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TSRO > SEC Filings for TSRO > Form 10-K on 14-Mar-2014All Recent SEC Filings

Show all filings for TESARO, INC.

Form 10-K for TESARO, INC.


14-Mar-2014

Annual Report


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

Overview

We are an oncology-focused biopharmaceutical company dedicated to improving the lives of cancer patients. We were founded in March 2010 by former executives of MGI PHARMA, Inc., or MGI PHARMA, an oncology and acute-care focused biopharmaceutical company. We have in-licensed and are currently developing three oncology-related product candidates, rolapitant, niraparib and TSR-011, and in March 2014 we initiated our immuno-oncology platform strategy by entering into a collaboration and exclusive license agreement with AnaptysBio, Inc., or AnaptysBio, for the discovery and development of antibodies for immuno-oncology targets.

Rolapitant is a potent and long-acting neurokinin-1, or NK-1, receptor antagonist currently in Phase 3 (oral formulation) and Phase 1 (intravenous, or IV formulation) clinical trials for the prevention of chemotherapy induced nausea and vomiting, or CINV. In December 2013, we announced top-line results for two Phase 3 trials of rolapitant. The primary endpoint was successfully achieved in each trial, and preparations in support of our anticipated submission to the U.S. Food and Drug Administration, or FDA, in mid-2014 of a new drug application, or NDA, for oral rolapitant are ongoing.

Niraparib, formerly known as MK-4827, is an orally active and potent poly (ADP-ribose) polymerase, or PARP, inhibitor. In July 2013, we dosed the first patient in a Phase 3 clinical trial evaluating niraparib for the treatment of patients with high grade serous, platinum sensitive, relapsed ovarian cancer. We expect to dose the first patient in a Phase 3 clinical trial evaluating niraparib in breast cancer patients with germline BRCA mutations in the first quarter of 2014. We also are collaborating with the Sarcoma Alliance for Research through Collaboration, or SARC, to evaluate niraparib in combination with temozolomide for the treatment of Ewing's sarcoma. We may also evaluate niraparib for the treatment of gastric, lung, and prostate cancer.

TSR-011 is an orally available targeted anti-cancer agent which is a potent inhibitor of both anaplastic lymphoma kinase, or ALK, and tropomyosin-related kinase, or TRK, currently in a Phase 1/2a dose escalation clinical trial in cancer patients. We have identified the maximum tolerated dose of TSR-011 and are now evaluating fractionated 60 milligram (mg) doses of TSR-011 in patients with ALK or TRK expression, including those with ALK-positive, or ALK+, and TRK-positive, or TRK+, non-small cell lung cancer, or NSCLC, who have not been previously treated with ALK inhibitors, those with ALK+ NSCLC who have progressed during treatment with other ALK inhibitors, and in those patients with other tumor types driven by ALK or TRK.

In March 2014, we entered into a collaboration and exclusive license agreement with AnaptysBio, a privately-held therapeutic antibody company. Under the terms of this agreement, we obtained an exclusive, royalty-bearing, sublicenseable worldwide license to research, develop, manufacture, market and sell products incorporating certain specified immunotherapy antibodies developed using AnaptysBio's proprietary technology for the discovery, generation and optimization of antibodies. Specifically, we received exclusive rights to monospecific antibody product candidates targeting TIM-3, LAG-3 and PD-1 and dual-reactive antibody product candidates targeting PD-1/TIM-3 and PD-1/LAG-3.
Under the agreement, AnaptysBio is responsible for performing initial discovery and development of therapeutic antibodies against immune checkpoint proteins, with the goal of generating immunotherapy antibodies for use in the treatment of cancer. We are responsible for all subsequent preclinical, clinical, regulatory, manufacturing and other activities necessary to develop and commercialize antibodies selected under each of three development programs, and we are obligated to use commercially reasonable efforts to research, develop or commercialize at least one product under each development program. We believe this strategic platform will enable us to initiate clinical development in new tumor indications, not addressed with our current product candidates, and to study combination approaches in the clinic, both with our existing product candidates and with new candidates we either in-license or access through collaborative transactions with others. Further, we believe antibody candidates from these programs may potentially enter clinical trials over the next 18 to 24 months. For example, we anticipate beginning clinical trials using TSR-042, the lead anti-PD-1 antibody that we have in-licensed as part of the agreement, in mid-2015.

Development Stage Operations. We commenced business operations in May 2010. Our operations to date have been limited to organizing and staffing our company, business planning, raising capital, acquiring and developing product candidates, identifying potential product candidates and undertaking preclinical studies and clinical trials of our product candidates. To date, we have not generated any revenues and have financed our operations with net proceeds from private placements of our convertible preferred stock and public offerings of our common stock. On June 19, 2012, we effected a 1 for 3.50 reverse stock split of our common stock. Our historical share and per share information has been retroactively adjusted to give effect to this reverse stock split.

As of December 31, 2013, we had a deficit accumulated during the development stage of $179.5 million. Our net losses were $92.4 million, $61.8 million, $16.4 million and $9.0 million, respectively, for the years ended December 31, 2013, 2012, and 2011, and the period from March 26, 2010 (inception) to December 31, 2010. We expect to continue to incur significant expenses and operating losses for the foreseeable future. Overall, we expect operating expenses to increase over time, primarily depending on the timing and magnitude of clinical trial and other development activities under our current development programs, such as niraparib and TSR-011, the up-front cash payment, milestones and other costs incurred related to the immuno-oncology discovery and development activities occurring under our collaboration with AnaptysBio, and potential future in-licensed development programs, and expected decreases in clinical trial and other development activities under our rolapitant program. If we obtain regulatory approval for any of our product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. Furthermore, we expect to incur increasing general and administrative costs associated with our anticipated growth and continuing operation as a public company. Accordingly, we will seek to fund our operations through additional public or private equity or debt offerings and may seek additional capital through arrangements with strategic partners or from other sources. Adequate additional financing may not be available to us on acceptable terms, or at all. Our failure to raise capital as and when needed would have a negative impact on our financial


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condition and our ability to pursue our business strategy. We will need to generate significant revenues to achieve profitability, and we may never do so.

Rolapitant. In December 2010, we entered into a license agreement with OPKO Health, Inc., or OPKO, to obtain exclusive worldwide rights to research, develop, manufacture, market and sell rolapitant. The license agreement also extended to an additional, backup compound, SCH900978, to which we have the same rights and obligations as rolapitant, but which we are not currently advancing. In consideration for this license, we paid OPKO $6.0 million upon signing the agreement and issued 1,500,000 shares of our Series O convertible preferred stock. At the time of this transaction, the fair value of the Series O convertible preferred stock was determined to be $0.6 million. We are also required to make development milestone payments to OPKO of up to an aggregate of $30.0 million if specified regulatory and initial commercial sales milestones are achieved. Preparations in support of our anticipated submission to the FDA in mid-2014 of an NDA for oral rolapitant are currently ongoing; upon acceptance of this NDA by the FDA, we would owe OPKO a milestone payment of $5.0 million. In addition, we are required to make additional milestone payments to OPKO of up to an aggregate of $85.0 million if specified levels of annual net sales of rolapitant are achieved. If commercial sales of rolapitant commence, we are required to pay OPKO tiered royalties on the amount of annual net sales achieved in the United States and Europe at percentage rates that range from the low teens to the low twenties, which we expect will result in an effective royalty rate in the low teens. The royalty rate on annual net sales outside of the United States and Europe is slightly above the single digits. We will pay royalties on rolapitant until the later of the date that all of the patent rights licensed from OPKO and covering rolapitant expire, are invalidated or are not enforceable and twelve years from the first commercial sale of the product, in each case, on a country-by-country and product-by-product basis. If we elect to develop and commercialize rolapitant in Japan through a third-party licensee, we will share equally with OPKO all amounts received by us in connection with such activities under our agreement with such third party, subject to certain exceptions and deductions. OPKO also retains an option to become the exclusive distributor of such products in Latin America, provided that OPKO exercises that option within a defined period following specified regulatory approvals in the United States.

We are responsible for all preclinical, clinical, regulatory and other activities necessary to develop and commercialize rolapitant. There were no ongoing clinical trials for rolapitant or SCH900978 at the time of our acquisition of these rights.

Niraparib. In May 2012, we entered into a license agreement with Merck Sharp & Dohme Corp., a subsidiary of Merck & Co., Inc., or Merck, under which we obtained exclusive, worldwide rights to certain patents and non-exclusive rights to certain Merck know-how, to research, develop, manufacture, market and sell niraparib and a backup compound, MK-2512, for all therapeutic and prophylactic uses in humans. We are not currently advancing MK-2512. Under the terms of the license agreement, we made an up-front payment to Merck of $7.0 million in June 2012, and upon dosing of the first patient in our Phase 3 ovarian cancer clinical trial in July 2013, we made a milestone payment of $1.9 million. We are required to make total milestone payments to Merck of up to $57.0 million in development and regulatory milestones for the first indication, up to $29.5 million in development and regulatory milestones for each successive indication, and up to $87.5 million in one-time sales milestones based on the achievement of annual sales objectives. If commercial sales of niraparib commence, we will pay Merck tiered royalties at percentage rates in the low teens based on worldwide annual net sales, until the later of the expiration of the last patent licensed from Merck covering or claiming niraparib, or the tenth anniversary of the first commercial sale of niraparib, in either case, on a country-by-country basis. Upon dosing of the first patient in our Phase 3 breast cancer clinical trial, which we expect to occur in the first quarter of 2014, we would owe a milestone payment of $1.0 million to Merck.

We are responsible for all clinical, regulatory and other activities necessary to develop and commercialize niraparib. At the time of the license transaction, niraparib had completed a Phase 1 clinical trial in cancer patients as a monotherapy. We are evaluating niraparib for the treatment of patients with high grade serous, platinum sensitive, relapsed ovarian cancer in a Phase 3 clinical study, which we initiated in July 2013. We also plan to evaluate niraparib in breast cancer patients with germline BRCA mutations in a Phase 3 clinical trial, which we expect to initiate in the first quarter of 2014. We also are collaborating with SARC to evaluate niraparib in combination with temozolomide for the treatment of Ewing's sarcoma. We may also evaluate niraparib for the treatment of gastric, lung, and prostate cancer. None of the assets to which we acquired rights have alternative future uses, nor have they reached a stage of technological feasibility. We have accounted for this transaction as an asset acquisition because we did not acquire any processes or activities that would constitute a "business" in addition to the license. Accordingly, we recorded the entire purchase price of $7.0 million as acquired in-process research and development expense.


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TSR-011. In March 2011, we entered into a license agreement with Amgen, Inc., or Amgen, to obtain exclusive worldwide rights to research, develop, manufacture, market and sell certain licensed ALK inhibitor compounds, including TSR-011. Under the terms of the license agreement, we made an up-front payment to Amgen of $0.5 million, and upon dosing of the first patient in our Phase 1/2a clinical trial of TSR-011 in October 2012, we made a milestone payment of $1.0 million. We are required to make total milestone payments to Amgen of up to an aggregate of $138.0 million if specified clinical development, regulatory, initial commercialization and annual net product sales milestones are achieved. If commercial sales of a product commence, we will pay Amgen tiered royalties at percentage rates ranging from the mid-single digits to slightly above the single digits based on cumulative worldwide net sales until the later of the last patent licensed from Amgen covering the product, the loss of regulatory exclusivity for the product, or the tenth anniversary of the first commercial sale of the product, in all cases, on a country-by-country and product-by-product basis.

We are responsible for all preclinical, clinical, regulatory and other activities necessary to develop and commercialize the licensed product candidates. At the time of the license transaction, TSR-011 was a preclinical compound. We are currently conducting a Phase 1/2a dose escalation clinical trial in cancer patients. We accounted for this transaction as an asset acquisition because we did not acquire any processes or activities that would constitute a "business" in addition to the license. We recorded the entire purchase price of $0.5 million as acquired in-process research and development expense.

Immuno-Oncology Platform. In March 2014, we entered into a collaboration and exclusive license agreement with AnaptysBio, a privately-held therapeutic antibody company. Under the terms of this agreement, we obtained an exclusive, royalty-bearing, sublicenseable worldwide license to research, develop, manufacture, market and sell products based on AnaptysBio's proprietary technology for the discovery, generation and optimization of certain specified immunotherapy antibodies. Under the agreement, AnaptysBio is responsible for performing initial discovery and development of therapeutic antibodies with the goal of generating immunotherapy antibodies for use in the treatment of cancer. We are responsible for all subsequent preclinical, clinical, regulatory, manufacturing and other activities necessary to develop and commercialize antibodies selected under each of three development programs, and we are obligated to use commercially reasonable efforts to research, develop or commercialize at least one product under each development program.

Under the terms of this agreement, we are obligated to make an up-front, non-creditable and non-refundable cash payment of $17.0 million to AnaptysBio. We are also required to reimburse AnaptysBio on a quarterly basis for specified costs incurred by AnaptysBio in its initial discovery and development activities covered by the agreement. For each of the three development programs, we will also be required to make milestone payments to AnaptysBio of up to $18.0 million if certain research and development milestone events are achieved, and up to an additional $90.0 million of milestone payments if certain U.S. and non-U.S. regulatory submissions and approvals occur in initial and subsequent indications. We will also be required to pay AnaptysBio tiered single-digit royalties, on a product-by-product basis, on the amount of worldwide annual net sales achieved, and additional commercial milestone payments if specified levels of annual net sales of a product are attained.

Private Placements of Securities and Public Offerings of Common Stock. As of December 31, 2013, our principal source of liquidity was cash and cash equivalents, which totaled $130.3 million. Since our inception on March 26, 2010, we have funded our operations primarily through the private placement of our equity securities, an initial public offering of our common stock, and follow-on offerings of our common stock. As of December 31, 2013, we had received $120.4 million in net proceeds from the issuance of convertible preferred stock. On June 28, 2012, we completed our initial public offering through which we sold 6,000,000 shares of common stock at a price of $13.50 per share. The shares began trading on the NASDAQ Global Select Market on June 29, 2012, and the transaction closed on July 3, 2012. Immediately prior to the closing of the offering, all outstanding shares of our convertible preferred stock converted into 19,410,490 shares of common stock. On July 23, 2012, the underwriters purchased an additional 430,183 shares by exercising a portion of the over-allotment option granted to them in connection with the initial public offering. As a result of the closing of the initial public offering and subsequent exercise of the over-allotment option, we received aggregate net proceeds of approximately $78.0 million, which is net of underwriting discounts and commissions and offering expenses. In March 2013, we sold 5,428,000 shares of common stock in an underwritten public offering pursuant to a registration statement on Form S-1, at a price of $18.00 per share, resulting in net proceeds of approximately $91.3 million, which is net of underwriting discounts and commissions and offering expenses. In February 2014, we sold 3,200,000 shares of common stock in an underwritten public offering pursuant to a registration statement on Form S-3, at a price of $31.50 per share, resulting in net proceeds of approximately $94.1 million, which is net of underwriting discounts and commissions and estimated offering expenses. The proceeds of our February 2014 offering are not reflected in the financial results reported in this Annual Report on Form 10-K.

Financial Operations Overview

Revenue

To date, we have not generated any revenues. Our ability to generate revenue and become profitable depends upon our ability to successfully commercialize products, including any of our product candidates that we have in-licensed (rolapitant, niraparib, TSR-011, and products potentially resulting from our immuno-oncology collaboration with AnaptysBio) or other products or product candidates that we may in-license or acquire in the future. We expect to incur losses for the foreseeable future, and we expect these losses to increase as we continue our development of, and seek regulatory approvals for, our product candidates, incur additional costs under our collaboration with AnaptysBio and begin to commercialize any approved products. Because of the numerous risks and uncertainties associated with product development, we are unable to predict the timing or amount of increased expenses, or when or if we will be able to achieve or maintain profitability. Even if we are able to generate revenues from the sale of our products, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce our operations.

Research and Development Expenses

Research and development expenses consist primarily of costs incurred for the development of our product candidates, which include:


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license fees related to the acquisition of in-licensed products, which are reported on our statements of operations as acquired in-process research and development;

employee-related expenses, including salaries, bonuses, benefits, travel and stock-based compensation expense;

expenses incurred under agreements with contract research organizations, or CROs, investigative sites and research consortia in connection with the conduct of clinical trials and preclinical studies and related services, such as administrative, data management and biostatistics services;

the cost of acquiring, developing and manufacturing active pharmaceutical ingredients, clinical trial materials and other research and development materials;

milestone payments and expenses relating to immunotherapeutic discovery and development activities performed by us or our partner under our collaboration and exclusive license agreement with AnaptysBio;

facilities, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, insurance and other supplies; and

costs associated with other preclinical activities and regulatory operations.

Research and development costs are expensed as incurred. License fees and milestone payments related to in-licensed products and technology are expensed if it is determined that they have no alternative future use. Costs for certain development activities, such as clinical trials, are recognized based on an evaluation of the progress to completion of specific tasks using data such as patient enrollment, clinical site activations or information provided to us by our vendors.

Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect that our total research and development expenses will increase in 2014 versus the prior year, depending upon the progress of our clinical development programs as well as the up-front cash payment, milestone payments and other costs associated with our collaboration with AnaptysBio. We expect overall costs associated with our rolapitant development program to decrease going forward, principally due to the reduction of activities as we progress toward the end of our Phase 3 clinical trials. However, this decrease will be offset to an extent by increased development activities with respect to our rolapitant IV program. In addition, we expect an increase in costs associated with our niraparib development program, for which we enrolled the first patient in our Phase 3 clinical trial in patients with ovarian cancer in July 2013 and for which we expect to dose the first patient in our Phase 3 clinical trial in breast cancer patients with germline BRCA mutations in the first quarter of 2014. We expect costs associated with our TSR-011 development program to increase as we continue to progress through clinical testing. Finally, we expect to incur milestone and other discovery and development related expenses under our March 2014 collaboration and exclusive license agreement with AnaptysBio, including the up-front cash payment, which will further contribute to higher research and development expenses in 2014.

We cannot determine with certainty the duration and completion costs of the current or future clinical trials of our product candidates or if, when, or to what extent we will generate revenues from the commercialization and sale of any of our product candidates that obtain regulatory approval. We may never succeed in achieving regulatory approval for any of our product candidates. The duration, costs and timing of clinical trials and development of our product candidates will depend on a variety of factors, including the uncertainties of future clinical and preclinical studies, uncertainties in clinical trial enrollment rates and significant and changing government regulation. In addition, the probability of success for each product candidate will depend on numerous factors, including competition, manufacturing capability and commercial viability. We will determine which programs to pursue and how much to fund each program in response to the scientific and clinical success of each product candidate, as well as an assessment of each product candidate's commercial potential.

The following table presents research and development expenses and acquired in-process research and development expenses on a program-specific basis for our in-licensed product candidates through December 31, 2013 (in thousands). Certain costs, such as personnel-related costs, depreciation and stock-based compensation, are not allocated to a program, as they are deployed across multiple projects under development and, as such, are separately classified as 'Personnel and other expenses' in the table below.


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                                                                                The Period From
                                                                                 March 26, 2010
                                          Years Ended December 31,               (Inception) to
                                     2011           2012           2013        December 31, 2013
Rolapitant Expenses
Acquired in-process research
and development                  $          -    $         -    $         -    $            6,630
Research and development                9,041         36,524         42,685                88,264
Rolapitant total                        9,041         36,524         42,685                94,894

Niraparib Expenses
Acquired in-process research
and development                             -          7,000          1,940                 8,940
Research and development                    -            679         15,742                16,421
Niraparib total                             -          7,679         17,682                25,361

TSR-011 Expenses
Acquired in-process research
and development                           500          1,000              -                 1,500
Research and development                  688          3,066          3,524                 7,278
TSR-011 total                           1,188          4,066          3,524                 8,778

Personnel and Other Expenses            2,039          6,931         13,774                22,776

Total                            $     12,268    $    55,200    $    77,665    $          151,809

General and Administrative Expenses

General and administrative expenses consist principally of salaries and related costs for personnel, including stock-based compensation and travel expenses, in executive and other administrative functions. Other general and administrative expenses include facility related costs, communication expenses and professional fees for legal, patent review, consulting and accounting services.

We anticipate that our general and administrative expenses will increase in the future in support of continued research and development activities, potential commercialization of our product candidates and continued costs of operating as a public company. These increases will likely include increased costs related to the hiring of additional personnel and payments to outside consultants, lawyers and accountants, among other expenses. Additionally, if and when we . . .

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