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EPZM > SEC Filings for EPZM > Form 10-Q on 14-May-2014All Recent SEC Filings

Show all filings for EPIZYME, INC.

Form 10-Q for EPIZYME, INC.


14-May-2014

Quarterly Report


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

Forward-looking Information

This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. These statements may be identified by such forward-looking terminology as "anticipate," "believe," "estimate," "expect," "intend," "may," "plan," "predict," "project," "target," "potential," "will," "would," "could," "should," "continue," and similar statements or variations of such terms. Our forward-looking statements are based on a series of expectations, assumptions, estimates and projections about our company, are not guarantees of future results or performance and involve substantial risks and uncertainty. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in these forward-looking statements. Our business and our forward-looking statements involve substantial known and unknown risks and uncertainties, including the risks and uncertainties inherent in our statements regarding:

• our plans to develop and commercialize personalized therapeutics for patients with genetically defined cancers;

• our ongoing and planned clinical trials, including the timing of anticipated results;

• our ability to receive research funding and achieve anticipated milestones under our collaborations;

• the timing of and our ability to obtain and maintain regulatory approvals for our product candidates;

• the rate and degree of market acceptance and clinical utility of our products;

• our commercialization, marketing and manufacturing capabilities and strategy;

• our intellectual property position;

• our ability to identify additional products or product candidates with significant commercial potential that are consistent with our commercial objectives; and

• our estimates regarding expenses, future revenue, capital requirements and needs for additional financing.

All of our forward-looking statements are as of the date of this Quarterly Report on Form 10-Q only. In each case, actual results may differ materially from such forward-looking information. We can give no assurance that such expectations or forward-looking statements will prove to be correct. An occurrence of or any material adverse change in one or more of the risk factors or risks and uncertainties referred to in this Quarterly Report on Form 10-Q or included in our other public disclosures or our other periodic reports or other documents or filings filed with or furnished to the SEC could materially and adversely affect our business, prospects, financial condition and results of operations. Except as required by law, we do not undertake or plan to update or revise any such forward-looking statements to reflect actual results, changes in plans, assumptions, estimates or projections or other circumstances affecting such forward-looking statements occurring after the date of this Quarterly Report on Form 10-Q, even if such results, changes or circumstances make it clear that any forward-looking information will not be realized. Any public statements or disclosures by us following this Quarterly Report on Form 10-Q which modify or impact any of the forward-looking statements contained in this Quarterly Report on Form 10-Q will be deemed to modify or supersede such statements in this Quarterly Report on Form 10-Q.

Management Overview

We are a clinical stage biopharmaceutical company that discovers, develops and plans to commercialize innovative personalized therapeutics for patients with genetically defined cancers. We have built a proprietary product platform that we use to create small molecule inhibitors of a 96-member class of enzymes known as histone methyltransferases, or HMTs. Genetic alterations can result in changes to the activity of HMTs, making them oncogenic. Our therapeutic strategy is to inhibit oncogenic HMTs to treat the underlying causes of the associated genetically defined cancers. The three months ended March 31, 2014 and 2013 are referred to as the first quarter of 2014 and 2013, respectively. Unless the context indicates otherwise, all references herein to our company include our wholly-owned subsidiary.

Our management's discussion and analysis of our financial condition and results of operations are based upon our unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q, which have been prepared by us in accordance with accounting principles generally accepted in the United States of America, or GAAP, for interim periods and with Regulation S-X promulgated under the Securities Exchange Act of 1934, as amended. This discussion and analysis should be read in conjunction with these unaudited consolidated financial statements and the notes thereto as well as in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, or our Annual Report.


Table of Contents

We commenced active operations in early 2008, and since inception, have incurred significant operating losses. As we are a clinical stage company, we expect to continue to incur significant expenses and operating losses over the next several years. Since our inception and through March 31, 2014, we have raised an aggregate of $429.0 million to fund our operations, of which $169.2 million was non-equity funding through our collaboration agreements, $183.8 million was from the sale of common stock in our public offerings and $76.0 million was from the sale of redeemable convertible preferred stock. In addition, as of March 31, 2014, we were entitled to receive $8.2 million in non-equity funding through our collaboration agreements. As of March 31, 2014, we had $237.1 million in cash and cash equivalents.

We are a leader in the translation of the science of epigenetics into first-in-class personalized therapeutics for patients with genetically defined cancers and currently have two HMT inhibitors in clinical development for the treatment of patients with genetically defined cancers. We believe we are the first company to conduct a clinical trial of an HMT inhibitor. We are conducting a Phase 1 clinical trial of our most advanced product candidate, EPZ-5676, an inhibitor targeting the DOT1L HMT, being developed for the treatment of acute leukemias with genetic alterations of the MLL gene, referred to as MLL-r or MLL-PTD, and plan to disclose adult Phase 1 dose escalation and expansion stage data in the second half of 2014. In May 2014, we initiated a Phase 1b study in pediatric patients with MLL-r leukemia, which is considered to be one of the last inadequately treated pediatric acute leukemias. This Phase 1b study is designed to evaluate the safety, pharmacokinetics and pharmacodynamics of escalating doses of EPZ-5676 in patients between the ages of 3 months and 18 years and also provide a preliminary assessment of efficacy. With this pediatric study, we now have ongoing assessments of proof-of-concept in three genetically defined cancer patient groups in the EPZ-5676 clinical program: adult MLL-r, adult MLL-PTD and pediatric MLL-r. We are also conducting a Phase 1/2 clinical trial of our second most advanced product candidate, EPZ-6438, an inhibitor targeting the EZH2 HMT, being developed for the treatment of a genetically defined subtype of non-Hodgkin lymphoma and solid tumors including INI1-deficient tumors such as synovial sarcoma and malignant rhabdoid tumors, or MRT, and plan to disclose data from the Phase 1 portion of this Phase 1/2 study in the second half of 2014. Pending the results of the Phase 1 portion of the ongoing Phase 1/2 study, we plan to initiate Phase 2 development, enrolling two proof-of-concept studies, one in non-Hodgkin lymphoma patients and one in patients with INI1-deficient tumors, such as synovial sarcoma. In addition to our clinical programs, we also have a pipeline of other HMT inhibitors that are in preclinical development that target our other prioritized HMTs. These programs are directed to genetically defined cancers, both hematological and solid tumors.

The clinical development plan for each of our therapeutic product candidates is directed towards patients with a particular genetically defined cancer. For many of our therapeutic product candidates, we plan to develop a companion diagnostic for the identification of patients with the genetically defined cancers that we seek to treat with our therapeutic product candidates. We plan to include patients with the particular genetically defined cancer in our clinical trials beginning in Phase 1 with a view to assessing possible early evidence of potential therapeutic effect. As we are tailoring our personalized therapeutics for discrete patient populations with genetically defined cancers, we believe that many of our products may qualify for orphan drug designation in the United States, the European Union and other regions.

We have entered into strategic collaborations for certain of our therapeutic programs and corresponding companion diagnostics. Our three primary collaboration partners for our therapeutic programs are Celgene Corporation and Celgene International Sàrl, collectively, Celgene; Eisai Co., Ltd., or Eisai; and Glaxo Group Limited, an affiliate of GlaxoSmithKline, or GSK. We retain all product rights in the United States under the Celgene collaboration and an opt-in right to co-develop, co-commercialize and share profits as to licensed products in the United States under the Eisai collaboration.


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The following table summarizes key information about our two most advanced product candidates:

  Product       Genetically Defined Populations                               Commercial        Diagnostic
 Candidate           (Genetic Alteration)           Stage of Development        Rights         Collaborator

EPZ-5676      Acute leukemias with alterations in   Phase 1 MLL-r and       Epizyme: United   Abbott
(DOT1L        the MLLgene                           MLL-PTD adult patient   States            (MLL-r)
inhibitor)                                          trial ongoing           Celgene: Rest
                                                                            of world
                      •    MLL-r subtype of acute     •   Dose escalation
                           myeloid leukemia, or           stage fully
                           AML, and acute                 enrolled in
                           lymphoblastic                  MLL-r adult
                           leukemia, or ALL, in           patient trial
                           adult patients
                           (Chromosomal
                           translocation
                           involving the MLL
                           gene)

                      •    MLL partial tandem         •   MLL-r / MLL-PTD
                           duplication, or                only adult
                           MLL-PTD, subtype of            expansion stage
                           AML in adult patients          enrolling
                           (Partial tandem
                           duplication of the MLL
                           gene)

                      •    MLL-r in pediatric       Phase 1b MLL-r
                           patients                 pediatric patient
                           (Chromosomal             trial initiated in
                           translocation            May 2014
                           involving the MLL
                           gene)

EPZ-6438      Non-Hodgkin lymphoma                  Phase 1/2 clinical      Eisai:            Roche
(EZH2         (Point mutations in EZH2)             trial ongoing           Worldwide         (Non-Hodgkin
inhibitor)                                                                  rights, subject   lymphoma with
              Other solid tumors including                                  to Epizyme's      EZH2 point
              INI1-deficient tumors, such as          •   Phase 1 dose      opt-in on 50.0%   mutations)
              synovial sarcoma and MRT                    escalation        of United
                                                          enrolling         States rights

                                                      •   Phase 2 trial
                                                          for non-Hodgkin
                                                          lymphoma
                                                          patients with
                                                          point mutations
                                                          in EZH2
                                                          expected to
                                                          initiate in
                                                          2014 pending
                                                          our review of
                                                          data from the
                                                          Phase 1 dose
                                                          escalation
                                                          trial

                                                    Phase 2 trial for
                                                    patients with
                                                    INI1-deficient
                                                    tumors, such as
                                                    synovial sarcoma,
                                                    expected to initiate
                                                    in 2014 pending our
                                                    review of data from
                                                    the Phase 1 dose
                                                    escalation trial

Program highlights for the three months ended March 31, 2014 include:

• For EPZ-5676, we continued enrollment in the expansion stage of our Phase 1 trial which is limited to patients with MLL-r and MLL-PTD. In May 2014, we initiated our Phase 1 trial of EPZ-5676 in pediatric MLL-r patients.

• For EPZ-6438, which Eisai refers to as E7438, we continued enrollment in the Phase 1 portion of our Phase 1/2 clinical trial. Additionally, the United States Patent and Trademark Office granted our U.S. Patent No. 8,691,507 with claims that cover the diagnosis and treatment of cancers associated with EZH2 mutation.

• For our discovery and preclinical stage product programs, we continued to progress the target programs partnered with GSK, earning a $2.0 million preclinical research and development milestone upon the February 2014 selection of a lead candidate for the second of the three targets under the agreement. In April 2014, we recorded a $1.0 million preclinical research and development milestone upon the April 2014 selection of a lead candidate for the third of the three targets under the agreement. We also continued to progress a number of other research programs directed to high priority HMTs in our pipeline.


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Collaborations

The key terms of our primary collaboration agreements are as follows:

• Celgene

In April 2012, we entered into a collaboration and license agreement with Celgene, to discover, develop and commercialize, in all countries other than the United States, small molecule HMT inhibitors targeting DOT1L, including EPZ-5676, and any other HMT targets from our product platform for patients with genetically defined cancers, excluding targets already selected by our two other existing collaborations, which we refer to as the available targets.

Agreement Structure

Under the terms of the agreement, we recorded a $65.0 million upfront payment and $25.0 million from the sale of our series C redeemable convertible preferred stock to an affiliate of Celgene, of which $3.0 million was considered a premium and included as collaboration arrangement consideration for a total upfront payment of $68.0 million. In addition, we have recorded a $25.0 million clinical development milestone payment and $2.3 million of global development co-funding through March 31, 2014. We are also eligible to receive up to $35.0 million in additional clinical development milestone payments and up to $100.0 million in regulatory milestone payments related to DOT1L as well as up to $65.0 million in payments, including a combination of clinical development milestone payments and an option exercise fee for each selected target, and up to $100.0 million in regulatory milestone payments for each available target as to which Celgene exercises its option during an initial option period ending in July 2015. Celgene has the right to extend the option period until July 2016 by making a significant option extension payment. As to DOT1L and each available target as to which Celgene exercises its option, we retain all product rights in the United States and are eligible to receive royalties for each target at defined percentages ranging from the mid-single digits to the mid-teens on net product sales outside of the United States, subject to reductions in specified circumstances. Due to the uncertainty of pharmaceutical development and the high historical failure rates generally associated with drug development, we may not receive any additional milestone or royalty payments from Celgene. The next potential milestone payment that we might be entitled to receive under this agreement is $35.0 million for the initiation of a pivotal clinical trial, as defined in the agreement, for our DOT1L inhibitor.

We are obligated to conduct and solely fund research and development costs of the Phase 1 clinical trials for EPZ-5676. For all development costs other than the development costs of the Phase 1 clinical trials for EPZ-5676, Celgene and we will equally co-fund global development and each party will solely fund territory-specific development costs for its territory. We are obligated to conduct and solely fund research and development costs through the effectiveness of the first investigational new drug application for an HMT inhibitor directed to each available target selected by Celgene, after which point Celgene and we will equally co-fund global development and each party will solely fund territory-specific development costs for its territory. In the first quarter of 2014, we recorded accounts receivable of $0.4 million related to non-Phase 1 global development costs subject to the co-funding provisions of this agreement. Co-funded amounts receivable from Celgene are recorded as a reduction to research and development expense.

Collaboration Revenue

Through March 31, 2014, in addition to amounts allocated to Celgene's purchase of shares of our series C redeemable convertible preferred stock, we had recorded a total of $95.3 million in cash and accounts receivable under the Celgene agreement, including the $3.0 million implied premium on Celgene's purchase of our series C redeemable convertible preferred stock. Through March 31, 2014, we have recognized $63.4 million of collaboration revenue, including $1.7 million and $3.6 million in the three months ended March 31, 2014 and 2013, respectively, and $2.3 million of global development co-funding as a reduction to research and development expense, including $0.4 million in the three months ended March 31, 2014, in the consolidated statements of operations and comprehensive loss related to this agreement. As of March 31, 2014 and December 31, 2013, we had deferred revenue of $29.7 million and $31.3 million, respectively, related to this agreement.


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• Eisai

In April 2011, we entered into a collaboration and license agreement with Eisai under which we granted Eisai an exclusive worldwide license to our small molecule HMT inhibitors directed to EZH2, including EPZ-6438, while retaining an opt-in right to co-develop, co-commercialize and share profits with Eisai as to licensed products in the United States. Additionally, as part of the research collaboration, we agreed to provide research and development services related to the licensed compounds through December 31, 2014.

Agreement Structure

Under the terms of the agreement, we recorded a $3.0 million upfront payment, $7.0 million in preclinical research and development milestone payments, a $6.0 million clinical development milestone payment and $19.2 million for research and development services through March 31, 2014. We are eligible to receive up to $25.0 million in additional clinical development milestone payments, up to $55.0 million in regulatory milestone payments and up to $115.0 million in sales-based milestone payments. We are also eligible to receive royalties at a percentage in the mid-single digits on any net product sales outside of the United States and at a percentage from the mid-single digits to low double-digits on any net product sales in the United States, subject to reduction in specified circumstances. Due to the uncertainty of pharmaceutical development and the high historical failure rates generally associated with drug development, we may not receive any additional milestone payments or royalty or profit share payments from Eisai. The next potential milestone payment that we might be entitled to receive under this agreement is $10.0 million for the initiation of the Phase 2 portion of the ongoing Phase 1/2 clinical trial of EPZ-6438.

Eisai solely funds all research, development and commercialization costs for licensed compounds, except for the cost obligations that we will undertake if we exercise our opt-in right to co-develop, co-commercialize and share profits with Eisai as to licensed products in the United States. If we exercise our opt-in right as to a licensed compound, the licensed compound would become a shared product as to which (i) Eisai's obligation to pay royalties to us as to such shared product in the United States will terminate; (ii) Eisai and we will share in net profits or losses with respect to such shared product in the United States; (iii) 25.0% of specified past development costs will become creditable by Eisai against future milestones or royalties due to us, subject to certain limitations specified in the agreement; (iv) all subsequent milestone payments that become payable by Eisai to us after we exercise our opt-in right will be decreased by 50.0% in certain circumstances; and (v) Eisai and we will share equally in subsequent development costs allocated to the United States.

Collaboration Revenue

Through March 31, 2014, we recorded a total of $35.2 million in cash and accounts receivable under the Eisai agreement. Through March 31, 2014, we have recognized $34.0 million of collaboration revenue, including $1.6 million and $2.3 million in the three months ended March 31, 2014 and 2013, respectively, in the consolidated statements of operations and comprehensive loss related to this agreement. As of March 31, 2014 and December 31, 2013, we had deferred revenue of $1.2 million and $1.6 million, respectively, related to this agreement.

• GSK

In January 2011, we entered into a collaboration and license agreement with GSK to discover, develop and commercialize novel small molecule HMT inhibitors directed to available targets from our product platform. Under the terms of the agreement, we granted GSK exclusive worldwide license rights to HMT inhibitors directed to three targets. Additionally, as part of the research collaboration provided for in the agreement, we agreed to provide research and development services related to the licensed targets pursuant to agreed upon research plans until the earlier of the achievement of development candidate selection for a target or the end of the research term on January 8, 2015. During 2013, development candidate selection was achieved for the first target under the collaboration and license agreement, and, accordingly, we are no longer providing research and development services related to this target as of March 31, 2014.

In March 2014, we and GSK amended certain terms of this agreement for the third target, revising the license terms with respect to candidate compounds and amending the corresponding financial terms, including reallocating milestone payments and increasing royalty rates as to the third target. In connection with the execution of this amendment, we recorded a $3.0 million upfront payment.


Table of Contents

Agreement Structure

Under the agreement, we recorded a $20.0 million upfront payment, a $3.0 million payment upon the execution of the March 2014 agreement amendment, $6.0 million of fixed research funding, $14.0 million of preclinical research and development milestone payments and $3.6 million for research and development services through March 31, 2014. In addition, in April 2014, we recorded a $1.0 million preclinical research and development milestone under this agreement. Following the April 2014 milestone achievement, we are eligible to receive up to $18.0 million in additional preclinical research and development milestone payments, up to $109.0 million in clinical development milestone payments, up to $275.0 million in regulatory milestone payments and up to $218.0 million in sales-based milestone payments. In addition, GSK is required to pay us royalties at percentages from the mid-single digits to the low double-digits, on a licensed product-by-licensed product basis, on worldwide net product sales, subject to reductions in specified circumstances. Due to the uncertainty of pharmaceutical development and the high historical failure rates generally associated with drug development, we may not receive any additional milestone payments or royalty payments from GSK. Due to the varying stages of development of each licensed target, we are not able to determine the next milestone that might be achieved, if any.

For each selected target in the collaboration, we are primarily responsible for research until the selection of the development candidate, and GSK is solely responsible for subsequent development and commercialization. GSK provided a fixed amount of research funding during the second and third years of the research term and is obligated to provide research funding equal to 100.0% of research and development costs, subject to specified limitations, for research activities we conduct in the fourth year of the research term.

Collaboration Revenue

Through March 31, 2014, we recorded a total of $46.6 million in cash and accounts receivable under the GSK agreement. Through March 31, 2014, we have recognized $36.2 million of collaboration revenue, including $10.1 million and $3.0 million in the three months ended March 31, 2014 and 2013, respectively, in the consolidated statements of operations and comprehensive loss related to this agreement, including a $2.0 million preclinical research and development milestone achieved and recognized as collaboration revenue in the three months ended March 31, 2014. As of March 31, 2014 and December 31, 2013, we had deferred revenue of $10.4 million and $13.9 million, respectively, related to this agreement.

Results of Operations

Collaboration Revenue

The following is a comparison of collaboration revenue for the three months ended March 31, 2014 and 2013:

Three Months Ended March 31, 2014 2013 Increase

(In millions)

Collaboration revenue $ 13.4 $ 8.9 $ 4.5

Our revenue consists of collaboration revenue, including amounts recognized from deferred revenue related to upfront payments for licenses or options to obtain . . .

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