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KBIO > SEC Filings for KBIO > Form 10-Q on 8-May-2014All Recent SEC Filings

Show all filings for KALOBIOS PHARMACEUTICALS INC

Form 10-Q for KALOBIOS PHARMACEUTICALS INC


8-May-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. Forward-Looking Statements

The following discussion and analysis should be read in conjunction with our financial statements and accompanying notes included in this Quarterly Report on Form 10-Q and the financial statements and accompanying notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, filed with the Securities and Exchange Commission, or SEC, on March 13, 2014. This discussion contains "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Such forward looking statements involve risks and uncertainties. We use words such as "may," "will," "expect," "anticipate," "estimate," "intend," "plan," "predict," "potential," "believe," "should" and similar expressions to identify forward-looking statements. Although we believe the expectations reflected in these forward- looking statements are reasonable, such statements are inherently subject to risk and we can give no assurances that our expectations will prove to be correct. These statements appearing throughout this Quarterly Report on Form 10-Q are statements regarding our intent, belief, or current expectations, primarily regarding our operations. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q. As a result of many factors, such as those set forth under "Risk Factors" under Item 1A of Part II below, and elsewhere in this Quarterly Report on Form 10-Q, our actual results may differ materially from those anticipated in these forward-looking statements. We undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date of this report or to reflect actual outcomes.

Overview

We are a biopharmaceutical company focused on monoclonal antibody therapeutics for diseases that are a significant burden to society and patients and their families. We have a portfolio of patient- targeted, first-in-class antibodies using our Humaneered® antibody technology to treat serious medical conditions with a primary clinical focus on respiratory diseases and cancer. Our principal pharmaceutical product candidates that we have advanced to the clinical development stage are:

†† KB001-A, a Humaneered®, PEGylated, anti-PcrV modified antibody fragment (Fab') antibody that is being developed for the prevention and treatment of Pseudomonas aeruginosa (Pa) infections in mechanically ventilated patients and cystic fibrosis(CF) patients with chronic Pa lung infections;

† KB004, a Humaneered® anti-EphA3 monoclonal antibody that has the potential to offer a novel approach to treating both hematologic malignancies and solid tumors; and

† KB003, a Humaneered® anti-granulocyte macrophage colony-stimulating factor (anti-GM-CSF) monoclonal antibody that was being developed for the treatment of severe asthma inadequately controlled by corticosteroids. We have discontinued the development of this antibody in severe asthma.

In January 2010, we entered into an agreement with Sanofi pursuant to which we granted Sanofi an exclusive worldwide license to develop, manufacture, and commercialize antibodies directed against the PcrV protein of Pa (including KB001-A) for all indications, and Sanofi is solely responsible for research, development, manufacturing, and commercialization. As part of this agreement, we retained the right to develop and promote KB001-A for Pa in CF or bronchiectasis patients. Sanofi is focusing its clinical development on prevention of Pa VAP. Pursuant to the agreement, we received an initial upfront payment of $35 million and an additional $5 million payment in August 2011 that were recognized as revenue through June 30, 2012. We have the potential to receive additional contingent payments aggregating up to $250 million upon achievement by Sanofi of certain clinical, regulatory and commercial events, together with tiered royalties based upon global net sales of licensed products. However, there can be no assurances that Sanofi will continue to further develop KB001-A or achieve the events that will trigger the contingent payments. As a result, we may not recognize any additional revenue from this agreement. We are conducting a Phase 2 clinical trial in CF patients with chronic Pa infections. As part of Sanofi's clinical development plan for Pa ventilator associated pneumonia (VAP), Sanofi has conducted a Phase 1 clinical safety study in healthy volunteers to evaluate higher doses than those that we previously tested. That study was successfully completed, dosing patients at levels up to 30 mg/kg with no safety issues noted.
Sanofi has further indicated that they have completed their manufacturing process development and are preparing for GMP manufacturing runs to provide material for a Phase 2b intravenous study to begin as early as mid-year 2015 to determine the safety and efficacy of KB001-A in preventing VAP. Based on the results of this clinical trial, Sanofi plans to conduct a subsequent Phase 3 study. We also understand that the Phase 2b and Phase 3 trials are being designed as pivotal studies and are intended to serve as a basis for registration of KB001-A for the prevention of Pa VAP.

As part of our agreement with Sanofi, we have retained responsibility for developing and promoting the product for the diagnosis, treatment, and/or prevention of Pa in patients with CF or bronchiectasis. Subject to the terms of the agreement, Sanofi has an option to assume primary responsibility for developing and promoting KB001-A for Pa infection in CF or bronchiectasis patients upon the completion of our Phase 2 clinical trial. If Sanofi exercises its option to acquire ex-US or global rights to our CF program, we currently estimate that the payments to us would be in the range of $40 million to $70 million based on estimated development costs during the term of the agreement.


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We have an ongoing 180-patient, randomized, double-blind, placebo-controlled monthly-dosed, intravenous Phase 2 clinical trial of KB001-A in CF patients with chronic Pa infections. We also have an ongoing Phase 1 dose escalation study of KB004 in subjects with hematologic cancer and entered the Phase 2 expansion portion of the clinical testing of KB004 in AML and MDS patients in February 2014. Finally, we completed our 160-patient, randomized, double-blind, placebo-controlled, monthly-dose, intravenous Phase 2 clinical trial of KB003 in patients with severe asthma inadequately controlled by corticosteroids in February 2014. We have discontinued development of KB003 in severe asthma, and we are evaluating other potential indications for this antibody.

We believe our available capital, including the net proceeds from our stock offerings, and our borrowing capacity pursuant to the loan and security agreement we entered into with MidCap will be sufficient to sustain operations for at least the next 12 months. We will need to raise additional capital in order to further advance our product candidates towards regulatory approval.

We licensed our proprietary Humaneered® antibody technology to Novartis in 2007 on a non-exclusive basis and received a license fee of $30 million at that time. We are not currently actively pursuing the license of our Humaneered® technology to third parties and we are not expecting to receive future revenue from additional licenses to this technology.

From the date we commenced our operations through 2006, our efforts focused primarily on research, development, and the advancement of our Humaneered® antibody technology. In 2006, we commenced our first clinical trial. We have incurred significant losses to date and, as of March 31, 2014, we had an accumulated deficit of $150.6 million. We have funded our operations primarily through private and public placements of our equity securities, contract revenue in connection with our collaborations, and grants and borrowings under equipment financing arrangements and our loan and security agreement. On February 5, 2013, we closed our initial public offering (IPO) of 8,750,000 shares of common stock at an offering price of $8.00 per share, resulting in net proceeds of approximately $61.5 million, after deducting underwriting discounts, commissions and offering expenses. On October 1, 2013 we closed a public offering of 8,625,000 shares of common stock at an offering price of $4.00 per share, resulting in net proceeds of approximately $32.0 million, after deducting underwriting discounts, commissions and offering expenses. As of March 31, 2014, we had cash, cash equivalents, and investments of $64.4 million. We expect to continue to incur net losses as we develop our drug candidates, expand clinical trials for our drug candidates currently in clinical development, expand our research and development activities, expand our systems and facilities, seek regulatory approvals, and engage in commercialization preparation activities in anticipation of Food and Drug Administration (FDA) approval of our drug candidates. Specifically, we have incurred substantial expenses in connection with our Phase 2 clinical trial for KB003 in severe asthma patients inadequately controlled by corticosteroids. In addition, we have incurred and we expect to continue to incur substantial expenses for our Phase 2 clinical trial of KB001-A in CF patients with chronic Pa infections and our Phase 1 and Phase 2 clinical trials for our KB004 oncology program. Significant capital is required to continue to develop and to launch a product and many expenses are incurred before revenue is received, if any. We are unable to predict the extent of any future losses or when we will receive revenue or become profitable, if at all.

Critical Accounting Policies and Use of Estimates

Our management's discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (GAAP). The preparation of our financial statements in conformity with GAAP requires our management to make estimates and assumptions that affect the amounts and disclosures reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates. Our management believes judgment is involved in determining revenue recognition, the fair value-based measurement of stock-based compensation, accruals and warrant valuations. Our management evaluates estimates and assumptions as facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ from these estimates and assumptions, and those differences could be material to the consolidated financial statements. If our assumptions change, we may need to revise our estimates, or take other corrective actions, either of which may also have a material adverse effect on our statements of operations, liquidity and financial condition.

We are an emerging growth company under the JOBS Act. Emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to avail ourselves of this exemption from new or revised accounting standards and, therefore, we may not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

There have been no significant and material changes in our critical accounting policies and use of estimates during the three months ended March 31, 2014, as compared to those disclosed in "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Use of Estimates" in our 2013 Annual Report on Form 10-K (File No. 001-35798), filed with the Securities and Exchange Commission (SEC) on March 13, 2014.


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Results of Operations

General

We have not generated net income from operations, except for the year ended December 31, 2007 during which we recognized a one-time license payment from Novartis. At March 31, 2014, we had an accumulated deficit of $150.6 million primarily as a result of research and development and general and administrative expenses. While we may in the future generate revenue from a variety of sources, including license fees, milestone payments, and research and development payments in connection with strategic partnerships, our product candidates are at an early stage of development and may never be successfully developed or commercialized. Accordingly, we expect to continue to incur substantial losses from operations for the foreseeable future, and there can be no assurance that we will ever generate significant revenue or profits.

Contract Revenue

Our recent revenue is comprised primarily of collaboration agreement-related revenue. Collaboration agreement-related revenue includes license fees, payments for research and development services, and milestone and other contingent payments.

Research and Development Expenses

Conducting research and development is central to our business model. We expense both internal and external research and development costs as incurred. We currently track external research and development costs incurred by project for each of our clinical programs (KB001-A, KB003, and KB004). We have not tracked our external costs by project since inception. We began tracking our external costs by project beginning January 1, 2008, and we have continued to refine our systems and our methodology in tracking external research and development costs. Our external research and development costs consist primarily of:

† expenses incurred under agreements with contract research organizations, investigative sites, and consultants that conduct our clinical trials and a substantial portion of our preclinical activities;

† the cost of acquiring and manufacturing clinical trial and other materials; and

† other costs associated with development activities, including additional studies.

Other research and development costs consist primarily of internal research and development costs such as salaries and related fringe benefit costs for our employees (such as workers compensation and health insurance premiums), stock-based compensation charges, travel costs, lab supplies, overhead expenses such as rent and utilities, and external costs not allocated to one of our clinical programs. Internal research and development costs generally benefit multiple projects and are not separately tracked per project. The following table shows our total research and development expenses for the three months ended March 31, 2014 and 2013, and for the period from January 1, 2008 to March 31, 2014.

                                               Three
                                           Months Ended       For the Period from
                                             March 31,        January 1, 2008 to
(in thousands)                            2014      2013        March 31, 2014

External costs by Program:
KB001-A                                  $ 1,578   $ 1,149   $              27,058
KB003                                      1,606     2,457                  37,420
KB004                                      2,039     1,135                  27,941
Other research and & development costs     2,467     1,579                  57,157
Total research and development           $ 7,690   $ 6,320   $             149,576

We expect to continue to incur substantial expenses related to our development activities for the foreseeable future as we continue product development including continuing our Phase 2 clinical trial for our KB001-A CF program, and our Phase 1/ Phase 2 clinical trial for our KB004 oncology program, as well as concluding our Phase 2 clinical trial for our KB003 severe asthma program completed in February 2014. As 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 research and development expenses will increase in the future. In addition, if our product development efforts are successful, we expect to incur substantial costs to prepare for potential clinical trials and activities beyond the Phase 2 trial for KB001-A, and the ongoing Phase 1/Phase 2 trial for KB004.


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General and Administrative Expenses

General and administrative expenses consist principally of personnel-related costs, professional fees for legal, consulting, audit and tax services, rent and other general operating expenses not otherwise included in research and development. We anticipate general and administrative expenses will increase in future periods, reflecting an expanding infrastructure and increased professional fees associated with being a public reporting company.

Comparison of Three Months Ended March 31, 2014 and 2013




                               Three Months Ended March 31,        Increase/        Percent
(in thousands)                    2014               2013          (Decrease)       Change
Contract revenue            $              -    $           16    $        (16 )         (100 )%
Operating expenses:
Research and development               7,690             6,320           1,370             22 %
General and
administrative                         2,470             2,019             451             22 %
Loss from operations                 (10,160 )          (8,323 )        (1,837 )          (22 )%
Interest expense                        (260 )            (263 )             3              1 %
Interest and other
income, net                               12                12               -              0 %
Net loss                    $        (10,408 )  $       (8,574 )  $     (1,834 )          (21 )%

Contract revenue in each period related solely to our arrangement with Sanofi in which we licensed the KB001-A program to Sanofi in 2010. Contract revenue decreased from $16,000 for the three months ended March 31, 2013 to zero for the three months ended March 31, 2014. This decrease was mainly attributable to the completion of our substantive performance obligations under our agreement with Sanofi in mid 2012. We expect future contract revenue from Sanofi to remain at a minimal level in future periods unless we receive contingent payments or royalties under our agreement.

Research and development expenses increased $1.4 million, from $6.3 million for the three months ended March 31, 2013 to $7.7 million for the three months ended March 31, 2014. The increase was primarily attributed to a $0.9 million increase in costs, including milestone payments for our KB004 clinical program for hematological malignancies, $0.9 million in increased employee, consulting and overhead expenses and a $0.4 million increase in spending for our KB001-A CF program. These increases were partially offset by a decrease of $0.9 million in spending for clinical trial expenses for our KB003 severe asthma program.

In addition to the ongoing enrollment work for our Phase 2 clinical trial for KB001-A in CF patients with chronic Pa infections, we have now commenced enrollment in the Phase 2 expansion portion of our clinical trial for KB004 in hematologic malignancies. We also incurred significant costs in the first quarter of 2014 on our Phase 2 clinical trial of KB003 in severe asthma and expect we will continue to incur costs in 2014 on that program as we complete the follow up activities, resolve manufacturing commitments and work through other close-out related activities. As a result, we expect a modest overall increase in research and development expenses in 2014 as compared to 2013.

General and administrative expenses increased $0.5 million, from $2.0 million for the three months ended March 31, 2013 to $2.5 million for the three months ended March 31, 2014 due primarily to increases of $0.4 million in employee-related expenses and $0.1 million in office expenses. We expect a modest increase in general and administrative expenses in 2014 as compared to 2013, driven primarily by increases in facilities and employee-related costs.

Interest expense of $0.3 million recognized for the three months ended March 31, 2013 and March 31, 2012, was related to our loan and security agreement with MidCap Financial entered into in September 2012 and amended in 2013

Interest and other income, net primarily consists of interest earned on our cash and cash equivalents, foreign currency gains and losses and realized gains and losses on the sale of investments.

Liquidity and Capital Resources

Since our inception, we have financed our operations primarily through proceeds from our initial and secondary public equity offerings, private placements of our equity securities, debt financing, interest income earned on cash, and cash equivalents, and marketable securities, borrowings against lines of credit, and payments under agreements with Sanofi and Novartis. At March 31, 2014, we had cash and cash equivalents and investments of $64.4 million.

We expect to incur substantial expenditures in the foreseeable future for the development and potential commercialization of our product candidates. Specifically, we have incurred and we expect to continue to incur substantial expenses in connection with our Phase 2 clinical trial for KB001-A in CF patients with chronic Pa infections, and for our ongoing Phase 1/Phase 2 clinical trials for our KB004 development program in hematologic malignancies.


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We believe our available capital, including the net proceeds from our recent public offerings and our borrowing capacity pursuant to the loan and security agreement we entered into with MidCap Financial in September 2012 and amended in June 2013, will be sufficient to sustain operations for at least the next 12 months. If the KB001-A or KB004 Phase 2 clinical trials are successful, we will need to raise additional capital in order to further advance our product candidates towards regulatory approval.

We will continue to require additional financing to develop our products and fund operations. We will seek funds through equity or debt financings, collaborative or other arrangements with corporate partners, or through other sources of financing. Adequate additional funding 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 condition and our ability to pursue our business strategies. We anticipate that we will need to raise substantial additional capital, the requirements of which will depend on many factors, including:

† the type, number, costs, and results of the product candidate development programs which we are pursuing or may choose to pursue in the future;

† the scope, progress, expansion, costs, and results of our clinical trials;

† the timing of and costs involved in obtaining regulatory approvals;

† our ability to establish and maintain development partnering arrangements;

† the timing, receipt and amount of contingent, royalty, and other payments from Sanofi or any of our future development partners;

† the emergence of competing products or technologies and other adverse market developments;

† the costs of maintaining, expanding, and protecting our intellectual property portfolio, including potential litigation costs and liabilities;

† the resources we devote to marketing, and, if approved, commercializing our product candidates;

† the scope, progress, expansion, and costs of manufacturing our product candidates;

† our ability to draw funds from our current or any future loan and security agreement; and

† the costs associated with being a public company.

If we are unable to raise additional funds when needed, we may be required to delay, reduce, or terminate some or all of our development programs and clinical trials. We may also be required to sell or license to others technologies or clinical product candidates or programs that we would prefer to develop and commercialize ourselves.

The following table sets forth the primary sources and uses of cash and cash equivalents for each of the periods presented below:

                                                           Three Months
                                                         Ended March 31,
(in thousands)                                           2014        2013
Net cash (used in) provided by:
Operating activities                                   $ (11,298 ) $ (7,801 )
Investing activities                                      (8,773 )    2,390
Financing activities                                        (752 )   64,413
Net increase (decrease) in cash and cash equivalents   $ (20,823 ) $ 59,002

Net cash used in operating activities was $11.3 million and $7.8 million for the three months ended March 31, 2014 and 2013, respectively. The primary use of cash in each of the periods was to fund our operations related to the development of our product candidates. Cash used in operating activities of $11.3 million for the three months ended March 31, 2014 primarily related to our net loss of $10.4 million, adjusted for non-cash items such as $0.5 million of stock-based compensation expense and net cash outflows of $1.6 million related to changes in operating assets and liabilities. Cash used in operating activities of $7.8 million for the three months ended March 31, 2013 primarily related to our net loss of $8.6 million, adjusted for non-cash items such as $0.2 million of stock-based compensation expense and net cash inflows of $0.5 million related to changes in operating assets and liabilities..

Net cash used in investing activities was $8.8 million for the three months ended March 31, 2014, primarily related to purchases of investments. Net cash provided by investing activities was $2.4 million for the three months ended March 31, 2013, primarily related to proceeds from maturities of investments, net of cash used for the purchase of investments.


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Net cash used in financing activities was $0.8 million for the three months ended March 31, 2014, and consisted primarily of debt payments on our borrowings. Net cash provided by financing activities was $64.4 million for the three months ended March 31, 2013, which consisted primarily of net proceeds from our IPO.

We expect to incur substantial expenditures in the foreseeable future for the research, development and potential commercialization of our product candidates. We will continue to require additional financing to develop our products and fund operating losses. We will seek funds through equity or debt financings, collaborative or other arrangements with corporate sources, or through other sources of financing. Adequate additional funding may not be available to us on acceptable terms or at all. Our failure to raise capital as and when needed could have a negative impact on our financial condition and our ability to pursue our business strategies. If adequate funds are not available to us, we . . .

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