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ASTX > SEC Filings for ASTX > Form 10-Q on 9-Nov-2011All Recent SEC Filings




Quarterly Report

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

You should read the following discussion together with our condensed consolidated financial statements and related notes included elsewhere in this report. The results discussed below are not necessarily indicative of the results to be expected in any future periods. Our disclosure and analysis in this section of the report also contain forward-looking statements. When we use the words "anticipate," "estimate," "project," "intend," "expect," "plan," "believe," "should," "likely" and similar expressions, we are making forward-looking statements. Forward-looking statements provide our current expectations or forecasts of future events. In particular, these statements include statements such as: our estimates about profitability; the percentage and amount of royalties we expect to earn on Dacogen sales under our agreement with Eisai; our forecasts regarding our operating expenses; our expectations about the joint development program with GSK; our statements regarding the sufficiency of our cash to meet our operating needs; and statements about our acquisition of Astex Therapeutics. Our actual results could differ materially from those predicted in the forward-looking statements as a result of risks and uncertainties including, but not limited to: our ability to successfully integrate Astex Therapeutics with our existing business, particularly launching the Pyramid drug development platform; the commercial success of Dacogen; delays and risks associated with conducting and managing our clinical trials; developing products and obtaining regulatory approval; our ability to exit research operations in Pleasanton and Salt Lake City; our ability to establish and maintain collaborative relationships; competition; our ability to obtain funding; our ability to protect our intellectual property; our dependence on third party suppliers; risks associated with the hiring and loss of key personnel; adverse changes in the specific markets for our products; and our ability to launch and commercialize products. Certain unknown or immaterial risks and uncertainties can also affect our forward-looking statements. Consequently, no forward-looking statement can be guaranteed and you should not rely on these forward-looking statements. For a discussion of the known and material risks that could affect our actual results, please see the "Risk Factors" section of this report. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. Readers should carefully review the Risk Factors section as well as other reports or documents we file from time to time with the Securities and Exchange Commission.


We are a pharmaceutical company dedicated primarily to the discovery and development of novel cancer therapeutics in epigenetic and cell signaling modulation. We changed our name from SuperGen, Inc. to Astex Pharmaceuticals, Inc. in September 2011. We develop products through biochemical and clinical proof of concept to partner for further development and commercialization. Our primary developmental efforts prior to our acquisition of Astex Therapeutics Limited ("ATL") revolved around the products progressing out of our small-molecule drug discovery programs. We commenced Phase I clinical trials for amuvatinib, a multi-targeted kinase inhibitor and DNA repair suppressor in June 2007, and we commenced a Phase II trial in small cell lung cancer with amuvatinib in September 2011. In 2010, SGI-110, our small molecule DNA hypomethylating agent, received clearance from the FDA to advance into Phase I trials. Dose escalation of SGI-110 is currently in progress in the Phase I trial. In July 2011, we completed the acquisition of ATL, a privately held UK-based biotechnology company with particular expertise in fragment-based drug discovery. Our clinical pipeline now includes eight drugs in development, four of which are currently in or entering Phase II clinical trials, and four of which are currently partnered or optioned to large pharmaceutical companies.

On July 20, 2011, we completed the acquisition of all of the outstanding shares of ATL (the "Transaction"), a privately held UK-based biotechnology company with particular expertise in fragment-based drug discovery. The Transaction was effected through a scheme of arrangement in the United Kingdom, which the High Court of Justice, Chancery Division, Companies Court, London approved prior to the closing of the Transaction. Pursuant to the Transaction, we paid approximately

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$24.9 million in cash and issued 32.4 million shares of Astex common stock (representing approximately 35% of the issued and outstanding stock of Astex as of the closing of the Transaction after giving effect to the issuance of such shares) to the securityholders of ATL. In addition, we will pay deferred consideration of $30 million in stock, cash, or a combination of stock and cash, to be paid at the discretion of the Company. Deferred consideration will be paid in semi-annual installments whose amounts will be determined based on the amounts of the contingent milestone payments ATL has received and will receive under its collaboration arrangements during the period from January 2011 through January 2014. While the timing of the deferred consideration payments can vary, the aggregate amount of deferred consideration is fixed and will be paid no later than 30 months after the closing of the Transaction (January 2014), with a minimum of $15 million payable no later than the 18 month anniversary of the closing of the Transaction (January 2013). Also, as part of the Transaction, we issued replacement options for the outstanding options and assumed warrants of ATL.

ATL discovers and develops novel small molecule therapeutics. Using its fragment-based drug discovery platform, Pyramid™, ATL has built a pipeline of molecularly-targeted drugs in clinical trials, with others in discovery and pre-clinical development.

Some of its proprietary research programs include the following:

º •
º AT13387, a second generation HSP90 inhibitor, has started a Phase II trial in combination with imatinib in unresectable or metastatic gastrointestinal tumors.

º •
º AT7519 is a small molecule targeted inhibitor of CDK's 1, 2, 7 and 9. AT7519 has been investigated in two Phase I clinical trials in patients with advanced solid tumors, and has commenced a Phase II study in combination with bortezomib in patients with multiple myeloma. In addition, two Phase II trials of AT7519 to treat patients with chronic lymphocytic leukemia and mantle cell lymphoma are starting, sponsored by the NCIC Clinical Trials Group in Canada. Novartis has an option to develop and commercialize AT7519.

º •
º AT9283 is a small molecule inhibitor of kinases including aurora A and B, and JAK2. Initial clinical trials have demonstrated early signals of efficacy in patients with hematological malignancies. AT9283 has been investigated as monotherapy in patients with advanced solid tumors in two Phase I, open-label, dose-escalation trials at centers in the UK, USA and Canada. In conjunction with Cancer Research UK, we are also investigating the activity of single agent AT9283 in pediatric patients with solid tumors. AT9283 has been investigated in a Phase I/II open-label, dose-escalation trial to assess the safety, tolerability and preliminary efficacy of AT9283 as monotherapy in patients with acute leukemia. AT9283 is also being investigated in a Phase II setting in a chemotherapy refractory, multiple myeloma patient population in a trial being sponsored by the NCIC Clinical Trials Group in Canada.

In addition to its internally advancing proprietary research programs, ATL's productivity in discovery has been endorsed through numerous partnerships with major pharmaceutical companies:

º •
º Novartis commenced a Phase I study in January 2011 of LEE011, a selective inhibitor of the key cell cycle enzyme CDK4, derived from the collaboration with Novartis announced in December 2005 aimed at developing novel cancer therapies targeting the cell cycle. The commencement of the Phase I trial triggered a milestone payment received earlier in 2011, prior to our acquisition of ATL. The Company is eligible to receive additional future contingent milestone payments during the clinical development of LEE001 as well as milestones and royalties on commercialization of approved products.

º •
º In June 2011, AstraZeneca commenced a Phase I study of AZD3839, a clinical candidate selected in October 2010 and derived from the collaborative program on beta-secretase, a key enzyme implicated in the progression of Alzheimer's disease. The commencement of the Phase I trial triggered a milestone payment received earlier in 2011, prior to our acquisition of ATL. The

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Company is eligible to receive additional future contingent milestone payments during the clinical development of AZD3839 as well as milestones and royalties on commercialization of approved products.

º •
º In April 2011, AstraZeneca started clinical trials of AZD5363, a clinical candidate derived from ATL's collaborative program on protein kinase B. The Company is also eligible to receive additional future contingent payments during clinical development of AZ5363 and royalties in the event of commercialization of approved products derived from the collaboration.

º •
º Janssen Pharmaceuticals, Inc., a pharmaceutical company of Johnson & Johnson ("Janssen"), selected a development candidate from the collaborative drug discovery program aimed at identifying novel, small molecule inhibitors of Fibroblast Growth Factor Receptor ("FGFR"), for the treatment of cancer. The selection of a candidate by Janssen triggered a milestone payment received earlier in 2011, prior to our acquisition of ATL. The Company is also eligible to receive additional future contingent milestone payments during clinical development and milestones and royalties in the event of commercialization of approved products derived from the collaboration. The FGFR inhibitor program originated from a collaboration initiated in 2005 with the Cancer Research UK Drug Discovery Group at the Newcastle Cancer Centre (NCC), Northern Institute for Cancer Research, Newcastle University, UK.

We currently receive royalty revenues relating to sales of Dacogen for treatment of patients with myelodysplastic syndromes ("MDS"), which has been licensed to Eisai. We are entitled to receive a royalty on worldwide net sales of Dacogen starting at 20% and escalating to a maximum of 30%. We recognize royalty revenue when the royalty statement is received from Eisai because we do not have sufficient ability to accurately estimate Dacogen sales prior to that time. In 2006, Eisai executed an agreement to sublicense Dacogen to Cilag Gmbh International ("Cilag"), a Johnson & Johnson company, granting exclusive development and commercialization rights in all territories outside North America. Cilag is responsible for conducting regulatory and commercial activities related to Dacogen in all territories outside North America, while Eisai retains all commercialization rights and responsibility for all activities in the United States, Canada and Mexico. As a result of both the original agreement with Eisai and the sublicense with Cilag, we may receive up to $17.5 million in future contingent payments dependent upon achievements for Dacogen globally. Early next year, the Company will learn the outcomes of the supplemental New Drug Application ("sNDA")and a Marketing Authorization Application ("MAA") submissions to the United States Food and Drug Administration and the European Medicines Agency ("EMA"), respectively, seeking approval for Dacogen in the elderly Acute Myeloid Leukemia indication. Specifically, Eisai was advised that the Pharmaceutical Drug User Fee Act ("PDUFA") date for the sNDA is March 6, 2012. It is expected that the EMA will determine the outcome of the MAA within the second quarter of 2012.

All of our current products are in the development or clinical trial stage, and will require substantial additional investments in research and development, clinical trials, regulatory and sales and marketing activities to commercialize these product candidates. Conducting clinical trials is a lengthy, time-consuming, and expensive process involving inherent uncertainties and risks, and our studies may be insufficient to demonstrate safety and efficacy to support FDA approval of any of our product candidates.

As a result of our substantial research and development expenditures and minimal product revenues, we have incurred cumulative losses of $335.0 million through September 30, 2011, and have not consistently generated enough funds through our operations to support our business. We expect to have modest operating losses over the next few years and, although we were profitable in the years ended December 31, 2009 and 2010, and anticipate being marginally profitable in 2011, we may never achieve sustained profitability.

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Ultimately, our ability to sustain profitability will depend upon a variety of factors, including regulatory approvals of our products, the timing of the introduction and market acceptance of our products and competing products, Eisai's success in selling Dacogen, the success of our various collaborative, research and license arrangements, the launch of new products and our ability to control our ongoing costs and operating expenses. If our drug discovery and research efforts are not successful, or if the results from our clinical trials are not positive, we may not be able to get sufficient funding to continue our trials or conduct new trials, and we would be forced to scale down or cease our business operations. Moreover, if our products are not approved or commercially accepted we will remain unprofitable for longer than we currently anticipate. Additionally, we might be forced to substantially scale down our operations or sell certain of our assets, and it is likely the price of our stock would decline precipitously.

Critical Accounting Policies

Our management discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and reported disclosures. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, valuation of investments and stock-based compensation. We base our estimates on historical experience and on various other assumptions that we believe are 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.

Our significant accounting policies are more fully disclosed in Note 1 to our consolidated financial statements included in our 2010 Annual Report on Form 10-K. However, some of our accounting policies are particularly important to the portrayal of our financial position and results of operations and require the application of significant judgment by our management. We believe the following critical accounting policies, among others, affect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements.

Stock-Based Compensation

We account for stock-based compensation at the fair value estimated on the measurement date using the Black-Scholes option-pricing model based on assumptions for volatility, risk-free interest rates, expected life of the option, and dividends (if any). Expected volatility is determined based on a blend of historical volatility and implied volatility of our common stock based on the period of time corresponding to the expected life of the stock options. The expected life of our stock options is based on our historical data and represents the period of time that stock options granted are expected to be outstanding. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant commensurate with the expected life assumption.

We are using the straight-line attribution method to recognize stock-based compensation expense. The amount of stock-based compensation recognized during a period is based on the value of the portion of the awards that are ultimately expected to vest, including awards that vest based on certain performance criteria. We estimate forfeitures at the time of grant and revise them, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The term "forfeitures" is distinct from "cancellations" or "expirations" and represents only the unvested portion of the surrendered option. This analysis is re-evaluated quarterly and the forfeiture rate is adjusted as necessary based upon historical data. Ultimately, the actual expense recognized over the vesting period will only be for those shares that vest.

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As of September 30, 2011, there was $4.7 million of total unrecognized compensation cost related to unvested stock-based awards that vest based upon service conditions or vest based upon performance conditions and are probable of vesting. This cost is expected to be recognized over a weighted average period of 2.59 years.

Revenue Recognition

Eisai is required to pay us royalties starting at 20% and escalating to a maximum of 30% of net worldwide Dacogen sales within 45 days after the end of each calendar quarter. During the nine month period ended September 30, 2011, we recorded royalty revenue of $45.1 million. Because we do not have sufficient ability to accurately estimate Dacogen sales, we recognize royalty revenue when we receive the royalty statement from Eisai. In accordance with our license agreement with Eisai, we are entitled to receive 50% of any payments Eisai receives as a result of any sublicenses.

Development and license revenue in the nine month periods ended September 30, 2011 relates primarily to the agreements we entered into with GSK in October 2009. In connection with the agreements, we received an upfront payment of $2 million, in addition to a $3 million equity investment by GSK at above-market price. As our substantive performance obligations under the agreements are estimated to be completed over a five year period, the $2 million upfront payment and the premium paid on the $3 million equity investment of $0.5 million are being recognized as revenue ratably over 60 months. We assess the substantive performance period on a quarterly basis and will change it if appropriate based upon our latest expectations. We assumed a similar arrangement with Janssen in recording deferred revenue of $1.5 million upon the acquisition of ATL. This amount is being recognized as revenue as certain performance obligations under the agreement are completed. During the three months ended September 30, 2011 we recorded $181,000 as development and license revenue relating to this agreement.

Revenues associated with substantive, at-risk milestones pursuant to ATL's collaborative agreements will be recognized upon achievement of the milestones through option exercise by the collaboration partner. We consider a milestone to be substantive at the inception of the arrangement if it is commensurate with either our performance to achieve the milestone or the enhancement of the value of the delivered item as a result of a specific outcome resulting from our performance to achieve the milestone, it relates solely to past performance, and it is reasonable relative to all of the deliverables and payment terms within the arrangement. Non-refundable contingent future amounts receivable in connection with future events specified in the collaboration agreement that are not considered milestones will be recognized as revenue when payments are earned from our collaborators through completion of any underlying performance obligations, the amounts are fixed or determinable, and collectibility is reasonably assured.

Intangible Assets and Goodwill

The fair value of the identified intangible assets recorded in the acquisition of ATL was estimated by using income or cost replacement approaches. The acquisition of ATL also created goodwill as the purchase price exceeded the fair value of the identifiable assets acquired net of the liabilities assumed. The value assigned to developed technology is being amortized over seven years and the value assigned to the non-active collaboration agreements is being amortized over five years, the estimated useful lives of the assets. During the three and nine months ended September 30, 2011, we have recorded amortization of $498,000 related to the developed technology and $987,000 related to the non-active collaboration agreements. The in-process research and development and trademark intangibles, as well as the goodwill, are deemed to have indefinite lives. These assets will not be amortized but instead will be tested for impairment at least annually (more frequently if certain indicators are present).

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Impairment of Investments in Financial Instruments

Investments in financial instruments are carried at fair value based on quoted market prices, with unrealized gains and losses included in accumulated other comprehensive income or loss in stockholders' equity. Our investment portfolio includes equity securities that could subject us to material equity market risk and corporate and U.S. government (or U.S. governmental agency) obligations that subject us to varying levels of credit risk. An other than temporary decline in fair value of a financial instrument will be subject to a write-down resulting in a charge against earnings. The determination of whether a decline in fair value is other than temporary requires significant judgment, and could have a material impact on our balance sheet and results of operations. Our management reviews the securities within our portfolio for other than temporary declines in value on a regular basis. As of September 30, 2011, the gross unrealized losses on available for sale debt securities was approximately $11,000, and such losses were not attributed to changes in credit risk. The prices of some of our marketable equity securities are subject to considerable volatility. Currently we own 2,384,211 shares of AVI Bio Pharma, Inc. ("AVI") and recorded an other-than-temporary decline in value of $3.1 million related to this investment during the year ended December 31, 2008. As of September 30, 2011, the fair value of our investment in AVI was equal to our adjusted cost basis. Decreases in the fair value of our securities may significantly impact our results of operations.

Investments in equity securities without readily determinable fair value are carried at cost. We periodically review those carried costs, amounting to $500,000 as of September 30, 2011, and evaluate whether an impairment has occurred. The determination of whether an impairment has occurred requires significant judgment, as each investment has unique market and development opportunities.

Recent Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2011-04 relating to fair value measurements. This guidance clarifies the application of existing fair value measurements and disclosures, and changes certain principles or requirements for fair value measurements and disclosures. The amendment is effective for interim and annual periods beginning after December 15, 2011. The adoption of this amendment will not have a material impact on our consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05 on the presentation of comprehensive income, which amends current comprehensive income guidance. This amendment will require companies to present the components of net income and other comprehensive income either as one continuous statement or as two consecutive statements. It eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders' equity. The amended guidance, which must be applied retroactively, is effective for interim and annual periods beginning after December 15, 2011, with earlier adoption permitted. This amendment impacts presentation only, and will have no effect on our financial condition, results of operations or cash flows.

In September 2011, the FASB issued ASU 2011-08 on testing goodwill for impairment. Under the amendment, an entity may assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. If determined to be necessary, the two-step impairment test shall be used to identify potential goodwill impairment and measure the amount of a goodwill impairment loss to be recognized, if any. The amendment is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. We do not expect that adoption of this amendment will have a material impact on our consolidated financial statements.

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Results of Operations

Three months ended September 30, 2011 compared to three months ended
September 30, 2010:

    The results for the three months ended September 30, 2011 include the
consolidated results of ATL since the acquisition date of July 20, 2011.

                                           Three months ended
                                             September 30,              Change
       Revenues                             2011         2010     Dollar    Percent
                                              (Dollars in thousands)
       Royalty revenue                    $   16,638   $ 13,249   $ 3,389      25.58 %
       Development and license revenue           308        127       181     142.52

The increase in royalty revenue from 2010 to 2011 is due to higher Dacogen product sales by Eisai. Eisai is required to pay us royalties starting at 20% and escalating to a maximum of 30% of net worldwide Dacogen sales within 45 days after the end of each calendar quarter. Because we do not have sufficient ability to accurately estimate Dacogen sales, we recognize royalty revenue when we receive the royalty statements from Eisai. Therefore, royalty revenues recognized in the third quarters of 2011 and 2010 relate to worldwide Dacogen sales for the second quarters of 2011 and 2010, respectively.

Development and license revenue relates to the recognition of upfront payments received in connection with collaboration agreements with GSK and the recognition of deferred revenue arising from the acquisition of ATL related to the collaboration with Janssen. The upfront payment received from GSK is being recognized ratably through October 2014. Deferred revenue related to the collaboration with Janssen is recognized as the Company performs development services over the period starting from July 20, 2011 through December 2011.

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