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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended March 31, 2015

 

¨ 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 0-23155

 

 

SYNAGEVA BIOPHARMA CORP.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   56-1808663

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

33 Hayden Avenue,

Lexington, MA 02421

(Address of principal executive offices, including zip code)

(781) 357-9900

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 such 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 (§232.405 of this chapter) 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.

 

Large accelerated filer   x    Accelerated filer   ¨
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 Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares outstanding of the registrant’s common stock as of April 24, 2015 was 37,153,036.

 

 

 


Table of Contents

SYNAGEVA BIOPHARMA CORP.

TABLE OF CONTENTS

 

         Page  

PART I. FINANCIAL INFORMATION

  

Item 1.

 

Financial Statements

     3   
 

Consolidated Balance Sheets as of March 31, 2015 (Unaudited) and December 31, 2014

     3   
 

Consolidated Statements of Operations (Unaudited) for the three months ended March 31, 2015 and 2014

     4   
 

Consolidated Statements of Comprehensive Loss (Unaudited) for the three months ended March 31, 2015 and 2014

     5   
 

Consolidated Statements of Cash Flows (Unaudited) for the three months ended March 31, 2015 and 2014

     6   
 

Notes to the Consolidated Financial Statements

     7   

Item 2.

 

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

     13   

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

     22   

Item 4.

 

Controls and Procedures

     22   

PART II. OTHER INFORMATION

     22   

Item 1.

 

Legal Proceedings

     22   

Item 1A.

 

Risk Factors

     22   

Item 5.

 

Other Information

     38   

Item 6.

 

Exhibits

     38   
SIGNATURES      40   

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

SYNAGEVA BIOPHARMA CORP.

CONSOLIDATED BALANCE SHEETS

(Unaudited and in thousands, except per share amounts)

 

     March 31,
2015
    December 31,
2014
 

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 98,577      $ 82,653   

Short-term investments

     611,984        364,255   

Accounts receivable

     926        986   

Prepaid expenses and other current assets

     10,791        9,938   
  

 

 

   

 

 

 

Total current assets

  722,278      457,832   

Property and equipment, net

  31,917      31,559   

Developed technology, net

  1,781      2,003   

Goodwill

  8,535      8,535   

Other assets

  4,035      4,274   
  

 

 

   

 

 

 

Total assets

$ 768,546    $ 504,203   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

Current liabilities:

Accounts payable

$ 2,080    $ 2,625   

Accrued expenses

  24,801      21,710   

Other current liabilities

  971      908   
  

 

 

   

 

 

 

Total current liabilities

  27,852      25,243   

Other liabilities

  5,568      5,721   
  

 

 

   

 

 

 

Total liabilities

$ 33,420    $ 30,964   
  

 

 

   

 

 

 

Commitments and contingencies (Note 8)

Stockholders’ equity:

Common stock, par value $0.001; 60,000 shares authorized at March 31, 2015 and December 31, 2014; 37,002 and 33,370 shares issued and outstanding at March 31, 2015 and December 31, 2014, respectively

  37      33   

Additional paid-in capital

  1,241,853      920,333   

Accumulated other comprehensive loss

  (276   (240

Accumulated deficit

  (506,488   (446,887
  

 

 

   

 

 

 

Total stockholders’ equity

  735,126    $ 473,239   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

$ 768,546    $ 504,203   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these interim consolidated financial statements.

 

3


Table of Contents

SYNAGEVA BIOPHARMA CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited and in thousands, except per share amounts)

 

     Three Months Ended
March 31,
 
     2015     2014  

Revenue:

    

Royalty revenue

   $ 927      $ 1,447   

Collaboration and license revenue

     —          139   
  

 

 

   

 

 

 

Total revenue

  927      1,586   

Costs and expenses:

Research and development

  38,207      27,868   

Selling, general and administrative

  21,671      9,804   

Amortization of developed technology

  222      390   
  

 

 

   

 

 

 

Total costs and expenses

  60,100      38,062   
  

 

 

   

 

 

 

Loss from operations

  (59,173   (36,476

Other expense, net

  (252   (5

Interest income, net

  83      75   
  

 

 

   

 

 

 

Loss before provision for income taxes

  (59,342   (36,406

Provision for income taxes

  259      18   
  

 

 

   

 

 

 

Net loss

$ (59,601 $ (36,424
  

 

 

   

 

 

 

Basic and diluted net loss per common share

$ (1.63 $ (1.16
  

 

 

   

 

 

 

Weighted average shares used in basic and diluted per common share computations

  36,495      31,338   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these interim consolidated financial statements.

 

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Table of Contents

SYNAGEVA BIOPHARMA CORP.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited and in thousands)

 

     Three Months Ended
March 31,
 
     2015     2014  

Net loss

   $ (59,601   $ (36,424

Other comprehensive loss:

    

Change in fair market value of available for sale securities

     (24     51   

Foreign currency translation adjustments

     (12     (5
  

 

 

   

 

 

 

Total other comprehensive (loss) gain

  (36   46   
  

 

 

   

 

 

 

Comprehensive loss

$ (59,637 $ (36,378
  

 

 

   

 

 

 

The accompanying notes are an integral part of these interim consolidated financial statements.

 

5


Table of Contents

SYNAGEVA BIOPHARMA CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited and in thousands)

 

     Three Months Ended
March 31,
 
     2015     2014  

Cash flows from operating activities

    

Net Loss

   $ (59,601   $ (36,424

Adjustments:

    

Depreciation and amortization

     1,641        1,407   

Stock compensation expense

     7,045        3,181   

Amortization of premium on investments

     1,491        687   

Loss on equity method investment

     254        —     

Changes in assets and liabilities:

    

Accounts receivable

     60        (73

Prepaid expenses, other current assets and other assets

     (868     (2,552

Accounts payable

     (545     (956

Accrued expenses, other current liabilities and other liabilities

     3,080        693   
  

 

 

   

 

 

 

Net cash used in operating activities

  (47,443   (34,037
  

 

 

   

 

 

 

Cash flows from investing activities

Purchase of available for sale investments

  (385,244   (167,577

Proceeds from sales and maturities available for sale investments

  136,000      90,650   

Capital expenditures

  (1,777   (3,245

Restricted cash

  —        320   
  

 

 

   

 

 

 

Net cash used in investing activities

  (251,021   (79,852
  

 

 

   

 

 

 

Cash flows from financing activities

Proceeds from issuance of common stock, net of issuance costs

  308,708      200,925   

Proceeds from exercise of stock options

  5,771      3,163   

Payments for lease financing obligation

  (79   —     
  

 

 

   

 

 

 

Net cash provided by financing activities

  314,400      204,088   
  

 

 

   

 

 

 

Effect of exchange rate on cash

  (12   (5
  

 

 

   

 

 

 

Net increase in cash and equivalents

  15,924      90,194   

Cash and equivalents at the beginning of period

  82,653      62,137   
  

 

 

   

 

 

 

Cash and equivalents at the end of period

$ 98,577    $ 152,331   
  

 

 

   

 

 

 

Capitalization of construction in progress related to facility lease obligation

  —        1,574   

Capital expenditures incurred but not yet paid

  213      2,633   

The accompanying notes are an integral part of these interim consolidated financial statements.

 

6


Table of Contents

SYNAGEVA BIOPHARMA CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts or as otherwise indicated)

(Unaudited)

 

1. Nature of the Business

Synageva BioPharma Corp. (Synageva or the Company) is a biopharmaceutical company focused on the discovery, development, and commercialization of therapeutic products for patients with rare diseases. The Company has a pipeline of protein therapeutic programs for rare diseases with unmet medical need which are currently at various stages of development. Synageva is currently planning for a global launch of its lead program, Kanuma™ (sebelipase alfa) for lysosomal acid lipase deficiency (LAL Deficiency). Kanuma is under regulatory review in the U.S., Europe, and Mexico. The Company also has an active investigational new drug application (IND) with the U.S. Food & Drug Administration (FDA) to evaluate its second program, SBC-103 a first-mover program for mucopolysaccharidosis IIIB (MPS IIIB, also known as Sanfilippo B syndrome). The Company is currently dosing patients with MPS IIIB in a Phase 1/2 study investigating intravenous administration of SBC-103 and plans to report preliminary data from this study in the second half of 2015. The Company’s third pipeline program, SBC-105, is a first-mover enzyme therapy in preclinical development for rare disorders of calcification. Synageva has additional first-mover and potentially bio-superior protein therapeutic pipeline programs for other rare diseases at different stages of preclinical development. Synageva owns the worldwide commercial rights to all of its pipeline programs.

The Company’s business is subject to risks including those common to companies in the biopharmaceutical industry, such as the successful development of products, patient enrollment, clinical trial uncertainty, regulatory approval, manufacturing and supply disruption, fluctuations in operating results and financial risks, potential need for additional funding, protection of proprietary technology and patent risks, compliance with government regulations, dependence on key personnel, competition, appropriate commercial infrastructure, technological and medical risks and management of growth.

The Company has incurred losses since inception and at March 31, 2015, had an accumulated deficit of $506.5 million. The Company expects to incur losses over the next several years as it continues to expand its drug discovery, development efforts and commercial activities. As a result of continuing losses, the Company may seek additional funding through a combination of public or private financing, collaborative relationships, licensing or other arrangements. The Company may not be able to obtain financing on acceptable terms, or at all, and the Company may not be able to enter into new collaboration or license agreements. If the Company is unable to obtain additional funding on a timely basis, it may be required to curtail or terminate some or all of its development programs and commercialization plans, including some or all of its product candidates.

Through March 31, 2015, the Company has funded its operations primarily from proceeds of the sale of stock, and to a lesser extent, royalty income and collaboration agreements. In January 2015, the Company completed an offering of 3.45 million shares of common stock and received net proceeds of $308.7 million. In addition to this financing, the Company received aggregate net proceeds of approximately $674.8 million from public equity offerings in fiscal 2014, 2013 and 2012.

 

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for Quarterly Reports on Form 10-Q and do not include all of the information and note disclosures required by the accounting principles generally accepted in the United States of America (U.S. GAAP) for complete financial statements. The Financial Statements should therefore be read in conjunction with the Financial Statements and Notes thereto for the fiscal year ended December 31, 2014 included in the Company’s Annual Report on Form 10-K filed with the SEC on February 26, 2015.

The accompanying Financial Statements have been prepared in accordance with U.S. GAAP, which requires management to make estimates and assumptions that affect amounts reported in the Financial Statements and accompanying disclosures. Although these estimates are based on the information reasonably available and actions that the Company may undertake in the future, actual results may be different from those estimates. The Financial Statements reflect all adjustments of a normal, recurring nature that are, in the opinion of management, necessary for a fair statement of results for these interim periods. The results of operations for the three months ended March 31, 2015 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2015.

 

7


Table of Contents

Principles of Consolidation

The Company’s consolidated financial statements include the accounts of Synageva and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

Variable Interest Entities

The Company identifies entities that (1) do not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support or (2) in which the equity investors lack an essential characteristic of a controlling financial interest as variable interest entities (“VIE” or “VIEs”). The Company performs an initial and on-going evaluation of the entities with which the Company has variable interests to determine if any of these entities are a VIE. If an entity is identified as a VIE, the Company performs an assessment to determine whether the Company has both (1) the power to direct activities that most significantly impact the VIE’s economic performance and (2) have the obligation to absorb losses from or the right to receive benefits of the VIE that could potentially be significant to the VIE. If both of these criteria are satisfied, the Company is identified as the primary beneficiary of the VIE.

The Company determined that a strategic investment made and disclosed in the second quarter of 2014 was a VIE. The Company is not the primary beneficiary for this entity since it does not have the power to direct the activities that most significantly impact the economic performance of the VIE. This determination has not changed through March 31, 2015.

Significant Accounting Policies

There have been no material changes to the Company’s significant accounting policies during the three months ended March 31, 2015, as compared to the significant accounting policies disclosed in Note 2, Summary of Significant Accounting Policies, of the Company’s financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2014.

Recent Issued and Proposed Accounting Pronouncements

In August 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (ASU 2014-15). ASU 2014-15 requires management to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances. The standard is effective for public entities for annual and interim periods beginning after December 15, 2016, with early adoption permitted. We are currently evaluating the provisions of ASU 2014-15 and assessing the impact, if any, it may have on our financial position, results of operations or cash flows.

In May 2014, the FASB and the International Accounting Standards Board jointly issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance. The objective of ASU 2014-09 is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 will be effective for the first quarter of 2017. An entity can elect to adopt ASU 2014-09 using one of two methods, either full retrospective adoption to each prior reporting period, or recognizing the cumulative effect of adoption at the date of initial application. The Company is in the process of evaluating the new standard and does not know the effect, if any, ASU 2014-09 will have on the Consolidated Financial Statements or which adoption method will be used.

 

3. Fair Value of Financial Instruments

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with a maturity date of 90 days or less at the date of purchase to be cash equivalents. At March 31, 2015 and December 31, 2014, all cash equivalents were U.S. treasury bills and amounts held in money market accounts at commercial banks.

 

8


Table of Contents

Investments

All of the Company’s investments were classified as available-for-sale at March 31, 2015 and December 31, 2014. The principal amounts of short-term investments are summarized in the tables below:

 

     Less Than 12 Months to Maturity  
     Amortized
Cost
     Unrealized
Gains
     Unrealized
(Losses)
     Fair Value  

Balance at March 31, 2015:

           

U.S. Treasury securities

   $ 612,105       $ —         $ (121    $ 611,984   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 612,105    $ —      $ (121 $ 611,984   

Balance at December 31, 2014:

U.S. Treasury securities

$ 364,352    $ —      $ (97 $ 364,255   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 364,352    $ —      $ (97 $ 364,255   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents information about the Company’s financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2015:

 

     March 31,
2015
     Quoted
Price in
Active
Markets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Assets

           

Cash equivalents

           

Money market fund

   $ 53,100       $ —         $ 53,100       $ —     

US treasury securities

     31,024         —           31,024         —     

Marketable securities

           

US treasury securities

     611,984         —           611,984         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 696,108    $ —      $ 696,108    $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Level 1 inputs are quoted prices in active markets for identical assets or liabilities and consist of cash on deposit. Items classified as Level 2 within the valuation hierarchy consist of U.S. government-related debt securities and money market funds. We estimate the fair values of these marketable securities by taking into consideration valuations obtained from third-party pricing sources. These pricing sources utilize industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include market pricing based on real-time trade data for the same or similar securities, issuer credit spreads, benchmark yields, and other observable inputs. We validate the prices provided by our third-party pricing sources by understanding the models used, obtaining market values from other pricing sources and analyzing pricing data in certain instances.

The following table presents information about the Company’s financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2014:

 

     December 31,
2014
     Quoted
Price in
Active
Markets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Assets

           

Cash equivalents

           

Money market fund

   $ 71,226       $ —         $ 71,226       $ —     

US treasury securities

     —           —           —           —     

Marketable securities

           

US treasury securities

     364,255         —           364,255         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 435,481    $ —      $ 435,481    $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
4. Supplemental Balance Sheet Information

Prepaid expenses and other current assets consist of the following:

 

     March 31,
2015
     December 31,
2014
 

Prepaid clinical, manufacturing, and scientific costs

   $ 5,269       $ 4,081   

Interest receivable

     1,623         1,018   

Prepaid insurance

     1,054         1,238   

Other

     2,845         3,601   
  

 

 

    

 

 

 
$ 10,791    $ 9,938   
  

 

 

    

 

 

 

Other non-current assets consist of the following:

 

     March 31,
2015
     December 31,
2014
 

Restricted cash

   $ 2,151       $ 2,151   

Equity method investment

     1,744         2,000   

Other

     140         123   
  

 

 

    

 

 

 
$ 4,035    $ 4,274   
  

 

 

    

 

 

 

Restricted cash relates to deposits associated with construction activities at our new Bogart, GA facility and a long-term letter of credit associated with our headquarters in Lexington, MA. The equity method investment balance relates to an investment made in 2014.

Accrued expenses consist of the following:

 

     March 31,
2015
     December 31,
2014
 

Accrued compensation and benefits

   $ 4,608       $ 6,093   

Clinical, manufacturing and scientific costs

     14,352         12,140   

Commercial and medical costs

     3,055         539   

Professional fees

     1,653         1,131   

Other

     1,133         1,807   
  

 

 

    

 

 

 
$ 24,801    $ 21,710   
  

 

 

    

 

 

 

 

5. Share Based Payments

The Company’s 2014 Equity Incentive Plan (2014 Plan) replaced the Company’s 2005 Stock Plan as the equity compensation plan from which the Company may make equity based awards to employees, directors and consultants. The 2014 Plan provides for the issuance of up to 2.5 million shares of the Company’s common stock, plus up to 1.0 million of additional shares if awards under the 2005 Stock Plan are cancelled or expire. Shares subject to outstanding awards under the 2005 Stock Plan and 2014 Plan totaled 1.8 million and 1.4 million, respectively, as of March 31, 2015. At March 31, 2015, there were 1.3 million shares remaining available for grant under the 2014 Plan.

The Company uses the Black-Scholes option pricing model to measure the fair value of its option awards. The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option-pricing model. The expected life assumption is based on the limited exercise historical experience at the Company, management’s expectations based on the length of time that an employee will stay at the Company, the vesting period of four years and the contractual term of ten years. The Company estimates volatility using a blended approach encompassing: (i) historical experience and peer group (including industry, size, life cycle and financial leverage), and (ii) implied volatility from publicly traded options with the longest available contractual terms. The risk-free interest rate is based on the U.S. Treasury zero coupon rate with a remaining term approximating the expected term used as the input to the Black-Scholes option pricing model.

 

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The Company also maintains an Employee Stock Purchase Plan (the ESPP), which allows eligible employees to use payroll deductions to purchase shares of the Company’s common stock at a discount of 15% to the lesser of the fair market value of the Company’s stock on (i) the date on which an employee elects to participate in the ESPP and (ii) the closing price on the last day of the ESPP option period. The plan is considered a compensatory employee stock purchase plan, results in incremental stock-based compensation expense in future periods. Option periods under the ESPP run from January 1 to June 30 and July 1 to December 31 of each year.

A summary of stock option activity under all equity plans for the three months ended March 31, 2015 is as follows:

 

     Stock Options      Restricted Stock Units  
     Shares      Weighted
Average
Exercise Price
     Shares      Weighted
Average
Grant Date
Fair Value
 

Outstanding at December 31, 2014

     3,256       $ 53.62         30       $ 63.11   

Granted

     174         103.61         —           —     

Exercised

     (176      30.29         —           —     

Canceled or expired

     (40      77.45         —           —     
  

 

 

       

 

 

    

Outstanding at March 31, 2015

  3,214    $ 57.30      30    $ 63.11   
  

 

 

       

 

 

    

The Company recognized stock-based compensation expense on all stock option awards for the three months ended March 31, 2015 and 2014, as follows:

 

     Three Months Ended
March 31,
 
     2015      2014  

Research and development

   $ 2,736       $ 1,467   

Selling, general and administrative

     4,309         1,714   
  

 

 

    

 

 

 
$ 7,045    $ 3,181   
  

 

 

    

 

 

 

 

6. Accumulated Other Comprehensive Loss

The following table summarizes the changes in accumulated other comprehensive loss, net of tax by component:

 

     Unrealized
Loss on
Available
for Sale
Securities
     Translation
Adjustments
     Total  

Balance, as of December 31, 2014

   $ (97    $ (143    $ (240

Other comprehensive loss before reclassifications

     (24      (12      (36
  

 

 

    

 

 

    

 

 

 

Net current period other comprehensive loss

$ (24 $ (12 $ (36
  

 

 

    

 

 

    

 

 

 

Balance, as of March 31, 2015

$ (121 $ (155 $ (276

 

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7. Basic and Diluted Net Loss per Common Share

Basic net loss per common share has been computed by dividing net loss by the weighted average number of shares outstanding during the period. Diluted net income per share, if applicable, has been computed by dividing diluted net income by the diluted number of shares outstanding during the period. Except where the result would be antidilutive to loss from continuing operations, diluted net loss per share has been computed assuming the exercise of stock options, as well as their related income tax effects. The following table sets forth the computation of basic and diluted net loss per common share:

 

     Three Months Ended
March 31,
 
     2015      2014  

Numerator:

     

Net loss

   $ (59,601    $ (36,424

Denominator

     

Weighted average common shares

     

Denominator for basic calculation

     36,495         31,338   

Denominator for diluted calculation

     36,495         31,338   

Net loss per share:

     

Basic

   $ (1.63    $ (1.16

Diluted

   $ (1.63    $ (1.16

The Company’s potential dilutive stock options and restricted stock units have been excluded from the computation of diluted net loss per share as the effect would be to reduce the net loss per share. Therefore, the weighted-average common stock outstanding used to calculate both basic and diluted net loss per share are the same. The following shares of potentially dilutive securities have been excluded from the computations of diluted weighted average shares outstanding as the effect of including such securities would be antidilutive:

 

     March 31,  
     2015      2014  

Common stock equivalents

     3,244         2,574   

 

8. Commitments and Contingencies

There have been no significant changes to the Company’s commitments and contingencies and occupancy arrangements in the three months ended March 31, 2015, as compared to those disclosed in Note 10, “Commitments and Contingencies” included in our Annual Report on Form 10-K for the year ended December 31, 2014, which was filed with the SEC on February 26, 2015.

 

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

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements” as defined under federal securities laws. Many of these statements can be identified by the use of words such as “believes,” “expects,” “anticipates,” “plans,” “may,” “will,” “projects,” “continues,” “estimates,” “potential,” “opportunity” or the negative versions of these terms and other similar expressions. These forward looking statements address, among other matters, plans to prepare for the potential launch of Kanuma, plans for the Phase 1/2 trial with SBC-103 including the number of patients to enroll and timing to report preliminary data, plans and timing to advance SBC-105 to the clinic, the ability for the company’s manufacturing platform to potentially create bio-superior treatments, and plans to generate proof of concept data and improved product characteristics. Our actual results or experience could differ significantly from the forward-looking statements. Factors that could cause or contribute to these differences include inaccurate assumptions and a broad variety of risks and uncertainties some of which are known, including, unanticipated delays in our submission timelines, risk that the outcomes of our clinical trials may not support registration or further development of our product candidates due to safety, efficacy or other reasons, the content and timing of decisions by the U.S. Food and Drug Administration (FDA) and other regulatory authorities, and the risks discussed in “Risk Factors,” in Part II, Item 1A of this Quarterly Report on Form 10-Q. You should carefully consider that information before you make an investment decision.

We cannot guarantee any future results, levels of activity, performance or achievements. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in this Quarterly Report on Form 10-Q as anticipated, believed, estimated or expected. The forward-looking statements contained in this Quarterly Report on Form 10-Q represent our estimates as of the date of this Quarterly Report on Form 10-Q (unless another date is indicated) and should not be relied upon as representing our expectations as of any other date. While we may elect to update these forward-looking statements, we specifically disclaim any obligation to do so.

The following discussion of our financial condition and results of operations should be read in conjunction with our Financial Statements and the related Notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the Financial Statements and Notes thereto for the fiscal year ended December 31, 2014 included in the Company’s Annual Report on Form 10-K filed with the SEC on February 26, 2015.

All references in this Quarterly Report on Form 10-Q to “we,” “us” and “our” refer to Synageva BioPharma Corp. and its consolidated subsidiaries unless the context requires otherwise. Synageva BioPharma™ and Kanuma™ are trademarks of Synageva BioPharma Corp. FUZEON® , is a registered trademark of Hoffmann-La Roche, Inc.

Our Business

Overview

We are a biopharmaceutical company focused on the discovery, development and commercialization of therapeutic products for patients with rare diseases. We have a pipeline of protein therapeutic programs for rare diseases with unmet medical need which are at various stages of development. We are planning for a global launch of our lead product, Kanuma for LAL Deficiency. Kanuma is currently under regulatory review in the U.S., Europe, and Mexico.

We have an active IND with the FDA to evaluate our second program, SBC-103, a first-mover enzyme replacement therapy program for MPS IIIB, also known as Sanfilippo B syndrome. We have begun dosing patients with MPS IIIB in a Phase 1/2 study investigating intravenous administration of SBC-103 and plan to report preliminary data from this study in the second half of 2015.

Our third pipeline program, SBC-105, is a first-mover enzyme therapy in preclinical development for rare disorders of calcification. We have additional first-mover and potentially bio-superior protein therapeutic pipeline programs for other rare diseases at different stages of preclinical development. We own the worldwide commercial rights to all of our pipeline programs.

In addition to progressing our current programs, we continue to build our global commercial and medical affairs infrastructure, expand our manufacturing capabilities and accelerate the development and commercialization of rare disease programs using our proprietary technology platform and other technologies. We are focused on hiring and retaining a highly skilled team that has extensive experience and specific skill sets relating to the selection, development and commercialization of therapies for life-threatening rare diseases.

Kanuma™ (sebelipase alfa) and LAL Deficiency

Disease Overview

LAL Deficiency is a serious, underdiagnosed rare disease that manifests with significant morbidity and early mortality. LAL Deficiency is caused by genetic mutations that result in decreased LAL enzyme activity in the lysosomes across multiple body tissues, leading to the buildup of fatty material in the liver, blood vessel walls and other tissues. LAL

 

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Deficiency causes progressive and multisystemic organ damage including hepatic cirrhosis and accelerated atherosclerosis that can lead to sudden and unpredictable clinical complications. LAL Deficiency often manifests in childhood but can be diagnosed at all ages with a simple blood test. Infants presenting with LAL Deficiency show very rapid disease progression, with death usually occurring in the first six months of life.

Based on prevalence estimates published in the medical literature, we estimate there are at least 3,000 children and adults with LAL Deficiency in North America, South America, Europe, Japan and parts of the Middle East (the “major reimbursable markets”). The physician target audience for LAL Deficiency primarily consists of pediatric hepatologists and gastroenterologists, as well as lipidologists.

About Kanuma

Kanuma is a recombinant form of the human LAL enzyme that we are developing as an enzyme replacement therapy for LAL Deficiency. Kanuma has been granted orphan designation by the FDA, the European Medicines Agency (EMA), and the Japanese Ministry of Health, Labour and Welfare. Additionally, Kanuma received fast track designation by the FDA, and Breakthrough Therapy designation by the FDA for LAL Deficiency presenting in infants.

We have submitted a Biologics License Application (BLA) to the FDA and a Marketing Authorization Application (MAA) to the EMA for Kanuma as a treatment for patients with LAL Deficiency. The FDA has accepted for review the BLA for Kanuma for the treatment of LAL Deficiency. The FDA granted our request for Priority Review, which shortens the regulatory review period and is reserved for investigational therapies that treat serious conditions and, if approved, would provide a significant improvement in safety or effectiveness compared to available therapies. The FDA established a target action date of September 8, 2015 under the Prescription Drug User Fee Act (PDUFA). The EMA validated the MAA and granted our request for accelerated assessment, which has the potential to shorten the EMA’s regulatory review time. In addition, in March 2015, the Company announced the submission of an application for Kanuma to the Comisión Federal para la Protección contra Riesgos Sanitarios (Cofepris) in Mexico as a treatment for patients with LAL Deficiency.

The regulatory filings included data from a global, randomized, double-blind, placebo-controlled Phase 3 trial of Kanuma in children and adults with LAL Deficiency, a Phase 2/3 trial of Kanuma in infants with LAL Deficiency, and an ongoing Phase 1/2 trial in adults with LAL Deficiency. Patients in these trials, combined with patients in other ongoing clinical trials with Kanuma, represent the largest patient population studied to date for this rare, devastating disease.

We continue to conduct additional trials that expand the clinical experience with Kanuma in LAL Deficiency. These trials include eligible patients who were not able to enroll into the previously completed Phase 3 studies based on completion of enrollment, age, disease presentation, previous treatment by hematopoietic stem cell or liver transplantation, or disease characteristics that would have precluded participation in a placebo-controlled study.

Study LAL-CL06 is a global, open-label trial to assess the safety of Kanuma in infants (greater than eight months of age), or children and adults with LAL Deficiency with evidence of advanced liver disease or disease recurrence in patients with past liver or hematopoietic transplant, among other disease manifestations. This trial recently completed enrollment with a total of 31 patients.

Study LAL-CL08 is a global, open-label trial to expand the clinical experience with Kanuma in additional infants with LAL Deficiency. This trial continues to enroll with four infants currently receiving treatment with Kanuma. These four infants are in addition to the five infants who continue to receive treatment with Kanuma as part of the ongoing, open-label Phase 2/3 trial.

Additional studies may be initiated in order to further evaluate safety and efficacy and additional patients may also receive treatment under expanded access or compassionate use mechanisms unless or until we receive marketing approval of Kanuma.

Commercialization

We are developing marketing, sales and distribution capabilities to support the commercialization of Kanuma if it is approved. We have hired country managers, medical science liaisons and reimbursement specialists in the major reimbursable markets and we believe we have the necessary infrastructure in place to support the global commercial launch of Kanuma.

Our commercial strategy for Kanuma after approval will focus on: (i) continuing to raise disease awareness, (ii) facilitating diagnosis, (iii) supporting treatment, and (iv) facilitating third party reimbursement. By aligning resources against these imperatives, we believe that our commercial footprint will be efficient and scaled to a highly specialized market niche. Similar to other companies with such specialized call points, our current plans for resourcing the commercialization effort for Kanuma include a small number of highly specialized field-based representatives supported by a specialized organization in-house. The planned commercial organization is being developed to initially address the needs and opportunities for the major reimbursable markets.

 

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SBC-103 for MPS IIIB

Our second pipeline program is an enzyme replacement therapy for an LSD called MPS IIIB. The mucopolysaccharidoses (MPS) consist of a group of rare LSDs caused by a deficiency of enzymes needed to break down complex sugars called glycosaminoglycans. The MPS III syndromes (also known as Sanfilippo syndromes) share complications with other MPS diseases but represent a clinically distinct subset with marked central nervous system degeneration. MPS IIIB, also known as Sanfilippo B syndrome, is caused by a decrease in alpha-N-acetyl-glucosaminidase (NAGLU) enzyme activity which leads to the buildup of abnormal amounts of heparan sulfate (HS) in the brain and other organs. The accumulation of abnormal HS, particularly in the central nervous system, leads to severe cognitive decline, behavioral problems, speech loss, increasing loss of mobility, and premature death. Based on published incidence data in the medical literature, we estimate there are approximately 2,000 MPS IIIB patients in the major reimbursable markets.

SBC-103 is a recombinant form of the natural human NAGLU enzyme we are developing as an enzyme replacement therapy for MPS IIIB. In December 2014, we announced that the IND application to FDA to evaluate SBC-103 as a treatment for MPS IIIB is active. Patient enrollment and dosing continues with MPS IIIB in a Phase 1/2 study investigating intravenous administration of SBC-103 and we plan to report preliminary data from this study in the second half of 2015. SBC-103 has been granted orphan designation by the FDA and the EMA and Fast Track designation from the FDA.

The Phase 1/2 open-label trial will enroll approximately nine patients, two years of age or greater but less than 12 years of age, with definitive diagnosis of MPS IIIB and developmental delay. Patients will be treated in one of three different dosing cohorts (0.3 mg/kg, 1.0 mg/kg or 3.0 mg/kg) with every other week intravenous administrations of SBC-103 for 24 weeks. Patients who meet qualifying criteria may continue therapy with SBC-103 for an extended period. The primary endpoint of the trial is safety and tolerability of intravenous administration of SBC-103 in patients with MPS IIIB. The study will also determine the effects of dosing with SBC-103 on the onset, magnitude, and reversibility of changes in levels of total HS in cerebral spinal fluid (CSF), serum, and urine as well as measure the effects of neurocognitive and developmental function and change in brain structures as assessed by magnetic resonance imaging. Exploratory biomarkers, MPS IIIB disease characteristics, symptoms, and quality of life will also be measured.

The advancement of SBC-103 into the clinic is supported by preclinical studies demonstrating that intravenously administered SBC-103 is able to cross the blood-brain barrier and reduce HS storage in the brain, liver and kidney in an MPS IIIB animal model. These studies include a mouse model of MPS IIIB, an in vitro model of the blood-brain barrier, and a non-human primate study.

We are also conducting natural history studies in MPS IIIB. These include a retrospective natural history study of deceased MPS IIIB patients that began in July 2013 and a prospective, longitudinal natural history study in living MPS IIIB patients that began in September 2014. Natural history studies can help build an understanding of the etiology, manifestations and progression of disease and provide insights into biomarkers and other measures of clinical outcome.

SBC-105 for rare disorders of calcification

SBC-105 is our third pipeline program and a first-mover enzyme replacement therapy in preclinical development for rare disorders of calcification. In healthy individuals, an enzyme called ectonucleotide pyrophosphatase/phosphodiesterase-1 (ENPP1) generates pyrophosphate (PPi), which is a potent inhibitor of tissue calcification. Inherited mutations of ENPP1 in diseases such as generalized arterial calcification of infancy (GACI), hypophosphatemic rickets and pseudoxanthoma elasticum, result in increased calcification of the arteries and other tissues that can lead to increased morbidity and early mortality. In addition, low PPi levels have been linked to vascular calcification in patients with chronic kidney disease (CKD) and PPi has been shown to inhibit vascular calcification in animal models of CKD.

SBC-105 is a recombinant enzyme that replaces the mutated ENPP1 enzyme and increases production of PPi. SBC-105 improved survival and biomarkers, and decreased tissue calcification in a preclinical mouse model of GACI. We are testing SBC-105 in GACI animal models with plans to expand testing of SBC-105 to CKD animal models to support entry into the clinic in 2016.

Given the desired characteristics of SBC-105, manufacturing has been focused on a cell culture based platform. While the majority of our pipeline products are produced in our egg white (EW) platform, we continue to expand our knowledge and capabilities in multi-platform production. This multiple manufacturing platform capability will enable a diverse approach to manufacturing and development for future Synageva pipeline programs

 

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Other pipeline programs include potentially bio-superior treatments in addition to novel first-mover programs

We continue to explore opportunities that leverage our proprietary EW manufacturing platform and other capabilities to create potentially bio-superior treatments for patient populations who still have unmet medical need. We have produced enzymes targeting Hunter syndrome, Fabry disease and Pompe disease with expression levels and activity that support further preclinical assessment. Combined, these diseases affect well-defined patient populations in excess of 10,000 individuals worldwide. Preclinical testing in animal models is underway to generate proof of concept data including the potential for improved product characteristics for at least one of these programs this year.

In addition to SBC-105 and the potentially bio-superior programs, we have other first-mover protein therapeutic pipeline programs for other rare diseases at different stages of preclinical development. With respect to pipeline products and other product candidates, we may elect to utilize our own commercial capabilities to market and sell a product for which we obtain regulatory approval. We also may enter into strategic transactions to supplement or partner our technologies and resources. When identifying strategic transactions, we seek to leverage our expertise in commercial, product development and production technologies for rare diseases.

Financial Operations Overview

General

Our future operating results will depend on the progress of drug candidates currently in our research and development pipeline. The results of our operations will vary significantly from year-to-year and quarter-to-quarter and will depend largely on, among other factors, the cost and outcome of any preclinical development or clinical trials then being conducted and efforts for registration and commercialization of our products.

A discussion of certain risks and uncertainties that could affect our capital requirements and ability to raise additional funds is set forth under the section entitled “Risk Factors” in this Quarterly Report on Form 10-Q.

Revenue

Royalty Revenue

Royalty revenues are recognized in the period earned, based on contract terms when reported sales are reliably measurable and collectability is reasonably assured. Royalty revenue relates to amounts earned from the sale of FUZEON by Hoffman-La Roche, Inc. (Roche).

Collaboration and License Revenue

Collaboration and license revenue relates to revenue from the licensing of our intellectual property in 2014. In 2013 and 2012, collaboration and license revenue included revenue from collaboration agreements.

Research and Development

We expense research and development costs as incurred. Research and development expense consists of costs incurred to discover, research and develop drug candidates, including personnel and facility-related expenses, outside contracted services including clinical trial costs, manufacturing and process development costs, research costs, medical affairs and regulatory costs outside consulting services, research license fees, depreciation and amortization of lab facilities, lab supplies and other external costs. We accrue costs for clinical trial activities based upon estimates of the services received and related expenses incurred that have yet to be invoiced by the vendors that perform the services.

Selling, General and Administrative

Selling, general and administrative expense consists primarily of salaries, stock-based compensation expense and other related costs for personnel in commercial, executive, business development, finance, human resource, legal, information technology, and support personnel functions. Other costs include facility costs not otherwise included in research and development expense, insurance, and professional fees for legal, accounting and commercial services.

 

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Amortization of Developed Technology

We provide for the cost of amortization of developed technology, computed using an accelerated method based on the undiscounted cash flows received from the FUZEON royalty stream, in proportion to the estimated total undiscounted cash flows.

Other Expense, net

Other expense, net includes our pro-rata share of the net loss associated with an equity method investment.

Interest Income, net

Interest income, net relates to interest earned on our cash equivalent and short-term investment balances, partially offset by interest expense related to our financing lease obligation.

Provision for Income Taxes

Provision for income taxes is comprised of the taxes currently payable as a result of foreign operations. We have certain international subsidiaries that are profitable on a stand-alone basis. Accordingly, a tax provision is reflected for the taxes incurred in such jurisdictions based on intercompany service arrangements.

Results of Operations

Three Months Ended March 31, 2015 and 2014

Revenues

The following table presents total revenue for the three months ended March 31, 2015 and 2014, respectively (in thousands):

 

     Three Months Ended
March 31,
               
     2015      2014      $ Change      % Change  

Royalty revenue

   $ 927       $ 1,447       $ (520      (36 )% 

Collaboration and license revenue

     —           139         (139      (100
  

 

 

    

 

 

    

 

 

    

Total revenue

$ 927    $ 1,586    $ (659   (42 )% 
  

 

 

    

 

 

    

 

 

    

Total revenues decreased by approximately $0.7 million for the three months ended March 31, 2015, as compared to the comparable period of the prior year, primarily as a result of decreased FUZEON royalty revenue. In the three months ended March 31, 2014, we recognized approximately $0.1 million related to the licensing of certain intellectual property rights. FUZEON royalty revenues are unpredictable, as we are not marketing the product and inconsistent sales in certain regions can cause period to period variability. In general, we have seen a trend of decreasing royalties related to FUZEON which we expect to continue in 2015.

Research and Development Expenses

Research and development expenses for the three months ended March 31, 2015 and 2014 are summarized as follows (in thousands):

 

     Three Months Ended
March 31,
               
     2015      2014      $ Change      % Change  

Compensation and benefits-related

   $ 7,858       $ 5,576       $ 2,282         41

Clinical trials and manufacturing

     16,498         14,069         2,429         17   

Other development related external services

     6,702         4,117         2,585         63   

Facilities related and other

     4,413         2,639         1,774         67   

Stock-based compensation expense

     2,736         1,467         1,269         87   
  

 

 

    

 

 

    

 

 

    

Total research and development expense

$ 38,207    $ 27,868    $ 10,339      37
  

 

 

    

 

 

    

 

 

    

 

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Research and development expense increased by approximately $10.3 million to $38.2 million for the three months ended March 31, 2015 as compared to $27.9 million for the comparable prior year period. The increase in total research and development expense is due to increased clinical trial costs, external manufacturing fees, toxicology studies and other development related external services associated with on-going development of Kanuma, SBC-103, SBC-105 and our pipeline programs, as well as higher compensation expense and stock-based compensation expense from hiring additional staff to move our programs forward. Also contributing to the period-over-period increase in research and development expense was higher facilities and related costs of $1.8 million primarily related to increased depreciation expense for our manufacturing and lab facilities fixed asset additions, as well as higher costs to operate our facilities.

We expect our investment in research and development to continue to increase as development activities for Kanuma, SBC-103, SBC-105 and our other pipeline programs continue.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three months ended March 31, 2015 and 2014 are summarized as follows (in thousands):

 

     Three Months Ended
March 31,
               
     2015      2014      $ Change      % Change  

Compensation and benefits-related

   $ 7,807       $ 3,762       $ 4,045         108

External and professional services

     6,989         3,894         3,095         79   

Facilities related and other

     2,566         434         2,132         491   

Stock-based compensation expense

     4,309         1,714         2,595         151   
  

 

 

    

 

 

    

 

 

    

Total selling, general and administrative expense

$ 21,671    $ 9,804    $ 11,867      121
  

 

 

    

 

 

    

 

 

    

Selling, general and administrative expense increased by approximately $11.9 million to $21.7 million for the three months ended March 31, 2015 as compared to $9.8 million for the comparable prior year period. The increase was primarily due to higher compensation-related expenses (including stock-based compensation expense), external service costs and facilities related and other expenses. Compensation related costs, including stock-based compensation, increased $6.6 million as we continue to expand our resources to support our international organization and commercial preparations for Kanuma. External service costs contributed $3.1 million to the period-over-period increase in expense and were primarily due to increased consulting, external commercial and marketing costs, patent and legal fees and accounting and other professional service costs. Facilities related and other expenses increased approximately $2.1 million, period-over-period due to increased domestic facility expenses, travel and costs related to our commercial preparations for Kanuma. We expect selling, general and administrative expense to continue to increase as we continue commercial preparations and support expanded research operations.

Amortization of Developed Technology

Costs recognized for the amortization of developed technology for the three months ended March 31, 2015 and 2014 are summarized as follows (in thousands):

 

     Three Months Ended
March 31,
               
     2015      2014      $ Change      % Change  

Amortization of developed technology

   $ 222       $ 390       $ (168      (43 )% 
  

 

 

    

 

 

    

 

 

    

We recognized $0.2 million of amortization related to the developed technology associated with the FUZEON royalty stream in the three months ended March 31, 2015, as compared to $0.4 million in the prior year period. Amortization of

 

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developed technology is computed using an accelerated method based on the undiscounted actual cash flows received from the FUZEON royalty stream, in proportion to the estimated total undiscounted cash flows from the asset. In conjunction with expected cash flows, our amortization model assumed a larger proportion of expense in the periods immediately following the acquisition of the FUZEON royalty stream, thus the period-over-period decrease.

Interest Income, Net

 

     Three Months Ended
March 31,
               
     2015      2014      $ Change      % Change  

Interest income, net

   $ 83       $ 75       $ 8         11
  

 

 

    

 

 

    

 

 

    

Interest income, net primarily relates to interest earned on our short-term investment balance. Our investments include U.S. treasury securities and money market funds, with a weighted average maturity of one year or less.

Other Expense, net

 

     Three Months Ended
March 31,
               
     2015      2014      $ Change      % Change  

Other expense, net

   $ (252    $ (5    $ (247      (4940 )% 
  

 

 

    

 

 

    

 

 

    

For the three months ended March 31, 2015, other expense was comprised primarily of the Company’s pro-rata share of the net loss associated with an equity method investment.

Provision for income taxes

 

     Three Months Ended
March 31,
               
     2015      2014      $ Change      % Change  

Provision for income taxes

   $ 259       $ 18      $ 241         1,339  % 
  

 

 

    

 

 

    

 

 

    

Our provision for income taxes is comprised primarily of the taxes currently payable as a result of transfer pricing arrangements related to foreign operations, and totaled approximately $0.3 million for the three months ended March 31, 2015, compared to less than $0.1 million for the three months ended March 31, 2014. As we are in a full valuation allowance, we do not recognize any benefit from U.S. operating losses in our income statement or balance sheet.

Liquidity and Capital Resources

Sources of Liquidity

We have financed our operations to date primarily from the proceeds of the sale of stock, and to a lesser extent, license and royalty fees, upfront cash payments and research and development funding from collaborators, government grants and licensors. We completed a total of five equity financings from 2012 to 2014, resulting in the issuance of approximately 14.0 million shares of common stock and the receipt of approximately $674.8 million of net proceeds. In addition, in January of 2015, we raised another $308.7 million in net proceeds through the sale of 3.45 million shares of common stock.

We intend to use our cash, cash equivalents and investments for general corporate purposes, which may include funding the global launch of Kanuma, expanding our global awareness and commercial and manufacturing efforts, expanding our infrastructure, including commercial and manufacturing to benefit Kanuma and the rest of our pipeline, supporting the Phase 1/2 clinical trial for SBC-103, accelerating our early-stage programs into the clinic, including SBC-105 and potentially bio-superior treatments in addition to novel first-mover programs. We may acquire new technologies or businesses that are complementary to our current technologies and business focus.

 

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We are unsure when we will generate significant revenue from the direct sale of products currently in development, if ever. We receive royalties from the sale of FUZEON by Roche, which are generally expected to continue to decrease over time. As of March 31, 2015, our principal sources of liquidity consisted of cash and cash equivalents and short-term investments of approximately $710.6 million. Our cash equivalents are highly liquid investments purchased with a maturity date of 90 days or less at the date of purchase and consist of U.S. treasury bills and amounts held in money market funds.

Cash Flows

The use of our cash flows for operations has primarily consisted of salaries and wages for our employees, facility and facility-related costs for our office, laboratory, and manufacturing facilities, fees paid in connection with preclinical studies, clinical studies, outsourced manufacturing, laboratory supplies, consulting fees and commercial, legal and accounting fees. We expect that costs associated with clinical studies and manufacturing costs as well as commercial costs will increase in future periods as Kanuma approaches commercialization and our other clinical and preclinical candidates move forward in development.

Net cash used in operating activities was $47.4 million for the three months ended March 31, 2015, and was primarily the result of a net loss of $59.6 million, the drivers of which are discussed in further detail in “Results of Operations.” In addition, non-cash items and changes in certain operating assets and liabilities affected operating cash during the three months ended March 31, 2015. Non-cash items include depreciation of fixed assets of $1.4 million, amortization of developed technology of $0.2 million, stock-based compensation of $7.0 million, and the amortization of premium on available for sale investments of $1.5 million. Non-cash items also include $0.3 million of expense related to our pro-rata share of an equity method investment’s net loss. Changes in operating assets and liabilities resulted in a net source of cash of $1.7 million, which was primarily the result of a net increase in current liabilities and other liabilities of $2.5 million from December 31, 2014. These changes were partially offset by a net increase in current assets of approximately $0.8 million from December 31, 2014. The increase in accrued expenses and other liabilities were primarily driven by increased clinical, toxicology and manufacturing activities, as summarized in Note 4, “Supplemental Balance Sheet Information” of the Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

Net cash used in operating activities was $34.0 million for the three months ended March 31, 2014, and was primarily the result of a net loss of $36.4 million. In addition, non-cash items and changes in certain operating assets and liabilities affected operating cash during three months ended March 31, 2014. Non-cash items include depreciation of fixed assets of $1.0 million, amortization of developed technology of $0.4 million, stock-based compensation of $3.2 million, and the amortization of premium on available for sale investments of $0.7 million. Changes in operating assets and liabilities resulted in a net use of cash of $2.9 million, which was primarily the result of increased prepaid expenses, other current assets and other assets of $2.6 million. The increases in prepaid and other assets, as well as accrued expenses and other liabilities were primarily driven by clinical, toxicology and manufacturing activities.

Net cash used in investing activities totaled $251.0 million in the three months ended March 31, 2015 and was primarily a result of the purchase of available-for-sale investments of $385.2 million, partially offset by cash received from the maturity of available for sale investments totaling $136.0 million. The purchase of available for sale securities reflects the Company’s investment of the proceeds for the January equity offering. Cash flows used for investing activities also included $1.8 million for capital expenditures

Net cash used in investing activities totaled $79.9 million for the three months ended March 31, 2014, and was primarily a result of the purchase of available-for-sale investments of $167.6 million, partially offset by cash received from the maturity of available for sale investments totaling $90.7 million. Cash flows used for investing activities included $3.2 million for capital expenditure, partially offset by a change in restricted cash related to security deposits on properties of $0.3 million. Capital expenditures primarily relate to leasehold improvements at our production, lab and office locations. Cash used for capital expenditures in the statement of cash flows does not include $1.6 million for amounts that were incurred by our landlord related to the construction of our Bogart, GA manufacturing facility, where we have been deemed the “accounting owner” based on the applicable lease accounting guidance and $2.7 million for capital expenditures that were accrued but not yet paid.

 

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Financing activities provided cash of approximately $314.4 million for the three months ended March 31, 2015 resulting from net cash received from the January equity financing of $308.7 million and proceeds from the exercise of stock options of $5.8 million. Cash used in operating activities included $0.1 million related to payments of principle on our lease financing obligation.

Financing activities provided cash of approximately $204.1 million in the three months ended March 31, 2014, resulting from net cash received from a secondary offering of $200.9 million and proceeds from the exercise of stock options of $3.2 million.

Funding Requirements

Our cash and cash equivalents and investments balance at March 31, 2015 totaled $710.6 million. We expect to use our existing cash and cash equivalents and investments to continue our research and development programs and commercialization activities and to fulfill our planned operating goals. In particular, our currently planned operating and capital requirements include the need for working capital to support Kanuma, SBC-103, SBC-105 and the other preclinical candidates that we are seeking to develop, and to fund our commercial and medical affair costs and general and administrative expenses as we approach commercialization of Kanuma. We expect that our current funding position will enable us to sustain operations into at least 2017.

Our ability to finance our operations into the future and to generate revenues will depend heavily on our ability to obtain regulatory approval for Kanuma and to successfully clinically develop, manufacture and commercialize Kanuma. There are a number of factors that may adversely affect our planned future capital requirements and accelerate our need for additional financing, many of which are beyond our control, including the following:

 

    unanticipated costs in our research and development programs;

 

    the timing, receipt and amount of payments, if any, from current and potential future collaborators;

 

    the timing of regulatory approval and future product revenues, if any;

 

    the timing and amount of contingent milestone payments, if any, from future investments, acquisitions, or license agreements, as applicable;

 

    the timing and amount of payments due to licensors of patent rights and technology used in our product candidates; and

 

    unplanned costs to prepare, file, prosecute, maintain and enforce patent claims and other patent-related costs, including costs related to litigation and contested proceedings, and technology license fees.

We may seek additional funding through debt or equity financings. The fundraising environment for life science companies, in general, is highly volatile. Due to this and various other factors, additional funding may not be available on acceptable terms, if at all. In addition, the terms of any financing may be dilutive or otherwise adversely affect other rights of our stockholders. We also may seek additional funds through arrangements with collaborators, licensees or other third parties. These arrangements would generally require us to relinquish or encumber rights to some of our technologies or product candidates, and we may not be able to enter into such arrangements on acceptable terms, if at all. If we are unable to obtain additional funding on a timely basis, whether through sales of debt or equity or through third-party collaboration or license arrangements, we may be required to curtail or terminate some or all of our development programs, including some or all of our product candidates.

Contractual Obligations and Requirements

As of March 31, 2015, our contractual obligations consisted primarily of lease obligations for our headquarters, manufacturing and other facilities, contractual purchase obligations and to a lesser extent, minimum contractual payments on licensed technology.

There have not been any other significant changes to our contractual obligations and requirements during the three months ended March 31, 2015, as compared to those disclosed in “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, 2014, which was filed with the SEC on February 26, 2015.

 

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Off-Balance Sheet Arrangements

As of March 31, 2015, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

Critical Accounting Policies and Estimates

In preparing our Financial Statements in accordance with accounting principles generally accepted in the U.S. and pursuant to the rules and regulations promulgated by the SEC, we make assumptions, judgments and estimates that can have a significant impact on our net income/loss and affect the reported amounts of certain assets, liabilities, revenue and expenses, and related disclosures. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis, we evaluate our assumptions, judgments and estimates. We also discuss our critical accounting policies and estimates with the Audit Committee of our Board of Directors.

We believe that the assumptions, judgments and estimates involved in the revenue recognition, research and development expense, amortization of intangible assets, and income taxes have the greatest impact on our Financial Statements, so we consider these to be our critical accounting policies. Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results.

There have been no significant changes to our critical accounting policies and estimates during the three months ended March 31, 2015, as compared to the critical accounting policies and estimates disclosed in “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, 2014, which was filed with the SEC on February  26, 2015.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our market risks during the three months ended March 31, 2015 have not materially changed from those discussed in Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, of our Annual Report on Form 10-K for the year ended December 31, 2014, which was filed with the SEC on February 26, 2015.

Item 4. Controls and Procedures

We maintain disclosure controls and procedures designed to ensure that we are able to collect the information we are required to disclose in the reports we file with the SEC and to process, summarize and disclose this information within the time periods specified in the rules and forms of the SEC. Based on the evaluation of our disclosure controls and procedures (as defined in the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), Rules 13a-15(e) and 15d-15(e)) as of March 31, 2015, our Chief Executive Officer and Chief Financial Officer have concluded that such disclosure controls and procedures are effective to ensure that information required to be disclosed in our periodic reports filed under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions.

There has been no change in our internal control over financial reporting that occurred during the three months ended March 31, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings.

None.

Item 1A. Risk Factors.

RISK FACTORS

Investing in our securities involves risk. Prior to making a decision about investing in our securities, you should carefully consider the specific risk factors discussed below and all of the other information contained or incorporated by reference in this report. The risks and uncertainties we have described are not the only ones we face. Additional risks and

 

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uncertainties not presently known to us or that we currently deem immaterial may also affect our operations. If any of these risks were to occur, our business, financial condition or results of operations would likely suffer. In that event, the trading price of our common stock could decline, and you could lose all or part of your investment.

Risks Related to Research, Development and Commercialization of Product Candidates

We are largely dependent on the success of Kanuma. All of our product candidates, including Kanuma, are still in development. Preclinical and clinical trials of our product candidates may not be successful.

Our business prospects are largely dependent upon the successful development and commercialization of Kanuma. Before we can commercialize any of our product candidates, including Kanuma, we need to:

 

    conduct substantial research and development;

 

    undertake preclinical and clinical testing and other costly and time consuming measures;

 

    scale-up and transfer manufacturing processes while maintaining consistent product quality; and

 

    pursue and obtain marketing and manufacturing approvals and, in some jurisdictions, pricing and reimbursement approvals.

This process involves a high degree of risk and takes many years. Our product development efforts with respect to a product candidate may fail for many reasons, including:

 

    failure of the product candidate in preclinical studies;

 

    failure to obtain, or delays in obtaining, the required regulatory approvals to initiate or continue clinical studies for the product candidate;

 

    failure of later trials to confirm positive results from earlier preclinical studies or clinical trials;

 

    delays or difficulty enrolling patients in clinical trials, particularly for disease indications with small patient populations;

 

    failure to identify a sufficient number of patients who meet the clinical trial enrollment criteria and/or who would support commercial launch and subsequent commercialization efforts;

 

    patients exhibiting adverse reactions to the product candidate or indications of other safety concerns;

 

    insufficient clinical trial data to support the safety, effectiveness or superiority of the product candidate;

 

    inability to produce proteins with favorable or superior characteristics using our proprietary EW manufacturing platform;

 

    failure to obtain, or delays in obtaining, the required regulatory approvals for the product candidate, or the facilities or processes used to manufacture the product candidate; or

 

    changes in the regulatory or pricing and reimbursement environments could make development of a new product or further development of an existing product for a new indication no longer desirable.

Few research and development projects result in commercial products, and success in preclinical studies or clinical trials often is not replicated in later studies.

We may decide to abandon development of a product candidate or service at any time, or we may be required to expend considerable resources repeating clinical trials or conducting additional trials, either of which would increase costs of development and delay any revenue from those programs. In addition, a regulatory authority may delay or deny an approval because it is not satisfied with the design, conduct, or results of clinical trials or due to its assessment of the data we supply.

We have neither obtained marketing approval, nor commercialized any of our current product candidates.

We have submitted a BLA to the FDA and an MAA to the EMA for Kanuma as a treatment for patients with LAL Deficiency, but we have neither obtained marketing approval nor commercialized any of our current product candidates and do not know if or when we will receive marketing approval or generate revenue from the direct sale of an approved product, including Kanuma. We have only limited clinical experience, which might prevent us from successfully designing or implementing a clinical trial for any of

 

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the indications we currently, or in the future, target. We may not be able to demonstrate that our product candidates meet the appropriate standards for regulatory approval, including because we may be unsuccessful in convincing regulatory authorities of the adequacy of the design of our trials or the sufficiency of the data generated from our clinical and other studies. If we are not successful in conducting and managing our preclinical development activities or clinical trials or obtaining regulatory approvals, we might not be able to commercialize our lead programs, or might be significantly delayed in doing so, which will materially harm our business.

If our preclinical or clinical studies do not produce positive results or are delayed or if serious side effects are identified during drug development, we may experience delays, incur additional costs, receive a narrow label, or ultimately be unable to obtain regulatory approval and commercialize our product candidates.

Before obtaining regulatory approval for the sale of our product candidates, we must conduct, at our own expense, extensive preclinical tests to demonstrate the safety of our product candidates in animals, and clinical trials to demonstrate the safety and efficacy of our product candidates in humans. Preclinical and clinical testing is expensive, difficult to design and implement and can take many years to complete. A failure of one or more preclinical studies or clinical trials can occur at any stage of testing. We may experience numerous events during, or as a result of, preclinical testing and the clinical trial process, including for potential new indications, which could delay or prevent our receipt of regulatory approval for, or the commercialization of, our product candidates, including:

 

    our preclinical tests or clinical trials may produce negative or inconclusive results, and we may decide or regulators may require us, to conduct additional preclinical testing prior to initiating clinical trials, or to suspend ongoing studies;

 

    we may decide, or regulators may require us, to change the design of our preclinical studies or clinical trials in ways that may slow their progress, delay the initiation of clinical trials, or we may abandon projects that we expect to be promising;

 

    a regulatory authority or institutional review board may not authorize us to commence a clinical trial or conduct a clinical trial at a prospective trial site;

 

    conditions imposed on us by the FDA or any non-U.S. regulatory authority regarding the scope or design of our clinical trials may require us to resubmit our clinical trial protocols to these authorities or to institutional review boards or ethics committees for re-review due to changes in the regulatory environment;

 

    the number of patients required for clinical trials may be larger than we anticipate or are able to enroll, or participants may drop out of, or not qualify for, clinical trials at a higher rate than we anticipate;

 

    our third-party contractors or clinical investigators may fail to comply with regulatory requirements or fail to meet their contractual obligations to us in a timely manner or at all;

 

    we might have to suspend or terminate one or more of our clinical trials if we, a regulatory authority or an institutional review board or ethics committee determine that the participants are being exposed to unacceptable health risks;

 

    a regulatory authority or institutional review board or ethics committee may require that we hold, suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements;

 

    a regulatory authority may require that we conduct additional clinical research to provide additional information regarding the efficacy or safety of Kanuma;

 

    the cost of our clinical trials may be greater than we anticipate;

 

    the supply or quality of our product candidates or other materials necessary to conduct our clinical trials may be insufficient or inadequate or we may not be able to reach agreements on acceptable terms with prospective contract manufacturing organizations;

 

    we may not be able to produce, or sufficiently test, comparable or consistent drug materials derived from different manufacturing facilities operated by us or from processes run by third party manufacturers which could impact our ability or timing with respect to receiving regulatory approval for our product candidates;

 

    we may not be able to reach agreements on acceptable terms with prospective clinical research organizations;

 

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    if approved, we may not be able to reach agreements on acceptable terms with commercial distributors and other logistics providers; or

 

    the effects of our product candidates may not be the desired effects, may include undesirable side effects, or the product candidates may have other unexpected characteristics.

We may obtain approval for indications that are not as broad as intended or entirely different than those indications for which we sought approval. For example, even though we met the pre-specified primary and six secondary endpoints in the Phase 3 clinical trial for children and adults, potential regulatory approval could be limited to the treatment of LAL Deficiency only in infants, and that would represent a small portion of the total LAL Deficiency patient population. If we are required to conduct additional clinical trials or other testing of our product candidates beyond those that we currently contemplate or are unable to successfully complete our clinical trials or other testing or if the results of these trials or tests are not positive or are only modestly positive or if there are safety concerns, we may:

 

    be delayed in obtaining, or may not be able to obtain, marketing approval for one or more of our product candidates;

 

    incur substantial additional costs in conducting such additional clinical trials or other testing;

 

    obtain regulatory approval for only a narrower indication or an indication that might be otherwise qualified or constrained; or

 

    have the product removed from the market after obtaining marketing approval.

Our product development costs will also increase if we experience delays in testing or approvals. We do not know whether any preclinical tests or clinical trials will be initiated as planned, will need to be restructured or will be completed on schedule, if at all. Due to the limited term of a patent, significant preclinical or clinical trial delays could also shorten the period of time from marketing approval to patent expiration, during which we may benefit from patent protection of our product candidates. Such delays could allow our competitors to bring products to market before we do and impair our ability to commercialize our products or product candidates.

We may find it difficult to enroll patients in our clinical trials.

Potential patients for our product candidates may not be adequately diagnosed or identified with the diseases being targeted by our product candidates. Kanuma is being developed to treat LAL Deficiency, which is very rare. Based on prevalence estimates published in the medical literature, we estimate there are at least 3,000 children and adults with LAL Deficiency in the major reimbursable markets. In addition, we are recruiting patients to enroll in our Phase 1/2 trial for MPS IIIB. We may not be able to initiate or continue clinical trials if we are unable to locate a sufficient number of eligible patients to participate in the clinical trials required by the FDA or other non-U.S. regulatory agencies. In addition, the process of finding and diagnosing patients may prove costly. Our inability to enroll a sufficient number of patients for any of our current or future clinical trials would result in significant delays or may require us to abandon one or more clinical trials altogether.

The results of our clinical trials may not prove sufficient to obtain regulatory approval of our product candidates, and subsequent trials may fail to replicate promising data seen in earlier preclinical studies and clinical trials.

Promising results in our preclinical studies or clinical trials may not be replicated in ongoing and future studies or trials, and final data analysis may differ from interim data analysis. Even though we have reported positive top-line results from our Phase 3 clinical trial in children and adults with LAL Deficiency and our Phase 2/3 trial in infants with LAL Deficiency, and even if our other clinical trials for Kanuma are conducted and completed as planned, the results may not prove sufficient to obtain regulatory approval or result in a restricted product label that could negatively impact commercialization. Success in preclinical testing does not ensure success in clinical trials, and success in early stage clinical trials does not ensure success in later clinical trials. This can be due to a variety of reasons, including variations in patient populations, or the inability of certain patients to complete all assessments required by the clinical trial protocol, adjustments to clinical trial protocols or designs as compared to earlier testing or trials, variations in the data that could produce inconclusive or uninterpretable results, or the use of additional trial sites or investigators. Clinical trial data are subject to differing interpretations, and regulatory agencies may not concur with our analysis of clinical trial data or its implications, which may result in delays in the regulatory approval process. Ongoing and future studies, including for new indications, may, for example, indicate safety concerns that regulatory authorities view as unacceptable. Final data analysis of our completed, ongoing and future clinical trials may fail to demonstrate that our product candidates are sufficiently safe and effective for pursued or new indications. Any such failure could cause us to abandon a product candidate, substantially delay

 

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development of other product candidates, or require substantial expenditures to conduct additional trials. Both preclinical and clinical data are often susceptible to varying interpretations that may delay, limit or prevent initiation of clinical trials, regulatory approvals or commercialization. Any delay in, or termination of, our clinical trials would delay our obtaining regulatory approval of the affected product candidate and, consequently, our ability to commercialize that product candidate and potentially our other product candidates. Development and commercialization of therapies for rare diseases requires expenditure of significant funds with no assurance of success.

A regulatory authority may deny or delay approval of our product candidates, including Kanuma, because it is not satisfied with the structure or conduct of our clinical trials or due to its assessment of the data we supply, or may determine to approve our product candidates for use in narrow patient populations.

A regulatory authority may not agree with the design or endpoints of our clinical trials. We sought advice from EMA for our Kanuma development plan, including the Phase 3 clinical trial design for Kanuma in children and adults with LAL Deficiency and EMA was supportive of our plan in principle. We did not seek a special protocol assessment with the FDA and do not have agreement with the FDA regarding the design or primary endpoint utilized in the Phase 3 clinical trial. Accordingly, we believe that we will need to demonstrate efficacy based on a totality of evidence including success on multiple endpoints in our clinical studies to support a favorable risk-benefit profile and provide substantial evidence of efficacy of Kanuma for the treatment of LAL Deficiency, including data from the Phase 3 clinical trial in children and adults, the Phase 2/3 open-label trial in infants with LAL Deficiency, as well as from the natural history studies for LAL Deficiency. Based on FDA feedback, it will be essential to link the primary endpoint for the Phase 3 clinical trial, alanine aminotransferase (ALT) normalization, to other evidence of clinical benefit. We also will need to provide evidence to the FDA demonstrating that ALT normalization, alone or in combination with other endpoints, is reasonably likely to predict clinical benefit. If we are unable to do so, even though we met the pre-specified primary endpoint and six secondary endpoints in the Phase 3 clinical trial and the primary endpoint in the Phase 2/3 study in infants, we may not receive regulatory approval or we may receive narrower labeling with respect to the total LAL Deficiency patient population, unless and until we successfully complete additional clinical trials, if ever. In addition, regulatory authorities may not believe that we have provided sufficient safety data or adequately demonstrated clinical benefit in the patient population studied in the clinical trial. Clinical data is subject to varied interpretations, and regulatory authorities may disagree with our assessments of data. In any such case, a regulatory authority could insist that we provide additional data or conduct additional clinical studies, which could substantially delay or even prevent commercialization efforts, particularly if we are required to conduct additional pre-approval clinical studies. A positive opinion by the Committee for Medicinal Products for Human Use (CHMP) is required for EMA approval and requires agreement among a majority of CHMP members, each of whom may have differing opinions on the strength of the evidence we may provide.

Priority review for our drug product candidates may not actually lead to a faster review process, if at all.

The FDA has accepted for review the BLA for Kanuma for the treatment of LAL Deficiency. The FDA granted our request for Priority Review, which shortens the regulatory review period. The FDA established a target action date of September 8, 2015 under the PDUFA. The FDA review timeline for first cycle review could be longer and the FDA could issue a complete response letter requiring additional data to be submitted.

Because FDA also requires parallel approval of a New Animal Drug Application (NADA) for transgenic products such as Kanuma, this could create delays in the review and approval process for the BLA. A lengthier review process will delay revenue from the sale of products and will increase the capital necessary to fund our product development programs. In addition, Kanuma received Fast Track Designation by the FDA, and Breakthrough Therapy designation by the FDA for LAL Deficiency presenting in infants. The practical implications of Fast Track and Breakthrough Therapy designation on the regulatory review and approval process cannot be determined at this time and may not lead to a faster review or approval. In addition, the approval of the NADA and BLA will require successful completion of inspections and resolution of any significant issues raised during these inspections.

We also submitted an MAA to the EMA for Kanuma as a treatment for patients with LAL Deficiency. The EMA validated the MAA and granted our request for accelerated assessment, which has the potential to shorten the EMA’s regulatory review time. However, the review timelines to reach a CHMP opinion and EMA action will depend in part on how efficiently we respond to questions which stop the clock during the review. In addition, the approval of the MAA will require successful completion of inspections and resolution of any significant issues raised during these inspections.

Our product candidates, including Kanuma, if approved by any regulatory authorities could be subject to labeling and other restrictions, and we will be subject to ongoing regulatory obligations, oversight and continued regulatory review, which may result in significant additional expense.

 

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Any regulatory approvals that we obtain for our product candidates will be subject to limitations on the approved indicated uses or patient population for which the product may be recommended for use or marketed, or to the conditions of approval, including a possible risk evaluation and mitigation strategy or post-marketing commitments, requirements, or follow-up measures. In addition, if the FDA, EMA or other regulatory authorities approve a product candidate, the manufacturing processes, labeling, packaging, distribution, storage, adverse event reporting, dispensation, distribution, advertising, promotion and recordkeeping for the product will be subject to extensive and ongoing regulatory requirements. These requirements will include submissions of safety and other post-marketing information and reports, ongoing maintenance of product registration, as well as continued compliance with current good manufacturing practices (cGMPs), good clinical practices (GCPs) and good laboratory practices (GLPs). If we do not comply with the applicable regulations and requirements, the range of possible sanctions includes issuance of adverse publicity, product recalls or seizures, fines, total or partial suspensions of production and/or distribution, suspension of marketing applications, and enforcement actions, including injunctions and civil or criminal prosecution. The FDA and comparable international regulatory agencies can withdraw a product’s approval under some circumstances, such as the failure to comply with regulatory requirements or unexpected safety issues.

Regulatory approvals could also contain requirements for potentially costly post-marketing testing, including Phase 4 clinical trials and extraordinary requirements for surveillance to monitor the safety and efficacy of the drug product. Post-marketing studies and/or post-market surveillance may suggest that a product causes undesirable side effects which present an increased risk to the patient. If data we collect from post-marketing studies suggest that one of our approved products may present a risk to safety, the regulatory authorities could withdraw our product approval, suspend production or place other labeling or marketing restrictions on our products. If regulatory sanctions are applied or if regulatory approval is delayed or withdrawn, the value of our Company and our business, financial condition and operating results will be adversely affected.

If the market opportunities for our product candidates are smaller than we believe they are, our revenues may be adversely affected and our business may suffer.

We focus our research and product development on treatments for rare diseases. Our projections of both the number of people who have these diseases, as well as the subset of people with these diseases who have the potential to benefit from treatment with our product candidates, are based on estimates. In addition, the awareness of LAL Deficiency among treating health care providers is low. Currently, most reported estimates of the prevalence of these diseases are based on studies of small subsets of the population of specific geographic areas, which are then extrapolated to estimate the prevalence of the diseases in the broader world population. Based on prevalence estimates published in the medical literature, we estimate there are at least 3,000 children and adults with LAL Deficiency in the major reimbursable markets. In addition, there is no prevalent population for infants with LAL Deficiency, since these infants almost never survive beyond the first year of life. These estimates may prove to be incorrect and new studies may change the estimated prevalence of these diseases. If the estimates are incorrect, and the prevalence rate is lower than we anticipate, or if an approved indication is limited in any way, our commercial business may suffer.

The commercial success of any product candidate that we may develop, including Kanuma, will depend upon the degree of market acceptance by physicians, patients, third party payors and others in the medical community.

Any future product that we may bring to the market, including Kanuma, may not gain market acceptance by physicians, patients, third party payors and others in the medical community. If our products do not achieve an adequate level of acceptance, we may not generate significant product revenue and may not become profitable. The degree of market acceptance of these product candidates, if approved for commercial sale, will depend on a number of factors, including:

 

    the prevalence and severity of any side effects of the product, including any limitations or warnings contained in a product’s approved labeling;

 

    the perception of clinical benefit, safety, and potential advantages over alternative treatments;

 

    relative convenience and ease of administration;

 

    the willingness of the target patient population to try new therapies and of physicians to prescribe these therapies;

 

    the strength of marketing and distribution support and timing of market introduction of competitive products;

 

    publicity concerning our products or competing products and treatments; and

 

    sufficient third party insurance coverage or reimbursement in the countries or geographies where patients live.

 

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Even if a potential product displays a favorable efficacy and safety profile in preclinical and clinical trials, market acceptance of the product will not be known until after it is launched. Our efforts to educate the medical community and third party payors on the benefits of the product candidates may require significant resources and may never be successful. Such efforts to educate the marketplace may require more resources than are required by the conventional technologies marketed by our competitors.

Uncertainties relating to third-party reimbursement and health care reform measures could limit payments or reimbursements for future products that we may develop could materially adversely affect our business.

In the U.S. and elsewhere, sales of prescription drugs depend in part on the consumers’ ability to obtain reimbursement for the cost of the drugs from third-party payors, such as private and government insurance programs. Third-party payors are increasingly challenging the prices charged for medical products and services, including those related to rare diseases, in an effort to promote cost containment measures and alternative health care delivery systems. Our prospects for achieving profitability will depend heavily upon the availability of adequate reimbursement for the use of our approved product candidates from governmental and other third party payors, both in the U.S. and in other markets. Reimbursement by a third party payor may depend upon a number of factors, including the third party payor’s determination that use of a product is:

 

    a covered benefit under its health plan;

 

    safe, effective and medically necessary;

 

    appropriate for the specific patient;

 

    cost-effective; and

 

    neither experimental nor investigational.

Obtaining reimbursement approval for a product from each governmental or other third party payor is a time consuming and costly process that could require us to provide supporting scientific, clinical and cost effectiveness data for the use of our products to each payor. We may not be able to provide data sufficient to gain acceptance with respect to reimbursement or might need to conduct post-marketing studies in order to demonstrate the cost-effectiveness of any future products to such payors’ satisfaction. Such studies might require us to commit a significant amount of management time and financial and other resources. Even when a payor determines that a product is eligible for reimbursement, the payor may impose coverage limitations that preclude payment for some uses that are approved by the FDA or non-U.S. regulatory authorities. In addition, there is a risk that full reimbursement may not be available for high priced products. Moreover, eligibility for coverage does not imply that any product will be reimbursed in all cases or at a rate that allows us to make a profit or even cover our costs. Interim payments for new products, if applicable, may also not be sufficient to cover costs and may not be made permanent. Third party payors may attempt to contain health care costs by demanding price discounts or rebates and limiting both the types and variety of drugs that they will cover and the amounts that they will pay for drugs. As a result, they may not cover or provide adequate payment for our products. Our products might not ultimately be considered cost-effective. Adequate third-party reimbursement might not be available to enable us to maintain price levels sufficient to realize an appropriate return on our investment in product development.

Reimbursement rates vary according to the use of the drug and the clinical setting in which it is used, may be based on payments allowed for lower-cost products that already are reimbursed, may be incorporated into existing payments for other products or services and may reflect budgetary constraints and/or imperfections in the data used to calculate these rates. Net prices for products are reduced by mandatory discounts or rebates required by government health care programs and privately-negotiated discounts. The U.S. federal government, state governments and private payors frequently pursue actions against pharmaceutical and biotechnology companies alleging that the companies have overstated prices in order to inflate reimbursement rates. Any such action could adversely affect the pricing of and revenues from our products.

Specialty pharmaceuticals are drugs that are prescribed by specialist physicians to treat rare or life-threatening conditions and typically address smaller patient populations. Each of our product candidates is a specialty pharmaceutical product. The increasing availability and use of innovative specialty pharmaceuticals, combined with their relative higher cost as compared to other types of pharmaceutical products, is beginning to generate significant third party payor interest in developing cost-containment strategies targeted to this sector. The increasing use of health technology assessments in markets around the world and the financial challenges faced by many governments may lead to significant adverse effects on our business.

Any legislation or regulatory changes or relaxation of laws that restrict imports of drugs from other countries also could reduce the net price we receive for our products.

 

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We are subject to regulations regarding the manufacturing of therapeutic proteins and, if we are unable to comply, or if we or any third party provider fails to provide sufficient quantities of material, we may experience delays and incur additional costs.

We and our third party suppliers are subject to ongoing periodic unannounced inspections by the FDA, corresponding state agencies or non-U.S. regulatory authorities to ensure strict compliance with cGMPs and other government regulations and corresponding foreign standards. The cGMP requirements govern manufacturing, quality control and documentation policies and procedures. Complying with cGMP and non-U.S. regulatory requirements will require that we expend time, money, and effort in production, recordkeeping, and quality control to assure that the product candidate or any approved product meets applicable specifications and other requirements. We and our contract manufacturers and testing laboratories must also pass pre-approval inspections prior to regulatory approvals. Failure to pass a pre-approval inspection might significantly delay regulatory approval of our product candidates. If we or our contract manufacturers or testing laboratories fail to comply with these requirements, we would be subject to possible regulatory action and might be limited in the jurisdictions in which we are permitted to sell our products. As a result, our business, financial condition, and results of operations might be materially harmed.

We currently manufacture the therapeutic protein product candidates that we are developing using both internal resources and external contract manufacturers; however, we have limited experience in manufacturing or procuring products in commercial quantities and our manufacturing system has never been utilized to produce a product approved by regulatory authorities for commercial use. We may not be able to manufacture enough product to conduct clinical trials or for later commercialization at an acceptable cost or at all. We may also experience shortages in supply of our products which would have a material adverse impact on our business, financial condition and financial operations. We may not be able to produce, or sufficiently test comparable drug materials derived from different manufacturing facilities operating by us or from processes run by our third party manufacturing partners, which could impact our ability or timing with respect to receiving regulatory approval for our product candidates. In addition, a number of other factors could cause production interruptions at our facilities or the facilities of our third-party providers, including equipment malfunctions, facility or product contamination, labor problems, raw material shortages or contamination, natural disasters, disruption in utility services, terrorist activities, human error or disruptions in the operations of our suppliers. Our product candidates are biologics and are very difficult to manufacture. We employ multiple steps to attempt to control the manufacturing processes. Problems with these manufacturing processes, even minor deviations from the normal process, could result in product defects, contamination or manufacturing failures that result in lot failures, product recalls, product liability claims and insufficient material for clinical trials or commercial use. Certain of the raw materials required in the manufacturing and the formulation of our product candidates are derived from biological sources, including egg white and human serum albumin. Such raw materials are difficult to procure and may be subject to contamination or recall. Also, some countries in which we may operate could restrict the use of certain biologically derived substances in the manufacture of drugs. A material shortage, contamination, recall, or restriction on the use of certain biologically derived substances in the manufacture of our products could adversely impact or disrupt manufacturing or could result in a withdrawal of our product candidates or any approved products. As a result, our business, financial condition, and results of operations might be materially harmed.

Our current and anticipated future reliance on a limited number of third parties to complete the manufacturing process for our products exposes us to certain risks.

We currently rely on third parties to complete the manufacturing process, including purifying, finishing, filling, labeling and testing our products. We have recently entered into agreements with third parties related to these steps for the commercial supply of Kanuma, and as we do not have experience in producing Kanuma for commercial use, we may experience unanticipated delays or issues in this process. Our reliance on a limited number of third-party manufacturers exposes us to the following risks:

 

    We might be unable to identify or enter into agreements with manufacturers for clinical or commercial supply on acceptable terms or at all because the number of potential manufacturers is limited and the FDA and other regulatory authorities must approve any replacement contractor. This approval would generally require new testing and compliance inspections. In addition, a new manufacturer would have to be educated in, or develop substantially equivalent processes for, production of our products prior to receipt of FDA approval, if any.

 

    Our third-party manufacturers might be unable to formulate and manufacture the relevant drugs in the volume and of the quality required to meet our clinical and commercial needs, if any.

 

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    Our third-party contract manufacturers might not perform as agreed or might not remain in the contract manufacturing business for the time required to supply possible clinical trials or to successfully produce, store and distribute our products.

 

    Drug manufacturers are subject to ongoing periodic unannounced inspections by regulatory authorities, corresponding state agencies and non-U.S. regulatory authorities to ensure strict compliance with cGMP, and other government regulations and corresponding foreign standards. We do not have complete or direct control over third-party manufacturers’ compliance with these regulations and standards.

 

    If any third-party manufacturer makes improvements in the manufacturing process for the relevant products, we might not own, or might have to share, the intellectual property rights to the innovation with our licensors.

 

    We might compete with other companies for access to these manufacturers’ facilities and might be subject to manufacturing delays if the manufacturers give other clients higher priority than us.

Each of these risks could delay our clinical trials or the approval, if any, of our product candidates by the FDA or the commercialization of our product candidates and could result in higher costs or deprive us of potential product revenues. As a result, our business, financial condition, and results of operations might be materially harmed.

Even if we obtain regulatory approval for our product candidates, if we are unable to successfully develop internal and external commercialization capabilities, we will be unable to successfully commercialize them.

We currently have limited internal capabilities for the commercialization of any product candidates that may be approved. In order to commercialize a product if approved, we must develop our sales, marketing, contracting, distribution and reimbursement capabilities. We will need to commit significant time and financial and managerial resources to develop a medical affairs team, a marketing and sales force with technical expertise, and sufficient distribution capabilities.

Factors that may inhibit our efforts to develop our commercialization capabilities include:

 

    our inability to recruit and retain adequate numbers of effective medical and commercial personnel or manage a potential substantial increase in our number of full-time employees in a short period;

 

    our inability to train sales personnel, who may have limited experience with us or our future products, to deliver a consistent message regarding the underlying disease that complies with regulatory requirements and be effective (after regulatory approval) in convincing physicians to prescribe our future products;

 

    our inability to equip medical and sales personnel with effective materials, including medical and sales literature to help them educate physicians and other healthcare providers regarding applicable rare diseases and our future products;

 

    our inability to develop or obtain sufficient operational functions to support our commercial activities; and

 

    unforeseen costs and expenses associated with creating and sustaining an independent sales and marketing organization.

If we are not successful in building a medical affairs and sales, marketing and other commercial infrastructure, we will have difficulty commercializing any future products, which would adversely affect our business and financial condition.

In addition, we plan to rely on third parties to help distribute our future products to patients. We expect that we will need to contract with third-party logistics companies to warehouse and distribute any approved products, and coordinate prescription intake and distribution, reimbursement adjudication, patient financial support, and ongoing compliance support. This distribution network will require significant coordination with our sales and marketing and finance organizations. If we are unable to effectively establish and manage the distribution process, the commercial launch and sales of any future products we may commercialize, will be delayed or severely compromised and our results of operations may be harmed.

We may be subject, directly or indirectly, to healthcare fraud and abuse laws, false claims laws, and health information privacy and security laws. If we are unable to comply, or have not fully complied, with such laws, we could face substantial penalties and it could affect our ability to develop, market and sell our potential products.

Our operations may be directly, or indirectly through our customers, subject to various federal and state fraud and abuse laws, including, without limitation, the federal Anti-Kickback Statute, the federal False Claims Act, and physician sunshine laws and regulations. The laws and regulations concerning promotion and marketing of drug products and

 

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dialogistic tests may impact, among other things, our disease awareness and education programs, as well as our proposed sales and marketing activities for any of our products that might receive regulatory approval, including Kanuma. In addition, we may be subject to patient privacy regulation by both the federal government and the states in which we conduct our business. The laws that may affect our ability to operate include, but are not necessarily limited to:

 

    federal healthcare program anti-kickback law, which prohibits, among other things, persons from soliciting, receiving or providing remuneration, directly or indirectly, to induce either the referral of an individual for a healthcare item or service, or the purchasing or ordering of an item or service, for which payment may be made under a federal healthcare program such as Medicare or Medicaid;

 

    federal false claims law, which prohibits, among other things, individuals or entities from knowingly presenting or causing to be presented, claims for payment by government funded programs such as Medicare or Medicaid that are false or fraudulent, and which may apply to us by virtue of statements and representations made to customers or third parties;

 

    the federal Health Insurance Portability and Accountability Act of 1996 (HIPAA) and the Health Information Technology and Clinical Health (HITECH) Act, which prohibit executing a scheme to defraud healthcare programs; impose requirements relating to the privacy, security, and transmission of individually identifiable health information; and require notification to affected individuals and regulatory authorities of certain breaches of security of individually identifiable health information;

 

    the federal physician sunshine requirements under the health care reform laws requires manufacturers of drugs, devices, biologics, and medical supplies to report annually to the U.S. Department of Health and Human Services information related to payments and other transfers of value to physicians, other healthcare providers, and teaching hospitals, and ownership and investment interests held by physicians and other healthcare providers and their immediate family members and applicable group purchasing organizations; and

 

    state laws comparable to each of the above federal laws, such as, for example, anti-kickback and false claims laws applicable to commercial insurers and other non-federal payors, requirements for mandatory corporate regulatory compliance programs, and laws relating to patient data privacy and security. Similar strict restrictions are imposed on the promotion and marketing of drug products in the EU and other countries. Violations of the rules governing the promotion of drug products in the EU could be penalized by administrative measures, fines and imprisonment. In addition, many countries have strict data privacy laws and violators could be subject to administrative measures and fines.

Interactions between pharmaceutical companies and physicians are also governed by strict laws, regulations, industry self-regulation codes of conduct and physicians’ codes of professional conduct in the individual EU member states. The provision of any inducements to physicians to prescribe, recommend, endorse, order, purchase, supply, use or administer a drug product is prohibited. A number of EU member states have introduced additional rules requiring pharmaceutical companies to publicly disclose their interactions with physicians and to obtain approval from employers, professional organizations and/or competent authorities before entering into agreements with physicians. Violations of these rules could lead to the imposition of fines or imprisonment.

Laws, including those governing promotion, marketing and anti-kickback provisions, industry regulations and professional codes of conduct are often strictly enforced. Increasing regulatory scrutiny of the promotional activities of pharmaceutical companies has been observed in the U.S. and a number of EU member states. We are also subject to the Foreign Corrupt Practices Act, the U.K. Bribery Act, and other anti-corruption laws and regulations pertaining to our efforts in this area. For example, the Bribery Act in the United Kingdom entered into force in July 2011 applies to any company incorporated in or “carrying on business” in the United Kingdom, regardless of the country in which the alleged bribery activity occurs and even if the inappropriate activity is undertaken by our international distribution partners.

Risks Related to Intellectual Property and Orphan Drug Exclusivity

If we infringe the rights of third parties we might have to forgo selling our future products, pay damages, or defend litigation.

If our product candidates or FUZEON, methods, processes, or other technologies infringe the proprietary rights of other parties, we could incur substantial costs and might have to:

 

    obtain rights or licenses from such third parties, which might not be available on commercially reasonable terms, if at all;

 

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    abandon an infringing product candidate;

 

    redesign products or processes to avoid infringement;

 

    stop using the subject matter claimed in the patents held by others;

 

    pay damages; and/or

 

    engage in litigation or administrative proceedings which might be costly whether we win or lose, and which could result in a substantial diversion of financial and management resources.

Any of these events could substantially harm our earnings, financial condition, and operations.

Our business depends on protecting our intellectual property.

We and our licensors are pursuing intellectual property protection for Kanuma and other product candidates in the form of patent applications that have been and will continue to be filed in the U.S. and in other countries; however, there can be no assurance that patents will issue with the scope for which they are originally filed, if at all.

If we and our licensors do not obtain protection for our respective intellectual property rights and our products are not, or are no longer, protected by regulatory exclusivity protection, such as orphan drug protection, our competitors might be able to develop and commercialize competing drugs.

Our success, competitive position, and future revenues, if any, depend in part on our ability and the abilities of our licensors to obtain and maintain patent protection for our products, methods, processes, and other technologies, to preserve our trade secrets, to prevent third parties from infringing on our proprietary rights, and to operate without infringing on the proprietary rights of third parties. We currently hold various issued patents and exclusive licenses to issued patents and own and have exclusive licenses to various patent applications, in each case in the U.S. as well as rights under foreign patents and patent applications. We anticipate filing additional patent applications both in the U.S. and in other countries, as appropriate. However, the patent process is subject to numerous risks and uncertainties, and there can be no assurance that we will be successful in protecting our products by obtaining and defending patents. These risks and uncertainties include the following:

 

    our patent rights might be challenged, invalidated, or circumvented, or otherwise might not provide any competitive advantage;

 

    our competitors, many of which have substantially greater resources than we do and many of which might make significant investments in competing technologies, might seek, or might already have obtained, patents that will limit, interfere with, make obsolete, or eliminate our ability to make, use, and sell our potential products either in the U.S. or in international markets;

 

    governments may adopt regulations requiring compulsory licensing of IP rights, and governments or courts may render decisions enforcing those regulations;

 

    as a matter of public policy regarding worldwide health concerns, there might be significant pressure on the U.S. government and other international governmental bodies to limit the scope of patent protection both inside and outside the U.S. for disease treatments that prove successful; and

 

    countries other than the U.S. might have less restrictive patent laws than the U.S., giving foreign competitors the ability to exploit these laws to create, develop, and market competing products.

In addition, the USPTO and patent offices in other jurisdictions have often required that patent applications concerning pharmaceutical and/or biotechnology-related inventions be limited or narrowed substantially to cover only the specific innovations exemplified in the patent application, thereby limiting the scope of protection against competitive challenges. Thus, even if we or our licensors are able to obtain patents, the patents might be substantially narrower than anticipated.

Patent and other intellectual property protection is crucial to the success of our business and prospects, and there is a risk that such protections will prove inadequate. Our business and prospects might be materially harmed if these protections prove insufficient.

On September 16, 2011, the Leahy-Smith America Invents Act, or the Leahy-Smith Act, was signed into law. The Leahy-Smith Act includes a number of significant changes to United States patent law, including provisions that affect the way patent applications will be prosecuted and may also affect patent litigation. The USPTO has issued regulations and procedures to govern administration of the Leahy-Smith Act, but many of the substantive changes to patent law associated

 

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with the Leahy-Smith Act have only recently become effective. Accordingly, it is not clear what, if any, impact the Leahy-Smith Act will have on the operation of our business. However, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business and financial condition.

We rely on trade secret protections through confidentiality agreements with our employees and third parties, and the breach of these agreements could adversely affect our business and prospects.

We rely on trade secrets, which we seek to protect, in part, through confidentiality and non-disclosure agreements with our employees, collaborators, suppliers, and other parties. There can be no assurance that these agreements will not be breached, that we would have adequate remedies for any such breach, or that our trade secrets will not otherwise become known to or independently developed by our competitors. We might be involved from time to time in litigation to determine the enforceability, scope, and validity of our proprietary rights. Any such litigation could result in substantial cost and divert management’s attention from operations. If any of these events occurs, or we otherwise lose protection for our trade secrets or proprietary know-how, the value of this information may be greatly reduced.

We are dependent on certain license relationships.

We have licensed technology that is related to our proprietary expression technology from the University of Georgia, University of Minnesota and Pangenix. In addition, we obtained exclusive worldwide rights to multiple patents and patent applications relating to the use of LAL for the treatment of LAL Deficiency and atherosclerosis from Shire Human Genetics Therapies, Inc. and its affiliates and Cincinnati Children’s Hospital Research Foundation. We might enter into additional licenses in the future. Licenses to which we are a party contain, and we expect that any future licenses will contain, provisions requiring up-front, milestone, and royalty payments to licensors and other conditions to maintaining the license rights. If we fail to comply with our obligations under any such license, the applicable licensor may have the right to terminate the license on relatively short notice and as a result, we may not be able to commercialize product candidates or technologies that were covered by the applicable license. Also, the milestone and other payments associated with these licenses will make it less profitable for us to develop our product candidates.

We expect to rely on orphan drug exclusivity for Kanuma and SBC-103. A competitor may receive orphan drug marketing authorization prior to us for the same indication for which we are seeking approval.

Approval of Kanuma and SBC-103 as orphan drugs would grant us seven years of marketing exclusivity under the Federal Food, Drug, and Cosmetic Act, and up to 10 years of marketing exclusivity in Europe. While the orphan drug designation for Kanuma and SBC-103 will provide market exclusivity in the U.S., Europe and Japan, we will not be able to rely on market exclusivity to prevent other companies from obtaining regulatory approval in these territories for the same active ingredient for the same indication beyond that timeframe. Furthermore, the marketing exclusivity in Europe can be reduced from 10 years to six years if the initial designation criteria have significantly changed since the market authorization of the orphan drug or orphan exclusivity may be revoked if we cannot reliably supply the market. Even if we have orphan drug designation for a particular drug indication, we cannot guarantee that another company also with orphan drug designation will not receive marketing authorization for the same indication before we do. If that were to happen, our applications for that indication may not be approved until the competing company’s period of exclusivity has expired. Also, we cannot guarantee that another company with orphan drug designation will not receive marketing authorization for the same indication at the same time we do. In this case, both companies would receive market exclusivity, which could have a material adverse effect on sales in that market. Even if we are the first to obtain marketing authorization for an orphan drug indication, there are circumstances under which a competing product may be approved for the same indication during the seven-year period of marketing exclusivity in the U.S., such as if the later product is shown to be clinically superior to our product, or if the later product is a different drug than Kanuma or SBC-103. Further, the seven-year marketing exclusivity in the U.S. would not prevent competitors from obtaining approval of the same compound for other indications or the use of other types of drugs for the same use as the orphan drug.

Risks Related to our Business Operations and Industry

We face significant competition from other pharmaceutical and biotechnology companies. Our operating results will suffer if we fail to compete effectively.

The pharmaceutical and biotechnology industries are intensely competitive and subject to rapid and significant technological change. Our competitors include organizations such as major multinational pharmaceutical companies, established biotechnology companies and specialty pharmaceutical and generic drug companies. Many competitors have greater financial and other resources than we have, such as larger research and development staff, more extensive marketing, distribution, sales and manufacturing organizations and experience, more extensive clinical trial and regulatory experience,

 

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expertise in prosecution of intellectual property rights and access to development resources like personnel and technology. As a result, these companies may develop or improve existing technologies that make our manufacturing technology or product candidates obsolete or they may obtain regulatory approval more rapidly than we are able to and may be more effective in selling and marketing their products.

If we are unable to retain and recruit qualified scientists and advisors, or if any of our key executives, key employees or key consultants discontinues his or her employment or consulting relationship with us, it may delay our development efforts or otherwise harm our business.

The loss of any of our key executives, employees or key consultants could impede the achievement of our research, development and commercial objectives. Furthermore, recruiting and retaining qualified scientific personnel to perform research and development work in the future is critical to our success. We must also recruit and retain personnel experienced in manufacturing, marketing, selling, distributing, supporting and otherwise commercializing approved therapeutic products. We may be unable to attract and retain personnel on acceptable terms given the competition among biotechnology, biopharmaceutical, and health care companies, universities, and non-profit research institutions for experienced scientists and other disciplines. Competition for employees may impact our ability to recruit and retain qualified personnel in the future. Certain of our officers, directors, scientific advisors, and/or consultants may from time to time serve as officers, directors, scientific advisors, and/or consultants of other biopharmaceutical or biotechnology companies. We do not maintain “key man” insurance policies on any of our officers or employees. We currently have employment contracts with our Chief Executive Officer, Sanj K. Patel, and other executive officers which provide for certain severance benefits. Consistent with our current employment policies, all of our employees are employed “at will” and, therefore, each employee may leave our employment at any time. If we are unable to retain our existing employees, including qualified scientific personnel, and attract additional qualified candidates, our business and results of operations could be adversely affected. We are not aware of any key personnel who intend to retire or otherwise leave us in the near future.

We may pursue rapid expansion of our workforce or diversify our business strategy through mergers, acquisitions, licensing arrangements or other contractual arrangements with third parties which may require substantial resources and substantial amounts of time from members of our senior management and involve numerous risks.

We may spend substantial resources to hire additional employees or pursue acquisitions of new technologies or businesses that we would expect to be complementary to our current technologies or business focus through mergers, acquisitions, licensing arrangements or other contractual arrangements with third parties. Acquisitions of technologies, companies or product rights involve numerous risks, including potential difficulties in the integration of acquired operations such as retaining key employees of an acquired business, integrating research and development programs, not meeting financial objectives, increased costs, undisclosed liabilities not covered by insurance or terms of acquisition, and diversion of management’s attention and resources in connection with an acquisition. We cannot ensure that we will be successful in identifying, executing, and integrating acquisitions in the future.

If we fail to manage projected growth, our results and operations may be adversely affected.

With our growth and preparation for a potential commercial launch of Kanuma for the treatment of LAL Deficiency and the continued progress of our preclinical-stage programs, we will be required to retain existing and add required new qualified and experienced personnel in the commercial, regulatory, manufacturing, quality, program management, clinical and medical areas over the next several years. Also, as our preclinical pipeline diversifies through internal discoveries, or the acquisition or in-licensing of new molecules, we will need to hire additional scientists to supplement our existing scientific expertise over the next several years.

Our staff, financial resources, systems, procedures or controls may be inadequate to support our expanding operations and our management may be unable to take advantage of future market opportunities or manage successfully our relationships with third parties if we are unable to adequately manage our anticipated growth and the integration of new personnel.

Our operations are subject to the economic, political, legal and business conditions in the countries in which we do business, and our failure to operate successfully or adapt to changes in these conditions could cause our operations to be limited or disrupted.

We have expanded our operations outside of the United States and expect to continue to do so in the future. Our current operations in foreign countries subject us to certain risks that could cause our operations to be limited or disrupted, including volatility in international economies, inflation, political instability, difficulties enforcing contractual and intellectual property rights, changes in laws, regulations or enforcement practices with respect to our business, compliance with tax, privacy, employment and labor laws, costs and difficulties in recruiting and retaining qualified managers and employees to manage and operate the business in local jurisdictions and costs and difficulties in managing and monitoring international operations.

 

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We are exposed to product liability and preclinical and clinical liability risks which could place a substantial financial burden upon us, should we be sued, if we do not have adequate liability insurance or general insurance coverage for such a claim.

Our business exposes us to potential product liability and other liability risks that are inherent in the testing, manufacturing and marketing of products like ours. Foreign regulations or clinical sites may require us, as sponsor, to be liable for medical outcomes even if an adverse event is not directly related to our product candidate. In addition, the use in our clinical trials of pharmaceutical formulations and products that our potential collaborators may develop and the subsequent sale of these formulations or products by us or our potential collaborators may cause us to bear a portion or all of the product liability risks. As is common for companies sponsoring such clinical testing, we carry product liability insurance. This insurance may in some instances may be insufficient to offset a negative judgment or settlement payment. As a result, a successful liability claim or series of claims brought against us could have a material adverse effect on our business, financial condition and results of operations.

Security breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to suffer.

In the ordinary course of our business, we collect and store sensitive data, including intellectual property, our proprietary business information and data about our patients, suppliers, and business partners, and personally identifiable information. The secure maintenance of this information is critical to our operations and business strategy. Some of this information could be an attractive target of criminal attack by malicious third parties with a wide range of motives and expertise, including organized criminal groups, “hactivists,” patient groups, disgruntled current or former employees, and others. Hacker attacks are of ever-increasing levels of sophistication, and despite our security measures, our information technology and infrastructure may be vulnerable to such attacks or may be breached due to employee error or malfeasance. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Furthermore, if our systems become compromised, we may not promptly discover the intrusion. Like other companies in our industry, we have experienced attacks to our data and systems, including malware and computer viruses. Attacks could have a material impact on our business, operations or financial results. Any access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, disrupt our operations, and damage our reputation which could adversely affect our business.

If we do not achieve our projected development and commercialization goals in the time frames we expect and announce, the credibility of our management and our organizational competence may be adversely affected.

For planning purposes, we estimate the timing of the accomplishment of various scientific, preclinical, clinical, regulatory, market launch and commercialization goals, which we sometimes refer to as milestones. These milestones may include the commencement or completion of scientific, preclinical and clinical studies, the submission of regulatory filings and eventual product launch.

From time to time, we may publicly announce the estimated timing of some of these milestones. All of these milestones will be based on a variety of assumptions. The actual timing of these milestones can vary dramatically compared to our estimates, in many cases for reasons beyond our control. For example, clinical trials may be delayed due to factors such as regulatory agency approval, institutional review board approvals, qualification of clinical sites, scheduling conflicts with participating clinicians and clinical institutions and the rate of patient enrollment. In most circumstances, we rely on academic institutions, major medical institutions, governmental research organizations (U.S. or internationally based), clinical research organizations or contract manufacturing organizations to conduct, supervise or monitor some or all aspects of clinical trials involving our product candidates. We will have limited control over the timing and other aspects of these clinical trials.

If we do not meet the milestones as publicly announced (or as projected by various analysts who follow us), our stockholders or potential stockholders may lose confidence in our ability to meet overall product development and commercialization goals and, as a result, the price of our common stock may decline.

Our success will depend in part on relationships with third parties. Any adverse changes in these relationships could adversely affect our business, financial condition, or results of operations.

Our success will be dependent on our ability to maintain and renew business relationships with third parties and to establish new business relationships. There can be no assurance that our management will be able to maintain such business relationships, or enter into or maintain new business contracts and other business relationships, on acceptable terms, if at all. The failure to maintain important business relationships could have a material adverse effect on our business, financial condition, or results of operations.

 

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Our charter documents and indemnification agreements require us to indemnify our directors and officers to the fullest extent permitted by law, which may obligate us to make substantial payments and to incur significant insurance-related expenses.

Our charter documents require us to indemnify our directors and officers to the fullest extent permitted by law. This could require us, with some legally prescribed exceptions, to indemnify our directors and officers against any and all expenses, judgments, penalties, fines, and amounts reasonably paid in defense or settlement of an action, suit, or proceeding brought against any of them by reason of the fact that he or she is or was our director or officer. In addition, expenses incurred by a director or officer in defending any such action, suit, or proceeding must be paid by us in advance of the final disposition of that action, suit or proceeding if we receive an undertaking by the director or officer to repay us if it is ultimately determined that he or she is not entitled to be indemnified. We have also entered into indemnification agreements with each of our directors and officers. In furtherance of these indemnification obligations, we maintain directors’ and officers’ insurance in the amount of $30,000,000. For future renewals, if we are able to retain coverage, we may be required to pay a higher premium for our directors’ and officers’ insurance than in the past and/or the amount of its insurance coverage may be decreased.

Risks Relating to Our Financial Position and Capital Requirements

We may be unable to raise the substantial additional capital that we will need to further develop and commercialize our products.

As is typical of biotechnology companies at our stage of development, our operations consume substantial amounts of cash and we will need substantial additional funds to further develop and commercialize our products.

While we will need to seek additional funding, we may not be able to obtain financing on acceptable terms, or at all. In addition, the terms of our financings may be dilutive to, or otherwise adversely affect, holders of our common stock. We may also seek additional funds through arrangements with collaborators or other third parties. These arrangements would generally require us to relinquish rights to some of our technologies, product candidates or products, and we may not be able to enter into such agreements, on acceptable terms, if at all. If we are unable to obtain additional funding on a timely basis, we may be required to curtail or terminate some or all of our development programs, including some or all of our product candidates.

We have incurred significant losses since our inception and anticipate that we will continue to incur losses for the foreseeable future. We are a company with limited historical revenues, which makes it difficult to assess our future viability.

We are a clinical-stage biopharmaceutical company. Biopharmaceutical product development is a highly speculative undertaking and involves a substantial degree of risk. We have incurred significant losses since our inception, and at March 31, 2015, we had an accumulated deficit of approximately $506.5 million. We expect our expenses to increase in connection with our efforts to seek approval for and commercialize Kanuma and our research and development of our other product candidates, including but not limited to, SBC-103 and SBC-105. As a result, we expect to continue to incur significant research and development and other expenses related to our ongoing operations for the foreseeable future. If any of our product candidates fail in clinical trials or do not gain regulatory approval, or if any of our product candidates, if approved, fail to 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. Our prior losses, combined with expected future losses, have had and will continue to have an adverse effect on our stockholders’ equity and working capital.

Our ability to use net operating loss carry forwards to reduce future tax payments may be limited if there is or has been a change in ownership of Synageva, or if taxable income does not reach sufficient levels

Utilization of our net operating loss (NOL) and research and development (R&D) credit carry forwards to reduce future tax payments depends in part on whether taxable income reaches sufficient levels prior to the expiration of these deferred tax assets. Our federal NOL carryforwards begin to expire in 2018 and our state NOL carryforwards began to expire in 2014. We have federal orphan drug credits and federal and state research tax credit carryforwards, which begin expiring in 2018 and 2023, respectively. Utilization of these deferred tax assets also may be subject to a substantial annual limitation under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”) due to ownership change limitations that have occurred previously or that could occur in the future. These ownership changes may limit the amount of NOL and R&D credit carry forwards that can be utilized annually to offset future taxable income and tax, respectively. As part of the merger of Trimeris and Synageva BioPharma Corp., a privately held Delaware corporation in 2011, we acquired federal tax attributes that are significantly limited under Section 382 of the Code.

 

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A valuation allowance of $185.2 million and $128.8 million has been established at December 31, 2014 and 2013, respectively, to offset our potential deferred tax assets.

We may have exposure to additional tax liabilities which could have a material impact on our results of operations and financial position.

As a result of our international operations, we are subject to income taxes, as well as non-income based taxes, in both the United States and various foreign jurisdictions. Significant judgment is required in determining our worldwide tax liabilities. Although we believe our estimates are reasonable, the ultimate outcome with respect to the taxes we owe may differ from the amounts recorded in our financial statements. If the Internal Revenue Service, or other taxing authority, disagrees with the positions we take, we could have additional tax liability, and this could have a material impact on our results of operations and financial position. In addition, the United States government and other governments are considering and may adopt tax reform measures that significantly increase our worldwide tax liabilities which could materially harm our business, financial condition and results of operations.

Our management is required to devote substantial time to comply with public company regulations.

As a public company, we incur significant legal, accounting and other expenses. Sarbanes-Oxley and rules implemented by the SEC and the NASDAQ Global Select Market impose various requirements on public companies, including those related to corporate governance practices. Our management and other personnel will need to devote substantial time to these requirements.

Sarbanes-Oxley requires, among other things, that we maintain effective internal controls for financial reporting and disclosure controls and procedures. In particular, we are required to perform system and process evaluation and testing of our internal controls over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal controls over financial reporting, as required by Section 404 of Sarbanes-Oxley (Section 404). If we are not able to comply with the requirements of Section 404, or if we or our independent registered public accounting firm identifies deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject to sanctions or investigations by the NASDAQ Global Select Market, the SEC, or other regulatory authorities.

Risks Related to Ownership of Our Common Stock

The market price and trading volume of our common stock may be volatile.

The market price of our common stock could fluctuate significantly for many reasons, including the following factors:

 

    announcements of preclinical, clinical or regulatory developments or technological innovations by us or our competitors;

 

    changes in our relationship with our licensors and other strategic partners;

 

    our quarterly operating results;

 

    declines in sales of FUZEON;

 

    developments in patent or other technology ownership rights;

 

    public concern regarding the safety of our products;

 

    additional funds may not be available on terms that are favorable to us and, in the case of equity financings, may result in dilution to our stock holders;

 

    government regulation of drug pricing; and

 

    general changes in the economy, the financial markets or the pharmaceutical or biotechnology industries.

Additional factors beyond our control may also have an impact on the price of our stock. For example, to the extent that other large companies within our industry experience declines in their stock price, our stock price may decline as well. In addition, when the market price of a company’s common stock drops significantly, stockholders often institute securities class action lawsuits against the company. A lawsuit against us could cause us to incur substantial costs and could divert the time and attention of our management and other resources.

 

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Future sales of substantial amounts of our common stock, or the perception that such sales could occur, could adversely affect the market price of our common stock.

Future sales into the public market of substantial amounts of our common stock, or securities convertible or exchangeable into shares of our common stock, including shares of our common stock issued upon exercise of options and warrants, or perceptions that such sales could occur, could adversely affect the market price of our common stock and our ability to raise capital in the future.

Ownership of our common stock is highly concentrated, and it may prevent you and other stockholders from influencing significant corporate decisions and may result in conflicts of interest that could cause our stock price to decline.

Our executive officers and directors, together with their respective affiliates, beneficially own and control a significant portion of our common stock. Accordingly, these executive officers, directors and their affiliates, acting individually or as a group, have substantial influence over the outcome of a corporate action requiring stockholder approval, including the election of directors, any merger, consolidation or sale of all or substantially all of our assets or any other significant corporate transaction. These stockholders may also exert influence in delaying or preventing a change in control, even if such change in control would benefit our other stockholders. In addition, the significant concentration of stock ownership may adversely affect the market value of our common stock due to investors’ perception that conflicts of interest may exist or arise.

Anti-takeover provisions in our charter and bylaws may prevent or frustrate attempts by stockholders to change the board of directors or current management and could make a third-party acquisition of us difficult.

Our certificate of incorporation and bylaws contain provisions that may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. These provisions could limit the price that investors might be willing to pay in the future for shares of our common stock.

We have never declared or paid dividends on our common stock and do not anticipate paying dividends in the foreseeable future.

Our business requires significant funding, and we do not anticipate paying any cash dividends on our common stock in the foreseeable future.

We have broad discretion in how we use our resources, and we may not use our cash and investments effectively or in ways with which you agree.

Our management has broad discretion as to the application of our resources. Our stockholders may not agree with the manner in which our management chooses to allocate and spend our cash, cash equivalents and investments. Moreover, our management may use our resources for corporate purposes that may not increase the market price of our common stock.

Item 5. Other Information.

None.

Item 6. Exhibits.

 

  10.1 Commercial Supply Agreement, by and between the Company and Fujifilm Diosynth Biotechnologies U.S.A., Inc., dated January 28, 2015. †
  10.2 Manufacturing Services Agreement, by and between the Company and Patheon UK Limited, dated February 4, 2015. †
  10.3* Synageva BioPharma Corp. 2014 Equity Incentive Plan—form of Restricted Stock Unit Agreement.
  31.1 Certification of Chief Executive Officer pursuant to Rules 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.

 

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  31.2 Certification of Chief Financial Officer pursuant to Rules 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.
  32.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. This Certification accompanies this report and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed for purposes of §18 of the Securities Exchange Act of 1934, as amended.
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Document
101.DEF XBRL Taxonomy Extension Definition Linkbase
101.LAB XBRL Taxonomy Extension Labels Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Link Document

 

* Management contract or compensatory plan or arrangement required to be filed as an exhibit to this form pursuant to Item 6 of this report.
Confidential treatment has been requested from the Securities and Exchange Commission for portions of this exhibit.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Synageva BioPharma Corp.
Date: April 30, 2015 By:

/s/ Sanj K. Patel

Sanj K. Patel

President and Chief Executive Officer

(Principal Executive Officer)

Date: April 30, 2015 By:

/s/ Carsten Boess

Carsten Boess

Chief Financial Officer

(Principal Financial Officer)

 

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Exhibit Index

 

  10.1 Commercial Supply Agreement, by and between the Company and Fujifilm Diosynth Biotechnologies U.S.A., Inc., dated January 28, 2015. †
  10.2 Manufacturing Services Agreement, by and between the Company and Patheon UK Limited, , dated February 4, 2015. †
  10.3* Synageva BioPharma Corp. 2014 Equity Incentive Plan—form of Restricted Stock Unit Agreement.
  31.1 Certification of Chief Executive Officer pursuant to Rules 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.
  31.2 Certification of Chief Financial Officer pursuant to Rules 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.
  32.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. This Certification accompanies this report and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed for purposes of §18 of the Securities Exchange Act of 1934, as amended.
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Document
101.DEF XBRL Taxonomy Extension Definition Linkbase
101.LAB XBRL Taxonomy Extension Labels Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Link Document

 

* Management contract or compensatory plan or arrangement required to be filed as an exhibit to this form pursuant to Item 6 of this report.
Confidential treatment has been requested from the Securities and Exchange Commission for portions of this exhibit.

 

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