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EX-32.1 - EX-32.1 - Viracta Therapeutics, Inc.snss-ex321_201409306.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2014

OR

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to            

Commission file number: 000-51531

 

 

SUNESIS PHARMACEUTICALS, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

 

94-3295878

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification Number)

395 Oyster Point Boulevard, Suite 400

South San Francisco, California 94080

(Address of Principal Executive Offices including Zip Code)

(650) 266-3500

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

 

¨

  

Accelerated filer

 

x

 

 

 

 

Non-accelerated filer

 

¨  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).    Yes  ¨    No  x

The registrant had 61,949,147 shares of common stock, $0.0001 par value per share, outstanding as of October 31, 2014.

 

 

 

 

 


SUNESIS PHARMACEUTICALS, INC.

TABLE OF CONTENTS

 

 

Page
No.

PART I. FINANCIAL INFORMATION

3

Item 1.

  

Financial Statements:

3

 

  

Condensed Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013

3

 

  

Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2014 and 2013

4

 

  

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013

5

 

  

Notes to Condensed Consolidated Financial Statements

6

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

14

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

19

Item 4.

  

Controls and Procedures

20

 

PART II. OTHER INFORMATION

22

Item 1.

  

Legal Proceedings

22

Item 1A.

  

Risk Factors

22

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

34

Item 3.

  

Defaults Upon Senior Securities

34

Item 4.

  

Mine Safety Disclosures

35

Item 5.

  

Other Information

35

Item 6.

  

Exhibits

35

 

  

Signatures

36

 

 

 


PART I — FINANCIAL INFORMATION

 

Item 1.

Financial Statements

SUNESIS PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

 

 

September 30,

2014

 

 

December 31,

2013

 

 

(Unaudited)

 

 

(1)

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

20,807

 

 

$

15,121

 

Marketable securities

 

23,912

 

 

 

24,172

 

Prepaids and other current assets

 

1,279

 

 

 

1,199

 

Total current assets

 

45,998

 

 

 

40,492

 

Property and equipment, net

 

53

 

 

 

23

 

Deposits and other assets

 

 

 

 

10

 

Total assets

$

46,051

 

 

$

40,525

 

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

772

 

 

$

953

 

Accrued clinical expense

 

3,621

 

 

 

4,750

 

Accrued compensation

 

1,995

 

 

 

1,719

 

Other accrued liabilities

 

3,967

 

 

 

1,645

 

Current portion of deferred revenue

 

3,418

 

 

 

7,956

 

Current portion of notes payable

 

9,859

 

 

 

9,018

 

Warrant liability

 

13,673

 

 

 

7,931

 

Total current liabilities

 

37,305

 

 

 

33,972

 

Non-current portion of deferred revenue

 

3,418

 

 

 

3,712

 

Non-current portion of notes payable

 

1,713

 

 

 

9,025

 

Commitments

 

 

 

 

 

 

 

Stockholders’ equity (deficit):

 

 

 

 

 

 

 

Common stock

 

6

 

 

 

5

 

Additional paid-in capital

 

524,992

 

 

 

473,509

 

Accumulated other comprehensive loss

 

(9

)

 

 

(3

)

Accumulated deficit

 

(521,374

)

 

 

(479,695

)

Total stockholders’ equity (deficit)

 

3,615

 

 

 

(6,184

)

Total liabilities and stockholders’ equity (deficit)

$

46,051

 

 

$

40,525

 

 

  

 

(1)

The condensed consolidated balance sheet as of December 31, 2013 has been derived from the audited financial statements as of that date included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

See accompanying notes to condensed consolidated financial statements.

 

 

 

3


SUNESIS PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except per share amounts)

 

 

Three months ended

September 30,

 

 

Nine months ended

September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

(Unaudited)

 

 

(Unaudited)

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

License and other revenue

$

854

 

 

$

1,989

 

 

$

4,838

 

 

$

5,967

 

Total revenues

 

854

 

 

 

1,989

 

 

 

4,838

 

 

 

5,967

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

6,939

 

 

 

6,957

 

 

 

21,697

 

 

 

22,008

 

General and administrative

 

7,226

 

 

 

2,807

 

 

 

17,030

 

 

 

8,140

 

Total operating expenses

 

14,165

 

 

 

9,764

 

 

 

38,727

 

 

 

30,148

 

Loss from operations

 

(13,311

)

 

 

(7,775

)

 

 

(33,889

)

 

 

(24,181

)

Interest expense

 

(391

)

 

 

(695

)

 

 

(1,408

)

 

 

(2,294

)

Other income (expense), net

 

(1,623

)

 

 

863

 

 

 

(6,382

)

 

 

(946

)

Net loss

 

(15,325

)

 

 

(7,607

)

 

 

(41,679

)

 

 

(27,421

)

Unrealized gain (loss) on available-for-sale securities

 

(2

)

 

 

9

 

 

 

(6

)

 

 

(29

)

Comprehensive loss

$

(15,327

)

 

$

(7,598

)

 

$

(41,685

)

 

$

(27,450

)

Basic and diluted loss per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

(15,325

)

 

$

(7,607

)

 

$

(41,679

)

 

$

(27,421

)

Diluted

$

(15,325

)

 

$

(8,329

)

 

$

(41,679

)

 

$

(27,421

)

Shares used in computing net loss per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

60,549

 

 

 

51,698

 

 

 

59,052

 

 

 

51,639

 

Diluted

 

60,549

 

 

 

53,271

 

 

 

59,052

 

 

 

51,639

 

Net loss per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

(0.25

)

 

$

(0.15

)

 

$

(0.71

)

 

$

(0.53

)

Diluted

$

(0.25

)

 

$

(0.16

)

 

$

(0.71

)

 

$

(0.53

)

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

4


SUNESIS PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

Nine months ended

September 30,

 

 

2014

 

 

2013

 

 

(Unaudited)

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net loss

$

(41,679

)

 

$

(27,421

)

Adjustments to reconcile loss to net cash used in operating activities:

 

 

 

 

 

 

 

Stock-based compensation expense

 

4,405

 

 

 

2,897

 

Depreciation and amortization

 

18

 

 

 

16

 

Amortization of debt discount and debt issuance costs

 

300

 

 

 

488

 

Increase in fair value of warrant liability

 

6,238

 

 

 

984

 

Foreign exchange gain on marketable securities

 

 

 

 

(174

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Prepaids and other assets

 

(94

)

 

 

679

 

Accounts payable

 

(181

)

 

 

1,381

 

Accrued clinical expense

 

(1,129

)

 

 

(611

)

Accrued compensation

 

276

 

 

 

(163

)

Other accrued liabilities

 

2,512

 

 

 

169

 

Deferred revenue

 

(4,832

)

 

 

(5,967

)

Net cash used in operating activities

 

(34,166

)

 

 

(27,722

)

Cash flows from investing activities

 

 

 

 

 

 

 

Purchases of property and equipment

 

(48

)

 

 

 

Purchases of marketable securities

 

(37,947

)

 

 

(22,602

)

Proceeds from maturities of marketable securities

 

38,201

 

 

 

55,268

 

Net cash provided by investing activities

 

206

 

 

 

32,666

 

Cash flows from financing activities

 

 

 

 

 

 

 

Principal payments on notes payable

 

(6,937

)

 

 

(4,971

)

Proceeds from issuance of common stock and warrants in underwritten offering, net

 

40,024

 

 

 

 

Proceeds from issuance of common stock through controlled equity offering facilities, net

 

4,726

 

 

 

6,574

 

Proceeds from exercise of warrants, stock options and stock purchase rights

 

1,833

 

 

 

245

 

Net cash provided by financing activities

 

39,646

 

 

 

1,848

 

Net increase in cash and cash equivalents

 

5,686

 

 

 

6,792

 

Cash and cash equivalents at beginning of period

 

15,121

 

 

 

14,940

 

Cash and cash equivalents at end of period

$

20,807

 

 

$

21,732

 

Supplemental disclosure of non-cash activities

 

 

 

 

 

 

 

Transfer of fair value of exercised warrants to additional paid-in capital

$

496

 

 

$

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

5


SUNESIS PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014

(Unaudited)

 

1. Company Overview

Description of Business

Sunesis Pharmaceuticals, Inc. (the “Company” or “Sunesis”) was incorporated in the state of Delaware on February 10, 1998, and its facilities are located in South San Francisco, California. Sunesis is a biopharmaceutical company focused on the development and commercialization of new oncology therapeutics for the treatment of solid and hematologic cancers. The Company’s primary activities since incorporation have been conducting research and development internally and through corporate collaborators, in-licensing and out-licensing pharmaceutical compounds and technology, conducting clinical trials and raising capital.

In October 2014, the Company announced the results of a Phase 3, multi-national, randomized, double-blind, placebo-controlled, clinical trial of vosaroxin in combination with cytarabine in patients with relapsed or refractory acute myeloid leukemia (the “VALOR trial”). The trial did not meet its primary endpoint of demonstrating a statistically significant improvement in overall survival, but based upon the favorable results of other predefined analyses of the data, Sunesis plans to commence preparation and submission of a marketing authorization application to the European Medicines Agency (the “EMA”) and to meet with the U.S. Food and Drug Administration to determine a potential regulatory path forward.

Significant Risks and Uncertainties

The Company has incurred significant losses and negative cash flows from operations since its inception, and as of September 30, 2014, had cash, cash equivalents and marketable securities totaling $44.7 million and an accumulated deficit of $521.4 million.

The Company will need to raise substantial additional capital to pursue a regulatory strategy for the potential commercialization of QINPREZOTM (vosaroxin) and to continue the development of QINPREZO and the Company’s other programs. The Company expects to finance its future cash needs primarily through equity issuances, debt arrangements, one or more possible licenses, collaborations or other similar arrangements with respect to development and/or commercialization rights to QINPREZO and its other development programs, or a combination of the above.

Concentrations of Credit Risk

In accordance with its investment policy, the Company invests cash that is not currently being used for operational purposes. The policy allows for the purchase of low risk debt securities issued by: (a) the United States and certain European governments and government agencies, and (b) highly rated banks and corporations, denominated in U.S. dollars, Euros or British pounds, subject to certain concentration limits. The policy limits maturities of securities purchased to no longer than 24 months and the weighted average maturity of the portfolio to 12 months. Management believes these guidelines ensure both the safety and liquidity of any investment portfolio the Company may hold.

Financial instruments that potentially subject the Company to concentrations of credit risk generally consist of cash, cash equivalents and marketable securities. The Company is exposed to credit risk in the event of default by the institutions holding its cash, cash equivalents and any marketable securities to the extent of the amounts recorded in the balance sheets.

 

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. The financial statements include all adjustments (consisting only of normal recurring adjustments) that management believes are necessary for a fair presentation of the periods presented. The balance sheet as of December 31, 2013 was derived from the audited financial statements as of that date. These interim financial results are not necessarily indicative of results to be expected for the full year or any other period. These unaudited condensed consolidated financial statements and the notes accompanying them should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

 

6


Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), that will supersede most existing revenue recognition guidance under US GAAP. The core principle of the guidance is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. Entities can choose to apply the standard using either the full retrospective approach or a modified retrospective approach. Entities electing the full retrospective adoption will apply the standard to each period presented in the financial statements. This means that entities will have to apply the new guidance as if it had been in effect since the inception of all its contracts with customers presented in the financial statements. Entities that elect the modified retrospective approach will apply the guidance retrospectively only to the most current period presented in the financial statements. This means that entities will have to recognize the cumulative effect of initially applying the new standard as an adjustment to the opening balance of retained earnings at the date of initial application. The new revenue standard will be applied to contracts that are in progress at the date of initial application. The standard will be effective for annual and interim periods beginning after December 15, 2016. The Company has yet to evaluate which adoption method it plans to use or the potential effect of the new standard on its consolidated financial statements.

In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern (“ASU 2014-15”), which will require a reporting entity to evaluate, at each annual and interim reporting period, whether there are conditions or events that raise substantial doubt about the reporting entity's ability to continue as a going concern within one year after the date the financial statements are issued and provide related disclosures. The standard will be effective for annual and interim periods beginning after December 15, 2016, with early adoption permitted. The Company has yet to evaluate the potential effect of the new standard on its consolidated financial statements.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Sunesis Europe Limited, a United Kingdom corporation, and Sunesis Pharmaceuticals (Bermuda) Ltd., a Bermuda corporation, as well as a Bermuda limited partnership, Sunesis Pharmaceuticals International LP. All intercompany balances and transactions have been eliminated in consolidation.

Segment Reporting

Management has determined that the Company operates as a single reportable segment.

Significant Estimates and Judgments

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the Company’s condensed consolidated financial statements and accompanying notes thereto. Actual results could differ materially from these estimates. Estimates, assumptions and judgments made by management include those related to the valuation of equity and related instruments, revenue recognition, stock-based compensation and clinical trial accounting.

Cash Equivalents and Marketable Securities

Invoices for certain services provided to the Company are denominated in foreign currencies. To manage the risk of future movements in foreign exchange rates that would affect such amounts, the Company may purchase certain European currencies or highly-rated investments denominated in those currencies, subject to similar criteria as for other investments defined in the Company’s investment policy. There is no guarantee that the related gains and losses will substantially offset each other, and the Company may be subject to significant exchange gains or losses as currencies fluctuate from quarter to quarter. To date, the Company has purchased Euros and Euro-denominated obligations of foreign governments and corporate debt. As of September 30, 2014 and December 31, 2013, the Company held investments denominated in Euros with an aggregate fair value of $0 and $2.6 million, respectively. Any cash, cash equivalent and short-term investment balances denominated in foreign currencies are recorded at their fair value based on the current exchange rate as of each balance sheet date. The resulting exchange gains or losses and those from amounts payable for services originally denominated in foreign currencies are both recorded in other income (expense) in the statements of operations and comprehensive loss.


7


Fair Value Measurements

The Company measures cash equivalents, marketable securities and warrant liabilities at fair value on a recurring basis using the following hierarchy to prioritize valuation inputs, in accordance with applicable GAAP:

Level 1 - quoted prices (unadjusted) in active markets for identical assets and liabilities that can be accessed at the measurement date.

Level 2 - inputs other than quoted prices included within Level 1 that are observable, either directly or indirectly.

Level 3 - unobservable inputs.

The Company’s Level 2 valuations of marketable securities are generally derived from independent pricing services based upon quoted prices in active markets for similar securities, with prices adjusted for yield and number of days to maturity, or based on industry models using data inputs, such as interest rates and prices that can be directly observed or corroborated in active markets.

The fair value of the Company’s liability for warrants issued in connection with an underwritten offering completed in October 2010 (the “2010 Offering”) is determined using the Black-Scholes model, which requires inputs such as the expected term of the warrants, share price volatility, expected dividend yield and risk-free interest rate. As some of these inputs are unobservable, and require significant analysis and judgment to measure, these variables are classified as Level 3.

The Company does not measure cash, prepayments, accounts payable, accrued liabilities, deferred revenue and notes payable at fair value, as their carrying amounts approximated their fair value as of September 30, 2014 and December 31, 2013.

3. Loss per Common Share

Basic loss per common share is calculated by dividing net loss by the weighted-average number of common shares outstanding for the period. Diluted loss per common share is computed by dividing (a) net loss, less any anti-dilutive amounts recorded during the period for the change in the fair value of warrant liabilities, by (b) the weighted-average number of common shares outstanding for the period plus dilutive potential common shares as determined using the treasury stock method for options and warrants to purchase common stock.

The following table sets forth the computation of basic and diluted loss per common share for the periods presented (in thousands, except per share amounts):

 

 

Three months ended

September 30,

 

 

Nine months ended

September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss—basic

$

(15,325

)

 

$

(7,607

)

 

$

(41,679

)

 

$

(27,421

)

Adjustment for change in fair value of warrant liability

 

 

 

 

(722

)

 

 

 

 

 

 

Net loss—diluted

$

(15,325

)

 

$

(8,329

)

 

$

(41,679

)

 

$

(27,421

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding—basic

 

60,549

 

 

 

51,698

 

 

 

59,052

 

 

 

51,639

 

Dilutive effect of warrants

 

 

 

 

1,573

 

 

 

 

 

 

 

Weighted-average common shares outstanding—diluted

 

60,549

 

 

 

53,271

 

 

 

59,052

 

 

 

51,639

 

Net loss per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

(0.25

)

 

$

(0.15

)

 

$

(0.71

)

 

$

(0.53

)

Diluted

$

(0.25

)

 

$

(0.16

)

 

$

(0.71

)

 

$

(0.53

)

 

8


 

 

The following table represents the potential common shares issuable pursuant to outstanding securities as of the related period end dates that were excluded from the computation of diluted loss per common share because their inclusion would have had an anti-dilutive effect (in thousands):

 

 

Three months ended

September 30,

 

 

Nine months ended

September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Warrants to purchase shares of common stock

 

19,059

 

 

 

6,878

 

 

 

19,059

 

 

 

9,996

 

Options to purchase shares of common stock

 

9,240

 

 

 

7,512

 

 

 

9,240

 

 

 

7,512

 

Outstanding securities not included in calculations

 

28,299

 

 

 

14,390

 

 

 

28,299

 

 

 

17,508

 

 

  

4. Financial Instruments

Financial Assets

The following tables summarize the estimated fair value of the Company’s financial assets measured on a recurring basis as of the dates indicated, which were comprised solely of available-for-sale marketable securities with remaining contractual maturities of one year or less (in thousands):

 

September 30, 2014

 

Input Level

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Estimated Fair

Value

 

Money market funds

 

Level 1

 

$

9,877

 

 

$

 

 

$

 

 

$

9,877

 

U.S. certificates of deposit

 

Level 1

 

 

2,511

 

 

 

 

 

 

 

 

 

2,511

 

U.S. corporate debt obligations

 

Level 2

 

 

15,513

 

 

 

 

 

 

(9

)

 

 

15,504

 

U.S. commercial paper

 

Level 2

 

 

7,427

 

 

 

 

 

 

 

 

 

7,427

 

Total available-for-sale securities

 

 

 

 

35,328

 

 

 

 

 

 

(9

)

 

 

35,319

 

Less amounts classified as cash equivalents

 

 

 

 

(11,407

)

 

 

 

 

 

 

 

 

(11,407

)

Amounts classified as marketable securities

 

 

 

$

23,921

 

 

$

 

 

$

(9

)

 

$

23,912

 

 

December 31, 2013

 

Input Level

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Estimated Fair

Value

 

Money market funds

 

Level 1

 

$

6,282

 

 

$

 

 

$

 

 

$

6,282

 

U.S. corporate debt obligations

 

Level 2

 

 

13,509

 

 

 

 

 

 

(4

)

 

 

13,505

 

U.S. commercial paper

 

Level 2

 

 

8,396

 

 

 

3

 

 

 

 

 

 

8,399

 

Foreign corporate debt obligations

 

Level 2

 

 

2,571

 

 

 

 

 

 

(2

)

 

 

2,569

 

Total available-for-sale securities

 

 

 

 

30,758

 

 

 

3

 

 

 

(6

)

 

 

30,755

 

Less amounts classified as cash equivalents

 

 

 

 

(6,583

)

 

 

 

 

 

 

 

 

(6,583

)

Amounts classified as marketable securities

 

 

 

$

24,175

 

 

$

3

 

 

$

(6

)

 

$

24,172

 

 

 

The following table summarizes the available-for-sale securities that were in an unrealized loss position as of the date indicated, having been in such a position for less than 12 months, and none having been deemed to be other-than-temporarily impaired (in thousands):

 

September 30, 2014

 

Gross

Unrealized

Losses

 

 

Estimated Fair

Value

 

U.S. corporate debt obligations

 

$

9

 

 

$

15,378

 

U.S. commercial paper

 

 

 

 

 

3,428

 

 

 

$

9

 

 

$

18,806

 

 

 

9


No significant facts or circumstances have arisen to indicate that there has been any deterioration in the creditworthiness of the issuers of these securities. The gross unrealized losses are not considered to be significant and have generally been for relatively short durations. The Company does not intend to sell these securities before maturity and it is not likely that they will need to be sold prior to the recovery of their amortized cost basis. There were no sales of available-for-sale securities during either the nine months ended September 30, 2014 or 2013.

Financial Liabilities

The following table summarizes the inputs and assumptions and estimated fair value of the Company’s financial liabilities measured on a recurring basis as of the dates indicated, which were comprised solely of a liability for warrants issued in connection with the 2010 Offering:

 

 

September 30,

2014

 

 

December 31,

2013

 

Inputs and assumptions:

 

 

 

 

 

 

 

Fair market value of Company’s common stock

$

7.14

 

 

$

4.74

 

Exercise price

$

2.52

 

 

$

2.52

 

Expected term (years)

 

1.0

 

 

 

1.8

 

Expected volatility

 

63.9

%

 

 

60.8

%

Risk-free interest rate

 

0.1

%

 

 

0.3

%

Expected dividend yield

 

0.0

%

 

 

0.0

%

Fair value:

 

 

 

 

 

 

 

Estimated fair value per warrant share

$

4.68

 

 

$

2.56

 

Shares underlying outstanding warrants classified as

   liabilities (in thousands)

 

2,920

 

 

 

3,099

 

Total estimated fair value of outstanding warrants

   (in thousands)

$

13,673

 

 

$

7,931

 

 

 

The warrants have been classified as a liability on the Company’s balance sheet due to the potential for the warrants to be settled in cash upon the occurrence of certain transactions specified in the warrant agreements. At each balance sheet date, the estimated fair value of the outstanding warrants is determined using the Black-Scholes model and recorded to the balance sheet, with the change in fair value recorded to other income (expense) in the statements of operations and comprehensive loss, and the fair value of warrant exercises transferred to additional paid-in capital. During the nine months ended September 30, 2014, warrants to purchase 179,427 shares of common stock issued in connection with the 2010 Offering were exercised, resulting in cash proceeds to the Company of $452,000.

The Black-Scholes model requires Level 3 inputs such as the expected term of the warrants and share price volatility. These inputs are subjective and generally require significant analysis and judgment to develop. Any changes in these inputs could result in a significantly higher or lower fair value measurement.

The following table summarizes the changes in the fair value of the Company’s Level 3 financial liabilities for the period indicated (in thousands):

 

 

Warrant

Liability

 

Balance as of December 31, 2013

$

7,931

 

Change in fair value of warrant liability

 

6,238

 

Exercise of warrants

 

(496

)

Balance as of September 30, 2014

$

13,673

 

 

 

  

5. Royalty Agreement

In March 2012, the Company entered into a Revenue Participation Agreement (the “Royalty Agreement”), with RPI Finance Trust (“RPI”), an entity related to Royalty Pharma. In September 2012, pursuant to the provisions of the Royalty Agreement, RPI made a $25.0 million cash payment to the Company. The payment, less $3.1 million representing the fair value of the warrants granted under the arrangement, was initially classified as deferred revenue and is being amortized to revenue over the related performance period.

10


Based on the results of the VALOR trial and the Company’s plans to file a marketing authorization application with the European Medicines Agency and to meet with the U.S. Food and Drug Administration to determine a potential regulatory path forward as discussed in Note 1, the Company extended the end date of the estimated performance period through which the balance of deferred revenue will be amortized from June 30, 2015 to September 30, 2016. As a result, the quarterly amortization was adjusted to $0.9 million per quarter, commencing with the quarter ended September 30, 2014, from the previous amortization rate of $2.0 million per quarter.

Revenue participation right payments will be made to RPI if and when QINPREZO is commercialized, at a rate of 6.75% of net sales of QINPREZO, on a product-by-product and country-by-country basis world-wide through the later of: (a) the expiration of the last to expire of certain specifically identified patents; (b) 10 years from the date of first commercial sale of such product in such country; or (c) the expiration of all applicable periods of data, market or other regulatory exclusivity in such country with respect to such product.

6. License Agreements

Biogen Idec

In December 2013, the Company entered into a second amended and restated collaboration agreement with Biogen Idec MA, Inc. (the “Biogen Idec 2nd ARCA”), to provide the Company with an exclusive worldwide license to develop, manufacture and commercialize SNS-062, a BTK inhibitor synthesized under the first amended and restated collaboration agreement with Biogen Idec (the “Biogen Idec 1st ARCA”), solely for oncology indications. The Company may be required to make a $2.5 million milestone payment depending on its development of SNS-062 and royalty payments depending on related product sales of SNS-062. All other of Sunesis’ rights and obligations contained in the Biogen Idec 1st ARCA remain unchanged, except that potential future royalty payments to Sunesis were reduced to equal those amounts due to Biogen Idec for potential future sales of SNS-062.

Millennium

In January 2014, the Company entered into an amended and restated license agreement with Millennium Pharmaceuticals, Inc., a wholly-owned subsidiary of Takeda Pharmaceutical Company Limited (the “Amended Millennium Agreement”), to provide the Company with an exclusive worldwide license to develop and commercialize preclinical inhibitors of PDK1. In connection with the execution of the Amended Millennium Agreement, the Company paid an upfront fee and may be required to make up to $9.2 million in pre-commercialization milestone payments depending on its development of PDK1 inhibitors and royalty payments depending on related product sales, if any.

With respect to the Raf target product rights that were licensed to Millennium under the original license agreement, the Company may in the future receive up to $57.5 million in pre-commercialization event-based payments related to the development by Millennium of the first two indications for each of the licensed products directed against the Raf target and royalty payments depending on related product sales. Millennium is currently conducting a Phase 1 clinical study of an oral investigative drug, MLN2480, which is licensed to them under the Amended Millennium Agreement.

7. Notes Payable

In October 2011, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with Oxford Finance LLC, Silicon Valley Bank and Horizon Technology Finance Corporation (collectively, the “Lenders”), under which the Company could borrow up to $25.0 million in two tranches (the “Loan Facility”). The first tranche of $10.0 million was funded upon closing of the transaction in October 2011, and the second tranche of $15.0 million was drawn by the Company in September 2012. In connection with the Loan Agreement, the Lenders were granted a perfected first priority security interest in substantially all of the Company’s assets, other than intellectual property.

The interest rates for the first and second tranche are 8.95% and 9.00% per annum, respectively. Payments under the Loan Agreement are monthly in arrears and were interest-only until February 1, 2013, followed by 32 equal monthly payments of principal and interest from March 1, 2013 to the scheduled maturity date of October 1, 2015. In addition, a final payment equal to $937,500 will be due on October 1, 2015, or such earlier date as specified in the Loan Agreement.  The weighted average annual effective interest rate on the notes payable, including the amortization of the debt discounts and accretion of the final payment, is 13.9%.

11


Aggregate future minimum payments due under the Loan Agreement as of September 30, 2014 were as follows (in thousands):

 

Year ending December 31,

 

 

 

 

2014

 

$

2,644

 

2015

 

 

8,814

 

Total minimum payments

 

 

11,458

 

Less amount representing interest

 

 

(578

)

Notes payable, gross

 

 

10,880

 

Unamortized discount on notes payable

 

 

(146

)

Accretion of final payment

 

 

838

 

Notes payable, balance

 

 

11,572

 

Less current portion of notes payable

 

 

(9,859

)

Non-current portion of notes payable

 

$

1,713

 

 

 

8. Stockholders’ Equity

Underwritten Offering

On March 4, 2014, the Company completed an underwritten offering of 4,650,000 shares of common stock, each with two accompanying warrants to purchase one share of the Company’s common stock at exercise prices of $8.50 (Series A) and $12.00 (Series B) per share, respectively. The purchase price for each share of common stock and two accompanying warrants was $9.25. Gross proceeds from the sale were $43.0 million, and net proceeds were $40.0 million, after deducting the underwriting discount and offering expenses payable by the Company.

The warrants became exercisable on a gross exercise basis upon unblinding of the VALOR trial, which occurred on October 6, 2014. The Series A warrants will expire on December 4, 2014. The Series B warrants will expire on or before the later of 30 days following any final date assigned by the Food and Drug Administration as the Prescription Drug User Fee Act action date for vosaroxin (the “PDUFA date”) and September 4, 2015, but in no event later than March 4, 2016. The common stock and accompanying warrants have both been classified to stockholders’ equity (deficit) in the Company’s balance sheet.

Controlled Equity Offerings

In August 2011, the Company entered into a Controlled Equity OfferingSM sales agreement (the “Sales Agreement”), with Cantor Fitzgerald & Co. (“Cantor”), as agent and/or principal, pursuant to which the Company could issue and sell shares of its common stock having an aggregate gross sales price of up to $20.0 million. In April 2013, the Sales Agreement was amended to provide for an increase of $30.0 million in the aggregate gross sales price under the Sales Agreement. The Company will pay Cantor a commission of 3.0% of the gross proceeds from any common stock sold through the Sales Agreement, as amended.

During the three months ended September 30, 2014, the Company sold no shares of common stock under the Sales Agreement. During the nine months ended September 30, 2014, the Company sold an aggregate of 1,024,718 shares of common stock under the Sales Agreement, as amended, at an average price of approximately $4.75 per share for gross proceeds of $4.9 million and net proceeds of $4.7 million, after deducting Cantor’s commission. As of September 30, 2014, $16.7 million of common stock remained available to be sold under this facility, subject to certain conditions as specified in the agreement.

9. Stock-Based Compensation

Employee stock-based compensation expense is calculated based on the grant-date fair value of awards ultimately expected to vest, and is recorded on a straight-line basis over the vesting period of the awards. Forfeitures are estimated at the time of grant, based on historical option cancellation information, and revised in subsequent periods if actual forfeitures differ from those estimates.


12


The following table summarizes stock-based compensation expense related to the Company’s stock-based awards for the periods indicated (in thousands):

 

 

Three months ended

September 30,

 

 

Nine months ended

September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Research and development

$

585

 

 

$

402

 

 

$

1,563

 

 

$

1,202

 

General and administrative

 

972

 

 

 

528

 

 

 

2,536

 

 

 

1,486

 

Employee stock-based compensation expense

 

1,557

 

 

 

930

 

 

 

4,099

 

 

 

2,688

 

Non-employee stock-based compensation expense

 

78

 

 

 

103

 

 

 

306

 

 

 

209

 

Total stock-based compensation expense

$

1,635

 

 

$

1,033

 

 

$

4,405

 

 

$

2,897

 

 

 

  


13


Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition as of September 30, 2014 and results of operations for the three and nine months ended September 30, 2014 should be read together with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and in our other Securities and Exchange Commission, or SEC, filings, including our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the SEC on March 6, 2014.

This discussion and analysis contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the Private Securities Litigation Reform Act of 1995, which involve risks, uncertainties and assumptions. All statements, other than statements of historical facts, are “forward-looking statements” for purposes of these provisions, including without limitation any statements relating to our strategy, including, regulatory plans to file a marketing authorization application with the European Medicines Agency, our preliminary analysis, assessment and conclusions of the results of the VALOR trial, and the efficacy and commercial potential of vosaroxin, presenting clinical data and initiating clinical trials, our future research and development activities, including clinical testing and the costs and timing thereof, sufficiency of our cash resources, our ability to raise additional funding when needed, any statements concerning anticipated regulatory activities or licensing or collaborative arrangements, our research and development and other expenses, our operations and legal risks, and any statement of assumptions underlying any of the foregoing. In some cases, forward-looking statements can be identified by the use of terminology such as “anticipates,” “believe,” “continue,” “estimates,” “expects,” “intend,” “look forward,” “may,” “could,” “seeks,” “plans,” “potential,” or “will” or the negative thereof or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, there can be no assurance that such expectations or any of the forward-looking statements will prove to be correct, and actual results could differ materially from those projected or assumed in the forward-looking statements. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including but not limited to those set forth under “Risk Factors,” and elsewhere in this report. We urge you not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. All forward-looking statements included in this report are based on information available to us on the date of this report, and we assume no obligation to update any forward-looking statements contained in this report.

In this report, “Sunesis,” the “Company,” “we,” “us,” and “our” refer to Sunesis Pharmaceuticals, Inc. and its wholly-owned subsidiaries, except where it is made clear that the term means only the parent company.

Overview

We are a biopharmaceutical company focused on the development and commercialization of new oncology therapeutics for the treatment of solid and hematologic cancers. Our efforts are currently focused primarily on the development, regulatory strategy and potential commercialization of QINPREZOTM (vosaroxin), our product candidate for the treatment of acute myeloid leukemia, or AML. In October 2014, we announced the results of a Phase 3, multi-national, randomized, double-blind, placebo-controlled trial of vosaroxin in combination with cytarabine in patients with relapsed or refractory AML, or the VALOR trial. The VALOR trial was designed to evaluate the effect of vosaroxin in combination with cytarabine, a widely used chemotherapy in AML, on overall survival as compared to placebo in combination with cytarabine, and was conducted at more than 100 study sites in the U.S., Canada, Europe, South Korea, Australia and New Zealand.

The VALOR trial did not meet its primary endpoint of demonstrating a statistically significant improvement in overall survival, as results showed a median overall survival of 7.5 months for patients receiving vosaroxin and cytarabine compared to 6.1 months for patients receiving placebo and cytarabine (HR=0.865, p=0.06). In a pre-planned analysis accounting for the stratification factors at randomization, a significant improvement in overall survival was demonstrated (HR=0.830, p=0.02).

Given the complexity of interpreting the impact of transplantation therapy, a predefined analysis of overall survival censoring for hematopoietic stem cell transplantation was planned. In this analysis, patients receiving the vosaroxin combination had a median overall survival of 6.7 months versus 5.3 months for patients receiving placebo and cytarabine (HR=0.809, p=0.02). The VALOR trial also demonstrated a clinically significant benefit in complete remission, or CR, rate (30.1% vs 16.3%, p=0.0000147), the secondary endpoint.  

Regarding drug safety, Grade 3 or higher non-hematologic adverse events that were more common in the vosaroxin combination arm were gastrointestinal and infection-related toxicities, consistent with those observed in our previous clinical trials. The rate of serious adverse events was 55.5% in the vosaroxin combination arm compared to 35.7% in the placebo and cytarabine arm. 30-day and 60-day all-cause mortality were comparable between the trial arms (7.9% versus 6.6% and 19.7% versus 19.4%, for the vosaroxin combination versus placebo and cytarabine, respectively).


14


In November, we announced that we have submitted a letter of intent describing our intention to file a marketing authorization application, or MAA, with the European Medicines Agency, or EMA, seeking marketing authorization of vosaroxin plus cytarabine for the treatment of relapsed or refractory AML. We expect to file the MAA in the second half of 2015.We also plan to meet with the U.S. Food and Drug Administration, or FDA, to determine the appropriate regulatory path forward.

In the second half of 2013, we announced the initiation of three Phase 1/2 investigator-sponsored trials of vosaroxin, either as a standalone therapy or in combination with approved compounds, in various indications of AML and high-risk myelodysplastic syndrome, or MDS. The trials are being conducted at the University of Texas MD Anderson Cancer Center, or MDACC, Weill Cornell Medical College and New York-Presbyterian Hospital, and the Washington University School of Medicine.

In June 2014, updated results from the ongoing Phase 1b/2 MDACC-sponsored trial of vosaroxin in combination with decitabine in older patients with previously untreated AML and high-risk MDS were presented at the 2014 American Society of Clinical Oncology Annual Meeting (ASCO). This trial is expected to enroll up to a combined total of approximately 70 patients.

In January 2014, we announced the expansion of our oncology pipeline through separate global licensing agreements for two preclinical kinase inhibitor programs. The first agreement, with Biogen Idec MA, Inc., or Biogen Idec, is for global commercial rights to SNS-062, a potent and selective non-covalently binding oral inhibitor of BTK. We anticipate filing an investigational new drug, or IND, application for SNS-062 with the FDA in 2015 to begin human clinical trials.

The second agreement, with Millennium Pharmaceuticals, Inc., a wholly-owned subsidiary of Takeda Pharmaceutical Company Limited, or Millennium, is for global commercial rights to several potential first-in class, pre-clinical inhibitors of the novel target PDK1. We anticipate selecting a lead PDK1 development candidate to take into IND-enabling studies by the end of 2014.

Both BTK and PDK1 programs were originally developed under a research collaboration agreement between Biogen Idec and Sunesis. In 2011, the PDK1 program was purchased by and exclusively licensed to Millennium along with the more advanced program, MLN2480, a pan-RAF inhibitor currently in the maximum tolerated dose cohort expansion stage of a Millennium Phase 1, multicenter dose escalation study.

In March 2014, we completed an underwritten offering of 4,650,000 shares of common stock, each with two accompanying warrants to purchase one share of our common stock at exercise prices of $8.50 (Series A) and $12.00 (Series B) per share, respectively. The purchase price for each share of common stock and two accompanying warrants was $9.25. Gross proceeds from the sale were $43.0 million and net proceeds were $40.0 million.

Capital Requirements

We have incurred significant losses in each year since our inception. As of September 30, 2014, we had cash, cash equivalents and marketable securities of $44.7 million and an accumulated deficit of $521.4 million. We expect to continue to incur significant losses for the foreseeable future as we continue the development process and seek regulatory approvals for QINPREZO.

We will need to raise substantial additional capital to pursue our regulatory strategy for the potential commercialization of QINPREZO, and to continue the development of this and our other programs. We expect to finance our future cash needs primarily through equity issuances, debt arrangements, one or more possible licenses, collaborations or other similar arrangements with respect to development and/or commercialization rights to QINPREZO and our other development programs, or a combination of the above. However, we do not know whether additional funding will be available on acceptable terms, or at all. If we are unable to raise required funding on acceptable terms or at all, we will need to reduce operating expenses, enter into a collaboration or other similar arrangement with respect to development and/or commercialization rights to QINPREZO, outlicense intellectual property rights to QINPREZO or our other development programs, sell unsecured assets, or a combination of the above, or be forced to delay or reduce the scope of our QINPREZO development program, potentially including any regulatory filings related to the VALOR trial, and/or limit or cease our operations.

Critical Accounting Policies and Significant Judgments and Estimates

There have been no significant changes during the nine months ended September 30, 2014 to our critical accounting policies and significant judgments and estimates as disclosed in our management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2013, except the estimated performance period over which deferred revenue is being recognized, as described below.

15


Overview of Revenues

We have not generated any revenue from the sale of commercial products, and do not anticipate product sales if and until QINPREZO or any other product candidate we may develop has been approved by the FDA, EMA or similar regulatory agencies in other countries.

Recently, we have recorded revenue primarily through a Revenue Participation Agreement, or the Royalty Agreement, which was entered into in March 2012 with RPI Finance Trust, or RPI, an entity related to Royalty Pharma. In September 2012, we received a $25.0 million cash payment from RPI pursuant to the provisions of the Royalty Agreement. The payment, less $3.1 million representing the fair value of the warrants granted under the arrangement, was initially classified as deferred revenue and is being amortized to revenue over the related performance period. Based on the results of the VALOR trial and our plans to file a marketing authorization application with the EMA and to meet with the FDA to determine a potential regulatory path forward, we adjusted the remaining estimated performance period through which the balance of deferred revenue will be amortized from June 30, 2015 to September 30, 2016. As a result, the quarterly amortization was adjusted to $0.9 million per quarter, commencing with the quarter ended September 30, 2014, from the previous amortization rate of $2.0 million per quarter.

Overview of Operating Expenses

Research and Development expense. Research and development expense consists primarily of clinical trial costs, which include: payments for work performed by our contract research organizations, clinical trial sites, labs and other clinical service providers and for drug packaging, storage and distribution; drug manufacturing costs, which include costs for producing drug substance and drug product, and for stability and other testing; personnel costs for related permanent and temporary employees; other outside services and consulting costs; and payments under license agreements. We expense all research and development costs as they are incurred.

We are currently focused on the development and regulatory strategy for QINPREZO for the treatment of AML. Based on results of translational research, both our own and investigator-sponsored trials, regulatory and competitive concerns and our overall financial resources, we anticipate that we will make determinations as to which indications to pursue and patient populations to treat in the future, and how much funding to direct to each indication, which will affect our research and development expense. If we proceed to commercialization following our planned and potential regulatory filings related to the VALOR trial, we anticipate research and development costs to increase.  We also anticipate additional costs will be incurred related to obtaining any such regulatory approval.

We are no longer conducting any research activities in connection with existing collaboration agreements; however, we have and will incur further development expenses in 2014 associated with advancing the recently in-licensed SNS-062 and PDK1 inhibitor programs. Additionally, under the license agreement between Millennium and us, or the Millennium Agreement, we have the right to participate in co-development and co-promotion activities for the related product candidates, including MLN2480, a pan-RAF inhibitor currently in the maximum tolerated dose cohort expansion stage of a Millennium Phase 1, multicenter dose escalation study. If we were to exercise our option to this or other product candidates, our research and development expense would increase significantly.

If we engage a collaboration partner for our QINPREZO program, or if, in the future, we acquire additional product candidates, our research and development expenses could be significantly affected. We cannot predict whether future licensing or collaborative arrangements will be secured, if at all, and to what degree such arrangements would affect our development plans and capital requirements.

General and Administrative expense. General and administrative expense consists primarily of personnel costs for the related employees, including non-cash stock-based compensation; professional service costs, including fees paid to outside legal advisors, consultants and our independent registered public accounting firm; facilities expenses; and other administrative costs. If we proceed to commercialization following our planned and potential regulatory filings related to the VALOR trial, we anticipate general and administrative expenses to increase in the future, including additional expenses related to selling and marketing.

Results of Operations

Revenue

Total revenue was $0.9 million and $4.8 million for the three and nine months ended September 30, 2014 as compared to $2.0 million and $6.0 million for the same periods in 2013. Revenue in each period was primarily due to deferred revenue recognized related to the Royalty Agreement with RPI. The decrease in revenue in the comparable three and nine month periods was due to the extension in the amortization period of deferred revenue related to the Royalty Agreement with RPI.

16


Research and Development Expense

Research and development expense was $6.9 million and $21.7 million for the three and nine months ended September 30, 2014, as compared to $7.0 million and $22.0 million for the same periods in 2013, primarily relating to the QINPREZO development program in each period. The decrease of $0.1 million between the comparable three month periods was primarily due to a reduction of $1.8 million in clinical trial expenses, partially offset by total increases of $1.7 million in personnel, drug manufacturing and other outside services costs. The decrease of $0.3 million between the comparable nine month periods was primarily due to a reduction of $5.0 million in clinical trial expenses, partially offset by total increases of $4.7 million in personnel, drug manufacturing, consulting and licensing costs.

General and Administrative Expense

General and administrative expense was $7.2 million and $17.0 million for the three and nine months ended September 30, 2014, as compared to $2.8 million and $8.1 million for the same periods in 2013. The increases between the comparable three and nine month periods were primarily due to increased personnel and consulting costs, primarily related to commercial planning and medical affairs.

Interest Expense

Interest expense was $0.4 million and $1.4 million for the three and nine months ended September 30, 2014, as compared to $0.7 million and $2.3 million for the same periods in 2013. The decreases in 2014 were due to the reduced principal balance outstanding on notes payable to Oxford Finance LLC, Silicon Valley Bank and Horizon Technology Finance Corporation, or collectively, the Lenders, under the loan and security agreement, or the Loan Agreement, entered into in September 2012.

Other Income (Expense), Net

Net other expense was $1.6 million for the three months ended September 30, 2014, as compared to net other income of $0.9 million for the same period in 2013. Net other expense was $6.4 million for the nine months ended September 30, 2014, as compared to $0.9 million for the same period in 2013. The amounts for each period were primarily comprised of non-cash credits or charges for the revaluation of warrants issued in the October 2010 underwritten offering.

Liquidity and Capital Resources

Sources of Liquidity

Since our inception, we have funded our operations primarily through the issuance of common and preferred stock and other equity instruments, debt financings, receipts from our collaboration partners, the sale of revenue participation rights, and research grants.

Our cash, cash equivalents and marketable securities totaled $44.7 million as of September 30, 2014, as compared to $39.3 million as of December 31, 2013. The increase of $5.4 million was primarily due to net proceeds of $40.0 million from the underwritten offering and $4.7 million from sales of our common stock through the Controlled Equity OfferingSM sales agreement, or the Sales Agreement, with Cantor Fitzgerald & Co., or Cantor, both as described below, and $1.8 million from the exercise of warrants, stock options and stock purchase rights, partially offset by $34.2 million of net cash used in operating activities and $6.9 million of principal payments against notes payable.

In March 2014, we completed an underwritten offering of 4,650,000 shares of common stock, each with two accompanying warrants to purchase one share of our common stock, at exercise prices of $8.50 (Series A) and $12.00 (Series B) per share, respectively. The purchase price for each share of common stock and two accompanying warrants was $9.25. Gross proceeds from the sale were $43.0 million and net proceeds were $40.0 million, after deducting the underwriting discount and offering expenses. The warrants are only exercisable on a gross exercise basis. The Series A warrants will expire on December 4, 2014. The Series B warrants will expire on or before the later of 30 days following the PDUFA date of the VALOR trial, if any, and September 4, 2015, but in no event later than March 4, 2016.

In August 2011, we entered into the Sales Agreement, with Cantor as agent and/or principal, pursuant to which we could issue and sell shares of our common stock having an aggregate gross sales price of up to $20.0 million. In April 2013, the Sales Agreement was amended to provide for an increase of $30.0 million in the aggregate gross sales price under the Sales Agreement. We will pay Cantor a commission of 3.0% of the gross proceeds from any common stock sold through the Sales Agreement, as amended. During the three months ended September 30, 2014, we sold no shares of common stock under the Sales Agreement. During the nine months ended September 30, 2014, we sold an aggregate of 1,024,718 shares of common stock under the Sales Agreement, as amended, at an average price of approximately $4.75 per share for gross proceeds of $4.9 million and net proceeds of $4.7 million, after deducting Cantor’s commission. As of September 30, 2014, $16.7 million of common stock remained available to be sold under this facility, subject to certain conditions as specified in the agreement.

17


Cash Flows

Net cash used in operating activities was $34.2 million for the nine months ended September 30, 2014, as compared to $27.7 million for the same period in 2013. Net cash used in the 2014 period resulted primarily from the net loss of $41.7 million and changes in operating assets and liabilities of $3.4 million, partially offset by net adjustments for non-cash items of $11.0 million. Net cash used in the 2013 period resulted primarily from the net loss of $27.4 million and changes in operating assets and liabilities of $4.5 million, partially offset by net adjustments for non-cash items of $4.2 million.

Net cash provided by investing activities was $0.2 million for the nine months ended September 30, 2014, as compared to $32.7 million for the same period in 2013. Net cash provided in each period consisted primarily of proceeds from maturities of marketable securities offset by purchases of marketable securities.

Net cash provided by financing activities was $39.6 million for the nine months ended September 30, 2014, as compared to $1.8 million for the same period in 2013. Net cash provided in the 2014 period resulted primarily from net proceeds of $40.0 million from the underwritten offering, $4.7 million from sales of our common stock through the Sales Agreement with Cantor, and $1.8 million from the exercise of warrants, stock options and stock purchase rights, partially offset by $6.9 million of principal payments against notes payable. Net cash provided in the 2013 period resulted primarily from net proceeds of $6.6 million from sales of our common stock through Cantor and $0.2 million from the exercise of stock options and stock purchase rights, partially offset by principal payments pursuant to the Loan Agreement of $5.0 million.

Operating Capital Requirements

We expect to continue to incur substantial operating losses in the future. We will not receive any product revenue until a product candidate has been approved by the FDA, EMA, or similar regulatory agencies in other countries, and has been successfully commercialized, if at all. We will need to raise substantial additional funding to pursue our regulatory strategy for the potential commercialization of QINPREZO, and to continue the development of QINPREZO and our other programs.

Our future funding requirements will depend on many factors, including but not limited to the:

rate of progress and cost of our clinical trials;

need for additional or expanded clinical trials;

timing, economic and other terms of any licensing, collaboration or other similar arrangement into which we may enter;

costs and timing of seeking and obtaining FDA, EMA and other regulatory approvals;

extent of our other development activities, including those related to our in-license agreements;

costs associated with building or accessing commercialization and additional manufacturing capabilities and supplies;

costs of acquiring or investing in businesses, product candidates and technologies, if any;

costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;

effect of competing technological and market developments; and

costs, if any, of supporting our arrangements with Biogen Idec and Millennium.

We believe that we currently have the resources to fund our operations at least to the second half of 2015. Until we can generate a sufficient amount of licensing or collaboration or product revenue to finance our cash requirements, which we may never do, we expect to finance our future cash needs primarily through equity issuances, debt arrangements, one or more possible licenses, collaborations or other similar arrangements with respect to development and/or commercialization rights to QINPREZO or our other development programs, or a combination of the above.

Our failure to raise significant additional capital in the future would force us to delay or reduce the scope of our QINPREZO development program, potentially including any regulatory filings related to the VALOR trial and potential commercialization of QINPREZO, if approved, and/or limit or cease our operations. Any one of the foregoing would have a material adverse effect on our business, financial condition and results of operations.


18


Contractual Obligations

The following table summarizes our long-term contractual obligations as of September 30, 2014 (in thousands):

 

 

Payments Due by Period

 

 

Total

 

 

Less Than

1 Year

 

 

1-3 Years

 

 

3-5 Years

 

 

After

5 Years

 

Long-term debt obligations(1)

$

12,396

 

 

$

10,577

 

 

$

1,819

 

 

$

 

 

$

 

Operating lease obligations(2)

$

368

 

 

$

368

 

 

$

 

 

$

 

 

$

 

  

 

(1)

Includes interest and final payment of 3.75% of the aggregate amount drawn under the Loan Agreement. Upon the occurrence of an event of default, as defined in the Loan Agreement, and following any applicable cure periods, a default interest rate of an additional 5% may be applied to the outstanding loan balances, and the Lenders may declare all outstanding obligations immediately due and payable and take such other actions as set forth in the Loan Agreement.

(2)

Operating lease obligations relate solely to the leasing of office space in a building at 395 Oyster Point Boulevard in South San Francisco, California, which is currently our corporate headquarters. In January 2014, a lease for 15,378 square feet was entered into with an expiry date of April 30, 2015. On June 3, 2014, the lease was amended to extend the expiration date to June 30, 2015, and to add 6,105 square feet of additional office space within the same building. The amended lease also includes an option to extend the lease for an additional six months, at a predetermined price, if exercised within a certain period.

The above amounts exclude potential payments under:

our 2003 license agreement with Sumitomo Dainippon Pharma Co., Ltd., or Sumitomo Dainippon, pursuant to which we are required to make certain milestone payments in the event we file new drug applications in the United States, Europe or Japan, and if we receive regulatory approvals in any of these regions, for cancer-related indications. If QINPREZO is approved for a non-cancer indication, an additional milestone payment becomes payable to Sumitomo Dainippon. We are also required to make royalty payments to Sumitomo Dainippon in the event that QINPREZO is commercialized;

our Royalty Agreement with RPI, pursuant to which we are required to make certain revenue participation payments in the event that QINPREZO is commercialized; and

our December 2013 second amended and restated collaboration agreement with Biogen Idec and our January 2014 amended license agreement with Millennium, pursuant to which we are required to make certain milestone and royalty payments.

We also have agreements with contract research organizations clinical sites and other third party contractors for the conduct of our clinical trials. We generally make payments to these entities based upon the activities they perform related to the particular clinical trial. There are generally no penalty clauses for cancellation of these agreements if notice is duly given and payment is made for work performed by the third party under the related agreement.

Off-Balance Sheet Arrangements

Since our inception, we have not had any off-balance sheet arrangements or relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or variable interest entities, which are typically established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Interest Rate and Market Risk

As of September 30, 2014 and December 31, 2013, we had $44.7 million and $39.3 million, respectively, in cash, cash equivalents and marketable securities. The securities in our investment portfolio are not leveraged and are classified as available-for-sale, which, due to their short-term nature, are subject to minimal interest rate risk. We currently do not hedge our interest rate risk exposure. Because of the short-term maturities of our investments, we do not believe that a change in market rates would have a significant impact on the value of our investment portfolio.

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The primary objective of our investment activities is to preserve capital while at the same time maximizing the income we receive from our investments without significantly increasing risk. To achieve this objective, we maintain our portfolio of cash equivalents and short-term and long-term investments in a variety of highly rated securities, which may include money market funds and U.S. and European government obligations and corporate debt obligations (including certificates of deposit, corporate notes and commercial paper). These securities are classified as available for sale and consequently are recorded on the balance sheet at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive income (loss). In the past, we have generally purchased investments with an original maturity of less than one year, although our policy allows for the purchase of securities with a maturity of up to two years. Our holdings of the securities of any one issuer, except obligations of the U.S. Treasury or U.S. Treasury guaranteed securities, do not exceed 10% of the portfolio. If interest rates rise, the market value of our investments may decline, which could result in a realized loss if we are forced to sell an investment before its scheduled maturity. We do not utilize derivative financial instruments to manage our interest rate risks.

The tables below present the original principal amounts and weighted-average interest rates by maturity period for our investment portfolio as of the dates indicated (in thousands, except percentages):

 

 

Expected Maturity

 

 

Total

 

 

0-3

months

 

 

Over 3

months

 

 

Fair Value as of

September 30,

2014

 

Available-for-sale securities

$

19,046

 

 

$

16,273

 

 

$

35,319

 

Average interest rate

 

0.2

%

 

 

0.2

%

 

 

 

 

  

 

Expected Maturity

 

 

Total

 

 

0-3

months

 

 

Over 3

months

 

 

Fair Value as of

December 31,

2013

 

Available-for-sale securities

$

20,387

 

 

$

10,368

 

 

$

30,755

 

Average interest rate

 

0.2

%

 

 

0.3

%

 

 

 

 

Foreign Currency Exchange Rate Risk

We consider our direct exposure to foreign exchange rate fluctuations to be minimal. Invoices for certain services provided to us are denominated in foreign currencies, including the Euro and British pound, among others. Therefore, we are exposed to adverse movements in the related foreign currency exchange rates. To manage this risk, we may purchase certain European currencies or highly-rated investments denominated in those currencies, subject to similar criteria as for other investments allowed by our investment policy. We do not make these purchases for trading or speculative purposes, and there is no guarantee that the related gains and losses will substantially offset each other. As of September 30, 2014 and December 31, 2013, we held investments denominated in Euros with an aggregate fair value of $0 and $2.6 million, respectively. The balances are recorded at their fair value based on the current exchange rate as of each balance sheet date. The resulting exchange gains or losses and those from amounts payable for services originally denominated in foreign currencies are recorded in other income (expense) in the statements of operations and comprehensive loss.

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures, as such term is defined in SEC Exchange Act Rule 13a-15(e), that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by SEC Exchange Act Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of the end of the period covered by this Quarterly Report on Form 10-Q.

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Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

21


PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

From time to time, we may be involved in routine legal proceedings, as well as demands, claims and threatened litigation, which arise in the normal course of our business. The ultimate outcome of any litigation is uncertain and unfavorable outcomes could have a negative impact on our results of operations and financial condition. Regardless of outcome, litigation can have an adverse impact on us because of the defense costs, diversion of management resources and other factors.

We believe there is no litigation pending that could, individually or in the aggregate, have a material adverse effect on our results of operations or financial condition.

Item  1A.

Risk Factors

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below and all information contained in this Quarterly Report on Form 10-Q, as each of these risks could adversely affect our business, operating results and financial condition. If any of the possible adverse events described below actually occurs, we may be unable to conduct our business as currently planned and our financial condition and operating results could be harmed. In addition, the trading price of our common stock could decline due to the occurrence of any of these risks, and you may lose all or part of your investment.

Please see the language regarding forward-looking statements in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

We have marked with an asterisk (*) those risk factors below that reflect substantive changes from the risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2013 filed with the Securities and Exchange Commission on March 6, 2014.

Risks Related to Our Business

We need to raise substantial additional funding to pursue our regulatory strategy for the potential commercialization of QINPREZOTM (vosaroxin), and to continue the development of QINPREZO and our other programs.*

We believe that with $44.7 million in cash and investments held as of September 30, 2014, we currently have the resources to fund our operations at least to the second half of 2015.

However, we will need to raise substantial additional capital to:

complete the development, regulatory strategy and potential commercialization of vosaroxin in AML;

fund additional clinical trials of vosaroxin and seek regulatory approvals;

expand our development activities;

implement additional internal systems and infrastructure; and

build or access commercialization and additional manufacturing capabilities and supplies.

Our future funding requirements and sources will depend on many factors, including but not limited to the:

rate of progress and cost of our clinical trials;

need for additional or expanded clinical trials;

timing, economic and other terms of any licensing, collaboration or other similar arrangement into which we may enter;

costs and timing of seeking and obtaining FDA and other regulatory approvals;

extent of our other development activities, including our other clinical programs and in-license agreements;

costs associated with building or accessing commercialization and additional manufacturing capabilities and supplies;

costs of acquiring or investing in businesses, product candidates and technologies, if any;

costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;

effect of competing technological and market developments; and

22


costs, if any, of supporting our arrangements with Biogen Idec, Millennium or any potential future licensees or partners.

Until we can generate a sufficient amount of licensing, collaboration or product revenue to finance our cash requirements, which we may never do, we expect to finance future cash needs primarily through equity issuances, debt arrangements, one or more possible licenses, collaborations or other similar arrangements with respect to development and/or commercialization rights to vosaroxin or our other development programs, or a combination of the above. Any issuance of convertible debt securities, preferred stock or common stock may be at a discount from the then-current trading price of our common stock. If we issue additional common or preferred stock or securities convertible into common or preferred stock, our stockholders will experience additional dilution, which may be significant. Further, we do not know whether additional funding will be available on acceptable terms, or at all. If we are unable to raise substantial additional funding on acceptable terms, or at all, we will be forced to delay or reduce the scope of our vosaroxin development program, potentially including any regulatory filings related to the VALOR trial, and/or limit or cease our operations.

We have incurred losses since inception and anticipate that we will continue to incur losses for the foreseeable future. We may not ever achieve or sustain profitability.

We are not profitable and have incurred losses in each year since our inception in 1998. Our net losses for the nine months ended September 30, 2014 and the years ended December 31, 2013 and 2012 were $41.7 million, $34.6 million and $44.0 million, respectively. As of September 30, 2014, we had an accumulated deficit of $521.4 million. We do not currently have any products that have been approved for marketing, and we continue to incur substantial development and general and administrative expenses related to our operations. We expect to continue to incur losses for the foreseeable future, and we expect these losses to increase significantly as we seek regulatory approvals for vosaroxin, and as we prepare to commercialize vosaroxin, if approved. Our losses, among other things, have caused and will continue to cause our stockholders’ equity and working capital to decrease.

To date, we have derived substantially all of our revenue from license and collaboration agreements. We currently have two agreements, the Biogen Idec 2nd ARCA and the Amended Millennium Agreement, which each include certain pre-commercialization event-based and royalty payments. We cannot predict whether we will receive any such payments under these agreements in the foreseeable future, or at all.

We also do not anticipate that we will generate revenue from the sale of products until at least 2016, if at all. In the absence of additional sources of capital, which may not be available to us on acceptable terms, or at all, the development of vosaroxin or future product candidates, if any, may be reduced in scope, delayed or terminated. If our product candidates or those of our collaborators fail in clinical trials or do not gain regulatory approval, or if our future products do not achieve market acceptance, we may never become profitable. Even if we achieve profitability in the future, we may not be able to sustain profitability in subsequent periods.

The development of vosaroxin could be halted or significantly delayed for various reasons; our clinical trials for vosaroxin may not lead to regulatory approval.*

Vosaroxin is vulnerable to the risks of failure inherent in the drug development process. Our VALOR trial failed to meet its primary endpoint, and we may not be able to obtain regulatory approval for commercialization in either the United States, Europe, or in other regions. We may need to conduct significant additional preclinical studies and clinical trials before we can attempt to demonstrate that vosaroxin is safe and effective to the satisfaction of the FDA and other regulatory authorities. Failure can occur at any stage of the development process, and successful preclinical studies and early clinical trials do not ensure that later clinical trials will be successful. A number of companies in the pharmaceutical industry have suffered significant setbacks in advanced clinical trials, even after obtaining promising results in earlier trials.

For example, we terminated two Phase 2 clinical trials of vosaroxin in small cell and non-small cell lung cancer, and the LI-1 trial, conducted by a co-operative group in Europe, was halted at an interim data analysis. If our clinical trials result in unacceptable toxicity or lack of efficacy, we may have to terminate them. If clinical trials are halted, or if they do not show that vosaroxin is safe and effective in the indications for which we are seeking regulatory approval, our future growth will be limited and we may not have any other product candidates to develop.

We do not know whether any future clinical trials with vosaroxin or any of our product candidates will be completed on schedule, or at all, or whether our ongoing or planned clinical trials will begin or progress on the time schedule we anticipate. The commencement of future clinical trials could be substantially delayed or prevented by several factors, including:

delays or failures to raise additional funding;

results of meetings with the FDA and/or other regulatory bodies;

a limited number of, and competition for, suitable patients with particular types of cancer for enrollment in our clinical trials;

23


delays or failures in obtaining regulatory approval to commence a clinical trial;

delays or failures in obtaining sufficient clinical materials;

delays or failures in obtaining approval from independent institutional review boards to conduct a clinical trial at prospective sites; or

delays or failures in reaching acceptable clinical trial agreement terms or clinical trial protocols with prospective sites.

The completion of our clinical trials could be substantially delayed or prevented by several factors, including:

delays or failures to raise additional funding;

slower than expected rates of patient recruitment and enrollment;

failure of patients to complete the clinical trial;

delays or failures in reaching the number of events pre-specified in the trial design;

the need to expand the clinical trial;

delays or failures in obtaining sufficient clinical materials, including vosaroxin, its matching placebo and cytarabine;

unforeseen safety issues;

lack of efficacy during clinical trials;

inability or unwillingness of patients or clinical investigators to follow our clinical trial protocols; and

inability to monitor patients adequately during or after treatment.

Additionally, our clinical trials may be suspended or terminated at any time by the FDA, other regulatory authorities, or ourselves. Any failure to complete or significant delay in completing clinical trials for our product candidates could harm our financial results and the commercial prospects for our product candidates.

We rely on a limited number of third-party manufacturers that are capable of manufacturing the vosaroxin active pharmaceutical ingredient, or API, and finished drug product, or FDP, to supply us with our vosaroxin API and FDP. If we fail to obtain sufficient quantities of these materials, the development and potential commercialization of vosaroxin could be halted or significantly delayed.

We do not currently own or operate manufacturing facilities and lack the capability to manufacture vosaroxin on a clinical or commercial scale. As a result, we rely on third parties to manufacture vosaroxin API and FDP. The vosaroxin API is classified as a cytotoxic substance, limiting the number of available manufacturers for both API and FDP.

We currently rely on two contract manufacturers for the vosaroxin API. We also currently rely on a single contract manufacturer to formulate the vosaroxin API and fill and finish vials of the vosaroxin FDP. If our third-party vosaroxin API or FDP manufacturers are unable or unwilling to produce the vosaroxin API or FDP we require, we would need to establish arrangements with one or more alternative suppliers. However, establishing a relationship with an alternative supplier would likely delay our ability to produce vosaroxin API or FDP. Our ability to replace an existing manufacturer would also be difficult and time consuming because the number of potential manufacturers is limited and the FDA must approve any replacement manufacturer before it can be an approved commercial supplier. Such approval would require new testing, stability programs and compliance inspections. It may be difficult or impossible for us to identify and engage a replacement manufacturer on acceptable terms in a timely manner, or at all. We expect to continue to depend on third-party contract manufacturers for all our vosaroxin API and FDP needs for the foreseeable future.

Vosaroxin requires precise, high quality manufacturing. For example, in the past, we observed visible particles during stability studies of two vosaroxin FDP lots which resulted from process impurities in the vosaroxin API that, when formulated into the packaged vial of the vosaroxin FDP, resulted in the formation of these particles. We have since addressed this issue by the implementation of a revised manufacturing process to control the impurities and thereby minimize particle formation, however, there is no assurance that similar issues will not arise in the future as we prepare for regulatory approval and potential commercialization of vosaroxin.

In addition to process impurities, the failure of our contract manufacturers to achieve and maintain high manufacturing standards in compliance with current Good Manufacturing Practice, or cGMP, regulations could result in other manufacturing errors leading to patient injury or death, product recalls or withdrawals, delays or interruptions of production or failures in product testing or delivery. Although contract manufacturers are subject to ongoing periodic unannounced inspection by the FDA and corresponding state agencies to ensure strict compliance with cGMP and other applicable government regulations and corresponding foreign standards, any such performance failures on the part of a contract manufacturer could result in the delay or prevention of filing or approval of

24


marketing applications for vosaroxin, cost overruns or other problems that could seriously harm our business. This would deprive us of potential product revenue and result in additional losses.

To date, vosaroxin has been manufactured in quantities appropriate for preclinical studies and clinical trials, including the manufacture of registration batches of API and FDP. Prior to submission for FDA review and approval for commercial sale, we will need to perform process validation studies on API batches manufactured for commercial launch. If the results of these process validation studies do not meet preset criteria, the regulatory approval or commercial launch of vosaroxin may be delayed.

The failure to enroll patients for clinical trials may cause delays in developing vosaroxin.

We may encounter delays if we are unable to enroll enough patients to complete clinical trials of vosaroxin. We completed enrollment of the VALOR trial in September 2013, but we may be required to enroll patients for Phase 4 or other clinical trials requested by the FDA. Patient enrollment depends on many factors, including the size of the patient population, the nature of the protocol, the proximity of patients to clinical sites, the number and nature of competing treatments and ongoing clinical trials of competing drugs for the same indication, and the eligibility criteria for the trial. Patients participating in our trials may elect to leave our trials and switch to alternative treatments that are available to them, either commercially or on an expanded access basis, or in other clinical trials. Competing treatments include nucleoside analogs, anthracyclines and hypomethylating agents. Moreover, when one product candidate is evaluated in multiple clinical trials simultaneously, patient enrollment in ongoing trials can be adversely affected by negative results from completed trials.

The results of preclinical studies and clinical trials may not satisfy the requirements of the FDA, EMA or other regulatory agencies.*

Prior to receiving approval to commercialize vosaroxin or future product candidates, if any, in the United States or internationally, we must demonstrate with substantial evidence from well-controlled clinical trials, to the satisfaction of the FDA, EMA and other regulatory authorities, that such product candidates are safe and effective for their intended uses. The results from preclinical studies and clinical trials can be interpreted in different ways, and the VALOR trial failed to meet its primary endpoint. Even if we believe the preclinical or clinical data are promising, such data may not be sufficient to support approval by the FDA, EMA and other regulatory authorities.

We rely on third parties to conduct our clinical trials. If these third parties do not successfully carry out their contractual duties or fail to meet expected deadlines, we may be unable to obtain regulatory approval for, or commercialize, vosaroxin.

We rely on third parties, such as contract research organizations, medical institutions, clinical investigators and contract laboratories, to conduct our planned and existing clinical trials for vosaroxin. If the third parties conducting our clinical trials do not perform their contractual duties or obligations, do not meet expected deadlines or need to be replaced, or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical trial protocols or for any other reason, we may need to enter into new arrangements with alternative third parties and our clinical trials may be extended, delayed or terminated or may need to be repeated, and we may not be able to obtain regulatory approval for or commercialize the product candidate being tested in such trials.

We may expand our development capabilities in the future, and any difficulties hiring or retaining key personnel or managing this growth could disrupt our operations.

We are highly dependent on the principal members of our development staff. We may expand our research and development capabilities in the future by increasing expenditures in these areas, hiring additional employees and potentially expanding the scope of our current operations. Future growth will require us to continue to implement and improve our managerial, operational and financial systems and continue to retain, recruit and train additional qualified personnel, which may impose a strain on our administrative and operational infrastructure. The competition for qualified personnel in the biopharmaceutical field is intense. We are highly dependent on our continued ability to attract, retain and motivate highly qualified management and specialized personnel required for clinical development. Due to our limited resources, we may not be able to effectively manage any expansion of our operations or recruit and train additional qualified personnel. If we are unable to retain key personnel or manage our growth effectively, we may not be able to implement our business plan.

If we are sued for infringing intellectual property rights of third parties, litigation will be costly and time consuming and could prevent us from developing or commercializing vosaroxin.

Our commercial success depends on not infringing the patents and other proprietary rights of third parties and not breaching any collaboration or other agreements we have entered into with regard to our technologies and product candidates. If a third party asserts that we are using technology or compounds claimed in issued and unexpired patents owned or controlled by the third party, we may

25


need to obtain a license, enter into litigation to challenge the validity of the patents or incur the risk of litigation in the event that a third party asserts that we infringe its patents.

If a third party asserts that we infringe its patents or other proprietary rights, we could face a number of challenges that could seriously harm our competitive position, including:

infringement and other intellectual property claims, which would be costly and time consuming to litigate, whether or not the claims have merit, and which could delay the regulatory approval process and divert management’s attention from our business;

substantial damages for past infringement, which we may have to pay if a court determines that vosaroxin or any future product candidates infringe a third party’s patent or other proprietary rights;

a court order prohibiting us from selling or licensing vosaroxin or any future product candidates unless a third party licenses relevant patent or other proprietary rights to us, which it is not required to do; and

if a license is available from a third party, we may have to pay substantial royalties or grant cross-licenses to our patents or other proprietary rights.

If our competitors develop and market products that are more effective, safer or less expensive than vosaroxin, our commercial opportunities will be negatively impacted.

The life sciences industry is highly competitive, and we face significant competition from many pharmaceutical, biopharmaceutical and biotechnology companies that are researching, developing and marketing products designed to address the treatment of cancer, including AML and MDS. Many of our competitors have significantly greater financial, manufacturing, marketing and drug development resources than we do. Large pharmaceutical companies in particular have extensive experience in the clinical testing of, obtaining regulatory approvals for, and marketing drugs.

We believe that our ability to successfully compete in the marketplace with vosaroxin and any future product candidates, if any, will depend on, among other things:

our ability to develop novel compounds with attractive pharmaceutical properties and to secure, protect and maintain intellectual property rights based on our innovations;

the efficacy, safety and reliability of our product candidates;

the speed at which we develop our product candidates;

our ability to design and successfully execute appropriate clinical trials;

our ability to maintain a good relationship with regulatory authorities;

our ability to obtain, and the timing and scope of, regulatory approvals;

our ability to manufacture and sell commercial quantities of future products to the market;

the availability of reimbursement from government agencies and private insurance companies; and

acceptance of future products by physicians and other healthcare providers.

Vosaroxin is a small molecule therapeutic that will compete with other drugs and therapies currently used for AML, such as nucleoside analogs, anthracyclines, hypomethylating agents, Flt-3 inhibitors, other inhibitors of topoisomerase II, and other novel agents. Additionally, other compounds currently in development could become potential competitors of vosaroxin, if approved for marketing.

We expect competition for vosaroxin for the treatment of AML and other potential future indications to increase as additional products are developed and approved in various patient populations. If our competitors market products that are more effective, safer or less expensive than vosaroxin or our other future products, if any, or that reach the market sooner we may not achieve commercial success or substantial market penetration. In addition, the biopharmaceutical industry is characterized by rapid change. Products developed by our competitors may render vosaroxin or any future product candidates obsolete.

Our proprietary rights may not adequately protect vosaroxin or future product candidates, if any.

Our commercial success will depend on our ability to obtain patents and maintain adequate protection for vosaroxin and any future product candidates in the United States and other countries. We own, co-own or have rights to a significant number of issued U.S. and foreign patents and pending U.S. and foreign patent applications. We will be able to protect our proprietary rights from unauthorized

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use by third parties only to the extent that our proprietary technologies and future products are covered by valid and enforceable patents or are effectively maintained as trade secrets or are subject to marketing exclusivity administered by regulatory authorities.

We apply for patents covering both our technologies and product candidates, as we deem appropriate. However, we may fail to apply for patents on important technologies or product candidates in a timely fashion, or at all. Our existing patents and any future patents we obtain may not be sufficiently broad, valid, or enforceable to prevent others from practicing our technologies or from developing competing products and technologies. In addition, we generally do not exclusively control the patent prosecution of subject matter that we license to or from others. Accordingly, in such cases we are unable to exercise the same degree of control over this intellectual property as we would over our own. Moreover, the patent positions of biopharmaceutical companies are highly uncertain and involve complex legal and factual questions for which important legal principles remain unresolved. As a result, the scope, validity and enforceability of patents cannot be predicted with certainty. In addition, we do not know whether:

we, our licensors or our collaboration partners were the first to make the inventions covered by each of our issued patents and pending patent applications;

we, our licensors or our collaboration partners were the first to file patent applications for these inventions;

others will independently develop similar or alternative technologies or duplicate any of our technologies;

any of our, our licensors’ or our collaboration partners’ pending patent applications will result in issued patents;

any of our, our licensors’ or our collaboration partners’ patents will be valid or enforceable;

because of differences in patent laws of countries, any patent granted in one country or region will be granted