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ECYT > SEC Filings for ECYT > Form 10-Q on 12-May-2014All Recent SEC Filings

Show all filings for ENDOCYTE INC

Form 10-Q for ENDOCYTE INC


12-May-2014

Quarterly Report


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

This quarterly report on Form 10-Q contains certain statements that are forward-looking statements within the meaning of federal securities laws. When used in this report, the words "may," "will," "should," "could," "would," "anticipate," "estimate," "expect," "plan," "believe," "predict," "potential," "project," "target," "forecast," "intend" and similar expressions are intended to identify forward-looking statements. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include the important risks and uncertainties that may affect our future operations as discussed in Part II
- Item 1A of this Quarterly Report on Form 10-Q and any other filings made with the Securities and Exchange Commission. Readers of this report are cautioned not to place undue reliance on these forward-looking statements. While we believe the assumptions on which the forward-looking statements are based are reasonable, there can be no assurance that these forward-looking statements will prove to be accurate. This cautionary statement is applicable to all forward-looking statements contained in this report.

Overview

We are a biopharmaceutical company developing targeted therapies for the treatment of cancer and inflammatory diseases. We use our proprietary technology to create novel small molecule drug conjugates, or SMDCs, and companion imaging agents. Our SMDCs actively target receptors that are over-expressed on diseased cells, relative to healthy cells. This targeted approach is designed to enable the treatment of patients with highly active drugs at greater doses, delivered more frequently, and over longer periods of time than would be possible with the untargeted drug alone. We are also developing companion imaging agents for each of our SMDCs that are designed to identify the patients whose disease over-expresses the target of the therapy and who are therefore more likely to benefit from treatment. This combination of an SMDC with its companion imaging agent is designed to personalize the treatment of patients by delivering effective therapy, selectively to diseased cells, in the patients most likely to benefit.

One of our lead SMDC candidates, vintafolide, targets the folate receptor, which is frequently over-expressed on cancer cells. We initially chose platinum-resistant ovarian cancer, or PROC, a highly treatment-resistant disease, as our lead indication for development of vintafolide because of the high unmet need in treating this patient population and the high percentage of ovarian cancer patients whose tumors over-express the targeted folate receptor. We conducted a multicenter, open-label randomized phase 2 clinical trial of vintafolide in 149 women with PROC, referred to as the PRECEDENT trial. Based upon our findings from the PRECEDENT trial, we initiated enrollment of our PROCEED trial, a phase 3 registration trial in women with PROC, in the first half of 2011. PROCEED is a randomized, double-blinded trial of vintafolide in combination with pegylated liposomal doxorubicin, or PLD (marketed in the U.S. under the brand name DOXIL® and in Europe under the brand name CAELYX®), compared to PLD plus placebo. In the first quarter of 2013, we announced our decision to amend the PROCEED trial design to incorporate a progression free survival, or PFS, analysis on 250 FR(100%) patients (patients in which 100 percent of their target lesions over-expressed the folate receptor as determined by an etarfolatide scan) which was to be evaluated by the Data and Safety Monitoring Board, or DSMB. On April 30, 2014, the DSMB recommended that the PROCEED trial be stopped after the interim futility analysis was performed because vintafolide did not demonstrate efficacy on the pre-specified outcome of PFS. In May 2014, we suspended screening and enrollment for the PROCEED trial pending review of the interim data, while continuing to treat patients already participating in the trial. In the event that we decide to terminate the PROCEED trial, we would record a charge in the period of termination for the remaining expenses of the PROCEED trial, including prepaid research and development expenses and site close-out expenses. Merck is responsible for the future development of vintafolide, and has previously announced its intention to initiate a randomized trial for vintafolide in folate-receptor positive, triple negative breast cancer, expected to begin in the second quarter of 2014. It is possible that this could be delayed as Merck evaluates clinical trial data from other trials.

We are also developing vintafolide for use in non-small cell lung cancer, or NSCLC. Based on results of our single-arm, single agent phase 2 clinical trial of vintafolide in patients with second line NSCLC, in 2012 we began enrollment in TARGET, a randomized phase 2b trial, which is now substantially complete. The trial is designed to enroll up to 200 patients with adenocarcinoma and squamous cell carcinoma of the lung who have failed one prior line of therapy and enrollment was completed in July 2013. Patients were selected based on etarfolatide scan results and only FR(100%) patients are included. The trial design is intended to evaluate the safety and efficacy of vintafolide in second line NSCLC as a single agent and in combination with docetaxel, a commonly used second line chemotherapy approved by the U.S. Food and Drug Administration, or the FDA. The study has three arms: docetaxel alone; vintafolide alone; and vintafolide plus docetaxel. The primary outcome measure will be PFS with secondary measures of overall survival, or OS, tumor response and duration of response. In October 2013, we announced the outcomes of the planned DSMB review of the interim futility analysis for the TARGET trial. The DSMB recommended the continuation of the vintafolide plus docetaxel arm and docetaxel alone arm of the trial. The DSMB also recommended investigators and patients be advised that the vintafolide alone arm is not likely to be declared superior to docetaxel in PFS at the end of the study, and patients currently on the vintafolide alone arm may continue treatment based on guidance from their investigator. In March 2014, we announced that the study met the primary endpoint of PFS for the combination vintafolide plus docetaxel arm, and demonstrated initial positive trends in secondary endpoints of OS and response rate. We expect to communicate the detailed data, including updated OS results, at a medical conference in the fall of 2014.

The recommendation of the DSMB regarding the PROCEED trial does not affect our plans to continue the TARGET trial or to advance our pipeline.

In September 2013, the FDA accepted the investigational new drug application, or IND, filed for EC1456, a folate-targeted tubulysin therapeutic. We are currently enrolling patients in a Phase 1 trial.

In March 2014, the FDA accepted the IND filed for EC1169, a tubulysin therapeutic targeting prostate-specific membrane antigen, or PSMA. We have initiated a Phase 1 trial in prostate cancer for EC1169.

In April 2012, we entered into a worldwide collaboration agreement with Merck Sharp & Dohme Research GmbH, a subsidiary of Merck & Co, Inc., or Merck, regarding the development and commercialization of vintafolide. The agreement grants Merck worldwide rights to develop and commercialize vintafolide. We received a non-refundable $120.0 million upfront payment and a $5.0 million milestone payment in 2012 and are eligible for additional milestone payments of up to $875.0 million based on the successful achievement of development, regulatory and commercialization goals for vintafolide in a total of six different cancer indications. In the event that there is regulatory approval and launch of vintafolide, we would split U.S. earnings under the collaboration arrangement on a 50/50 basis with Merck and would receive a double-digit percentage royalty on sales of the product in the rest of the world. We have retained the right (which we can opt out of) to co-promote vintafolide with Merck in the U.S. and Merck has the exclusive right to promote vintafolide in the rest of the world. We are responsible for the majority of funding and completion of the PROCEED trial. We are responsible for the execution of the TARGET trial of vintafolide for the treatment of second line NSCLC, which is now substantially complete, pending the receipt of OS results. Merck is responsible for the costs of the TARGET trial and for all other development activities and costs and has all decision rights with respect to the development and commercialization of vintafolide. We are responsible for the development, manufacture and commercialization worldwide of etarfolatide, the companion imaging diagnostic for vintafolide. Merck has the right to terminate the collaboration agreement on 90 days notice. Each party has the right to terminate the agreement due to the material breach or insolvency of the other party. We have the right to terminate the agreement in the event that Merck challenges an Endocyte patent right relating to vintafolide. Upon termination of the agreement, depending upon the circumstances, the parties have varying rights and obligations with respect to the continued development and commercialization of vintafolide and, in the case of termination for cause by Merck, certain royalty obligations and U.S. profit and loss sharing. While Merck has not terminated the collaboration agreement as a result of the suspension of the PROCEED trial, the continuation and future success of the collaboration likely depends on the favorable results of ongoing and planned trials, including the final OS data for the TARGET trial.

In March 2014, we received positive opinions from the Committee for Medicinal Products for Human Use (CHMP) of the European Medicines Agency on our applications for conditional marketing authorizations in Europe for vintafolide for the treatment of PROC, and etarfolatide and folic acid for patient selection, and we were awaiting formal approval from the European Commission, or EC, on our applications. As a result of the suspension of the PROCEED trial, and pending additional review of the PROCEED trial interim data, the EC is not expected to take further action on the pending applications for conditional marketing authorizations in Europe.

In August 2013, we entered into a license and commercialization agreement with Nihon Medi-Physics Co., Ltd., or NMP, that grants NMP the right to develop and commercialize etarfolatide in Japan for use in connection with vintafolide in Japan. We received a $1.0 million non-refundable upfront payment and are eligible to receive double-digit percentage royalties on sales of etarfolatide in Japan. The upfront payment will be recognized on a straight-line basis over the performance period, which is from the execution of the agreement through the end of 2033, the estimated termination date of the agreement. The agreement with NMP also includes milestone payments of up to approximately $4.5 million and the milestones are based on the commencement of clinical trials in Japan for specific and non-specific indications and filing for regulatory approval in Japan for specific and non-specific indications. We evaluated each of these milestone payments and believe that all of the milestones are substantive as there is substantial performance risk that must occur in order for them to be met as they must complete additional clinical trials which show a positive outcome or receive approval from a regulatory authority and would be commensurate with the enhancement of value of the underlying intellectual property. To date, the products have not been approved in Japan and no revenue has been recognized related to the regulatory milestones or royalties. NMP has the right to terminate the collaboration agreement on 90 days notice prior to first commercial sale in Japan and six months notice after the first commercial sale in Japan. NMP also has the right to terminate the agreement on six months notice if the Company and/or Merck fail to launch vintafolide after receiving regulatory approval in Japan. NMP and the Company each have the right to terminate the agreement due to the material breach or insolvency of the other party. Upon termination of the agreement depending on the circumstances, the parties have varying rights and obligations with respect to licensing and related regulatory materials and data.

We have never been profitable and have incurred significant net losses since our inception. As of March 31, 2014, we had a retained deficit of $177.1 million. We expect to continue to incur significant and increasing operating expenses for the next several years as we pursue the advancement of our SMDCs and companion imaging diagnostics through the research, development, regulatory and commercialization processes.

As of March 31, 2014, our current cash position was $131.5 million, which includes cash equivalents and investments. In April 2014, we completed a public offering of 5,175,000 shares of our common stock and received net proceeds of approximately $101.8 million. We believe that our current cash balance, including the proceeds from that offering, will be sufficient to fund our current operating plan, including the expenses of the PROCEED trial and the advancement of our pipeline.

Critical Accounting Policies

While our significant accounting policies are described in more detail in our 2013 Annual Report on Form 10-K, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our condensed consolidated financial statements.

Revenue Recognition

We recognize revenues from license and collaboration agreements when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the fee is fixed or determinable, and there is reasonable assurance that the related amounts are collectible in accordance with ASC Topic 605, Revenue Recognition, or ASC 605. Our license and collaboration agreements may contain multiple elements, including grants of licenses to intellectual property rights, agreement to provide research and development services and other deliverables. The deliverables under such arrangements are evaluated under ASC Subtopic 605-25, Multiple-Element Arrangements.Under ASC 605-25, each required deliverable is evaluated to determine whether it qualifies as a separate unit of accounting based on whether the deliverable has "stand-alone value" to the customer. The arrangement's consideration that is fixed or determinable, excluding contingent milestone payments, is then allocated to each separate unit of accounting based on the relative selling price of each deliverable. In general, the consideration allocated to each unit of accounting is recognized as the related goods or services are delivered, limited to the consideration that is not contingent upon future deliverables.

Upfront payments for licensing our intellectual property are evaluated to determine if the licensee can obtain stand-alone value from the license separate from the value of the research and development services and other deliverables in the arrangement to be provided by us. If at the inception of an arrangement we determine that the license does not have stand-alone value separate from the research and development services or other deliverables, the license, services and other deliverables are combined as one unit of account and upfront payments are recorded as deferred revenue in the balance sheet and are recognized in a manner consistent with the final deliverable. Subsequent to the inception of an arrangement, we evaluate the remaining deliverables for separation as items in the arrangement are delivered. When stand-alone value is identified, the related consideration is recorded as revenue in the period in which the license or other intellectual property rights are delivered.

In those circumstances where research and development services or other deliverables are combined with the license, and multiple services are being performed such that a common output measure to determine a pattern of performance cannot be discerned, we recognize amounts received on a straight line basis over the performance period. Such amounts are recorded as collaboration revenue. Any subsequent reimbursement payments, which are contingent upon our future research and development expenditures, will be recorded as collaboration revenue and will be recognized on a straight-line basis over the performance period using the cumulative catch up method. The costs associated with these activities are reflected as a component of research and development expense in the statements of operations in the period incurred.

Milestone payments under collaborative arrangements are triggered either by the results of our research and development efforts, achievement of regulatory goals or by specified sales results by a third-party collaborator. Milestones related to our development-based activities may include initiation of various phases of clinical trials and applications and acceptance for product approvals by regulatory agencies. Due to the uncertainty involved in meeting these development-based milestones, the determination is made at the inception of the collaboration agreement whether the development-based milestones are considered to be substantive (i.e. not just achieved through passage of time). In addition, the amounts of the payments assigned thereto are considered to be commensurate with the enhancement of the value of the delivered intellectual property as a result of our performance. Because our involvement is necessary to the achievement of development-based milestones, we would account for development-based milestones as revenue upon achievement of the substantive milestone events. Milestones related to sales-based activities may be triggered upon events such as first commercial sale of a product or when sales first achieve a defined level. Since these sales-based milestones would be achieved after the completion of our development activities, we would account for the sales-based milestones in the same manner as royalties, with revenue recognized upon achievement of the milestone.

Royalties based on reported sales of licensed products will be recognized based on contract terms when reported sales are reliably measurable and collectability is reasonably assured. To date, none of our products have been approved and therefore we have not earned any royalty revenue from product sales. In territories we and the collaborator will share profit, the revenue will be recorded in the period earned.

We often are required to make estimates regarding drug development and commercialization timelines for compounds being developed pursuant to a collaboration agreement. Because the drug development process is lengthy and our collaboration agreements typically cover activities over several years, this approach often results in the deferral of significant amounts of revenue into future periods. In addition, because of the many risks and uncertainties associated with the development of drug candidates, our estimates regarding the period of performance may change in the future. Any change in our estimates could result in substantial changes to the period over which the revenues are recognized.

Results of Operations



Comparison of Three Months Ended March 31, 2013 to Three Months Ended March 31,
2014



                                  Three Months Ended         $ Increase/       % Increase/
                                       March 31,             (Decrease)        (Decrease)
                                   2013          2014
                                                      (In thousands)
Statement of operations data:
Collaboration Revenue           $   14,514     $ 17,269     $       2,755                19 %
Operating expenses:
Research and development            12,259       12,987               728                 6 %
General and administrative           6,256        7,501             1,245                20 %

Total operating expenses            18,515       20,488             1,973                11 %

Loss from operations                (4,001 )     (3,219 )            (782 )             (20 %)

Interest income                        140           85               (55 )             (39 %)
Interest expense                        (1 )          -                (1 )            (100 %)
Other income (expense), net              -           (7 )               7               100 %
Net loss                        $   (3,862 )   $ (3,141 )   $        (721 )             (19 %)

Revenue

Our revenue of $17.3 million recorded in the three months ended March 31, 2014 related primarily to the collaboration with Merck. Of this revenue, $11.3 million related to the amortization of the $120.0 million upfront license payment, $0.5 million related to a milestone payment and $3.2 million related to reimbursable research and development expenditures incurred prior to the three months ended March 31, 2014. The remaining $2.3 million of revenue related to the amortization of reimbursable research and development expenditures that we incurred during the three months ended March 31, 2014 and the amortization of the $1.0 million non-refundable upfront payment from NMP.

The amortization of both the upfront license payment and the ongoing reimbursable research and development expenditures related to the Merck collaboration have been recognized as revenue ratably over the performance period. NMP revenue related to the upfront payment will be recorded ratably over the contract period. Our revenue of $14.5 million in the three months ended March 31, 2013 related to the collaboration with Merck.

In the second quarter of 2014, we may accelerate the recognition of the balance of deferred revenue of $45.7 million associated with the Merck collaboration. This deferred revenue is a combination of a portion of the upfront payment from Merck, a $5.0 million milestone payment received and reimbursable services provided by us for the development of vintafolide which, through the end of the first quarter of 2014, was being recognized over the performance period. The potential acceleration would be the result of the expected completion of certain obligations associated with the Merck collaboration agreement, the transfer of knowledge and know-how to Merck and as a result of the completion of the enrollment of the 250th FR(100%) patient in the PROCEED trial. If the remaining deferred revenue balance is recognized in the second quarter of 2014, any future reimbursable research and development services will be recognized as revenue in the period in which the services are performed.

Research and Development

The increase in research and development expense for the three months ended March 31, 2014 compared to the three months ended March 31, 2013 was primarily attributable to a $0.8 million increase in expenses relating to the PROCEED trial, a $1.3 million increase in compensation expenses due to increases in headcount and stock based compensation, as well as a $1.0 million increase in development of the pipeline and general research and development expenses. These increases were partially offset by a $1.0 million decrease in expenses relating to the TARGET trial and a $1.2 million decrease in manufacturing expenses for vintafolide which has been transitioned to Merck. Included in research and development expense for the three months ended March 31, 2014 were $3.2 million of expenses that are reimbursable from Merck under the collaboration agreement for vintafolide. In the event that we decide to terminate the PROCEED trial, we would record a charge in the period of termination for the remaining expenses of the trial, including prepaid research and development expenses and site close-out expenses.

Included in research and development expense were stock-based compensation charges of $0.6 million and $1.2 million for the three months ended March 31, 2013 and 2014, respectively.

Research and development expense included expense of $0.2 million and $0.3 million for the three months ended March 31, 2013 and 2014, respectively, for company-funded research at Purdue University, the primary employer of our Chief Science Officer.

General and Administrative

The increase in general and administrative expense in the three months ended March 31, 2014 compared to the three months ended March 31, 2013 was primarily attributable to stock-based compensation and expenses related to European Union, or EU, launch preparations, including an increase in compensation expenses. As previously discussed, pending additional review of the PROCEED interim data, we do not expect the EC to take further action on our conditional marketing applications in Europe for vintafolide, etarfolatide and folic acid, and therefore we will not be incurring any additional launch preparation expenses in the EU during that review. Included in general and administrative expense for the three months ended March 31, 2014 were $0.1 million of expenses that are reimbursable from Merck under the collaboration agreement for vintafolide relating to patent and trademark costs.

Included in general and administrative expense were stock-based compensation charges of $0.5 million and $1.0 million for the three months ended March 31, 2013 and 2014, respectively.

Interest Income

The decrease in interest income in the three months ended March 31, 2014 compared to the three months ended March 31, 2013 resulted from a decrease in the average short- and long-term investment balances during the three months ended March 31, 2014 as compared to the three months ended March 31, 2013.

Liquidity and Capital Resources

We have funded our operations principally through sales of equity and debt securities, revenue from strategic collaborations, grants, and loans. As of March 31, 2014, we had cash, cash equivalents and investments of $131.5 million.

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

                                                             Three Months Ended
                                                                  March 31,
                                                             2013          2014
                                                               (In thousands)

    Net cash used in operating activities                  $ (15,203 )   $ (16,585 )
    Net cash provided by (used in) investing activities       17,116        (3,698 )
    Net cash provided by financing activities                    122           292
    Effect of exchange rate                                        1             1

    Net increase (decrease) in cash and cash equivalents   $   2,036     $ (19,992 )

Operating Activities

The cash used in operating activities for the three months ended March 31, 2013 and the three months ended March 31, 2014 primarily resulted from our net loss adjusted for non-cash items and changes in operating assets and liabilities, including a decrease in deferred revenue related to the upfront payment from Merck, a milestone payment, and the reimbursable research and development expenditures that through the end of the first quarter have been recognized ratably over the performance period.

Investing Activities

The cash provided by and used in investing activities for each of the three month periods was due primarily to the net result of maturities and purchases of investments, which were partially offset by capital expenditures for equipment of $0.1 million during each of the 2013 and 2014 periods.

Financing Activities

The cash provided by financing activities during the three month periods ended March 31, 2013 and March 31, 2014 consisted of proceeds from the exercise of stock options.

Operating Capital Requirements

We anticipate we will continue to incur significant losses for the next several years as we bear the majority of the expenses of the PROCEED trial for vintafolide and etarfolatide in PROC and as we develop our pipeline.

As of March 31, 2014, our current cash position was $131.5 million, which includes cash equivalents and investments. In April 2014, we completed a public offering of 5,175,000 shares of our common stock and received net proceeds of . . .

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