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GEVA > SEC Filings for GEVA > Form 10-Q on 1-May-2014All Recent SEC Filings

Show all filings for SYNAGEVA BIOPHARMA CORP

Form 10-Q for SYNAGEVA BIOPHARMA CORP


1-May-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains "forward-looking statements" as defined under federal securities laws. Many of these statements can be identified by the use of words such as "believes," "expects," "anticipates," "plans," "may," "will," "projects," "continues," "estimates," "potential," "opportunity" or the negative versions of these terms and other similar expressions. Our actual results or experience could differ significantly from the forward-looking statements. Factors that could cause or contribute to these differences include those discussed in "Risk Factors," in Part II, Item 1A of this Quarterly Report on Form 10-Q. You should carefully consider that information before you make an investment decision.

We cannot guarantee any future results, levels of activity, performance or achievements. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in this Quarterly Report on Form 10-Q as anticipated, believed, estimated or expected. The forward-looking statements contained in this Quarterly Report on Form 10-Q represent our estimates as of the date of this Quarterly Report on Form 10-Q (unless another date is indicated) and should not be relied upon as representing our expectations as of any other date. While we may elect to update these forward-looking statements, we specifically disclaim any obligation to do so.

The following discussion of our financial condition and results of operations should be read in conjunction with our Financial Statements and the related Notes thereto included elsewhere in this Quarterly Report on Form 10-Q.

Our Business

We are a biopharmaceutical company focused on the discovery, development, and commercialization of therapeutic products for patients with rare diseases. Our most advanced pipeline programs are enzyme replacement therapies for lysosomal storage diseases (LSDs) and we have additional protein therapeutic programs for other rare diseases, which are currently at different stages of preclinical development. These programs are selected based on scientific rationale, unmet medical need within the patient population, potential to substantially impact disease course, and strategic alignment with our corporate and commercial efforts. Our lead program, sebelipase alfa for lysosomal acid lipase deficiency (LAL Deficiency), is in global Phase 3 clinical trials.

Sebelipase Alfa for LAL Deficiency

LAL Deficiency is a rare autosomal recessive LSD caused by a marked decrease in LAL enzyme activity. LAL Deficiency presenting in children and adults, historically called Cholesteryl Ester Storage Disease (CESD), is an underappreciated cause of cirrhosis and accelerated atherosclerosis. These complications are due to the buildup of fatty material in the liver, blood vessel walls and other tissues as a result of the decreased LAL enzyme activity. Infants presenting with LAL Deficiency, historically called Wolman disease, show very rapid progression, with death usually in the first six months of life. Affected infants develop growth failure, severe liver complications, and malabsorption.

Sebelipase alfa is a recombinant form of the human LAL enzyme being developed by us as an enzyme replacement therapy for LAL Deficiency. We are evaluating sebelipase alfa in global Phase 3 clinical trials in infants, children and adults with LAL Deficiency. Sebelipase alfa has been granted orphan designation by the U.S. Food and Drug Administration (FDA), the European Medicines Agency (EMA), and the Japanese Ministry of Health, Labour and Welfare. Additionally, sebelipase alfa received fast track designation by the FDA, and Breakthrough Therapy designation by the FDA for LAL Deficiency presenting in infants.

We are pursuing a development strategy for sebelipase alfa to assess safety and tolerability in a broad population of patients, including infants, children, and adults, and to demonstrate efficacy, safety and tolerability of sebelipase alfa in the treatment of LAL Deficiency. We intend to submit a Biologic License Application (BLA) and a New Animal Drug Application (NADA) to the FDA and a Marketing Authorization Application (MAA) to the European Medicines Agency (EMA), as well as submit marketing applications in other regions of the world if clinical trials are successful.

The current clinical trials for sebelipase alfa are:

Phase 3 Trial of Sebelipase Alfa in Children and Adults with LAL Deficiency. In December 2013, we announced the completion of the target enrollment in our global, Phase 3 ARISE clinical trial with sebelipase alfa for LAL Deficiency. ARISE is a randomized, double-blind, placebo-controlled study of sebelipase alfa in children and adults with LAL Deficiency. We plan to report top-line results from this study during the third quarter of 2014, and plan to submit a BLA to the FDA and MAA to the EMA for sebelipase alfa for the treatment of LAL Deficiency by the end of the first quarter of 2015.


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Phase 1/2 Open Label Dose Escalation Study in Adult Patients with Liver Dysfunction Due to LAL Deficiency; and Phase 1/2 Extension Study to Evaluate the Long-Term Safety, Tolerability, and Efficacy of Sebelipase Alfa in Adult Subjects With LAL Deficiency. In addition to the ARISE trial, we conducted a Phase 1/2 trial and have an ongoing extension study in adults with LAL Deficiency.

Phase 2/3 Open Label Dose Escalation Study in Children with Growth Failure Due to LAL Deficiency. We are also conducting a Phase 2/3 open-label trial with sebelipase alfa in infants with LAL Deficiency and in January 2014 announced that we met the target enrollment for the study. Initial results were presented at the LDN WORLD Symposium in February 2014.

In addition to the studies noted above, we are planning to enroll patients in two other open label clinical trials, one targeting infants with LAL Deficiency and another for a broader patient population with LAL Deficiency, including children and adults. Additional studies may be initiated in order to support requirements for long-term safety and to provide patients with ongoing access to the drug until we receive BLA approval of sebelipase alfa, if ever.

SBC-103 for MPS IIIB

Our SBC-103 program is another enzyme replacement therapy for an LSD known as MPS IIIB. The mucopolysaccharidoses (MPS) consist of a group of rare LSDs caused by a deficiency of enzymes needed to break down complex sugars called glycosaminoglycans. The MPS III syndromes (also known as Sanfilippo syndromes) share complications with other MPS diseases but represent a clinically distinct subset with marked central nervous system degeneration. MPS IIIB is caused by a marked decrease in alpha-N-acetyl-glucosaminidase (NAGLU) enzyme activity which leads to the buildup of abnormal amounts of heparan sulfate (HS) in the brain and other organs. The accumulation of abnormal HS, particularly in the central nervous system, leads to severe cognitive decline, behavioral problems, speech loss, increasing loss of mobility, and premature death.

SBC-103 is a recombinant form of the human NAGLU enzyme which we are developing as an enzyme replacement therapy for MPS IIIB. SBC-103 has been granted orphan designation by the FDA and the EMA. We currently plan to initiate clinical trial sites for SBC-103 in patients with MPS IIIB in mid-2014.

Using various dosing approaches, SBC-103 reduced HS substrate storage in the brain, liver and kidney in an MPS IIIB animal model. At the LDN WORLD Symposium in February 2014, we presented data from a preclinical study with SBC-103 in a mouse model of MPS IIIB. Data from this study confirmed that SBC-103 delivered by intravenous and intrathecal administration reduced abnormal heparan sulfate levels in the brain of NAGLU-deficient mice. In addition, intravenously administered SBC-103 increased NAGLU enzyme activity levels in the brain of a MPS IIIB mouse model and increased cerebrospinal fluid NAGLU enzyme activity in non-human primates in preclinical studies. These findings suggest that SBC-103 may have properties that allow it to cross the normal blood-brain barrier.

Additional data at the meeting supporting this observation concerned an investigation of SBC-103 in an in vitro model of the blood-brain barrier. In this study, SBC-103 was effectively transported from the apical side (representing the blood) to the opposite basolateral side (representing the brain tissue). The addition of mannose-6-phospate inhibited directional transport by more than 90%, suggesting that the observed transport of SBC-103 was mediated by the mannose-6-phosphate receptor. These data suggest that the previously reported effects of intravenous SBC-103 on central nervous system substrate accumulation in an MPS IIIB disease model may be mediated by specific cellular transport across the blood-brain barrier.

Additional Pipeline Programs

In addition to sebelipase alfa and SBC-103, we are progressing protein therapeutic programs for rare diseases, which are currently at different stages of development. These protein therapeutic programs are selected based on scientific rationale, unmet medical need within the patient population, ability to make a meaningful impact on the lives of patients, a clinical endpoint that can be achieved with a small number of patients, a definable path to registration, and the attractiveness of the commercial opportunity.


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Financial Operations Overview

General

Our future operating results will depend on the progress of drug candidates currently in our research and development pipeline. The results of our operations will vary significantly from year-to-year and quarter-to-quarter and will depend largely on, among other factors, the cost and outcome of any preclinical development or clinical trials then being conducted and efforts for registration and commercialization of our products.

A discussion of certain risks and uncertainties that could affect our capital requirements and ability to raise additional funds is set forth under the section entitled "Risk Factors" in this Quarterly Report on Form 10-Q.

Revenue

Royalty Revenue

Royalty revenues are recognized in the period earned, based on contract terms when reported sales are reliably measurable and collectability is reasonably assured. Royalty revenue relates to amounts earned from the sale of FUZEON by Hoffman-La Roche, Inc. (Roche).

Collaboration and License Revenue

Collaboration and license revenue relates to revenue from the licensing of our intellectual property. In 2013 and 2012, revenues were primarily driven by our collaboration agreements with Mitsubishi Tanabe Corporation (Mitsubishi Tanabe) whereby we utilized our proprietary expression technology in two development programs, in exchange for upfront license payments and funded development. Under the first agreement, which was entered into in August 2011, we received an upfront license payment of $3.0 million and on-going funding of development costs. Additionally, we entered into a second agreement in March 2012, where we received an upfront license payment of $9.0 million and on-going funding of development costs. Both programs were completed in the fourth quarter of 2013. We recognized revenue under a proportional performance method.

Research and Development

We expense research and development costs as incurred. Research and development expense consists of costs incurred to discover, research and develop drug candidates, including personnel and facility-related expenses, outside contracted services including clinical trial costs, manufacturing and process development costs, research costs, medical affairs and regulatory costs outside consulting services, research license fees, depreciation and amortization of lab facilities, lab supplies and other external costs. We accrue costs for clinical trial activities based upon estimates of the services received and related expenses incurred that have yet to be invoiced by the vendors that perform the services. Research and development expense includes any costs associated with generating collaboration or grant revenue.

Selling, General and Administrative

Selling, general and administrative expense consists primarily of salaries, stock-based compensation expense and other related costs for personnel in commercial, executive, business development, finance, human resource, legal, information technology, and support personnel functions. Other costs include facility costs not otherwise included in research and development expense, insurance, and professional fees for legal, accounting and commercial services.

Amortization of Developed Technology

We provide for the cost of amortization of developed technology, computed using an accelerated method based on the undiscounted cash flows received from the FUZEON royalty stream, in proportion to the estimated total undiscounted cash flows.

Interest Income, net

Interest income relates to interest earned on our cash equivalent and short-term investment balances.

Provision for Income Taxes

Provision for income taxes is comprised of the taxes currently payable as a result of foreign operations. We have certain international subsidiaries that are profitable on a stand-alone basis. Accordingly, a tax provision is reflected for the taxes incurred in such jurisdictions based on intercompany service arrangements.


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Results of Operations

Three Months Ended March 31, 2014 and 2013

Revenues

The following table presents total revenue for the three months ended March 31,
2014 and 2013, respectively (in thousands):



                                           Three Months
                                         Ended March 31,
                                         2014        2013       $ Change       % Change
   Royalty revenue                     $  1,447     $ 1,705     $    (258 )          (15 )%
   Collaboration and license revenue        139       3,413        (3,274 )          (96 )

   Total revenue                       $  1,586     $ 5,118     $  (3,532 )          (69 )%

Total revenues decreased by approximately $3.5 million for the three months ended March 31, 2014, as compared to the comparable period of the prior year, primarily as a result of decreased collaboration revenue. Collaboration and license revenue was driven by the first and second Mitsubishi Tanabe programs in the prior year. These collaboration programs were completed in the fourth quarter of 2013 and as a result, collaboration and licensing revenue was lower for the three months ended March 31, 2014. For the three months ended March 31, 2013, we recognized $0.5 million and $2.9 million related to the first and second Mitsubishi Tanabe programs, respectively. In addition, royalty revenue decreased $0.3 million to $1.4 million in the three months ended March 31, 2014, as compared to the prior year period.

We expect license and collaboration revenue to continue to decrease in 2014 due to the completion of the Mitsubishi Tanabe programs in 2013. In addition, we estimate that royalty revenue in 2014 will be lower than 2013. FUZEON royalty revenues are unpredictable, as we are not marketing the product and inconsistent sales in certain regions can cause period to period variability. Prior year royalty revenues benefited from a higher than usual second quarter royalty, which contributed favorably to fiscal 2013 royalty revenues.

Research and Development Expenses

Research and development expenses for the three months ended March 31, 2014 and
2013 are summarized as follows (in thousands):



                                                   Three Months Ended
                                                        March 31,
                                                   2014            2013         $ Change      % Change
Compensation and benefits-related               $    5,576       $  3,738       $   1,838            49 %
Clinical trials and manufacturing                   14,069          6,010           8,059           134
Other development related external services          4,117          1,497           2,620           175
Facilities and related                               2,639          1,429           1,210            85
Stock-based compensation expense                     1,467            664             803           121

Total research and development expense          $   27,868       $ 13,338       $  14,530           109 %

Research and development expense increased by approximately $14.5 million, or 109%, to $27.9 million for the three months ended March 31, 2014 as compared to $13.3 million for the prior year. The increase in total research and development expense is due to increased clinical trial costs, external manufacturing fees, toxicology studies and other development related external services associated with on-going development of sebelipase alfa, SBC-103 and our pipeline programs, as well as higher compensation expense from hiring additional staff to move our programs forward. Also contributing to the period-over-period increase in research and development expense was higher facilities and other expenses of $1.2 million. Higher facilities expenses primarily relate to increased depreciation expense related to manufacturing and lab facilities fixed asset additions, as well as higher costs to operate our facilities. For the three months ended March 31, 2014, research and development expense includes $1.5 million of stock-based compensation expense, compared to $0.7 million in the prior year. We expect research and development expense to continue to increase as development activities for sebelipase alfa, SBC-103 and our other pipeline programs continue.


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Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three months ended
March 31, 2014 and 2013 are summarized as follows (in thousands):



                                                   Three Months
                                                 Ended March 31,
                                                2014          2013          $ Change        % Change
Compensation and benefits-related             $  3,762       $ 2,478       $    1,284              52 %
External and professional services               3,894         2,010            1,884              94
Facilities related and other                       434           114              320             281
Stock-based compensation expense                 1,714         1,052              662              63

Total selling, general and administrative
expense                                       $  9,804       $ 5,654       $    4,150              73 %

Selling, general and administrative expense increased by approximately $4.2 million to $9.8 million for the year ended December 31, 2013 as compared to $5.7 million for the prior year. The increase was primarily due to higher compensation-related expenses and external service costs. Compensation related costs, including stock-based compensation, increased $1.9 million as we continued to expand our resources to support our international organization and commercial preparations. External service costs contributed $1.9 million to the period-over-period increase in expense and were primarily due to increased consulting, accounting, patent and external commercial related costs. We expect selling, general and administrative expense to continue to increase as we continue commercial preparations and support expanded research operations.

Amortization of Developed Technology

Costs recognized for the amortization of developed technology for the three months ended March 31, 2014 and 2013 are summarized as follows (in thousands):

Three Months Ended March 31, 2014 2013 $ Change % Change Amortization of developed technology $ 390 $ 699 $ (309 ) (44 )%

We recognized $0.4 million of amortization related to the developed technology associated with the FUZEON royalty stream in the three months ended March 31, 2014, as compared to $0.7 million in the prior year period. Amortization of developed technology is computed using an accelerated method based on the undiscounted actual cash flows received from the FUZEON royalty stream, in proportion to the estimated total undiscounted cash flows from the asset. In conjunction with expected cash flows, our amortization model assumed a larger proportion of expense in the periods immediately following the acquisition of the FUZEON royalty stream, thus the period-over-period decrease.

Interest Income, Net

Three
Months
Ended
March 31,
2014 2013 $ Change % Change
Interest income, net $ 75 $ 89 $ (14 ) (16 )%

Interest income primarily relates to interest earned on our short-term investment balance. Our investments include U.S. treasury securities and money market funds, with a weighted average maturity of one year or less.

Provision for income taxes

Three Months Ended March 31, 2014 2013 $ Change % Change Provision for income taxes $ 18 $ - $ 18 - %

Our provision for income taxes is comprised of the taxes currently payable as a result of foreign operations, and totaled less than $0.1 million for the three months ended March 31, 2014. As we are in a full valuation allowance, we do recognize any benefit from U.S. operating losses in our income statement or balance sheet.


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Liquidity and Capital Resources

Sources of Liquidity

We have financed our operations to date primarily from the proceeds of the sale of stock, and, to a lesser extent, license and royalty fees, upfront cash payments and research and development funding from collaborators, government grants and licensors. We intend to use our cash, cash equivalents and investments for general corporate purposes, which may include expanding our infrastructure to benefit sebelipase alfa and our platform, commercial preparations, supporting our pre-clinical and clinical studies, supporting the advancement of SBC-103, accelerating our early-stage programs, leveraging our platform technology to initiate multiple new pipeline programs and acquiring new technologies or businesses that are complementary to our current technologies and business focus.

On March 5, 2014, the Company announced the closing of a $211.5 million underwritten public offering of 2.0 million shares of common stock at a price per share of $105.75. The Company received net proceeds of approximately $200.9 million from this offering. In addition to this financing, the Company received aggregate net proceeds of approximately $473.9 million from public equity offerings in fiscal 2013 and 2012.

We do not expect to generate significant revenue from the direct sale of products currently in development for years, if ever. We receive royalties from the sale of FUZEON by Roche, which we expect to decrease over time. A significant portion of our revenues for the foreseeable future will be quarterly royalty payments from Roche based on sales of FUZEON and up-front license payments and funded research and development that we may receive under existing or new collaboration agreements, if any.

As of March 31, 2014, our principal sources of liquidity consisted of cash and cash equivalents and short-term investments of approximately $575.2 million. Our cash equivalents are highly liquid investments with a maturity of three months or less at date of purchase and consist of U.S. treasury bills and amounts held in money market funds.

Cash Flows

The use of our cash flows for operations has primarily consisted of salaries and wages for our employees, facility and facility-related costs for our office, laboratory, and manufacturing facilities, fees paid in connection with preclinical studies, clinical studies, outsourced manufacturing, laboratory supplies, consulting fees and commercial, legal and accounting fees. We expect that costs associated with clinical studies and manufacturing costs as well as commercial costs will increase in future periods as sebelipase alfa advances into further stages of development and our other preclinical candidates move forward in development.

Net cash used in operating activities was $34.0 million for the three months ended March 31, 2014, and was primarily the result of a net loss of $36.4 million, the drivers of which are discussed in further detail in "Results of Operations." In addition, non-cash items and changes in certain operating assets and liabilities affected operating cash during three months ended March 31, 2014. Non-cash items include depreciation of fixed assets of $1.0 million, amortization of developed technology of $0.4 million, stock-based compensation of $3.2 million, and the amortization of premium on available for sale investments of $0.7 million. Changes in operating assets and liabilities resulted in a net use of cash of $2.9 million, which was primarily the result of increased prepaid expenses, other current assets and other assets of $2.6 million. The increases in prepaid and other assets, as well as accrued expenses and other liabilities were primarily driven by clinical, toxicology and manufacturing activities, the details of which are disclosed in further detail in Note 4, "Supplemental Balance Sheet Information."

Net cash used in operating activities was $17.2 million for the three months ended March 31, 2013, and was primarily the result of a net loss of $14.5 million. In addition, non-cash items and changes in certain operating assets and liabilities affected operating cash during the first quarter of fiscal 2013. Non-cash items partially offsetting net loss include depreciation of fixed assets of $0.6 million, amortization of developed technology of $0.7 million, stock-based compensation of $1.7 million, and the amortization of discount on available for sale investments of $0.7 million. Changes in operating assets and liabilities resulted in a net use of cash of $6.4 million, which was primarily the result of increased prepaid expenses and other assets of $2.5 million, decreased deferred revenue of $2.9 million and decreased accounts payable and accrued expenses of $1.0 million from December 31, 2012. The increase in prepaid expense and other assets was primarily driven by cash outlays for clinical and manufacturing activities. The decrease in deferred revenue in the period was primarily the result of the recognition of upfront license fees related to the Mitsubishi Tanabe development programs.

We expect to continue to use cash in operations as we continue to seek to advance our pipeline programs through preclinical testing and clinical development. In addition, in the future, we may owe royalties and other contingent payments to our licensors based on the achievement of developmental milestones, product sales, and other specified objectives.


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