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PBYI > SEC Filings for PBYI > Form 10-K on 3-Mar-2014All Recent SEC Filings

Show all filings for PUMA BIOTECHNOLOGY, INC.

Form 10-K for PUMA BIOTECHNOLOGY, INC.


3-Mar-2014

Annual Report


Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Annual Report on Form 10-K contains forward-looking statements within the meanings of the federal securities laws. These statements are subject to risks and uncertainties that could cause actual results and events to differ materially from those expressed or implied by such forward-looking statements. For a detailed discussion of these risks and uncertainties, see the "Risk Factors" section in Item 1A of Part I of this Form 10-K. We caution the reader not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date of this Form 10-K. We undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this Form 10-K.

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.

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 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 are evaluating for further development.

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 the licensor. During this transition period, as we built up 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 had an impact on research and development, or R&D, operating expense for the years ended December 31, 2013 and December 31, 2012, of approximately $0.3 million and $5.1 million, respectively.

The license agreement for PB272 established a limit for our expenses related to the Pfizer-initiated clinical trials for PB272 that were ongoing at the time of the agreement. This capped our "out-of-pocket" costs incurred in conducting these existing trials beginning January 1, 2012. We reached the cost cap during the fourth quarter of 2012, which resulted in a reduction of our R&D expenses for the fourth quarter of 2012. The licensor will continue to be responsible for these expenses until the licensor legacy trials are completed. Additionally, our expenses to date have been related to hiring staff, commencing company-sponsored clinical trials and the build out 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 continue to increase.


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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 public offerings of our common stock and sales of our common stock in private placements.

Summary of Expenses

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. Stock-based compensation expense for the year ended December 31, 2012, included approximately $18.2 million of stock-based compensation related to an anti-dilutive warrant issued to our Founder and Chief Executive Officer in 2011, of which the exercise price and the number of underlying shares were established in 2012. We do not expect to incur such additional expense for this warrant in the future.

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 year ended December 31, 2013, our R&D expenses consisted primarily of clinical research organization, or CRO fees; fees paid to consultants; salaries and related personnel costs; stock-based compensation; and facility costs. During the year ended December 31, 2012, our R&D expenses consisted primarily of transition costs, as clinical trial responsibilities shifted from the licensor to us and our outside clinical research organization, or CRO; fees paid to other consultants; salaries and related personnel costs; stock-based compensation; and facility costs. We expense our R&D costs as they are incurred.

Results of Operations

The following summarizes our results of operations for the years ended December 31, 2013, 2012 and 2011.

General and administration expenses:

General and administrative expenses                                                       Annual percentage change
(in thousands)                            2013            2012           2011          2013/2012            2012/2011
Payroll and related costs                $ 2,530        $  2,088        $   481                21 %                334 %
Professional fees and expenses             2,352           2,071            950                14 %                118 %
Facility and equipment costs               1,295             792             52                64 %               1423 %
Employee stock-based compensation
expense                                    2,332          18,706          7,615               -88 %                146 %
Other                                      1,278           1,157            233                10 %                397 %

                                         $ 9,787        $ 24,814        $ 9,331               -61 %                166 %

Year ended December 31, 2013 Compared to Year ended December 31, 2012

Total G&A expenses decreased approximately 61% to $9.8 million for the year ended December 31, 2013 from $24.8 million for the year ended December 31, 2012. This decrease was primarily attributable to a decrease in stock-based compensation of approximately $16.4 million, offset by increases in payroll and related costs, facility costs and professional fees. Stock-based compensation expense decreased to $2.3 million in 2013 from $18.7 million in 2012. The approximately $18.7 million of stock-based compensation expense in 2012, included approximately $18.2 million for an anti-dilutive warrant issued to the our Chief Executive Officer (see Note 6 in the accompanying notes to the consolidated financial statements). We had no additional expense for this anti-dilutive warrant in 2013 because it was fully expensed prior to December 31, 2012. We do not expect this level of expense to reoccur in the future. The increase in payroll and related costs primarily related to our adding G&A employees to support increased operations and to increase staffing in other areas such as accounting and human resources. The increase in overall facility and equipment costs was primarily due to additional leased office space


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and corresponding equipment to support corporate growth. The increase in professional fees and expenses was incurred primarily in support of meeting the requirements of becoming a large accelerated filer under the Securities Exchange Act of 1934 and the Sarbanes-Oxley Act of 2002. We expect G&A expenses to increase slightly going forward as we support the corporate growth of the Company.

Year ended December 31, 2012 Compared to Year ended December 31, 2011

Total G&A expenses increased approximately 166% to $24.8 million for the year ended December 31, 2012 from $9.3 million for the year ended December 31, 2011. The increase was primarily related to increases in employee stock-based compensation expense, facility and equipment costs, payroll and related costs and professional fees and expenses. Stock-based compensation increased to $18.7 million in 2012 compared to $7.6 million in 2011. This increase primarily related to the change in fair value of a warrant issued to our Chief Executive Officer. In connection with the closing of a public offering on October 24, 2012, the exercise price and number of shares underlying the anti-dilutive warrant issued to our Chief Executive Officer were established (see Note 6 in the accompanying notes to the consolidated financial statements), and accordingly, the final value of the warrant became fixed. The final valuation of the warrant based on the Black-Scholes Option Pricing Method, was approximately $25.8 million and resulted in an adjustment to the fair value of the warrant of $18.2 million, which is included in G&A expenses for 2012, compared to the $7.6 million estimated fair value of the warrant recorded in 2011. The remaining employee stock-based compensation expense represents the fair value of stock option grants to employees applicable to the reporting period. Facility and equipment costs increased to approximately $0.8 million in 2012 from approximately $52,000 in 2011, primarily due to our not having a physical office location until December 2011, and therefore incurring minimal expense in 2011 versus having two office locations in 2012. Payroll and related costs increased to approximately $2.1 million in 2012 from approximately $0.5 million in 2011, due to our having eight fulltime employees at December 31, 2012 versus four at December 31, 2011. Professional fees and expenses increased to approximately $2.1 million in 2012 from approximately $1.0 million in 2011, which resulted primarily from our having limited operations in 2011 prior to October 2011.

Research and development expenses:

Research and development expenses                                                      Annual percentage change
(in thousands)                                2013          2012        2011       2013/2012            2012/2011
Outside CRO/licensor services               $ 10,601      $ 34,773      $  -              -70 %                  -
Outside other clinical development            15,403         5,103         38             202 %               13329 %
Internal regulatory affairs and quality
assurance                                      6,228         4,791        612              30 %                 683 %
Internal clinical development                  6,998         3,720         73              88 %                4996 %
Internal chemical manufacturing                  628           326         65              93 %                 402 %
Employee stock-based compensation              5,188           923         38             462 %                2329 %

                                            $ 45,046      $ 49,636      $ 826              -9 %                5909 %

Year ended December 31, 2013 Compared to Year ended December 31, 2012

Total R&D expenses decreased approximately 9% to $45.0 million for the year ended December 31, 2013 from $49.6 million for the year ended December 31, 2012. This decrease is due to an approximately $16.4 million decrease in costs associated with outside CRO/licensor services due to our reaching the cap on expenses for the on-going clinical trials that we assumed from the licensor, which we refer to as our licensor legacy clinical trials (see Note 2 to the accompanying notes to the consolidated financial statements). The license agreement contained a cap on the external costs associated with the licensor legacy clinical trials for which we are responsible. We reached this cost cap in the fourth quarter of 2012 and the above table reflects the outside services incurred by us net of the excess cost billed back to the licensor. As a result of our reaching this cap, the


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outside CRO/licensor service costs and other outside clinical development costs pertaining to the licensor legacy clinical trials decreased significantly. This large decrease was offset by the initiation of our company-sponsored clinical trials. During 2013, we incurred increased outside CRO and other clinical development costs and expect these costs to increase significantly in the coming year. The decrease in outside CRO/licensor service expenses was partially offset by an increase in outside other clinical development expenses to approximately $15.4 million in 2013 from approximately $5.1 million in 2012. In 2013, outside other clinical development consisted of approximately $6.2 million in clinical services, which includes data management and our company-sponsored clinical trial specific activities, approximately $5.1 million in chemical manufacturing and controls, approximately $2.9 million in consultant and contract labor and approximately $1.2 million in legal services for clinical trial-related contracts in support of our company-sponsored clinical trials. The increases in 2013 from 2012 in internal chemical manufacturing costs, internal clinical development costs and internal regulatory affairs and quality assurance costs were primarily due to an increase in employee headcount in support of our company-sponsored clinical trials. Employee stock-based compensation included in R&D expenses for the year ended December 31, 2013, was approximately $5.2 million compared to $0.9 million in 2012 and increased as a result of the increase in the number of employees.

Year ended December 31, 2012 Compared to Year ended December 31, 2011

Total R&D expenses increased to $49.6 million for the year ended December 31, 2012 from $0.8 million for the year ended December 31, 2011. This increase was primarily driven by outside CRO/licensor service expenses of approximately $34.8 million in 2012. The majority of these expenses, approximately $31.5 million, were associated with our licensor legacy clinical trials. This included approximately $5.1 million of duplicate costs from contracting a CRO to take over the management of our licensor legacy clinical trials. Outside other clinical development expenses of approximately $5.1 million were incurred during 2012, as we became responsible for expenses and services related to maintaining and managing the licensor legacy clinical trials. The license agreement contained a cap on the external costs associated with the licensor legacy clinical trials for which we are responsible. We reached this cost cap in the fourth quarter of 2012 and the above table reflects the outside services incurred by us net of the excess cost billed back to the licensor. Internal expenses, which include all employee-related costs such as payroll, benefits and travel, were approximately $4.8 million for regulatory affairs and quality assurance, approximately $3.7 million for clinical development, and approximately $0.3 million for internal chemical manufacturing for the year ended December 31, 2012. Employee stock-based compensation included in R&D expenses for the year ended December 31, 2012, was approximately $0.9 million compared to $38,000 in 2011 and increased as a result of the increase in the number of employees.

While expenditures on current and future clinical development programs, particularly our PB272 program, are expected to be substantial and to increase in 2014, they are subject to many uncertainties, including the results of our 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 R&D 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.


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Interest income:

For the year ended December 31, 2013, we recognized approximately $172,000 in interest income compared to approximately $98,000 and $4,000 of interest income for the years ended December 31, 2012 and 2011, respectively. The increase in interest income reflects excess cash invested in money market accounts, marketable securities and "high yield" savings accounts for a full year and cash invested from a public offering of our common stock completed in October 2012 (see Note 6 in the accompanying notes to consolidated financial statements).

Adjusted Statement of Operations:

The following tables present our operating results, as calculated in accordance the accounting principles generally accepted in the United States, or GAAP, as adjusted to remove the impact of employee stock-based compensation and the outside CRO/licensor services and outside clinical development costs associated with the licensor legacy clinical trials that we are in the process of completing. These non-GAAP financial measures are not, and should not be viewed as, substitutes for GAAP reporting measures. We believe these non-GAAP measures enhance understanding of our financial performance, are more indicative of our operational performance and facilitate a better comparison among fiscal periods.

For the year ended December 31, 2013, stock-based compensation represented approximately 13.7% of our loss from operations. This cost is related to our employee hiring practice and the fair market value of the stock option grant on the day granted. The major component of the stock-based compensation for 2012 was the valuation of an anti-dilutive warrant issued to Mr. Auerbach, our President and Chief Executive Officer. These non-GAAP financial measures are not, and should not be viewed as, substitutes for GAAP reporting measures. We believe these non-GAAP measures enhance understanding of our financial performance, are more indicative of our operational performance and facilitate a better comparison among fiscal periods. We believe the issuance of the anti-dilutive warrant was a onetime occurrence and the full value of the warrant has been recorded in our consolidated financial statements.


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The majority of the cost associated with the licensor legacy clinical trials during 2012 were related to external costs that we were responsible for but that were subject to a cap. Having reached the cap, the licensor became responsible for all external costs associated with the licensor legacy clinical trials going forward and we had only limited costs associated with our managing these trials during 2013 and expect to have limited cost through to completion of these studies.

           Reconciliation of GAAP and Non-GAAP Financial Information

                 (in thousands except share and per share data)




                                      GAAP                      Expense Adjustments
                                     Measure                                                           Non-GAAP
                                   (Reported)                                                           Measure
                                   Year Ended                                   Licensor              Year Ended
                                  December 31,          Stock-based              legacy              December 31,
                                      2013             compensation          clinical trials             2013
Operating expense:
General and administrative        $       9,787               (2,332 )      $              -         $       7,455
Research and development                 45,046               (5,188 )                   (275 )             39,583

Loss from operations                    (54,833 )              7,520                      275              (47,038 )

Other income (expense):
Interest income                             172                   -                        -                   172
Other expense                                 2                   -                        -                     2

Totals                                      174                   -                        -                   174

Net loss                          $     (54,659 )      $       7,520        $             275        $     (46,864 )

Net loss applicable to common
stock                             $     (54,659 )      $       7,520        $             275        $     (46,864 )

Net loss per common
share-basic and diluted           $       (1.90 )      $        0.26        $            0.01        $       (1.63 )

Weighted-average common
shares outstanding-basic and
diluted                              28,696,573           28,696,573               28,696,573           28,696,573



                                      GAAP                      Expense Adjustments
                                     Measure                                                           Non-GAAP
                                   (Reported)                                                           Measure
                                   Year Ended                                   Licensor              Year Ended
                                  December 31,          Stock-based              legacy              December 31,
                                      2012             compensation          clinical trials             2012
Operating expense:
General and administrative        $      24,814        $     (18,706 )      $              -         $       6,108
Research and development                 49,636                 (923 )                (37,892 )             10,821

Loss from operations                    (74,450 )             19,629                   37,892              (16,929 )

Other income (expense):
Interest income                              98                   -                        -                    98
Other expense                                -                    -                        -                    -

Totals                                       98                   -                        -                    98

Net loss                          $     (74,352 )      $      19,629        $          37,892        $     (16,831 )

Net loss applicable to common
stock                             $     (74,352 )      $      19,629        $          37,892        $     (16,831 )

Net loss per common
share-basic and diluted           $       (3.42 )      $        0.90        $            1.74        $       (0.77 )

Weighted-average common
shares outstanding-basic and
diluted                              21,725,986           21,725,986               21,725,986           21,725,986


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