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CTMX > SEC Filings for CTMX > Form 10-K on 2-Mar-2017All Recent SEC Filings

Show all filings for CYTOMX THERAPEUTICS, INC.

Form 10-K for CYTOMX THERAPEUTICS, INC.


2-Mar-2017

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the attached financial statements and notes thereto. This Annual Report on Form 10-K, including the following sections, contains forward-looking statements within the meaning of the federal securities laws. These statements are subject to risks and uncertainties that could cause actual results and events to differ materially from those expressed or implied by such forward-looking statements. For a detailed discussion of these risks and uncertainties, see the "Risk Factors" section in Item 1A of this Annual Report on Form 10-K. We caution the reader not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date of this Form 10-K. We undertake no obligation to update forward-looking statements, which reflect events or circumstances occurring after the date of this Form 10-K.

Overview

We are a clinical-stage, oncology-focused biopharmaceutical company pioneering a novel class of investigational antibody therapeutics based on our Probody technology platform. We use our platform to create proprietary cancer immunotherapies against clinically-validated targets, as well as to develop first-in-class cancer therapeutics against difficult-to-drug targets. We believe that our Probody platform has the potential to improve the combined efficacy and safety profile of monoclonal antibody modalities, including cancer immunotherapies, antibody drug conjugates ("ADCs") and T-cell-recruiting bispecific antibodies. Our Probody therapeutics are designed to take advantage of unique conditions in the tumor microenvironment to enhance the tumor-targeting features of an antibody and reduce drug activity in healthy tissues. Our investigational Probody therapeutics address clinically-validated cancer targets in immuno-oncology, such as PD-L1, against which CX-072 is directed, as well as novel targets, such as CD-166, against which CX-2009 is directed, that may be difficult to drug without causing damage to healthy tissues. We received clearance from the United States Food and Drug Administration (the "FDA") for our IND for CX-072 in December 2016 and treated the first patient in our open-label, dose finding Phase 1/2 clinical trial in January 2017. We also expect to file an IND for CX-2009 in the first half of 2017 and initiate a Phase 1 clinical trial in 2017. In addition to our proprietary programs, we are collaborating with strategic partners including AbbVie Inc. through its subsidiary AbbVie Ireland Unlimited Company ("AbbVie"), Bristol-Myers Squibb Company ("BMS"), ImmunoGen, Inc. ("ImmunoGen"), The University of Texas MD Anderson Cancer Center ("MD Anderson"), and Pfizer Inc. ("Pfizer"). Our broad technology platform and lead product candidates are supported by more than a decade of thorough scientific research and strong intellectual property. Our vision is to transform lives with safer, more effective therapies. To realize this vision, we are executing on our mission of changing the treatment of cancer by urgently advancing our Probody pipeline.

We currently have one product candidate in clinical trials but we do not have any product candidates approved for sale, and we continue to incur significant research and development and general administrative expenses related to our operations. We are not profitable and have incurred losses in each year since our founding in 2008. Our net loss was $58.9 million for the year ended December 31, 2016. As of December 31, 2016, we had an accumulated deficit of $176.4 million. We expect to continue to incur significant losses for the foreseeable future.

We have three pipeline strategies that we are pursuing with our Probody platform: (i) developing a novel class of immunotherapies directed against clinically-validated targets, (ii) developing novel first-in-class therapeutics directed against difficult-to-drug targets and (iii) collaborating with leading pharmaceutical companies to discover and develop Probody therapeutics against selected targets.

Regulatory agencies, including the FDA, regulate many aspects of a product candidate's life cycle, including research and development and preclinical and clinical testing. We have product candidates that are still in research and preclinical development, which means that they have not yet been tested on humans. We will need to commit significant time and resources to develop these and additional product candidates. Many product candidates in human clinical trials fail to demonstrate the desired safety and efficacy characteristics. We are unable to provide the nature, timing, and estimated costs of the efforts necessary to complete the development of our product candidates because, among other reasons, we cannot predict with any certainty the pace of enrollment of our clinical trials, which is a function of many factors, including the availability and proximity of patients with the relevant condition.

We currently have no manufacturing capabilities and do not intend to establish any such capabilities. We have no commercial manufacturing facilities for our product candidates. As such, we are dependent on third parties to supply our product candidates according to our specifications, in sufficient quantities, on time, in compliance with appropriate regulatory standards and at competitive prices.


Components of Results of Operations

Revenue

Our revenue to date has been primarily derived from non-refundable license payments and reimbursements for research and development expenses under our research, collaboration, and license agreements. We recognize revenue from upfront payments ratably over the term of our estimated period of performance under the agreement. In addition to receiving upfront payments, we may also be entitled to milestone and other contingent payments upon achieving predefined objectives. Revenue from milestones, if they are nonrefundable and deemed substantive, is recognized upon successful accomplishment of the milestones. To the extent that non-substantive milestones are achieved and we have remaining performance obligations, milestones are deferred and recognized as revenue over the estimated remaining period of performance. Reimbursements from Pfizer and BMS for research and development costs incurred under our research, collaboration and license agreements with them are classified as revenue.

For the foreseeable future, we do not expect to generate any revenue from the sale of products unless and until such time as our product candidates have advanced through clinical development and obtained regulatory approval. We expect that any revenue we do generate in the foreseeable future will fluctuate from year to year as a result of the timing and amount of milestones and other payments from our collaborations with AbbVie, BMS, ImmunoGen and Pfizer, and any future collaboration partners, and as a result of the fluctuations in the research and development expenses we incur in the performance of assigned activities under these agreements.

Research and Development Expenses

Our research and development expenses consist primarily of costs incurred to conduct research, such as the discovery and development of our product candidates, clinical development including activities with third parties, such as clinical research organizations ("CROs") and contract manufacturing organizations ("CMOs"), drug products we used in clinical trials, as well as the development of product candidates pursuant to our research, collaboration and license agreements. Research and development expenses include personnel costs, including stock-based compensation expense, contractor services, laboratory materials and supplies, depreciation and maintenance of research equipment, and an allocation of related facilities costs. We expense research and development costs as they are incurred.

We expect our research and development expenses to increase substantially in absolute dollars in the future as we advance our product candidates into and through clinical trials and pursue regulatory approval of our product candidates. For example, we received clearance from the FDA for our IND for CX-072 in December 2016 and treated our first patient in our Phase 1/2 clinical trial in January 2017. We also expect to file an IND for CX-2009 in the first half of 2017 and initiate a Phase 1 clinical trial in 2017. The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming. The actual probability of success for our product candidates may be affected by a variety of factors including: the safety and efficacy of our product candidates, early clinical data, investment in our clinical program, the ability of collaborators to successfully develop our licensed product candidates, competition, manufacturing capability and commercial viability. We may never succeed in achieving regulatory approval for any of our product candidates. As a result of the uncertainties discussed above, we are unable to determine the duration and completion costs of our research and development projects or when and to what extent we will generate revenue from the commercialization and sale of our product candidates.

General and Administrative Expenses

General and administrative expenses include personnel costs, expenses for outside professional services and other allocated expenses. Personnel costs consist of salaries, bonuses, benefits and stock-based compensation. Outside professional services consist of legal, accounting and audit services and other consulting fees. Allocated expenses consist of rent expense related to our office and research and development facility. We expect to incur additional expenses as a result of operating as a public company, including expenses related to compliance with the rules and regulations of the SEC, and those of any national securities exchange on which our securities are traded, additional insurance expenses, investor relations activities and other administrative and professional services. We also expect to increase our administrative headcount to operate as a public company and as we advance our product candidates through clinical development, which will also increase our general and administrative expenses.

Interest Income

Interest income primarily consists of interest income from our cash equivalents, short-term and long-term investments.


Interest Expense

Interest expense primarily consists of interest costs related to our borrowings under our loan agreements and amortization of premiums on our short-term and long-term investments.

Other Income (Expense), Net

Other income (expense), net consists primarily of changes to the estimated fair value of the convertible preferred stock warrant liability and the convertible preferred stock liability.

Comparison of Years Ended December 31, 2016 and 2015

Revenue

Year Ended December 31,
2016 2015 Change
(in thousands)

Revenue: $ 15,043 $ 7,712 $ 7,331

Revenue increased $7.3 million during the year ended December 31, 2016 compared to the corresponding period in 2015. The increase in revenue was primarily due to an increase of $3.3 million in recognized revenue related to the recognition of upfront payment received pursuant to the Development and Licensing Agreement and Discovery Collaboration and Licensing Agreement we entered with AbbVie in April 2016 (collectively, the "AbbVie Agreements"), a $2.0 million in milestone revenue related to our BMS collaboration, an increase of $1.7 million in recognized revenue related to payments made by BMS in connection with the selection of its third and fourth targets under our collaboration, an increase of $0.5 million in recognized revenue related to the Pfizer payments received due to a shortened research timeline resulting from the lapse in May 2016 of Pfizer's option to select a fourth target, which increases were partly offset by $0.1 million decrease in service revenue.

Operating Costs and Expenses

Research and Development Expenses

Year Ended December 31,
2016 2015 Change
(in thousands)

Research and development $ 54,755 $ 28,357 $ 26,398

Research and development expense increased $26.4 million during the year ended December 31, 2016 compared to the corresponding period in 2015. The increase was attributable to an increase of $9.6 million in manufacturing costs for the Company's CX-072, CX-2009 and CX-2029 programs, an increase of $4.5 million in laboratory and professional services and supplies, an increase of $3.1 million in non-cash stock-based compensation primarily due to higher stock valuation, an increase of $3.1 million in personnel-related expenses due to an increase in headcount, an increase of $2.4 million to advance CX-072 into Phase 1/2 clinical development, an increase of $1.7 million in royalty payments triggered by the payments from BMS's third and fourth target selections, clinical candidate selection and upfront payments from AbbVie, and an increase of $1.6 million in facilities-related expense due to the Company's relocation to a larger facility in October 2016.

General and Administrative Expenses

Year Ended December 31,
2016 2015 Change
(in thousands)

General and administrative $ 19,874 $ 12,558 $ 7,316

General and administrative expense increased $7.3 million during the year ended December 31, 2016 compared to the corresponding period in 2015. The increase was attributable to an increase of $3.2 million in non-cash stock-based compensation primarily due to higher stock valuations, an increase of $2.0 million in professional and outside services, an increase of $1.8 million in personnel-related expense due to an increase in headcount, and an increase of $0.4 million in facilities-related expense due to the Company's relocation to a larger facility in October 2016.


Interest Income, Interest Expense and Other Income (Expense), net



                                                 Year Ended December 31,
                                                   2016             2015        Change
                                                            (in thousands)
   Interest income                             $      2,425       $   1,315     $ 1,110
   Interest expense                                  (1,689 )        (1,732 )        43
   Other income (expense), net                          (69 )        (1,744 )     1,675
   Total interest and other income (expense)   $        667       $  (2,161 )   $ 2,828

Interest Income

Interest income increased $1.1 million during the year ended December 31, 2016 compared to the corresponding period in 2015. The increase was attributable to interest income earned on cash equivalents and investments as a result of the proceeds received from our preferred stock financings in May 2015 and June 2015, and our initial public offering ("IPO") in October 2015.

Interest Expense

Interest expense was relatively flat during the year ended December 31, 2016 compared to the corresponding period in 2015. The result was attributable to a decrease in interest expense due to termination of our debt facility in September 2015, offset by an increase in amortization of premiums on our investments.

Other Income (Expense), Net

Other income (expense) net increased $1.7 million during the year ended December 31, 2016 compared to the corresponding period in 2015. The increase was primarily attributable to a loss of $1.1 million related to the remeasurement of the convertible preferred stock liability and an increase in the fair value of our convertible preferred stock warrant liability of $0.6 million incurred in 2015.

Comparison of Years Ended December 31, 2015 and 2014

Revenue

Year Ended December 31,
2015 2014 Change
(in thousands)

Revenue: $ 7,712 $ 5,077 $ 2,635

Revenue increased $2.6 million during the year ended December 31, 2015 compared to the corresponding period in 2014. The increase in revenue was primarily due to revenue recognized in 2015 related to the BMS agreement, which became effective in July 2014.

Operating Costs and Expenses

Research and Development Expenses

Year Ended December 31,
2015 2014 Change
(in thousands)

Research and development $ 28,357 $ 28,302 $ 55

Research and development expense remained relatively flat during the year ended December 31, 2015 compared to the corresponding period in 2014. The decrease of $12.8 million expensed in the first quarter of 2014 related to the ImmunoGen collaboration agreement was largely offset by an increase of $7.6 million in lab services and supplies related to advancement of our product pipeline, an increase of $4.1 million in personnel-related expenses due to an increase in headcount, and an increase of $0.7 million in allocated facility costs partly due to a lease we entered into in September 2014.


General and Administrative Expenses

Year Ended December 31,
2015 2014 Change
(in thousands)

General and administrative $ 12,558 $ 6,540 $ 6,018

General and administrative expense increased $6.0 million during the year ended December 31, 2015 compared to the corresponding period in 2014. The increase was attributable to an increase of $4.3 million of personnel-related expenses due to an increase in headcount and an increase of $1.6 million in consulting and professional services expenses due primarily to preparations for our IPO.

Interest Income, Interest Expense and Other Income (Expense), net



                                                Year Ended December 31,
                                                 2015               2014         Change
                                                           (in thousands)
 Interest income                             $       1,315       $        7     $  1,308
 Interest expense                                   (1,732 )           (487 )     (1,245 )
 Other income (expense), net                        (1,744 )            (55 )     (1,689 )
 Total interest and other income (expense)          (2,161 )           (535 )   $ (1,626 )

Interest Income

Interest income increased $1.3 million during the year ended December 31, 2015 compared to the corresponding period in 2014. The increase was attributable to interest income earned on cash equivalents and short-term investments as a result of the proceeds received from our preferred stock financings in December 2014, May 2015 and June 2015 and from our IPO in October 2015.

Interest Expense

Interest expense increased $1.2 million during the year ended December 31, 2015 compared to the corresponding period in 2014. The increase was primarily attributable to amortization of premiums on our short-term investments.

Other Income (Expense), Net

Other income (expense) increased $1.7 million during the year ended December 31, 2015 compared to the corresponding period in 2014. The increase was primarily attributable to a loss of $1.1 million related to the remeasurement of the convertible preferred stock liability and an increase of $0.6 million in the fair value of our convertible preferred stock warrant liability.

Liquidity and Capital Resources

Sources of Liquidity

As of December 31, 2016, we had cash, cash equivalents and short-term investments of $181.9 million and an accumulated deficit of $176.4 million, compared to cash and cash equivalents of $186.7 million and an accumulated deficit of $117.5 million as of December 31, 2015. To date, we have financed our operations primarily through sales of our common stock in conjunction with the IPO, sales of our convertible preferred securities prior to our IPO and payments received under our collaboration agreements. In May and June 2015, respectively, an investor exercised its option to purchase 659,209 shares of Series C redeemable convertible preferred stock for net proceeds of $3.5 million and we issued 7,490,540 shares of Series D redeemable convertible preferred stock for net proceeds of $69.7 million.

On October 14, 2015, we consummated our IPO and sold 7,666,667 shares of our common stock at a price of $12.00 per share, which included the exercise of the underwriters' option to purchase 1,000,000 additional shares of common stock. We received net proceeds of approximately $81.8 million, after deducting underwriting discounts, commissions and offering expenses. Immediately prior to the consummated IPO, all outstanding shares of the convertible preferred stock and redeemable convertible preferred stock converted into common stock on a one-for-one basis.


Based upon our current operating plan, we expect our existing capital resources will be sufficient to fund operations into 2019. However, if the anticipated operating results are not achieved in future periods, our planned expenditures may need to be reduced in order to extend the time period over which the then-available resources would be able to fund the operations. The amounts and timing of our actual expenditures depend on numerous factors, including the progress of our preclinical development efforts, the results of any clinical trials and other studies, our operating costs and expenditures and other factors describe under the caption "Risk Factors" in this Annual Report on Form 10-K. The cost and timing of developing our products, including CX-2009 and CX-072, are highly uncertain, are subject to substantial risks and many changes. As such, we may alter our expenditures as a result of contingencies such as the failure of one of these product candidates in clinical development, the identification of a more promising product candidate in our research efforts or unexpected operating costs and expenditures. We will need to raise additional funds in the future. There can be no assurance, however, that such efforts will be successful or that, in the event that they are successful, the terms and conditions of such financing will be favorable to us.

Summary Statement of Cash Flows

The following table summarizes our cash flows for the periods presented:



                                                         Year Ended December 31,
                                                    2016           2015           2014
                                                              (in thousands)
 Net cash (used in) provided by operating
 activities                                      $   (2,032 )   $  (27,415 )   $   31,802
 Net cash provided by (used in) investing
 activities                                          45,859       (130,562 )       (1,663 )
 Net cash provided by financing activities              996        153,403         25,554
 Net increase (decrease) in cash and cash
 equivalents                                     $   44,823     $   (4,574 )   $   55,693

Cash Flows from Operating Activities

During the year ended December 31, 2016, cash used in operating activities was $2.0 million, which consisted of a net loss of $58.9 million, adjusted by non-cash charges of $13.6 million and a net increase of $43.3 million in our net operating assets. The non-cash charges primarily consisted of $10.3 million in stock-based compensation, $1.7 million in depreciation and amortization and $1.6 million in amortization premiums on our investments. The change in our net operating assets and liabilities was primarily attributable to an increase of $43.3 million in deferred revenue, which was primarily due to a $30.0 million upfront payment from AbbVie in connection with the AbbVie Agreements and $25.0 million in payments from BMS in connection with the selection of its third and fourth targets under our collaboration, which increases were partially offset by the recognition of upfront fees under certain of our collaboration agreements of $11.7 million, an increase of $4.0 million in accrued liabilities and other liabilities, and an increase of $1.8 million in accounts payable. Such increase was partially offset by a decrease of $2.6 million in other assets, $1.6 million in prepaid expenses and other current assets and $1.6 million in accounts receivable.

During the year ended December 31, 2015, cash used in operating activities was $27.4 million, which consisted of a net loss of $35.4 million, adjusted by non-cash charges of $8.2 million and a net decrease of $0.2 million in our net operating assets. The non-cash charges primarily consisted of $4.0 million in stock-based compensation, $1.2 million in depreciation and amortization, $1.2 million in amortization premiums on our short-term investments, $1.1 million related to the remeasurement of our convertible preferred stock liability and $0.6 million related to the remeasurement of the convertible preferred stock warrant liability. The change in our net operating assets and liabilities was primarily due to a decrease of $6.1 million in deferred revenue due to the recognition of upfront fees received, which decrease was partially offset by an increase of $3.2 million in accrued liabilities and $2.9 million in accounts payable.

During the year ended December 31, 2014, cash provided by operating activities was $31.8 million, which consisted of a net loss of $30.3 million adjusted by non-cash charges of $1.4 million, and a net increase of $60.8 million in our net operating assets. The non-cash charges primarily consisted of $0.8 million in depreciation and amortization and $0.6 million in stock-based compensation. The change in our net operating assets and liabilities was primarily due to an increase of $61.5 million in deferred revenue resulting from the upfront payments of $50.0 million received from BMS and of $1.5 million received from Pfizer and $13.3 million from ImmunoGen, in each case, pursuant to our respective collaboration agreement with such parties, which increases were partially offset by the recognition of upfront fees of $3.3 million, and a $1.5 million increase in accounts payable and accrued liabilities due to our increased research and development activities as a result of our agreements with BMS and ImmunoGen. The increase is partially offset by an increase of $1.6 million in accounts receivable primarily due to the $1.5 million upfront payment due from Pfizer and a $0.6 million increase in prepaid expenses and other assets due to deferred costs related to the ImmunoGen collaboration agreement.


Cash Flows from Investing Activities

During the year ended December 31, 2016, cash provided by investing activities was $46.0 million, which consisted of $169.5 million in proceeds received upon the maturity of marketable securities. This was offset by $121.5 million used in the purchase of short-term investments and $2.2 million of capital expenditures used to purchase property and equipment.

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