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

Show all filings for ENDOCYTE INC

Form 10-Q for ENDOCYTE INC


8-Aug-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. In the first half of 2011, we initiated enrollment of our PROCEED trial, a phase 3 registration trial in women with PROC. 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 May 2014, we stopped the PROCEED trial based on the review of interim data by the Data Safety Monitoring Board, or DSMB, because vintafolide in combination with PLD versus PLD alone did not meet the pre-specified criteria for improvement in progression free survival, or PFS. In the three and six months ending June 30, 2014, we recorded a charge of $4.8 million for the remaining expenses of the PROCEED trial, including site close-out expenses.

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 enrolled 202 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. Based on the DSMB's additional recommendation, investigators and patients were 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 the European Society of Medical Oncology Congress, or ESMO, in September 2014. The future development of vintafolide will be assessed after we receive the final OS results from the TARGET trial.

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 dose-escalation trial. We are currently finalizing the development plan for EC1456, including the selection of target indications to evaluate once the maximum tolerated dose is determined.

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, which agreement has been terminated by Merck effective September 15, 2014. As a result of the termination of the collaboration with Merck, we are no longer eligible for additional milestone payments from Merck. In addition, all of our obligations under the agreement have been fulfilled and we are not required to perform any additional services to Merck. Pursuant to the collaboration agreement, we received a non-refundable $120.0 million upfront payment and a $5.0 million milestone payment in 2012 from Merck. Under the collaboration agreement, we are responsible for the majority of funding and completion of the PROCEED trial, which was terminated in May 2014. 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 final OS results. Merck is responsible for the costs of the TARGET trial through September 15, 2014. Based on receiving the notice of termination of the collaboration agreement in June 2014, we concluded that all of our obligations under the agreement have been fulfilled and we are not required to perform any additional services to Merck, and as a result the balance of deferred revenue of $31.1 million was recognized in June 2014. Any reimbursable costs incurred from July 1, 2014 through September 15, 2014, the contract termination date, will be recognized as revenue in the three months ended September 30, 2014. In addition, in July 2014, we entered into a letter agreement with Merck whereby Merck agreed to pay (i) $2.2 million of expenses related to costs incurred to prepare for the increase in the number of FR(100%) patients (patients in which 100 percent of their target lesions over-expressed the folate receptor as determined by an etarfolatide scan) in the PROCEED trial from 250 to 350, for which Merck agreed to reimburse at 75%, and (ii) its portion of the remaining PROCEED trial expenses beyond the September 15, 2014 termination date. We have no obligations nor are we required to perform any additional services under the letter agreement. Revenue for these additional payments will be recognized in future periods.

As a result of the termination of the PROCEED trial, in May 2014, we withdrew the conditional marketing authorization applications in Europe for vintafolide for the treatment of PROC, and etarfolatide and folic acid for patient selection. During the three and six months ended June 30, 2014, we terminated contracts and reduced headcount related to the pre-launch commercial activities 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 fails 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.

Until the second quarter of 2014, we had never been profitable and had incurred significant net losses since our inception. For the three and six months ended June 30, 2014, we had net income of $22.4 million and $19.2 million, respectively, as a result of accelerating the recognition of deferred revenue of $31.1 million associated with the Merck collaboration. As of June 30, 2014, we had a retained deficit of $154.7 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 June 30, 2014, our current cash position was $219.2 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 $101.9 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 close-out 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. In the event of an early termination of a collaboration agreement, any deferred revenue is recognized in the period in which all of our obligations under the agreement have been fulfilled.

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 or a termination of the arrangement could result in substantial changes to the period over which the revenues are recognized.

Results of Operations



Comparison of Three Months Ended June 30, 2013 to Three Months Ended June 30,
2014



                                  Three Months Ended
                                       June 30,              $ Increase       % Increase
                                   2013          2014
                                                     (In thousands)
Statement of operations data:
Collaboration revenue           $   16,483     $ 49,168     $     32,685              198
Operating expenses:
Research and development            18,607       18,990              383                2
General and administrative           6,211        7,968            1,757               28

Total operating expenses            24,818       26,958            2,140                9

Income (loss) from operations       (8,335 )     22,210           30,545              366

Interest income                        126          169               43               34
Interest expense                         -           (1 )              1              100
Other income (expense), net            (18 )        (22 )              4               22
Net income (loss)               $   (8,227 )   $ 22,356     $     30,583              372

Revenue

Our revenue of $49.2 million recorded in the three months ended June 30, 2014 related primarily to the collaboration with Merck. Of this revenue:

· $15.4 million related to the amortization of the $120.0 million upfront license payment, a milestone payment, reimbursable research and development expenditures incurred prior to the three months ended June 30, 2014;

· $2.7 million of revenue related to the amortization of reimbursable research and development expenditures that we incurred during the three months ended June 30, 2014; and

· $31.1 million related to the acceleration of the deferred revenue balance associated with the Merck collaboration that otherwise would have been recognized in future periods 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 were recognized as revenue ratably over the performance period, but we accelerated the recognition of that revenue in the three months ended June 30, 2014 due to the notice of termination of the Merck agreement that we received in that period. Any reimbursable costs incurred in the three months ending September 30, 2014, will be recognized as revenue in that period. NMP revenue related to the upfront payment will continue to be recorded ratably over the contract period.

All of our revenue of $16.5 million in the three months ended June 30, 2013 related to the collaboration with Merck.

Research and Development

The increase in research and development expense for the three months ended June 30, 2014 compared to the three months ended June 30, 2013 was primarily attributable to an increase in expenses relating to the accrual of $4.8 million for the remaining expenses of the PROCEED trial, including site close-out expenses, and an increase in compensation expenses due to increases in headcount and stock-based compensation. These increases were partially offset by a decrease in expenses relating to the TARGET trial and a decrease in manufacturing expenses for vintafolide that were previously transitioned to Merck. Included in research and development expense for the three months ended June 30, 2014 were $5.2 million of expenses that are reimbursable from Merck.

Included in research and development expense were stock-based compensation charges of $0.9 million and $1.3 million for the three months ended June 30, 2013 and 2014, respectively.

Research and development expense included expense of $0.2 million for each of the three months ended June 30, 2013 and 2014, 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 June 30, 2014 compared to the three months ended June 30, 2013 was primarily attributable to increases in stock-based compensation and severance costs associated with a reduction in headcount and the termination of contracts supporting commercial activities following the withdrawal of the marketing applications in Europe. Included in general and administrative expense for the three months ended June 30, 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 $0.6 million and $1.2 million for the three months ended June 30, 2013 and 2014, respectively.

Interest Income

The increase in interest income in the three months ended June 30, 2014 compared to the three months ended June 30, 2013 resulted from an increase in the average short and long-term investment balances during the three months ended June 30, 2014 as compared to the three months ended June 30, 2013 due to the investment of proceeds from our public offering of common stock that closed in April 2014.

Comparison of Six Months Ended June 30, 2013 Compared to Six Months Ended June 30, 2014

                                   Six Months Ended         $ Increase/       % Increase/
                                       June 30,             (Decrease)        (Decrease)
                                  2013          2014
                                                      (In thousands)
Statement of operations data:
Collaboration revenue           $  30,997     $ 66,437     $      35,440               114
Operating expenses:
Research and development           30,866       31,977             1,111                 4
General and administrative         12,467       15,469             3,002                24

Total operating expenses           43,333       47,446             4,113                 9

Income (loss) from operations     (12,336 )     18,991            31,327               254
Interest income                       266          254               (12 )              (5 )
Interest expense                       (1 )         (1 )               -                 -
Other income (expense), net           (18 )        (29 )              11                61

Net income (loss)               $ (12,089 )   $ 19,215     $      31,304               259

Revenue

Revenue of $66.4 million was recorded in the six months ended June 30, 2014 primarily related to the collaboration with Merck. Of this revenue:

· $30.0 million was related to amortization of the upfront license payment, a milestone payment, and reimbursable research and development expenditures incurred prior to the six months ended June 30, 2014;

· $5.3 million related to amortization of reimbursable research and development expenditures that we incurred during the six months ended June 30, 2014; and

· $31.1 million related to the acceleration of the deferred revenue balance associated with the Merck collaboration agreement that otherwise would have been recognized in future periods and the amortization of the $1.0 million non-refundable upfront payment from NMP.

Research and Development

The increase in research and development expense for the six months ended June 30, 2014 compared to the six months ended June 30, 2013 was primarily attributable to an increase in expenses relating to the accrual of $4.8 million for the remaining expenses of the PROCEED trial, including site close-out expenses, and an increase in compensation expenses due to increases in headcount and stock-based compensation. These increases were partially offset by a decrease in expenses related to the TARGET trial and a decrease in manufacturing expenses for vintafolide that were previously transitioned to Merck. Included in research and development expense for the six months ended June 30, 2014 were $8.8 million of expenses that are reimbursable from Merck.

Included in research and development expense were stock-based compensation charges of $1.5 million and $2.5 million for the six months ended June 30, 2013 and 2014, respectively.

Research and development expense included expenses of $0.4 million and $0.5 million for the six months ended June 30, 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 six months ended June 30, 2014 compared to the six months ended June 30, 2013 was primarily attributable to increases in stock-based compensation, expenses related to launch preparations in Europe prior to May 2014 and severance costs associated with a reduction in headcount and the termination of contracts supporting commercial activities following the withdrawal of the marketing applications in Europe in May 2014. Included in general and administrative expense for the six months ended June 30, 2014 were $0.2 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 expenses were stock-based compensation charges of $1.1 million and $2.2 million for the six months ended June 30, 2013 and 2014, respectively.

Interest Income

The decrease in interest income in the six months ended June 30, 2014 compared to the six months ended June 30, 2013 resulted from lower investment balances in the first quarter of 2014 compared to the first quarter of 2013. Investments balances increased in April 2014 due to our investment of the proceeds of the public offering.

Liquidity and Capital Resources . . .

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