPZ-5676 in MLL-r adult patients and MLL-PTD adult patients;

Our planned Phase 1b clinical trial of EPZ-5676 in MLL-r pediatric patients;

Our planned Phase 2 clinical trial of EPZ-6438 in non-Hodgkin lymphoma patients with EZH2 point mutations as part of our ongoing Phase 1/2 clinical trial of EPZ-6438; and

Our planned Phase 2 clinical trial of EPZ-6438 in synovial sarcoma patients.

The initiation of our proof-of-concept trials of EPZ-6438 is subject to our review of the data from the Phase 1 clinical trial of EPZ-6438 that we are conducting as part of our ongoing Phase 1/2 clinical trial of EPZ-6438.

In addition to our clinical programs, we also have a pipeline of HMT inhibitors in preclinical development that target our other prioritized HMTs in the HMTome. These programs are directed to genetically defined cancers, both hematological and solid tumors.

We have entered into three therapeutic collaborations that have provided us with $135.5 million in non-equity funding as of December 31, 2013. In addition, as of December 31, 2013, we were entitled to receive $33.7 million for milestone payments earned, research and development services revenue earned and global


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development co-funding, including a $25.0 million proof-of-concept milestone in our collaboration with Celgene earned by achieving objective responses in two MLL-r patients enrolled in the dose escalation stage of our Phase 1 trial of EPZ-5676 and a $4.0 million milestone in our collaboration with GSK earned by achieving a development candidate milestone. We retain commercialization or co-commercialization rights in the United States under two of these collaborations.

The clinical development plan for each of our therapeutic product candidates is directed towards patients with a particular genetically defined cancer. For many of our therapeutic product candidates, we plan to develop a companion diagnostic for the identification of patients with the genetically defined cancers that we seek to treat with our therapeutic product candidates. We plan to include patients with the particular genetically defined cancer in our clinical trials beginning in Phase 1 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, the European Union and other regions.

In addition to the therapeutic programs listed above, we are working with GSK on the development of three specified HMT inhibitors that are in preclinical development and for which GSK holds commercial rights. We also have active drug discovery programs for other HMTs that we have prioritized.

We design, manage and evaluate the results of all of our research and development plans centrally and have engaged a multinational network of clinical research organizations, or CROs, to execute on specific phases of our research and development programs. By employing this network of CROs, we seek to manage multiple development programs while maintaining flexibility in our cost structure.

We commenced active operations in early 2008, and our operations to date have been limited to organizing and staffing our company, business planning, raising capital, developing our technology, identifying potential product candidates, undertaking preclinical studies and, beginning in 2012, conducting clinical trials. To date, we have financed our operations primarily through our initial public offering, private placements of our preferred stock and funding received from collaboration and license agreements. All of our revenue to date has been collaboration revenue. Since our inception and through December 31, 2013, we have raised an aggregate of $294.0 million to fund our operations, of which $135.5 million was non-equity funding through our collaboration agreements, $82.5 million was from our initial public offering and $76.0 million was from the sale of preferred stock. In addition, as of December 31, 2013, we were entitled to receive $33.7 million for milestone payments earned, research and development services revenue earned and global development co-funding. In February 2014, we completed an offering of 3,673,901 shares of our common stock, at a price of $29.25 per share. We received net proceeds before expenses from this offering of $101.3 million after deducting underwriting discounts and commissions paid by us.

Since inception, we have incurred significant operating losses. Our net loss was $3.5 million for the year ended December 31, 2013. As of December 31, 2013, we had an accumulated deficit of $56.1 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 year to year. We anticipate that our expenses will increase substantially as we continue our Phase 1 clinical trial of EPZ-5676 in MLL-r and MLL-PTD adult patients; initiate our planned Phase 1b clinical trial of EPZ-5676 in pediatric patients with MLL-r; continue our Phase 1/2 clinical trial of EPZ-6438, subject to our opt-in right; initiate our planned Phase 2 clinical trial of EPZ-6438 in patients with synovial sarcoma, subject to our opt-in right; continue the research and development of our other product candidates; seek to discover and develop additional product candidates; seek regulatory approvals for our product candidates that successfully complete clinical trials; establish a sales, marketing and distribution infrastructure and scale up external manufacturing capabilities to commercialize any products for which we may obtain regulatory approval; maintain, expand and protect our intellectual property portfolio; hire additional clinical, quality control and scientific personnel; and add operational, financial and management information systems and personnel, including personnel to support our product development and planned future commercialization efforts.


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Collaborations

The key terms of our primary collaborations 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 covered by our two other existing therapeutic collaborations, which we refer to as the available targets.

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 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 earned a $25.0 million clinical development milestone payment and recorded $1.9 million of global development co-funding during the year ended December 31, 2013. We are also eligible to earn up to $35.0 million in additional clinical development milestone payments and up to $100.0 million in regulatory milestone payments related to DOT1L as well as 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 may exercise 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 next potential milestone payment that we might be entitled to receive under this agreement is $35.0 million for the initiation of a pivotal clinical trial, as defined in the agreement, for our DOT1L inhibitor.

We are obligated to conduct and solely fund research and development costs of the Phase 1 clinical trials for EPZ-5676 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.

Collaboration Revenue

Through December 31, 2013, in addition to amounts allocated to Celgene's purchase of shares of our series C preferred stock, we recorded a total of $94.9 million in cash and accounts receivable under the Celgene agreement, including a $3.0 million implied premium on Celgene's purchase of our series C preferred stock. Of this amount, we recognized $37.8 million and $23.9 million of collaboration revenue in the consolidated statements of operations and comprehensive loss during the years ended December 31, 2013 and 2012, respectively, and $1.9 million of global development co-funding as a reduction to research and development expense during the year ended December 31, 2013. As of December 31, 2013, we had deferred revenue of $31.3 million 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


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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 recorded a $3.0 million upfront payment, $7.0 million in preclinical research and development milestone payments, a $6.0 million clinical development milestone achieved in June 2013 and $18.0 million for research and development services through December 31, 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 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 2 portion of the Phase 1/2 clinical trial.

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 December 31, 2013, we recorded a total of $34.0 million in cash and accounts receivable under this agreement. During the years ended December 31, 2013, 2012 and 2011, we recognized $14.3 million, $11.5 million and $6.6 million of collaboration revenue, respectively, under this agreement. As of December 31, 2013, we had deferred revenue of $1.6 million 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, or earlier if selection of a development candidate occurs.

Agreement Structure

Under the agreement, we recorded a $20.0 million upfront payment, $6.0 million of fixed research funding, $12.0 million of preclinical research and development milestone payments and $2.0 million of prepaid research funding through December 31, 2013. In addition, in February 2014, we earned a $2.0 million preclinical research and development milestone under this agreement. Following the February 2014 milestone achievement, we are eligible to receive up to $15.0 million in additional preclinical


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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 preclinical research and development 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 is 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.

Collaboration Revenue

Through December 31, 2013, we recorded a total of $40.0 million in cash and accounts receivable under the GSK agreement. During the years ended December 31, 2013 and 2012, we recognized $16.4 million and $9.7 million of collaboration revenue, respectively, under this agreement. We did not recognize any collaboration revenue in the year ended December 31, 2011 under this agreement. As of December 31, 2013, we had deferred revenue of $13.9 million related to this agreement.

Companion Diagnostic Collaborations. In collaboration with established diagnostic companies, we are developing companion diagnostics to identify patients who have the specific genetically defined cancer targeted by our product candidate. In December 2012, Eisai and we entered into an agreement with Roche Molecular Systems, Inc., or Roche, to develop and to commercialize a companion diagnostic for use with our EPZ-6438 product candidate. The development costs under the agreement with Roche will be the responsibility of Eisai until such time as we may exercise our opt-in right under the collaboration with Eisai. If we exercise our opt-in right under the Eisai agreement, the costs under the Roche agreement will be shared by us and Eisai as determined under the profit share and co-commercialization components of the Eisai collaboration agreement.

In February 2013, we entered into an agreement with Abbott under which we agreed to fund Abbott's development of a companion diagnostic to identify patients with the MLL-r genetic alteration targeted by EPZ-5676. Under the terms of the agreement, we paid Abbott an upfront payment of $0.9 million upon the execution of the agreement, are obligated to make aggregate milestone-based development payments of up to $6.0 million and are obligated to reimburse Abbott specified costs expected to be incurred in connection with Abbott conducting clinical trials to obtain the necessary regulatory approvals for the companion diagnostic which are not to exceed $0.9 million unless any excess costs are agreed to in advance.


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Results of Operations for the Years Ended December 31, 2013, 2012 and 2011

Collaboration Revenue

The following is a comparison of collaboration revenue for the years ended December 31, 2013, 2012 and 2011:

Year Ended December 31, 2013 2012 2011

(In millions)

Collaboration revenue $ 68.5 $ 45.2 $ 6.9

Our revenue consists 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 services revenue earned and milestone payments earned under collaboration and license agreements with our collaboration partners.

2013 Compared to 2012

During the year ended December 31, 2013, collaboration revenue consisted of $24.3 million recognized from deferred revenue related to upfront payments for licenses, $35.0 million in milestone revenue and $9.2 million in research and development funding. This revenue compares to $30.2 million recognized from deferred revenue related to upfront payments for licenses, $8.0 million in milestone revenue and $7.0 million in research and development funding recognized in the year ended December 31, 2012, collectively representing a $23.3 million, or 51%, increase in collaboration revenue in 2013 compared to 2012.

Collaboration revenue recognized from deferred revenue related to upfront payments for licenses in the year ended December 31, 2013 comprised $12.8 million under our Celgene agreement, $1.6 million under our Eisai agreement and $9.9 million under our GSK agreement, as compared to $23.9 million under our Celgene agreement, $1.6 million under our Eisai agreement and $4.6 million under our GSK agreement in 2012. Milestone revenue in the year ended December 31, 2013 represents a $25.0 million clinical development milestone achieved under our Celgene agreement, a $6.0 million clinical development milestone achieved under our Eisai agreement and a $4.0 million preclinical research and development milestone achieved under our GSK agreement as compared to a $4.0 million preclinical research and development milestone achieved under our Eisai agreement and $4.0 million in preclinical research and development milestones achieved under our GSK agreement in the year ended December 31, 2012. Collaboration revenue recognized for research and development services in the year ended December 31, 2013 comprised $6.7 million under our Eisai agreement and $2.5 million under our GSK agreement, as compared to $5.9 million under our Eisai agreement and $1.1 million under our GSK agreement in 2012.

2012 Compared to 2011

The $38.3 million increase in collaboration revenue in 2012 compared to 2011 was primarily due to the recognition of $23.9 million of revenue in connection with our collaboration with Celgene, which was entered into in April 2012, the recognition of $9.7 million of revenue in 2012 in connection with our collaboration with GSK, as compared to none during 2011, and an increase in revenue recognized from our collaboration with Eisai from $6.6 million in 2011 to $11.5 million in 2012.

Collaboration revenue recognized under the Celgene agreement during 2012 reflects amounts earned related to:

the delivery of the DOT1L license and the provision of related research services, both prior to and subsequent to IND effectiveness for EPZ-5676 in July 2012; and

the provision of research services related to other potential DOT1L product candidates.

Collaboration revenue recognized under the Eisai agreement reflects amounts earned related to the EZH2 license and research services, including $4.0 million that we received upon the achievement of a substantive milestone related to the selection of a development candidate in 2012.


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Collaboration revenue recognized under the GSK agreement during 2012 reflects amounts earned for research services related to all three HMT targets licensed by GSK as of July 2012, the end of the target selection term under this agreement, as well as $4.0 million related to preclinical research and development milestones that were achieved in 2012 after the end of the selection term. Prior to the end of the selection term, we did not recognize any collaboration revenue under this agreement, as none of the delivered elements were deemed to have standalone value apart from the undelivered elements of the arrangement.

Research and Development

The following is a comparison of research and development expenses for the years ended December 31, 2013, 2012 and 2011:

2013 2012 2011

(In millions)

Research and development $ 57.6 $ 38.5 $ 22.9

Research and development expenses consist of expenses incurred in performing research and development activities, including compensation and benefits for full-time research and development employees, facilities expenses, overhead expenses, clinical trial and related clinical manufacturing expenses, fees paid to third party clinical research organizations, or CROs, and other outside expenses. As we advance our product platform, we are conducting research on several prioritized HMT targets. Our research and development team is organized such that the strategy, design, management and evaluation of results of all of our research and development plans is accomplished internally while some of our research and development activities are executed using our multinational network of CROs. In the early phases of development, our research and development costs are often devoted to enhancing our product platform and are not necessarily allocable to specific targets. In circumstances where our collaboration and license agreements provide for equally co-funded global development under joint risk sharing collaborations, amounts received from collaboration partners for such co-funding are recorded as a reduction to research and development expense.

The following table illustrates the components of our research and development expenses:

                                                                Year Ended December 31,
Product Program (Phase as of the latest period end)         2013           2012         2011
                                                                     (In millions)
External research and development expenses:
EPZ-5676 (Phase 1) and related DOT1L programs             $   13.3        $  8.0       $  5.8
EPZ-6438 (Phase 1/2) and related EZH2 programs                 3.9           3.5          3.8
Discovery and preclinical stage product programs,
collectively                                                  22.4          12.9          5.3
Internal research and development expenses                    18.0          14.1          8.0
. . .
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