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CLVS > SEC Filings for CLVS > Form 10-Q on 8-Aug-2014All Recent SEC Filings

Show all filings for CLOVIS ONCOLOGY, INC.

Form 10-Q for CLOVIS ONCOLOGY, INC.


8-Aug-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 and the information incorporated herein by reference includes statements that are, or may be deemed, "forward-looking statements." In some cases, these forward-looking statements can be identified by the use of forward-looking terminology, including the terms "believes," "estimates," "anticipates," "expects," "plans," "intends," "may," "could," "might," "will," "should," "approximately" or, in each case, their negative or other variations thereon or comparable terminology, although not all forward-looking statements contain these words. They appear in a number of places throughout this Quarterly Report on Form 10-Q and include statements regarding our intentions, beliefs, projections, outlook, analyses or current expectations concerning, among other things, our ongoing and planned preclinical studies and clinical trials, the timing of and our ability to make regulatory filings and obtain and maintain regulatory approvals for our product candidates, the degree of clinical utility of our products, particularly in specific patient populations, expectations regarding clinical trial data, our results of operations, financial condition, liquidity, prospects, growth and strategies, the industry in which we operate and the trends that may affect the industry or us.

By their nature, forward-looking statements involve risks and uncertainties because they relate to events, competitive dynamics, and industry change and depend on the economic circumstances that may or may not occur in the future or may occur on longer or shorter timelines than anticipated. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may differ materially from the forward-looking statements contained herein.

Any forward-looking statements that we make in this Quarterly Report on Form 10-Q speak only as of the date of such statement, and we undertake no obligation to update such statements to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect the occurrence of unanticipated events.

You should also read carefully the factors described in the "Risk Factors" section of this Quarterly Report on Form 10-Q to better understand the risks and uncertainties inherent in our business and underlying any forward-looking statements. You are advised, however, to consult any further disclosures we make on related subjects in our other reports filed with the SEC and on our website.

Overview

We are a biopharmaceutical company focused on acquiring, developing and commercializing innovative anti-cancer agents in the United States, Europe and additional international markets. We target our development programs for the treatment of specific subsets of cancer populations, and seek to simultaneously develop, with partners, companion diagnostics that direct our product candidates to the patients that are most likely to benefit from their use. We are currently developing three product candidates: rociletinib, an orally available, small molecule epidermal growth factor receptor, or EGFR, covalent inhibitor that is in Phase II clinical development for the treatment of non-small cell lung cancer, or NSCLC, in patients with activating EGFR mutations, including the initial activating mutations as well as the primary resistance mutation, T790M; rucaparib, an orally available, small molecule poly (ADP-ribose) polymerase, or PARP inhibitor, that is currently in Phase II/III clinical trials for the treatment of ovarian and pancreatic cancers; and lastly, lucitanib, an oral, selective tyrosine kinase inhibitor in Phase I/II clinical trials for the treatment of breast and lung cancers. We hold global development and commercialization rights for rociletinib and rucaparib and US and Japanese rights for lucitanib.

We were incorporated in Delaware in April 2009 and commenced operations in May 2009. To date, we have devoted substantially all of our resources to identifying and in-licensing product candidates, performing development activities with respect to those product candidates, and the general and administrative support of these operations. Through June 30, 2014, we have generated $13.6 million in license and milestone revenue related to our collaboration and license agreement with Les Laboratoires Servier (Servier), but have generated no product revenues. We have principally funded our operations using the net proceeds from the sale of convertible preferred stock, the issuance of convertible promissory notes, and from public offerings of our common stock. The convertible preferred stock and convertible promissory notes converted into shares of our common stock immediately prior to the closing of our initial public offering in November 2011.

We have never been profitable and, as of June 30, 2014, we had an accumulated deficit of $334.5 million. We expect to incur significant and increasing losses for the foreseeable future as we advance our product candidates through clinical development to seek regulatory approval and, if approved, commercialize such product candidates. We will need additional financing to support our operating activities. We will seek to fund our operations through equity or debt financings or other sources. Adequate additional financing may not be available to us on acceptable terms, or at all. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy. We expect that research and development expenses will increase as we continue the development of our product candidates. We will need to generate significant revenues to achieve profitability and we may never do so.

On November 19, 2013, the Company acquired all of the outstanding common and preferred stock of Ethical Oncology Science, S.p.A. (EOS) using a combination of cash and the Company's common stock as the initial purchase consideration. EOS was a biopharmaceutical company located in Italy that focused on the development of novel medicines for the treatment of cancer. The primary reason for the business acquisition was to obtain development and commercialization rights to lucitanib. The Company paid $11.8 million in cash and issued $173.7 million of common stock at the acquisition date and may make additional contingent future cash payments of $65.0 million and 115.0 million if certain regulatory and sales milestones are achieved.

The Company received notice on July 30, 2014 that the nonproprietary name rociletinib was adopted for our drug candidate CO-1686 by the United States Adopted Names Council. All future references to this drug candidate will now be presented as rociletinib.

Product License Agreements

Rociletinib (CO-1686)

In May 2010, we entered into a worldwide license agreement with Avila (now part of Celgene Corporation) to discover, develop and commercialize a covalent inhibitor of mutant forms of the EGFR gene product. Rociletinib was identified as the lead inhibitor candidate under the license agreement. We are responsible for all preclinical, clinical, regulatory and other activities necessary to develop and commercialize rociletinib. We made an up-front payment of $2.0 million upon execution of the license agreement, a $4.0 million milestone payment in the first quarter of 2012 upon the acceptance by the U.S. Food and Drug Administration, or FDA, of our investigational new drug, or IND, application for rociletinib, and a $5.0 million milestone payment in the first quarter of 2014 upon the initiation of the Phase II study for rociletinib. We recognized all payments as acquired in-process research and development expense. We are obligated to pay royalties on net sales of rociletinib, based on the volume of annual net sales achieved. Celgene has the option to increase royalty rates by electing to reimburse a portion of our development expenses. This option must be exercised within a limited period of time after Celgene is notified by us of our intent to pursue regulatory approval of rociletinib in the United States or the European Union as a first-line treatment. Such notice was provided to Celgene on June 4, 2014. We may be required to pay up to an additional aggregate of $110.0 million in additional development and regulatory milestone payments if certain clinical study objectives and regulatory filings, acceptances and approvals are achieved. In addition, we may be required to pay up to an aggregate of $120.0 million in sales milestone payments if certain annual sales targets are achieved.

In January 2013, the Company entered into an exclusive license agreement with Gatekeeper Pharmaceuticals, Inc. ("Gatekeeper") to acquire exclusive rights under patent applications associated with mutant EGFR inhibitors and methods of treatment. Pursuant to the terms of the license agreement, the Company made an up-front payment of $250,000 upon execution of the agreement, which was recognized as acquired in-process research and development expense. If rociletinib is approved for commercial sale, the Company will pay royalties to Gatekeeper on future net sales.


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Rucaparib

In June 2011, we entered into a license agreement with Pfizer to acquire exclusive global development and commercialization rights to Pfizer's drug candidate known as rucaparib. This drug candidate is a small molecule PARP inhibitor which we are developing for the treatment of ovarian and pancreatic cancers. Pursuant to the terms of the license agreement, we made an up-front payment of $7.0 million. In April, 2014, the Company initiated a pivotal registrational study for rucaparib, which resulted in a $0.4 million milestone payment to Pfizer Inc. as required by the license agreement. We recognized all payments as acquired in-process research and development expense. We are responsible for all development and commercialization costs of rucaparib and, if approved, we will be required to pay Pfizer royalties on sales of the product. In addition, we may be required to pay Pfizer up to an aggregate of $258.5 million in milestone payments if certain development, regulatory and sales milestones are achieved.

In April 2012, the Company entered into a license agreement with AstraZeneca UK Limited to acquire exclusive rights associated with rucaparib under a family of patents and patent applications that claim methods of treating patients with PARP inhibitors in certain indications. The license enables the development and commercialization of rucaparib for the uses claimed by these patents. Pursuant to the terms of the license agreement, the Company made an up-front payment of $250,000 upon execution of the agreement, which was recognized as acquired in-process research and development expense. The Company may be required to pay up to an aggregate of $0.7 million in milestone payments if certain regulatory filings, acceptances and approvals are achieved. If approved, AstraZeneca will also receive royalties on any sales of rucaparib.

Lucitanib

On November 19, 2013, the Company acquired all of the issued and outstanding capital stock of EOS and gained rights to develop and commercialize lucitanib, an oral, selective tyrosine kinase inhibitor. As further described below, EOS licensed the worldwide rights, excluding China, to develop and commercialize lucitanib from Advenchen Laboratories LLC (Advenchen). Subsequently, rights to develop and commercialize lucitanib in markets outside the U.S. and Japan were sublicensed by EOS to Les Laboratoires Servier (Servier) in exchange for upfront milestone fees, royalties on sales of lucitanib in the sublicensed territories, and research and development funding commitments.

In October 2008, EOS entered into an exclusive license agreement with Advenchen to develop and commercialize lucitanib on a global basis, excluding China. The Company is obligated to pay Advenchen royalties on net sales of lucitanib, based on the volume of annual net sales achieved. In addition, the Company is obligated to pay to Advenchen twenty-five percent of any consideration, excluding royalties, received pursuant to any sublicense agreements for lucitanib, including the agreement with Les Laboratoires Servier. In the first quarter of 2014, the Company recognized acquired in-process research and development expense of $3.4 million, which represents 25% of the sublicense agreement consideration of $13.6 million received from Servier upon the end of opposition and appeal of the lucitanib patent by the European Patent Office.

In September 2012, EOS entered into a collaboration and license agreement with Servier whereby EOS sublicensed to Servier exclusive rights to develop and commercialize lucitanib in all countries outside of the U.S., Japan, and China. In exchange for these rights, EOS received an upfront payment and is entitled to receive additional payments on the achievement of specified development, regulatory and commercial milestones up to 90.0 million in the aggregate. In addition, the Company is entitled to receive sales milestone payments if specified annual sales targets for lucitanib are met, which, in the aggregate, could total 250.0 million. The Company is also entitled to receive royalties on net sales of lucitanib by Servier.

The Company and Servier are developing lucitanib pursuant to a development plan agreed to between the parties. Servier is responsible for the initial 80 million in global development costs under the agreed upon plan. Cumulative global development costs, if any, in excess of 80.0 million will be shared equally between the Company and Servier.

CO-101

In November 2009, we entered into a license agreement with Clavis Pharma ASA to develop and commercialize CO-101. In November 2012, the Company reported results from a pivotal study of CO-101 in metastatic pancreatic cancer, which failed to demonstrate a difference in overall survival between the two study arms. Based on the results of the study, the Company ceased development of CO-101 and terminated the license agreement.

Drug Discovery Collaboration Agreement

In July 2012, the Company entered into a drug discovery collaboration agreement with Array BioPharma Inc. for the discovery of a novel KIT inhibitor targeting resistance mutations for the treatment of GIST, a gastrointestinal cancer. Under the terms of the agreement, the Company was responsible to fund all costs of the discovery program, as well as costs to develop and commercialize any clinical candidates discovered. This drug discovery program did not identify a compound to be used in further development activities and the program was terminated in the fourth quarter of 2013.

Financial Operations Overview

Revenue

To date, we have generated $13.6 million in license and milestone revenue related to our collaboration and license agreement with Servier. In the future, we may generate revenue from the sales of product candidates that are currently under development, as well as from milestone payments or royalties pursuant to our sublicense agreement with Servier. If we fail to successfully complete the development of our product candidates or obtain regulatory approval for them, our ability to generate future revenue, and our results of operations and financial position, will be adversely affected.

Research and Development Expenses

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

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

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

expenses incurred under agreements with contract research organizations and investigative sites that conduct our clinical trials;

the cost of acquiring, developing and manufacturing clinical trial materials;


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costs associated with preclinical activities and regulatory operations; and

activities associated with the development of companion diagnostics for our product candidates.

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

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 plan to increase our research and development expenses for the foreseeable future as we seek to expand our clinical and companion diagnostic development activities for our rociletinib, rucaparib and lucitanib product candidates.

The following table identifies research and development costs and acquired in-process research and development costs on a program-specific basis for our products under development. Personnel-related costs, depreciation and share-based compensation are not allocated to specific programs as they are deployed across multiple projects under development and, as such, are separately classified as personnel and other expenses in the table below.

                                        Three Months Ended          Six Months Ended
                                             June 30,                   June 30,
                                         2014          2013         2014         2013
       CO-101 Expenses
       Research and development       $       -      $    342     $     -      $    966

       CO-101 Total                           -           342           -           966
       Rociletinib Expenses
       Acquired in-process R&D                -            -         5,000          250
       Research and development           13,407        3,740       23,078        7,376

       Rociletinib Total                  13,407        3,740       28,078        7,626
       Rucaparib Expenses
       Acquired in-process R&D               400           -           400           -
       Research and development            7,629        4,668       15,411        7,305

       Rucaparib Total                     8,029        4,668       15,811        7,305
       cKIT Inhibitor Expenses
       Research and development               -         1,136           -         2,263

       cKIT Inhibitor Total                   -         1,136           -         2,263
       Lucitanib Expenses
       Acquired in-process R&D                -            -         3,406           -
       Research and development              180           -           352           -

       Lucitanib Total                       180           -         3,758           -
       Personnel and other expenses        7,224        5,930       13,750       10,028

       Total                          $   28,840     $ 15,816     $ 61,397     $ 28,188

General and Administrative Expenses

General and administrative expenses consist principally of salaries and related costs for personnel in executive, finance, business development, legal, investor relations and information technology functions. Other general and administrative expenses include facility costs, communication expenses, corporate insurance, and professional fees for legal, consulting and accounting services.

Accretion of Contingent Purchase Consideration

In connection with the acquisition of EOS in November 2013, we recorded an additional purchase consideration liability equal to the estimated fair value of future payments that are contingent upon the achievement of various regulatory and sales milestones. We re-measure the fair value of contingent consideration arrangements on a periodic basis and record changes in fair value as an operating expense in the statement of operations. Changes in fair value are primarily attributed to new information about the likelihood of achieving such milestones and increases to the liability associated with the passage of time. In the absence of new information, the changes to fair value represent the passage of time as we progress towards the achievement of future milestones.

Other Income and Expense

Other income is comprised of interest income earned on cash and cash equivalents. We also hold cash balances at financial institutions denominated in currencies other than the U.S. dollar to fund research and development activities performed by various third-party vendors. The translation of these currencies into U.S. dollars results in foreign currency gains or losses, depending on the change in value of these currencies in relation to the U.S. dollar.


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Critical Accounting Policies and Significant Judgments and Estimates

Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, expenses, revenue and the disclosure of contingent assets and liabilities in our financial statements. On an ongoing basis, we evaluate our estimates and judgments, including those related to accrued expenses and share-based compensation. We base our estimates on historical experience, known trends and events and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

For a description of our critical accounting policies, please see 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. There have not been any material changes to our critical accounting policies since December 31, 2013.

Recent Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update "Revenue from Contracts with Customers (Topic 606)" (ASU 2014-09). ASU 2014-09 specifies the accounting for revenue from contracts with customers and establishes disclosure requirements relating to the nature, timing and uncertainty of revenue and cash flows arising from the entity's contracts with customers. This update is effective for public entities for annual and interim periods beginning after December 15, 2016 and allows for either full retrospective or modified retrospective adoption. Early adoption is not permitted. The Company is currently evaluating the planned method of adoption and if this update will have a material impact on our financial position or results of operations.

Results of Operations

Comparison of Three Months Ended June 30, 2014 and 2013:

The following table summarizes the results of our operations for the three
months ended June 30, 2014 and 2013:



                                           Three Months Ended
                                                June 30,
                                          2014            2013           Change         Percent Change
                                                                (in thousands)
Revenues:
License and milestone revenue           $      -        $      -        $      -                    0.0 %
Operating expenses:
Research and development                   28,440          15,816          12,624                  79.8 %
General and administrative                  5,265           3,492           1,773                  50.8 %
Acquired in-process research and
development                                   400              -              400                 100.0 %
Accretion of contingent purchase
consideration                                 861              -              861                 100.0 %

Total expenses                             34,966          19,308          15,658                  81.1 %

Operating loss                            (34,966 )       (19,308 )       (15,658 )                81.1 %
Other income (expense), net                   270             (33 )           303                (918.2 %)

Loss before income taxes                  (34,696 )       (19,341 )       (15,355 )                79.4 %
Income taxes                                  (68 )            -              (68 )              (100.0 %)

Net loss                                $ (34,764 )     $ (19,341 )     $ (15,423 )                79.7 %


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Research and Development Expenses. The increase in research and development expenses for the three months ended June 30, 2014 as compared to the three months ended June 30, 2013 was due primarily to expanded development activities for the rociletinib and rucaparib programs. Clinical supply and related manufacturing development costs for both programs increased by a combined $5.9 million as we increased production to support expanded clinical studies. Costs associated with clinical and nonclinical development activities for rociletinib increased by $4.0 million in the second quarter of 2014 due primarily to the increased enrollment in the ongoing Phase I/II study in non small cell lung cancer as well as the initiation of the TIGER 1, TIGER 2 and Japanese Phase I studies in 2014. Clinical trial costs for rucaparib increased by $1.7 million in the second quarter of 2014 due primarily to the initiation of the ARIEL2 and ARIEL3 studies in ovarian cancer and a Phase II study in patients with pancreatic cancer and a known BRCA mutation. In addition, salaries, share-based compensation expense and other personnel related costs increased by $2.4 million in the second quarter of 2014 as we increased our headcount to support our expanded development activities. These increases in expense were partially offset by a $1.4 million decline in costs associated with the termination of the CO-101 and cKIT programs in late 2012 and 2013, respectively.

General and Administrative Expenses. The increase in general and administrative expenses for the three months ended June 30, 2014 compared to the three months ended June 30, 2013 was primarily attributable to an increase in share-based compensation expense of $1.6 million. The increase was also due to larger professional services, facilities and information technology costs in the second quarter of 2014 to support our expanded development activities and the operation of our EOS subsidiary acquired in November 2013.

Acquired In-Process Research and Development Expenses. The increase in acquired in-process research and development for the three months ended June 30, 2014 compared to the three months ended June 30, 2013 related to a $0.4 million milestone payment made to Pfizer in the second quarter of 2014 upon the initiation of a pivotal registrational study for rucaparib.

Accretion of Contingent Purchase Consideration. Accretion of the contingent purchase consideration totaled $0.9 million for the three months ended June 30, . . .

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