e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2011
OR
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o |
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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 001-35050
ENDOCYTE, INC.
(Exact name of Registrant as specified in its charter)
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Delaware
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35-1969-140 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification Number) |
3000 Kent Avenue, Suite A1-100
West Lafayette, IN 47906
(Address of Registrants principal executive offices)
Registrants telephone number, including area code: (765) 463-7175
Securities registered pursuant to Section 12(b) of the Act:
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer þ
(Do not check if a smaller reporting company)
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
Number of shares of the registrants Common Stock, $0.001 par value, outstanding on August 2,
2011: 35,568,301
ENDOCYTE, INC.
FORM 10-Q
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2011
TABLE OF CONTENTS
2
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Condensed Financial Statements
ENDOCYTE, INC.
CONDENSED BALANCE SHEETS
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December 31, |
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June 30, |
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2010 |
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2011 |
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(unaudited) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
16,872,783 |
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$ |
29,722,622 |
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Short-term investments |
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54,171,847 |
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Prepaid expenses |
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2,637,783 |
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1,194,991 |
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Other assets |
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539,659 |
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462,840 |
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Total current assets |
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20,050,225 |
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85,552,300 |
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Property and equipment, net |
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863,008 |
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772,516 |
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Deferred financing costs and other non-current assets |
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300,985 |
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597,260 |
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Total assets |
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$ |
21,214,218 |
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$ |
86,922,076 |
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Liabilities, Convertible Preferred Stock, and Stockholders Equity (Deficit) |
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Current liabilities: |
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Accounts payable |
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$ |
2,836,395 |
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$ |
3,994,419 |
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Accrued wages and benefits |
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155,102 |
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888,430 |
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Accrued interest payable |
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140,427 |
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111,011 |
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Current portion of long-term debt |
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4,318,078 |
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5,606,830 |
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Preferred stock warrants |
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223,032 |
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Total current liabilities |
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7,673,034 |
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10,600,690 |
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Long-term debt, net of current portion |
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10,485,811 |
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7,922,441 |
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Subordinated notes |
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9,529,413 |
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Other liabilities |
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637,500 |
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637,500 |
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Total liabilities |
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28,325,758 |
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19,160,631 |
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Convertible preferred stock, $0.001 par value, 14,310,992 shares authorized;
11,747,563 and 0, shares issued and outstanding at December 31, 2010 and June 30,
2011, respectively |
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89,799,483 |
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Stockholders equity (deficit): |
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Common stock: $0.001 par value, 100,000,000 shares authorized; 1,203,228 and
29,724,837 shares issued and outstanding at December 31, 2010 and June 30,
2011, respectively |
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1,203 |
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29,725 |
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Additional paid-in capital |
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1,156,681 |
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183,478,546 |
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Accumulated other comprehensive income |
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29,776 |
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Retained deficit |
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(98,068,907 |
) |
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(115,776,602 |
) |
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Total stockholders equity (deficit) |
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(96,911,023 |
) |
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67,761,445 |
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Total liabilities, convertible preferred stock, and stockholders equity (deficit) |
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$ |
21,214,218 |
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$ |
86,922,076 |
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See accompanying notes.
3
ENDOCYTE, INC.
CONDENSED STATEMENTS OF OPERATIONS
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Three Months |
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Six Months |
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Ended June 30, |
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Ended June 30, |
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2010 |
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2011 |
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2010 |
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2011 |
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(unaudited) |
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(unaudited) |
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Revenue: |
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Grant revenue |
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$ |
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$ |
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$ |
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$ |
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Collaboration revenue |
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Total revenue |
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Operating expenses: |
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Research and development |
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3,700,006 |
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7,721,894 |
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7,599,422 |
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12,160,276 |
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General and administrative |
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1,547,088 |
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2,339,999 |
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3,022 086 |
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4,414,361 |
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Total operating expenses |
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5,247,094 |
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10,061,893 |
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10,621,508 |
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16,574,637 |
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Loss from operations |
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(5,247,094 |
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(10,061,893 |
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(10,621,508 |
) |
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(16,574,637 |
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Other income (expense) net: |
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Interest income |
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1,253 |
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36,839 |
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4,368 |
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55,864 |
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Interest expense |
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(202,175 |
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(490,645 |
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(451,610 |
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(1,188,260 |
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Other income (expense) net |
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25,513 |
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(3,400 |
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37,692 |
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(662 |
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Net loss |
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$ |
(5,422,503 |
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$ |
(10,519,099 |
) |
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$ |
(11,031,058 |
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$ |
(17,707,695 |
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Net loss per share basic and diluted |
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$ |
(5.93 |
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$ |
(0.35 |
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$ |
(6.33 |
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$ |
(0.76 |
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Weighted-average number of common
shares used in net loss per share
calculation basic and diluted |
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914,580 |
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29,693,004 |
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1,743,522 |
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23,335,731 |
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See accompanying notes.
4
ENDOCYTE, INC.
STATEMENTS OF CONVERTIBLE PREFERRED STOCK, STOCKHOLDERS EQUITY (DEFICIT)
AND COMPREHENSIVE LOSS
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Accumulated |
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Convertible |
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Other |
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Preferred Stock |
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Common Stock |
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Additional |
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Comprehensive |
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Retained |
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Comprehensive |
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Shares |
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Amount |
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Shares |
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Amount |
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Paid-In Capital |
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Income (Loss) |
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Deficit |
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Total |
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Loss |
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Balances, December 31, 2010 |
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11,747,563 |
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$ |
89,799,483 |
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1,203,228 |
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$ |
1,203 |
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$ |
1,156,681 |
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$ |
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$ |
(98,068,907 |
) |
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$ |
(96,911,023 |
) |
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$ |
(20,094,899 |
) |
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Fair value adjustment of the
subordinated notes |
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(644,118 |
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(644,118 |
) |
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Net proceeds from initial
public offering |
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14,375,000 |
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14,375 |
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78,153,468 |
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78,167,843 |
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Conversion of preferred stock
to common stock |
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(11,747,563 |
) |
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(89,799,483 |
) |
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11,747,563 |
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11,747 |
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89,787,735 |
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89,799,482 |
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Reclassify warrants to equity |
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223,031 |
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223,031 |
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Conversion of subordinated
notes to common stock |
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2,335,823 |
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2,336 |
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13,981,441 |
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13,983,777 |
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Exercise of stock options |
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63,223 |
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64 |
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41,713 |
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41,777 |
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Stock-based compensation |
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778,595 |
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778,595 |
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Net loss |
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(17,707,695 |
) |
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(17,707,695 |
) |
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(17,707,695 |
) |
Unrealized gain on securities |
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29,776 |
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29,776 |
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29,776 |
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Balances June 30, 2011 (unaudited) |
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$ |
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29,724,837 |
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$ |
29,725 |
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$ |
183,478,546 |
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$ |
29,776 |
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$ |
(115,776,602 |
) |
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$ |
67,761,445 |
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$ |
(17,677,919 |
) |
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See accompanying notes.
5
ENDOCYTE, INC.
CONDENSED STATEMENTS OF CASH FLOWS
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Six Months |
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Ended June 30, |
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2010 |
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2011 |
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(unaudited) |
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Operating activities |
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Net loss |
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$ |
(11,031,058 |
) |
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$ |
(17,707,695 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation |
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131,743 |
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131,748 |
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Stock-based expense |
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252,334 |
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|
778,595 |
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Accretion of bond discount |
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(3,076 |
) |
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112,472 |
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Non cash interest expense |
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68,882 |
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471,258 |
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Change in fair value on preferred stock warrants |
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(32,057 |
) |
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Change in operating assets and liabilities: |
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Accounts and accrued interest receivable |
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(122,263 |
) |
Prepaid expenses and other assets |
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(18,650 |
) |
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1,057,154 |
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Accounts payable |
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|
415,239 |
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1,082,582 |
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Accrued interest, wages, benefits and other liabilities |
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(48,660 |
) |
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|
878,461 |
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Net cash used in operating activities |
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(10,265,303 |
) |
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(13,317,688 |
) |
Investing activities |
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Purchases of property and equipment |
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(137,768 |
) |
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(41,257 |
) |
Purchases of investments |
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(12,295,754 |
) |
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(151,253,212 |
) |
Proceeds from sale of investments |
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21,007,856 |
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96,998,670 |
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Net cash provided by (used in) investing activities |
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8,574,334 |
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(54,295,799 |
) |
Financing activities |
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Proceeds from issuance of subordinated convertible notes, net of issuance
costs |
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3,590,837 |
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Principal payments on borrowings |
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(3,052,305 |
) |
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(1,337,131 |
) |
Proceeds from initial public offering, net of issuance costs |
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|
78,167,843 |
|
Proceeds from the exercise of stock options |
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|
42,623 |
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|
41,777 |
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Net cash provided by (used in) financing activities |
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|
(3,009,682 |
) |
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|
80,463,326 |
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Net increase (decrease) in cash and cash equivalents |
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(4,700,651 |
) |
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12,849,839 |
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Cash and cash equivalents at beginning of period |
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8,699,372 |
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16,872,783 |
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Cash and cash equivalents at end of period |
|
$ |
3,998,721 |
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$ |
29,722,622 |
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|
See accompanying notes.
6
ENDOCYTE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. Nature of Business and Organization
Endocyte, Inc. (the Company) was incorporated on December 6, 1995. The Company is a
biopharmaceutical company developing targeted therapies for the treatment of cancer and
inflammatory diseases. The Company uses its proprietary technology to create novel small molecule
drug conjugates, or SMDCs, and companion imaging diagnostics.
Initial Public Offering
On February 9, 2011, the Company completed its initial public offering of 14,375,000 shares of
common stock, including 1,875,000 shares of common stock pursuant to the exercise of the
over-allotment option by the underwriters. Proceeds, net of underwriting discounts, commissions and
other transaction costs were approximately $78.2 million. Upon the closing of the offering, the
Subordinated Notes (see footnote 6) automatically converted into 2,335,823 shares of common stock
using a conversion price of $5.10 per share (85% of the original issue price of the shares sold in
the initial public offering), all of the outstanding shares of preferred stock were converted to
common stock and the outstanding warrants to purchase Series C-3 preferred stock were converted to
warrants to purchase common stock and reclassified from a liability to equity. Prepaid expenses as
of December 31, 2010 included $1.9 million of deferred costs for legal, accounting and other direct
costs related to the Companys initial public offering. These costs were reclassified to additional
paid-in capital upon completion of the initial public offering as a reduction of the initial public
offering proceeds.
Stock Split
On January 10, 2011, the Company effected a 1.00 for 1.91 reverse stock split of its common
stock. All historical common stock and per share information has been changed to reflect the stock
split.
2. Significant Accounting Policies
Basis of Presentation
The condensed financial statements are prepared in conformity with U.S. generally accepted
accounting principles (GAAP) for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. In the opinion of management, all
adjustments, consisting of normal recurring accruals and revisions of estimates, considered
necessary for a fair presentation of the accompanying condensed financial statements have been
included. Interim results for the six months ended June 30, 2011 are not necessarily indicative of
the results that may be expected for the fiscal year ending December 31, 2011 or any other future
period. These financial statements should be read in conjunction with the Companys audited
financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the
year ended December 31, 2010. We issued the financial statements by filing with the Securities and
Exchange Commission (SEC) and have evaluated subsequent events up to the time of filing.
Segment Information
Operating segments are defined as components of an enterprise engaging in business activities
for which discrete financial information is available and regularly reviewed by the chief operating
decision maker in deciding how to allocate resources and in assessing performance. The Company
views its operations and manages its business in one operating segment and the Company operates in
only one geographic segment.
Use of Estimates
The preparation of financial statements in conformity with GAAP in the U.S. requires the
Companys management to make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual amounts could differ from those estimates.
7
Cash and Cash Equivalents
The Company considers cash and all highly liquid investments with an original maturity of
three months or less at the date of purchase to be cash equivalents, except for those funds managed
by the Companys investment manager, which are classified as short-term investments. Cash
equivalents consist primarily of money market instruments.
Short-Term Investments
Short-term investments consist primarily of investments with original maturities greater than
three months and less than one year when purchased. Management determines the appropriate
classification of marketable securities at the time of purchase and reevaluates such designation as
of each balance sheet date. All securities held at June 30, 2011, were classified as
available-for-sale as defined by the Financial Accounting Standards Board (FASB) Accounting
Standards Codification (ASC) Topic 320, Investments Debt and Equity Securities (ASC 320).
The Company had no investment securities at December 31, 2010. Available-for-sale securities are
carried at fair value, with the unrealized gains and losses reported in other comprehensive income.
Realized gains and losses and declines in value judged to be other-than-temporary on
available-for-sale securities are included in other income. The Company considers and accounts for
other-than-temporary impairments according to ASC 320. The cost of securities sold is based on the
specific-identification method. Discounts and premiums on debt securities are amortized to interest
income and expense over the term of the security.
Research and Development Expenses
Research and development expenses represent costs associated with the ongoing development of
SMDCs and companion imaging diagnostics and include salaries, supplies, and expenses for clinical
trials. The Company records accruals for clinical trial expenses based on the estimated amount of
work completed. The Company monitors patient enrollment levels and related activities to the extent
possible through internal reviews, correspondence, and discussions with research organizations.
Upfront payments made in connection with business collaborations and research and development
arrangements are evaluated under ASC Subtopic 730-20, Research and Development Arrangements.
Upfront payments made in connection with business development collaborations are expensed as
research and development costs, as the assets acquired do not have alternative future use. Amounts
related to future research and development are capitalized as prepaid research and development and
are expensed over the service period based upon the level of services provided. To date, no
significant amounts have been capitalized.
Stock-Based Compensation
The Company accounts for its stock options pursuant to ASC Topic 718, Compensation Stock
Compensation (ASC 718), which requires the recognition of the fair value or calculated value for
nonpublic entities, of stock-based compensation in net income. Stock-based compensation consists of
stock options, which are granted to employees at exercise prices at or above the fair market value
of the Companys common stock on the dates of grant. The Company used the calculated value to
measure its stock-based compensation prior to the filing of its initial public offering. The
Company recognizes compensation cost based on the grant-date value estimated in accordance with the
provisions of ASC 718.
Net Loss per Share
Basic net loss per share is calculated by dividing the net loss attributable to common
stockholders by the weighted-average number of common shares outstanding during the period, without
consideration for common stock equivalents. Diluted net loss per share is computed by dividing the
net loss attributable to common stockholders by the weighted-average number of common share
equivalents outstanding for the period determined using the treasury-stock method and the
if-converted method. For purposes of this calculation, convertible preferred stock, stock options
and warrants are considered to be common stock equivalents and are only included in the calculation
of diluted net loss per share when their effect is dilutive.
The following tables and discussion provide a reconciliation of the numerator and denominator
of the basic and diluted net loss per share computations. The calculation below provides net loss,
weighted-average common shares outstanding, and the resultant net loss per share on both a basic
and diluted basis for the three months and six months ended June 30, 2010 and 2011.
8
Historical net loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(5,422,503 |
) |
|
$ |
(10,519,099 |
) |
|
$ |
(11,031,058 |
) |
|
$ |
(17,707,695 |
) |
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding |
|
|
914,580 |
|
|
|
29,693,004 |
|
|
|
1,743,522 |
|
|
|
23,335,731 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share |
|
$ |
(5.93 |
) |
|
$ |
(0.35 |
) |
|
$ |
(6.33 |
) |
|
$ |
(0.76 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock equivalents
As of June 30 2010 and 2011, the following number of potential common stock equivalents were
outstanding:
|
|
|
|
|
|
|
|
|
|
|
As of June 30, |
|
|
|
2010 |
|
|
2011 |
|
Outstanding common stock options |
|
|
2,047,232 |
|
|
|
2,812,872 |
|
Outstanding restricted stock units |
|
|
|
|
|
|
262,324 |
|
Outstanding restricted stock |
|
|
222,510 |
|
|
|
26,175 |
|
Outstanding warrants |
|
|
69,294 |
|
|
|
133,968 |
|
Common stock issuable upon conversion of preferred stock |
|
|
11,747,563 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
14,089,599 |
|
|
|
3,235,339 |
|
|
|
|
|
|
|
|
These common stock equivalents were excluded from the determination of diluted net loss per
share due to their anti-dilutive effect on earnings.
Comprehensive Income (Loss)
Comprehensive income (loss) is defined as the change in equity of a business enterprise during
a period from transactions and other events and circumstances from non-owner sources. Accumulated
other comprehensive loss consists of unrealized net loss and changes in unrealized gains and losses
on available-for-sale securities. Comprehensive loss from operations was calculated as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
Net loss |
|
$ |
(5,422,503 |
) |
|
$ |
(10,519,099 |
) |
|
$ |
(11,031,058 |
) |
|
$ |
(17,707,695 |
) |
Unrealized gain (loss) on available-for-sale securities |
|
|
1,573 |
|
|
|
26,496 |
|
|
|
(2,032 |
) |
|
|
29,776 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
$ |
(5,420,930 |
) |
|
$ |
(10,492,603 |
) |
|
$ |
(11,033,090 |
) |
|
$ |
(17,677,919 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
3. New Accounting Pronouncements
Recently Adopted Accounting Standards
In October 2009, the FASB ratified ASU No. 2009-13 guidance related to revenue recognition
that amends the previous guidance on arrangements with multiple deliverables, within ASC 605-25,
Revenue Recognition Multiple Element Arrangements. This guidance provides principles and
application guidance on whether multiple deliverables exist, how the arrangements should be
separated, and how the consideration should be allocated. It also clarifies the method to allocate
revenue in an arrangement using the estimated selling price. This guidance became effective for the
Company as of January 1, 2011, and did not impact the Companys financial position or results of
operations.
9
In April 2010, the FASB ratified ASU No. 2010-17 guidance related to the milestone method of
revenue recognition. The ASU provides guidance on defining a milestone under ASC 605. This guidance
states that an entity can make an accounting policy election to recognize a payment that is
contingent upon the achievement of a substantive milestone in its entirety in the period in which
the milestone is achieved. This guidance became effective for the Company as of January 1, 2011,
and did not impact the Companys financial position or results of operations.
4. Short-Term Investments
The Company applies the provisions of ASC Topic 820, Fair Value Measurements and Disclosures
(ASC 820). ASC 820, which defines fair value, establishes a framework for measuring fair value in
GAAP, and expands disclosures about fair value measurements.
ASC 820 establishes a three-level valuation hierarchy for fair value measurements. These
valuation techniques are based upon the transparency of inputs (observable and unobservable) to the
valuation of an asset or liability as of the measurement date. Observable inputs reflect market
data obtained from independent sources, while unobservable inputs reflect the Companys market
assumptions. These two types of inputs create the following fair value hierarchy:
Level 1 Valuation is based on quoted prices for identical assets or liabilities in active
markets.
Level 2 Valuation is based on quoted prices for similar assets or liabilities in active
markets, or other inputs that are observable for the asset or liability, either directly or
indirectly, for the full term of the financial instrument.
Level 3 Valuation is based upon other unobservable inputs that are significant to the
fair value measurement.
The fair value of the Companys fixed income securities is based on a market approach using
quoted market values.
The following table summarizes the fair value of short-term investments as of June 30, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value |
|
|
|
|
|
|
|
|
|
|
|
(Carrying |
|
Description |
|
Cost |
|
|
Level 1 |
|
|
Value) |
|
U.S. Treasuries |
|
$ |
53,141,682 |
|
|
$ |
53,170,978 |
|
|
$ |
53,170,978 |
|
U.S. Government agency obligations |
|
|
1,000,388 |
|
|
|
1,000,869 |
|
|
|
1,000,869 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
54,142,070 |
|
|
$ |
54,171,847 |
|
|
$ |
54,171,847 |
|
|
|
|
|
|
|
|
|
|
|
Total unrealized gross gains were $29,776 for the six months ended June 30, 2011,
respectively. Total unrealized gross losses were $0 for the six months ended June 30, 2011. The
Company does not consider any of the unrealized losses to be other-than-temporary impairments. The
Company held no investment securities as of December 31, 2010.
10
5. Notes Payable
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
As of |
|
|
|
December 31, |
|
|
June 30, |
|
|
|
2010 |
|
|
2011 |
|
Notes payable to Mid Cap Financial,
or Mid-Cap, and Silicon Valley Bank, or
SVB, with fixed interest rate of 9.75%,
monthly payments through September 1, 2013 |
|
$ |
15,000,000 |
|
|
$ |
13,662,869 |
|
|
|
|
|
|
|
|
Less unamortized discount |
|
|
(196,111 |
) |
|
|
(133,598 |
) |
|
|
|
|
|
|
|
|
|
|
14,803,889 |
|
|
|
13,529,271 |
|
Less current portion |
|
|
(4,318,078 |
) |
|
|
(5,606,830 |
) |
|
|
|
|
|
|
|
|
|
$ |
10,485,811 |
|
|
$ |
7,922,441 |
|
|
|
|
|
|
|
|
The Company was required to make interest-only payments on the notes payable to Mid-Cap and
SVB each month through March 2011, and principal and interest payments of $566,612 monthly started
April 1, 2011. The loan is collateralized by a security interest in all of the Companys assets,
excluding intellectual property. The loan agreement includes customary covenants, including those
that require prior written consent of the lenders before the Company can incur or prepay
indebtedness, create additional liens, sell, or transfer any material portion of its assets. The
loan agreement also contains customary events of defaults, and also includes a material adverse
effect clause. The Company is in compliance with all material covenants and other obligations in
the loan agreement.
6. Subordinated Notes
In December 2010 and January 2011, the Company issued $8.1 million and $3.7 million, respectively,
of Subordinated Convertible Promissory Notes (the Subordinated Notes). The Subordinated Notes,
plus accrued and unpaid interest thereon, were converted into 2,335,823 shares of common stock upon
the closing of the initial public offering on February 9, 2011, using a conversion price of $5.10
per share (85% of offering price). As of December 31, 2010, the Subordinated Notes were treated as
share-settled debt under ASC 480-10-25-14 and were recorded at fair value. The Subordinated Notes
accrued interest in kind at an annual rate of 10.0 percent.
11
7. Convertible Preferred Stock
On February 9, 2011, all of the Companys outstanding shares of preferred stock converted into
11,747,563 shares of common stock in connection with the completion of the initial public offering.
The Companys total outstanding convertible preferred stock, with a par value of $0.001 per share,
consisted of the following as of December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Net of |
|
Convertible |
|
Shares |
|
|
Shares |
|
|
Price per |
|
|
Offering |
|
Preferred Stock |
|
Authorized |
|
|
Issued |
|
|
Share |
|
|
Costs) |
|
Series A-1 |
|
|
750,261 |
|
|
|
750,167 |
|
|
$ |
1.91 |
|
|
$ |
1,470,370 |
|
Series A-2 |
|
|
241,884 |
|
|
|
241,634 |
|
|
|
5.73 |
|
|
|
1,430,749 |
|
Series B |
|
|
936,649 |
|
|
|
936,241 |
|
|
|
8.12 |
|
|
|
7,530,180 |
|
Series C-1 |
|
|
1,937,172 |
|
|
|
1,895,765 |
|
|
|
8.12 |
|
|
|
15,320,640 |
|
Series C-2 |
|
|
2,801,047 |
|
|
|
2,787,791 |
|
|
|
8.12 |
|
|
|
22,447,353 |
|
Series C-3 |
|
|
7,643,979 |
|
|
|
5,135,965 |
|
|
|
8.12 |
|
|
|
41,600,191 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
89,799,483 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8. Stockholders Equity (Deficit)
Common Stock
In conjunction with the issuance of Series B convertible preferred stock, the Company issued
common stock to several Series B investors. The Company has the right, but not the obligation, to
repurchase the common stock, if certain conditions are not met by the Series B investors. Based on
the post-money valuation upon the Companys closing of the initial public offering on February 9,
2011, 196,335 of the shares of common stock subject to certain repurchase conditions were released
to several Series B investors. The remaining 26,175 shares of common stock held by the Series B
investors remain restricted and, subject to certain conditions, may be repurchased by the Company.
Stock Options
The Company has an employee stock option plan for which 2,486,663 shares of common stock were
authorized and reserved at December 31, 2010 and 3,795,563 at June 30, 2011. The plan is available
to all employees, directors and certain contractors as determined by the Board. Employees are
granted incentive stock options, while directors and contractors are issued non-qualified options.
The plan allows the holder of an option to purchase common stock at the exercise price, which was
at or above the fair value of the Companys common stock on the date of grant.
Generally, options granted in the 1997 and 2007 plans fully vest four years from the grant
date and have a term of ten years. Options granted in the 1997 and 2007 plans in connection with an
employees commencement of employment generally vest over a four-year period with one-half of the
shares subject to the grant vesting after two years of employment and remaining options vesting
monthly over the remainder of the four-year period. Options granted for performance or promotions
vest monthly over a four-year period. Generally, options granted in the 2010 Equity Incentive Plan
vest annually over a four year period. Unexercised stock options terminate on the tenth
anniversary date after the date of grant. The Company recognizes the stock-based compensation
expense over the requisite service period of the individual grantees, which generally equals the
vesting period. The Company utilizes a Black-Scholes option-pricing model to estimate the value of
stock options. The Black-Scholes model allows the use of a range of assumptions related to
volatility, risk-free interest rate, and employee exercise behavior. Since the Company completed
its initial public offering in February 2011, it does not have sufficient history as a publicly
traded company to evaluate volatility. As a result, the Company has used an average of several peer
companies volatilities to determine a reasonable estimate of volatility. For purposes of
identifying similar entities, the Company considered characteristics such as industry, length of
trading history, market capitalization and similar product pipelines.
Due the lack of available quarterly data for these peer companies and insufficient history as
a public company, the Company elected to use the simplified method for plain vanilla options to
estimate the expected term of the stock options grants. Under this approach, the weighted-average
expected life is presumed to be the average of the vesting term and the contractual term of the
option. The risk-free interest rate is derived from the weighted-average yield of a Treasury
security with the same term as the expected life of the options and the dividend yield is based on
historical experience and the Companys estimate of future dividend yields.
12
The weighted-average value of the individual options during the three months and six months
ended June 30, 2010 and 2011 were determined using the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Six Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
Weighted-average volatility |
|
|
32.0 |
% |
|
|
83.0 |
% |
|
|
34.0 |
% |
|
|
83.0 |
% |
Risk-free interest rate |
|
|
3.46 |
% |
|
|
2.29 |
% |
|
|
3.83 |
% |
|
|
2.31 |
% |
Weighted-average expected life (in years) |
|
|
10.0 |
|
|
|
6.2 |
|
|
|
10.0 |
|
|
|
6.2 |
|
Dividend yield |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
The Companys stock option activity and related information during the six months ended June
30, 2011 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Remaining |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Contractual |
|
|
Aggregate |
|
|
|
|
|
|
|
Exercise |
|
|
Term |
|
|
Intrinsic |
|
|
|
Options |
|
|
Price |
|
|
(In Years) |
|
|
Value |
|
Outstanding at January 1, 2010 |
|
|
2,019,333 |
|
|
$ |
2.82 |
|
|
|
|
|
|
|
|
|
Granted during period |
|
|
115,022 |
|
|
|
6.40 |
|
|
|
|
|
|
|
|
|
Exercised during period |
|
|
(37,662 |
) |
|
|
0.45 |
|
|
|
|
|
|
|
|
|
Expired during period |
|
|
(23,039 |
) |
|
|
7.64 |
|
|
|
|
|
|
|
|
|
Forfeited during period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2011 |
|
|
2,073,654 |
|
|
|
3.01 |
|
|
|
7.12 |
|
|
$ |
11,532,189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2011 |
|
|
1,330,431 |
|
|
$ |
2.44 |
|
|
|
6.25 |
|
|
$ |
8,159,102 |
|
Outstanding at April 1, 2011 |
|
|
2,073,654 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted during period |
|
|
769,490 |
|
|
|
9.71 |
|
|
|
|
|
|
|
|
|
Exercised during period |
|
|
(25,561 |
) |
|
|
0.97 |
|
|
|
|
|
|
|
|
|
Expired during period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited during period |
|
|
(4,711 |
) |
|
|
5.84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2011 |
|
|
2,812,872 |
|
|
$ |
4.86 |
|
|
|
7.71 |
|
|
$ |
26,623,947 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2011 |
|
|
1,405,952 |
|
|
$ |
2.57 |
|
|
|
6.22 |
|
|
$ |
16,515,766 |
|
As of June 30, 2011, the total remaining unrecognized compensation cost related to stock
options was $6.0 million which is being amortized over the remaining requisite service period. The
expense is expected to be recognized over a weighted average period of 1.8 years.
Restricted Stock Units
In May 2011, the Company adopted and granted awards under a new performance-based restricted
stock unit (RSU) program (the 2011 RSU Program) under the Companys 2010 Equity Incentive Plan.
Each unit represents an amount equal to one share of the Companys common stock. The RSUs will be
earned, in whole or in part, based on performance and service conditions. The performance condition
is based upon whether the Company receives regulatory approval to sell a therapeutic product, and
the awards include a target number of RSUs that will vest upon a First Commercial Approval, and a
maximum number of RSUs that will vest upon a Second Commercial Approval. The RSUs will vest fifty
percent based on the performance condition of commercial approval and fifty percent one year
thereafter to fulfill the service condition, which requires the employee to remain employed by the
company.
As of June 30, 2011, the Company has 262,324 RSU awards outstanding. The unrecorded stock
compensation expense is based on number of units granted, less estimated forfeitures based on the
Companys historical forfeiture rate of 6.49%, and the closing market price of the Companys common
stock at the grant date of May 26, 2011 of $11.80. As of June 30, 2011, the performance condition
of obtaining regulatory approval has not been achieved, therefore, no vesting has occurred. The
awards are being accounted for under ASC 718, and compensation expense is to be recorded if the
Company has determined that it is probable that the performance conditions will be achieved. As of
June 30, 2011, it is not probable that the performance conditions will be achieved, therefore, no
compensation expense was recorded for the three months ended June 30, 2011. Unrecorded compensation
expense for the 2011 RSU program as of June 30, 2011 was $2.6 million.
13
9. Income Taxes
The Company accounts for income taxes under the liability method in accordance with the
provisions of ASC Topic 740, Income Taxes. The Company recognizes future tax benefits, such as net
operating losses, to the extent those benefits are expected to be realized in future periods. Due
to uncertainty surrounding the realization of its deferred tax assets, the Company has recorded an
equal and offsetting valuation allowance against its net deferred tax assets. The Company has not
determined whether it experienced a change in ownership as defined under Section 382 of the U.S.
Internal Revenue Code as a result of the initial public offering in February 2011 or the public
offering in August 2011, and whether the future use of its Net Operating Loss carryforwards could
be subject to limitation.
10. Subsequent Event
On
July 21, 2011, the Company formed Endocyte Europe B.V., a limited liability corporation in
The Netherlands. This new legal entity has been formed to assist with the administration of the
filing of applications with the European Medicines Authority and pre-commercial planning
activities.
On August 2, 2011, the Company completed a public offering of 4,968,321 shares of common
stock, including 871,489 shares of common stock pursuant to the exercise of the over-allotment by
the underwriters. Proceeds, net of underwriting discounts, commissions and other transaction costs
were approximately $66.8 million. The Company had 35,568,301 shares of common stock outstanding
after the public offering.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
This quarterly report on Form 10-Q contains certain statements that are forward-looking
statements within the meaning of federal securities laws. When used in this report, the words
may, will, should, could, would, anticipate, estimate, expect, plan, believe,
predict, potential, project, target, forecast, intend and similar expressions are
intended to identify forward-looking statements. Forward-looking statements are subject to risks
and uncertainties that could cause actual results to differ materially from those projected. These
risks and uncertainties include the important risks and uncertainties that may affect our future
operations as discussed in Part II Item 1A of this Quarterly Report on Form 10-Q and any other
filings made with the Securities and Exchange Commission. Readers of this report are cautioned not
to place undue reliance on these forward-looking statements. While we believe the assumptions on
which the forward-looking statements are based are reasonable, there can be no assurance that these
forward-looking statements will prove to be accurate. This cautionary statement is applicable to
all forward-looking statements contained in this report.
Overview
We are a biopharmaceutical company developing targeted therapies for the treatment of cancer
and inflammatory diseases. We use our proprietary technology to create novel small molecule drug
conjugates, or SMDCs, and companion imaging diagnostics. Our SMDCs actively target receptors that
are over-expressed on diseased cells, relative to healthy cells. This targeted approach is designed
to enable the treatment of patients with highly active drugs at greater doses, delivered more
frequently, and over longer periods of time than would be possible with the untargeted drug alone.
We are also developing companion imaging diagnostics for each of our SMDCs that are designed to
identify the patients whose disease over-expresses the target of the therapy and who are therefore
more likely to benefit from treatment. This combination of an SMDC with its companion imaging
diagnostic is designed to personalize the treatment of patients by delivering effective therapy,
selectively to diseased cells, in the patients most likely to benefit.
Our lead SMDC candidate, EC145, targets the folate receptor, which is frequently
over-expressed on cancer cells. We have chosen platinum-resistant ovarian cancer, or PROC, a highly
treatment-resistant disease, as our lead indication for development of EC145 because of the high
unmet need in treating this patient population and the high percentage of ovarian cancer patients
whose tumors over-express the targeted folate receptor. We recently conducted a multicenter,
open-label randomized phase 2 clinical trial of EC145 in 149 women with PROC, referred to as the
PRECEDENT trial. We received final PFS data in the fourth quarter of 2010 and based upon our
findings from the PRECEDENT trial, we initiated enrollment of our PROCEED trial, a phase 3
registration trial in women with PROC, in the first half of 2011. We spent a significant amount of
time and resources in 2010 on the PRECEDENT trial and as we conduct the PROCEED trial, we will be
increasing the amount of time and resources, both financial and personnel, devoted to our EC145
program in PROC. We are currently preparing to file marketing authorization applications to the
European Medicines Agency, or EMA, for EC145 for the treatment of PROC and for EC20 for patient
selection. These filings will be based on the results of our PRECEDENT trial. Our filings will be
supported by a separate Phase 2 single agent trial that we conducted. The PRECEDENT trial met its
primary endpoint, as the combination of EC145 and PLD showed an improvement in the time to disease progression or death
14
compared to PLD alone. This improvement was more substantial in patients who
had been selected with the companion imaging diagnostic EC20.
In addition to PROC, we are pursuing clinical trials of EC145 in other indications and we also
plan to advance other SMDCs and companion imaging diagnostics through development as preclinical
and clinical trial results merit and funding permits. We plan to begin a randomized phase 2 trial
of EC145 and EC20 for the treatment of second line non-small cell lung cancer (NSCLC) in the first
quarter of 2012.
On February 9, 2011, we sold 14,375,000 shares of common stock, including 1,875,000 shares of
common stock pursuant to the exercise of the over-allotment option by the underwriters in our
initial public offering. Proceeds, net of underwriting discounts, commissions and other transaction
costs, were approximately $78.2 million. Upon the completion of the offering, all of our
outstanding Subordinated Convertible Promissory Notes, or Subordinated Notes, plus accrued and
unpaid interest thereon were automatically converted into 2,335,823 shares of common stock using a
conversion price of $5.10 per share (85% of the original issue price of the shares sold in the
initial public offering), all of our outstanding preferred stock was converted into an aggregate
11,747,563 shares of common stock, and all of the outstanding warrants to purchase our preferred
stock were converted into warrants to purchase common stock.
On August 2, 2011, we sold 4,968,321 shares of common stock through a public offering,
including 871,489 shares of common stock pursuant to the exercise of the underwriters
over-allotment. Proceeds, net of underwriting discounts, commissions and other transaction costs,
were approximately $66.8 million.
We have never been profitable and have incurred significant net losses since our inception. As
of June 30, 2011, we had a retained deficit of $115.8 million. We expect to continue to incur
significant and increasing operating losses for the next several years as we pursue the advancement
of our SMDCs and companion imaging diagnostics through the research, development, regulatory and
commercialization processes. We expect that our current cash position, including cash equivalents
and short term investments plus the net proceeds from the August 2011 public offeringare sufficient
to fund our operations through the end of 2013. Our current operating plan includes completion of
PROCEED, the phase 3 clinical trial of EC145 and EC20, through the availability of final primary
PFS data from that study which is anticipated to be in the second quarter of 2013, the preparation
of applications for conditional marketing authorization for EC145 and EC20, pre-commercial
activities in Europe, a randomized phase 2 trial of EC145 and EC20 for the treatment of second line
NSCLC and to advance our earlier stage phase 1 and preclinical pipeline. If we were to receive
conditional marketing approval in Europe of EC145 and EC20 prior to the completion of the PROCEED
study, this could impact the enrollment timeline as European sites would transition from clinical
trials to commercial use. This could delay the availability of final data from the PROCEED trial.
We may be able to mitigate this potential delay by adding clinical trial sites in locations where
conditional marketing approval has not been granted. If the FDA requires us to undertake a second
phase 3 clinical trial or obtain final OS data from PROCEED or we initiate significant investments
in commercial capabilities, we will require additional financing through public or private
equity or debt financings or other sources, such as strategic partnerships or licensing
arrangements, to fund the additional activities. Such funding may not be available on favorable
terms, or at all. Our failure to raise capital as and when needed would have a negative impact on
our financial condition and our ability to pursue our business strategies.
Critical Accounting Policies
As of the date of the filing of the quarterly report, we believe there have been no material
changes or additions to our critical accounting policies during the six months ended June 30, 2011,
from those discussed in our 2010 Annual Report on Form 10-K filed.
15
Results of Operations
Comparison of Three Months Ended June 30, 2010 Compared to Three Months Ended June 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
June 30, |
|
|
Increase/ |
|
|
|
|
|
|
2010 |
|
|
2011 |
|
|
(Decrease) |
|
|
% |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Statement of operations data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
3,701 |
|
|
|
7,721 |
|
|
|
4,020 |
|
|
|
109 |
% |
General and administrative |
|
|
1,546 |
|
|
|
2,341 |
|
|
|
795 |
|
|
|
51 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
5,247 |
|
|
|
10,062 |
|
|
|
4,815 |
|
|
|
92 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(5,247 |
) |
|
|
(10,062 |
) |
|
|
(4.815 |
) |
|
|
92 |
% |
Interest income |
|
|
1 |
|
|
|
37 |
|
|
|
36 |
|
|
|
3600 |
% |
Interest expense |
|
|
(202 |
) |
|
|
(490 |
) |
|
|
(288 |
) |
|
|
143 |
% |
Other income (expense), net |
|
|
26 |
|
|
|
(4 |
) |
|
|
(30 |
) |
|
|
115 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(5,422 |
) |
|
$ |
(10,519 |
) |
|
$ |
(5,097 |
) |
|
|
94 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and Development
The increase in research and development expense for the three months ended June 30, 2011
compared to the three months ended June 30, 2010 was primarily attributable to a $3.3 million
increase in clinical trial and product expenses principally due to the PROCEED trial which
commenced enrollment in the quarter ended June 30, 2011. The increase also includes $347,000 of
severance compensation and related stock-based compensation expense.
Included in research and development expense were stock-based compensation charges of $100,000
and $373,000 for the three months ended June 30, 2010 and 2011, respectively, which for 2011
included a $133,000 charge relating to severance stock-based compensation.
Research and development expenses include expenses of $98,000 and $173,000 for the three
months ended June 30, 2010 and 2011, respectively, for company-funded research at Purdue
University, the primary employer of our Chief Science Officer.
General and Administrative
The increase in general and administrative expenses in the three months ended June 30, 2011
compared to the three months ended June 30, 2010 was primarily attributable to an increase in
professional fees associated with being a public company and increased compensation expenses.
Included in general administrative expenses were stock-based compensation charges of $28,000
and $222,000 for the three months ended June 30, 2010 and 2011, respectively.
Interest Income
The increase in interest income in the three months ended June 30, 2011 compared to the three
months ended June 30, 2010 resulted from an increase in short-term investments due to the proceeds
from the initial public offering.
Interest Expense
The increase in interest expense in the three months ended June 30, 2011 compared to the three
months ended June 30, 2010 was due to the increase in the principal obligation outstanding under
the credit facility we entered into in August 2010 with Mid Cap Financial, or Mid-Cap, and Silicon
Valley Bank, or SVB.
16
Other Income, Net
Other income decreased in 2011 compared to 2010 due to the income we recognized in 2010 for
the change in the fair value of the preferred stock warrant liability. No change in fair value occurred in 2011 as the warrants
were reclassified to equity upon the initial public offering, The decrease was also due to an
increase in charitable contributions made in 2011.
Comparison of Six Months Ended June 30, 2010 Compared to Six Months Ended June 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
|
|
|
June 30, |
|
|
Increase/ |
|
|
|
|
|
|
2010 |
|
|
2011 |
|
|
(Decrease) |
|
|
% |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
Statement of operations data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
7,600 |
|
|
|
12,160 |
|
|
|
4,560 |
|
|
|
60 |
% |
General and administrative |
|
|
3,022 |
|
|
|
4,415 |
|
|
|
1,393 |
|
|
|
46 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
10,622 |
|
|
|
16,575 |
|
|
|
5,953 |
|
|
|
56 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(10,622 |
) |
|
|
(16,575 |
) |
|
|
(5,953 |
) |
|
|
56 |
% |
Interest income |
|
|
4 |
|
|
|
56 |
|
|
|
52 |
|
|
|
1300 |
% |
Interest expense |
|
|
(451 |
) |
|
|
(1,188 |
) |
|
|
(737 |
) |
|
|
163 |
% |
Other income (expense), net |
|
|
38 |
|
|
|
(1 |
) |
|
|
(39 |
) |
|
|
103 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(11,031 |
) |
|
$ |
(17,708 |
) |
|
$ |
(6,677 |
) |
|
|
61 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and Development
The increase in research and development expense for the six months ended June 30, 2011
compared to the six months ended June 30, 2010 was primarily due to a $4.1 million increase in
clinical trial and product expenses principally due to the PROCEED trial which commenced enrollment
in April. The increase also includes $347,000 of severance compensation charges and related
stock-based compensation expense. These increases were partially offset by decreased spending on
our EC0489 and EC0225 programs as enrollment in the phase 1 trials for these SMDCs has concluded.
Included in research and development expense were stock-based compensation charges of $198,000
and $458,000 for the six months ended June 30, 2010 and 2011, respectively, which for 2011 included
a $133,000 charge relating to severance stock-based compensation.
Research and development expenses include expenses of $196,000 and $173,000 for the six months
ended June 30, 2010 and 2011, respectively, for company-funded research at Purdue University, the
primary employer of our Chief Science Officer.
General and Administrative
The increase in general and administrative expenses in the six months ended June 30, 2011
compared to the six months ended June 30, 2010 was primarily attributable to an increase in
professional fees and insurance associated with being a public company and compensation expenses.
Included in general administrative expenses were stock-based compensation charges of $54,000
and $321,000 for the six months ended June 30, 2010 and 2011, respectively.
Interest Income
The increase in interest income in the six months ended June 30, 2011 compared to the six
months ended June 30, 2010 resulted from an increase in short-term investments due to the proceeds
from the initial public offering.
Interest Expense
The increase in interest expense in the six months ended June 30, 2011 compared to the six
months ended June 30, 2010 was due to the increase in the principal obligation outstanding under
the credit facility we entered into in August 2010 with Mid Cap Financial, or Mid-Cap, and Silicon
Valley Bank, or SVB, and the interest payable on outstanding subordinated notes which were
converted to common shares at the initial public offering.
17
Other Income, Net
Other income decreased in 2011 compared to 2010 due to the income we recognized in 2010 for
the change in the fair value of the preferred stock warrant liability. No change in fair value
occurred in 2011 as the warrants were reclassified to equity upon the initial public offering, The
decrease was also due to a decrease in gains on disposition of fixed assets.
Liquidity and Capital Resources
We have funded our operations principally through private placements of equity and debt
securities, revenue from strategic collaborations, revenue from grants, loans, private equity and
debt financings and, most recently, our public offerings. As of June 30, 2011, we had cash, cash
equivalents and short-term investments of $83.9 million.
In August 2010, we obtained a $15.0 million loan commitment from Mid-Cap and SVB to pay-off an
existing loan commitment that was set to mature in March and July 2011. Upon execution of the
agreement, we drew $10.0 million in principal. In December 2010, we amended the term loan
arrangement with Mid-Cap and SVB in order to access the remaining tranche of $5.0 million.
On October 29, 2010, we were notified we had been awarded a total of $1.5 million under
section 48D of the Code for Qualifying Therapeutic Discovery Projects. In November 2010, we
received $1.4 million of this award, and the remaining $0.1 million was received in February 2011.
This was accounted for as other income.
In December 2010, we issued $8.1 million of Subordinated Notes, and as of December 31, 2010,
the Subordinated Notes were treated as share-settled debt under ASC 480-10-25-14 and were recorded
at fair value. The Subordinated Notes accrued interest in kind at an annual rate of 10.0 percent.
In January 2011, we issued an additional $3.7 million of Subordinated Notes to certain accredited
investors.
On February 9, 2011, we completed our initial public offering of 14,375,000 shares of common
stock, including 1,875,000 shares of common stock pursuant to the exercise of the over-allotment
option by the underwriters. Proceeds, net of underwriting discounts, commissions and other
transaction costs, were $78.2 million. Upon the completion of the offering, all outstanding
Subordinated Notes, plus accrued and unpaid interest thereon were automatically converted into
2,335,823 shares of common stock using a conversion price of $5.10 per share (85% of the original
issue price of the shares sold in the initial public offering), all outstanding shares of preferred
stock were converted into an aggregate 11,747,563 shares of common stock, and all outstanding
warrants to purchase preferred stock were converted into warrants to purchase common stock.
On August 2, 2011, we sold 4,968,321 shares of common stock in a public offering, including
871,489 shares of common stock pursuant to the exercise of the underwriters over-allotment option.
Proceeds, net of underwriting discounts, commissions and other transaction costs, were
approximately $66.8 million.
Currently, our primary uses of working capital are for conducting the phase 3 clinical trial
of EC145 and EC20, preparing the applications for conditional marketing authorization from the EMA
and preparing for the randomized phase 2 trial of EC145 and EC20 in NSCLC.
The following table sets forth the primary sources and uses of cash for each of the periods
set forth below:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
|
2010 |
|
|
2011 |
|
|
|
(unaudited) |
|
|
|
(In thousands) |
|
Net cash provided by (used in) operating activities |
|
$ |
(10,265 |
) |
|
$ |
(13,317 |
) |
Net cash provided by (used in) investing activities |
|
|
8,574 |
|
|
|
(54,296 |
) |
Net cash provided by (used in) financing activities |
|
|
(3,010 |
) |
|
|
80,463 |
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
$ |
(4,701 |
) |
|
$ |
12,850 |
|
|
|
|
|
|
|
|
Operating Activities
The use of cash in each of the periods primarily resulted from our net losses adjusted for
non-cash items and changes in operating assets and liabilities. The increase in cash used for the
six months ended June 30, 2010 compared to June 30, 2011 was primarily due to an increase in
clinical trial expenses and general and administrative expenses for professional fees, offset by a
decrease in prepaid initial public offering expenses that were reclassified to equity in 2011 and
an increase in accounts payable.
18
Investing Activities
The cash provided by (used in) investing activities for each of the periods was due primarily
to the net result of purchases of short-term investments of $12.3 million and $151.3 million and
maturities and sales of short-term investments of $21.0 million and $97.0 million, which was
partially offset by capital expenditures for equipment of $138,000 and $41,000 for the six months
ended June 30, 2010 and 2011, respectively.
Financing Activities
The cash used by financing activities in the six months ended June 30, 2010 consisted of
principal payments on our previous credit facility. The cash provided by financing activities in
the six months ended June 30, 2011 primarily consisted of receiving proceeds of $3.6 million for
the issuance of Subordinated Notes and $78.2 million net proceeds from our initial public offering,
partially offset by $1.3 million of principal payments on our current credit facility.
Credit Facilities
In August 2010, we entered into a $15.0 million credit facility with Mid-Cap and SVB to
pay-off the prior credit facility, to fund research and development, and for general corporate
purposes. We drew down $10.0 million in principal amount upon signing the agreement at a fixed 9.75
percent interest rate and drew down the remaining $5.0 million in December 2010. Repayment of the
principal began in April 2011 following a seven-month interest-only period, followed by a 30-month
repayment of principal and interest. The loan is collateralized by a security interest in all of
our assets, excluding intellectual property. The loan agreement includes customary covenants and
may be accelerated upon the occurrence of any event of default in the loan agreement, including
defects in collateral securing the loan, judgment defaults or any event or development that has a
material adverse effect, as defined in the agreement. The failure of any preclinical study or
clinical trial will not, in and of itself, constitute a material adverse effect. We are in
compliance with all material covenants and other obligations in the loan agreement.
Operating Capital Requirements
If we obtain conditional marketing approval in Europe, we anticipate commercializing our first
product in 2013 at the earliest. Therefore, we anticipate we will continue to generate significant
losses for the next several years as we incur expenses to complete our clinical trial programs for
EC145 and EC20 in platinum-resistant ovarian cancer, or PROC and NSCLC, build commercial
capabilities, develop our pipeline, initiate clinical trials of earlier stage products and expand
our corporate infrastructure.
If our available cash, cash equivalents and short-term investments are insufficient to satisfy
our liquidity requirements, or if we develop additional opportunities to do so, we may seek to sell
additional equity or debt securities, obtain additional credit facilities or refinance our current
credit facility with Mid-Cap and SVB. The sale of additional equity and debt securities may result
in additional dilution to our stockholders. If we raise additional funds through the issuance of
debt securities or preferred stock, these securities may have rights senior to those of our common
stock and could contain covenants that would restrict our operations. We may require additional
capital beyond our currently forecasted amounts. Any such required additional capital may not be
available on reasonable terms, if at all. If we were unable to obtain additional financing, we may
be required to reduce the scope of, delay or eliminate some or all of our planned research,
development and commercialization activities, which could harm our business.
Because of the numerous risks and uncertainties associated with research, development and
commercialization of pharmaceutical products, we are unable to estimate the exact amounts of our
working capital requirements. Our future funding requirements will depend on many factors,
including but not limited to:
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the number and characteristics of the SMDCs and companion imaging diagnostics we pursue; |
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the scope, progress, results and costs of researching and developing our SMDCs and
companion imaging diagnostics and conducting preclinical and clinical trials; |
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the timing of, and the costs involved in, obtaining regulatory approvals for our SMDCs
and companion imaging diagnostics; |
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the cost of commercialization activities if any of our SMDCs and companion imaging
diagnostics are approved for sale, including marketing sales and distribution costs; |
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the cost of manufacturing any of our any SMDCs and companion imaging diagnostics we
successfully commercialize; |
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our ability to establish and maintain strategic partnerships, licensing or other
arrangements and the financial terms of such
agreements; |
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the costs involved in preparing, filing, prosecuting, maintaining, defending and
enforcing patent claims, including litigation costs and the outcome of such litigation; and |
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the timing, receipt and amount of sales of, or royalties on, our SMDCs and companion
imaging diagnostics, if any. |
Contractual Obligations and Commitments
There have been no significant changes during the six months ended June 30, 2011 to the items
that we disclosed as our contractual obligations and commitments in our Form 10-K for the year
ended December 31, 2010.
Off-Balance Sheet Arrangements
None.
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Item 3. |
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Quantitative and Qualitative Disclosures About Market Risks |
We are exposed to market risk related to changes in interest rates. As of December 31, 2010
and June 30, 2011 we had cash, cash equivalents and short-term investments of $16.9 million and
$83.9 million, respectively. The short-term investments consisted of money market funds, U.S.
Treasuries, Certificates of Deposit and cash equivalents. Our primary exposure to market risk is
interest rate sensitivity, which is affected by changes in the general level of U.S. interest
rates, particularly because our investments are in short-term marketable securities. Our short-term
investments are subject to interest rate risk and will fall in value if market interest rates
increase. Due to the short-term duration of our investment portfolio and the low risk profile of
our investments, an immediate 10 percent change in interest rates would not have a material effect
on the fair market value of our portfolio. We have the ability to hold our short-investments until
maturity, and therefore we would not expect our operations results or cash flows to be affected by
any significant degree by the effect of a change in market interest rates on our investments. We
carry our investments based on publicly available information. We do not currently have any
investment securities for which a market is not readily available or active. In addition, our
credit facility with Mid-Cap and SVB provides that we will make interest payments at fixed rates.
We do not believe that any credit risk has the potential to materially impact the value of our
assets and liabilities.
We contract with contract research organizations and investigational sites globally. We may be
subject to fluctuations in foreign currency rates in connection with these agreements. A ten
percent fluctuation in foreign currency rates would not have a material impact on our financial
statements. We do not hedge our foreign currency exchange rate risk.
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Item 4. |
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Controls and Procedures |
Conclusion Regarding Effectiveness of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and our principal
financial officer, evaluated, as of the end of the period covered by this Quarterly Report on Form
10-Q , the effectiveness of our disclosure controls and procedures. Based on that evaluation, our
principal executive officer and principal financial officer concluded that our disclosure controls
and procedures as of such date are effective at the reasonable assurance level in ensuring that
information required to be disclosed by us in the reports that we file or submit under the
Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed,
summarized and reported within the time periods specified in the SECs rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures designed to ensure
that information required to be disclosed by us in the reports we file or submit under the Exchange
Act is accumulated and communicated to our management, including our principal executive officer
and principal financial officer, as appropriate to allow timely decisions regarding required
disclosure.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting during the quarter
ended June 30, 2011, that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
20
PART II. OTHER INFORMATION
Risk factors which could cause actual results to differ from our expectations and which could
negatively impact our financial condition and results of operations are discussed below and
elsewhere in this report. The risks and uncertainties described below are not the only ones we
face. Additional risks and uncertainties not presently known to us or that are currently not
believed to be significant to our business may also affect our actual results and could harm our
business, financial condition and results of operations. If any of the risks or uncertainties
described below or any additional risks and uncertainties actually occur, our business, results of
operations and financial condition could be materially and adversely affected.
Risks Related to Our Business and Industry
We have incurred significant losses since our inception and anticipate that we will continue
to incur losses for the foreseeable future. We may never achieve or sustain profitability.
We are a clinical-stage biopharmaceutical company with a limited operating history.
Biopharmaceutical product development is a highly speculative undertaking and involves a
substantial degree of risk. We are not profitable and have incurred losses in each year since our
inception in December 1995. We have not generated any revenue from product sales to date. We
continue to incur significant research and development and other expenses related to our ongoing
operations. Our net loss for the six months ended June 30, 2011 was $17.7 million. As of June 30,
2011, we had a retained deficit of $115.8 million. We expect to continue to incur losses for the
foreseeable future, and we expect these losses to increase as we continue our development of, and
seek regulatory approvals for, our small molecule drug conjugates, or SMDCs, and companion imaging
diagnostics, and begin to commercialize any approved products. As such, we are subject to all the
risks incident to the creation of new SMDCs and companion imaging diagnostics, and we may encounter
unforeseen expenses, difficulties, complications, delays and other unknown factors that may
adversely affect our business. If our product candidates fail in clinical trials, or do not gain
regulatory approval, or 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.
We are a clinical-stage company with no approved products, which makes it difficult to assess
our future viability.
We were incorporated in December 1995, are a clinical-stage company and, as of June 30, 2011,
have not derived any revenue from the sales of our products. Our operations to date have been
limited to organizing and staffing our company, acquiring, developing and securing our technology,
undertaking preclinical studies and clinical trials of our product candidates and engaging in
research and development under collaboration agreements. We have not yet demonstrated an ability to
obtain regulatory approval, formulate and manufacture commercial-scale products, or conduct sales
and marketing activities necessary for successful product commercialization. Consequently, it is
difficult to predict our future success and the viability of any commercial programs that we may
choose to take forward. From our inception through June 30, 2011, we have derived non-grant related
revenues of $11.9 million from payments under collaborative agreements with Bristol-Myers Squibb,
or BMS, and Sanofi-Aventis. We do not expect any further payments under these agreements, neither
of which are still in force.
We are highly dependent on the success of our lead SMDC, EC145, and we cannot give any
assurance that we will successfully complete its clinical development, or that it will receive
regulatory approval or be successfully commercialized.
Our lead SMDC, EC145, has been evaluated in a randomized phase 2 clinical trial for the
treatment of women with platinum-resistant ovarian cancer, or PROC, and is currently being
evaluated in a randomized phase 3 clinical trial in the same indication. In addition, we recently
completed a phase 2 single-arm clinical trial for heavily pre-treated non-small cell lung cancer,
or NSCLC, and are planning an additional randomized phase 2 clinical trial in the same indication.
Our future trials may not be successful, and EC145 may never receive regulatory approval or be
successfully commercialized. We may fail to obtain necessary marketing approvals for EC145 from the
EMA or FDA or similar non-U.S. regulatory authorities if our clinical development program for EC145
fails to demonstrate that it is safe and effective to the satisfaction of such authorities, or if
we have inadequate financial or other resources to advance EC145 through the necessary development
activities. Even if EC145 receives regulatory approval, we may not be successful in marketing it
for a number of reasons, including the introduction by our competitors of more clinically-effective
or cost-effective alternatives or failure in our sales and marketing efforts. Any failure to obtain
approval of EC145 and successfully commercialize it would have a material and adverse impact on our
business.
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The results of previous clinical trials may not be predictive of future results, and our
current and planned clinical trials may not satisfy the requirements of the FDA or other non-U.S.
regulatory authorities.
The clinical trials of our product candidates are, and the manufacturing and marketing of any
approved products will be, subject to extensive and rigorous review and regulation by numerous
government authorities in the United States, Europe and in other countries where we intend to test
and market our product candidates. Before obtaining regulatory approvals for the commercial sale of
any product candidate, we must demonstrate through preclinical testing and clinical trials that the
product candidate is safe and effective for use in each indication for which we intend to market
such product candidate. This process can take many years and requires the expenditure of
substantial financial and human resources and may include post-marketing trials and surveillance.
To date, we have not completed any randomized phase 3 clinical trials. We have completed two phase
2 single-arm and one phase 2 randomized clinical trials with EC145 for the treatment of patients
with advanced ovarian cancer and NSCLC. In May 2011 we began evaluating EC145 in a phase 3 clinical
trial, known as PROCEED, in PROC. We have three other product candidates in phase 1 clinical
trials. In addition, we have other product candidates in the discovery and preclinical testing
stages.
Positive results from preclinical studies and early clinical trials should not be relied upon
as evidence that later-stage or large-scale clinical trials will succeed. A number of companies in
the biopharmaceutical industry have suffered significant setbacks in advanced clinical trials due
to lack of efficacy or adverse safety profiles, even after promising results in earlier trials. We
will be required to demonstrate with substantial evidence through adequate and well-controlled
clinical trials, including our phase 3 trial of EC145 for the treatment of women with PROC, which
is currently underway, that our product candidates are safe and effective for use in the target
population before we can seek regulatory approvals for their commercial sale in the United States.
In our end of phase 2 meeting with the FDA related to EC145, the FDA stated that, because of
the difficulty in reliably determining cancer progression based on imaging studies in ovarian
cancer, its office policy is to require overall survival, or OS, to be the primary endpoint for an
ovarian cancer registration trial. However, the FDA stated that we may choose, at our own risk, to
conduct a phase 3 trial in which progression free survival, or PFS, is the primary endpoint;
provided that for such a trial to be the basis for approval, the PFS results must be very robust
statistically and clinically meaningful, and the trial must be powered to demonstrate a
statistically significant OS benefit. In addition to evaluating PFS in the patient population whose
lesions over-expressed the folate receptor, EC20(+) and EC20(++) patients, we also plan to conduct
a PFS analysis of the EC20(++) patient subset as part of the PROCEED clinical trial protocol. Even
if our phase 3 trial meets either of its PFS primary endpoints, a positive trend in OS at the time
of filing our new drug application, or NDA, may be required for approval or the FDA may delay
consideration of approval until final OS data becomes available, which would result in significant
additional costs and delay our ability to market EC145 for this indication. The FDA also noted that
the final OS analysis from our phase 3 trial would be required as a post-marketing commitment
should approval be granted based upon PFS. In addition, if the FDA approves EC145 based upon
meeting either of our PFS primary endpoints, in certain circumstances the approval could be
withdrawn if any required post-marketing trials or analyses do not meet FDA requirements.
Furthermore, as is typical for cancer drug approvals, the FDA stated that for the initial approval
of EC145 to be based on a single phase 3 clinical trial, the trial must provide evidence of
persuasive and robust statistically significant clinical benefit such that it would be considered
unethical to conduct another trial. If we fail to demonstrate a benefit of this magnitude in our
phase 3 trial, we would expect that the FDA would require us to conduct a second phase 3 trial in
order to receive marketing approval of EC145 for the treatment of PROC. Such a requirement would
result in significant additional cost and would delay our ability to market EC145 for this
indication.
Patients in our initial phase 3 trial are imaged with our companion imaging diagnostic, EC20,
prior to treatment with EC145. Although EC20 is part of our phase 3 trial design, there can be no
assurance that this trial will provide a sufficient basis for approval of an NDA for EC20.
Similarly, we can provide no assurance to you that EC145 will be approved without EC20 approval.
The FDA and other regulatory authorities may change requirements for the approval of our
product candidates even after reviewing and providing non-binding comment on a protocol for a
pivotal phase 3 clinical trial that has the potential to result in FDA approval. In addition,
regulatory authorities may also approve any of our product candidates for fewer or more limited
indications than we request, may grant approval contingent on the performance of costly
post-marketing clinical trials, or may approve a product candidate with a label that does not
include the labeling claims necessary or desirable for the successful commercialization of that
product candidate. Any of the foregoing scenarios could materially harm the commercial prospects
for our product candidates.
Our efforts to obtain conditional marketing authorization for EC145 and EC20 from the European
Medicines Agency may be unsuccessful.
We expect to file applications with the EMA in the first quarter of 2012 for conditional
marketing authorization for EC145 for the treatment of PROC and for EC20 for patient selection.
These filings will be based on the results of our randomized phase 2 clinical trial, which we refer
to as the PRECEDENT trial, which investigated EC145 in combination with standard chemotherapy,
pegylated liposomal doxorubicin, or PLD, for treatment of women with PROC and which also evaluated
the utility of EC20 for patient selection.
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Our filings will be supported by a separate phase 2 single agent trial that we conducted. The
PRECEDENT trial met its primary endpoint, as the combination of EC145 and PLD showed an improvement
in the time to disease progression or death compared to PLD alone. This improvement was more
substantial in patients who had been selected with the companion imaging diagnostic EC20.
We cannot predict with any certainty whether the EMA will grant the marketing authorizations
that we intend to seek in these applications. Marketing authorizations based on phase 2 randomized
studies are unusual and, if granted, are subject to significant conditions, which likely would
include requirements to:
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complete the phase 3 study; |
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confirm that the patient risk-benefit is positive; and |
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complete an annual renewal process. |
If the EMA were to grant conditional marketing authorization of EC145 and EC20 based on our
phase 2 studies, that authorization could be further limited or even withdrawn if our required
phase 3 studies fail to demonstrate evidence of persuasive and robust statistically significant
clinical benefit or result in unexpected safety concerns with the study drugs. We cannot give any
assurance that the EMA will approve our applications for conditional marketing authorization or
that, if approved, that the labeling restrictions and other approval conditions will enable us to
profitably commercialize these drug candidates in the European Union. Any such conditional approval
by the EMA would not authorize us to commercialize EC145 or EC20 in any country outside the
European Union and would not be expected to have any beneficial effect on our ability to obtain
regulatory approval from the FDA or other regulatory agencies.
Our plans to file applications with the EMA may be deferred or precluded by additional
analyses.
We are planning to base our applications to the EMA for conditional marketing authorization on
the results of our PRECEDENT trial. However, in connection with the applications, we will conduct
additional analyses of the PRECEDENT trial results that have not yet been completed. These include
EC20 validation, independent PFS, and final OS analyses. If the results of the additional analyses
do not support the reported results of the PRECEDENT trial, our plans to file applications with the
EMA may be delayed or abandoned.
There is a high risk that our development and clinical activities will not result in
commercial products, and we will have invested in our current development and clinical programs, to
the exclusion of others, for several more years before it is known whether one or more of our
product candidates will receive regulatory approval or be commercially introduced.
Our product candidates are in various stages of development and are prone to the risks of
failure inherent in biopharmaceutical development. We will need to complete significant additional
clinical trials before we can demonstrate that our product candidates are safe and effective to the
satisfaction of the FDA and other non-U.S. regulatory authorities. Clinical trials are expensive
and uncertain processes that take years to complete. Failure can occur at any stage of the process.
Further, even if our product candidates receive required regulatory approvals, we cannot assure you
that they will be successful commercially. In addition, we have a large number of product
candidates in our development pipeline, and while we invest in the technology and indications that
we believe are most promising, financial and resource constraints may require us to forego or delay
opportunities that may ultimately have greater commercial potential than those programs we are
currently actively developing.
The coverage and reimbursement status of newly approved biopharmaceuticals is uncertain, and
failure to obtain adequate coverage and adequate reimbursement of EC145 or other product candidates
could limit our ability to generate revenue.
There is significant uncertainty related to the third-party coverage and reimbursement of
newly approved drugs. The commercial success of our product candidates, including EC145, in both
domestic and international markets will depend in part on the availability of coverage and adequate
reimbursement from third-party payors, including government payors, such as the Medicare and
Medicaid programs, and managed care organizations. Government and other third-party payors are
increasingly attempting to contain healthcare costs by limiting both coverage and the level of
reimbursement for new drugs and, as a result, they may not cover or provide adequate payment for
our product candidates. These payors may conclude that our product candidates are less safe, less
effective or less cost-effective than existing or later introduced products, and third-party payors
may not approve our product candidates for coverage and reimbursement or may cease providing
coverage and reimbursement for these product candidates. Because each country has one or more
payment systems, obtaining reimbursement in the United States and internationally may take
significant time and cause us to spend significant resources. The failure to obtain coverage and
adequate reimbursement for our product candidates or healthcare cost containment initiatives that
limit or deny reimbursement for our product candidates may significantly reduce any future product
revenue.
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In the United States and in other countries, there have been and we expect there will
continue to be a number of legislative and regulatory proposals to change the healthcare system in
ways that could significantly affect our business. International, federal and state lawmakers
regularly propose and, at times, enact legislation that would result in significant changes to the
healthcare system, some of which are intended to contain or reduce the costs of medical products
and services. The U.S. government and other governments have shown significant interest in pursuing
healthcare reform, as evidenced by the recent passing of the Patient Protection and Affordable Care
Act and its amendment, the Health Care and Education Reconciliation Act. Such government-adopted
reform measures may adversely impact the pricing of healthcare products and services in the United
States or internationally and the amount of reimbursement available from governmental agencies or
other third-party payors. In addition, in some foreign jurisdictions, there have been a number of
legislative and regulatory proposals to change the healthcare system in ways that could affect our
ability to sell our products profitably. The continuing efforts of U.S. and other governments,
insurance companies, managed care organizations and other payors of healthcare services to contain
or reduce healthcare costs may adversely affect our ability to set satisfactory prices for our
products, to generate revenues, and to achieve and maintain profitability.
In some countries, particularly in the European Union, prescription drug pricing is subject to
governmental control. In these countries, pricing negotiations with governmental authorities can
take considerable time after the receipt of marketing approval for a product candidate. To obtain
reimbursement or pricing approval in some countries, we may be required to conduct additional
clinical trials that compare the cost-effectiveness of our product candidates to other available
therapies. If reimbursement of our product candidates is unavailable or limited in scope or amount
in a particular country, or if pricing is set at unsatisfactory levels, we may be unable to achieve
or sustain profitability of our products in such country.
Our development activities could be delayed or stopped for a number of reasons, many of which
are outside our control, including failure to recruit and enroll patients for clinical trials.
Each of our clinical trials requires the investment of substantial expense and time and the
timing of the commencement, continuation and completion of these clinical trials may be subject to
significant delays relating to various causes. We do not know whether our current clinical trials
will be completed on schedule, or at all, and we cannot guarantee that our future planned clinical
trials will begin on time, or at all. Clinical trials must be conducted in accordance with FDA or
other applicable foreign government guidelines and are subject to oversight by the FDA, other
foreign governmental agencies and independent institutional review boards, or IRBs, at the medical
institutions where the clinical trials are conducted. In addition, clinical trials must be
conducted with supplies of our product candidates produced under current Good Manufacturing
Practice, or cGMP, and other requirements in foreign countries, and may require large numbers of
test patients. Our current and planned clinical trials could be substantially delayed or prevented
by several factors, including:
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limited number of, and competition for, suitable sites to conduct our clinical trials; |
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government or regulatory delays and changes in regulatory requirements, policy and guidelines; |
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delay or failure to obtain sufficient supplies of
the product candidate for, or other drugs used in, our
clinical trials as a result of our suppliers
non-compliance with cGMP, or for other reasons; |
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delay or failure to reach agreement on acceptable
clinical trial agreement terms with prospective sites
or investigators; and |
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delay or failure to obtain IRB approval to conduct a clinical trial at a prospective site. |
The completion of our clinical trials could also be substantially delayed or prevented by
several factors, including:
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slower than expected rates of patient recruitment and enrollment; |
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unforeseen safety issues; |
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lack of efficacy evidenced during clinical trials,
which risk may be heightened given the advanced state
of disease and lack of response to prior therapies of
patients in our clinical trial for EC145 in PROC; |
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termination of our clinical trials by an IRB at one or more clinical trial sites; |
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inability or unwillingness of patients or medical investigators to follow our clinical trial protocols; and |
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inability to monitor patients adequately during or after treatment or high patient dropout rates. |
For example, we have in the past experienced slower than expected rates of patient recruitment
and enrollment with our PRECEDENT trial due to a number of reasons, including slower than expected
clinical trial site activations due to prolonged contract negotiations and delays in scheduling or
approval by IRBs, lack of qualified patients at a particular site, competition with other clinical
trials for patients, and clinical investigator scheduling and availability due to vacations or
absences.
Our clinical trials may be suspended or terminated at any time by the FDA, other regulatory
authorities or us. For example, a Data Safety Monitoring Board, or DSMB, will monitor PROCEED and
could recommend closing the trial based on the results of a pre-specified interim futility analysis
or any observed unexpected safety concern that may occur during the trial. Failure or significant
delay in completing clinical trials for our product candidates could materially harm our financial
results and the commercial prospects for our product candidates.
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Even if we are able to obtain regulatory approval of EC145 based on our initial phase 3
clinical trial, marketing will be limited to our intended indication of PROC and not ovarian cancer
generally, or any other type of cancer.
Even if we are able to obtain regulatory approval of EC145 based on our initial phase 3
clinical trial, PROCEED, and formulate and manufacture a commercial-scale product, our marketing of
EC145 will be limited to our initial intended indication of PROC and not ovarian cancer generally,
or any other type of cancer. According to the American Cancer Society, approximately 21,500 new
cases of ovarian cancer were reported in the United States in 2009. Of those ovarian cancer cases,
approximately 50 percent of patients will eventually develop PROC. Marketing of EC145, if approved
for our intended indication, will be limited to those women with ovarian cancer who demonstrate a
resistance to platinum-based therapies and who are EC20(+) or EC20(++). The intended indication for
use may be further limited to only patients who are EC20(++). Marketing efforts for EC145 outside
of our approved indication of PROC will require additional regulatory approvals, which we may never
pursue or receive.
Our product candidates may cause undesirable side effects that could delay or prevent their
regulatory approval or commercialization.
Common side effects of EC145 include abdominal pain, vomiting, constipation, nausea, fatigue,
loss of appetite and peripheral sensory neuropathy. Because our products have been tested in
relatively small patient populations and for limited durations to date, additional side effects may
be observed as their development progresses.
Undesirable side effects caused by any of our product candidates could cause us or
regulatory authorities to interrupt, delay or discontinue clinical trials and could result in the
denial of regulatory approval by the FDA or other non-U.S. regulatory authorities for any or all
targeted indications. This, in turn, could prevent us from commercializing our product candidates
and generating revenues from their sale. In addition, if one of our products receives marketing
approval and we or others later identify undesirable side effects caused by this product:
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regulatory authorities may withdraw their approval of this product; |
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we may be required to recall this product, change
the way this product is administered, conduct
additional clinical trials or change the labeling of
this product; |
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this product may be rendered less competitive and sales may decrease; or |
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our reputation may suffer generally both among clinicians and patients. |
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Any one or a combination of these events could prevent us from achieving or maintaining market
acceptance of the affected product or could substantially increase the costs and expenses of
commercializing the product, which in turn could delay or prevent us from generating significant
revenues from the sale of the product.
We may not obtain government regulatory approval to market our product candidates or negotiate
satisfactory pricing for our product candidates which could adversely impact our future
profitability.
We intend to seek approval to market certain of our product candidates in both the United
States and in non-U.S. jurisdictions. Prior to commercialization, each product candidate will be
subject to an extensive and lengthy governmental regulatory approval process in the United States
and in other countries. In order to market our products in the European Union and many other
non-U.S. jurisdictions, we must obtain separate regulatory approvals and comply with numerous and
varying regulatory requirements. Although we intend to file applications with the EMA seeking
conditional marketing authorization for EC145 and EC20 based on the results of our randomized phase
2 PRECEDENT trial, we have not yet filed for marketing approval for any of our product candidates
in the U.S. or in any other jurisdictions and may not receive the approvals necessary to
commercialize our product candidates in any market. We may not be able to obtain regulatory
approval for any product candidates, or even if approval is obtained, the labeling for such
products may place restrictions on their use that could materially impact the marketability and
profitability of the product subject to such restrictions. Satisfaction of these regulatory
requirements, which includes satisfying the FDA and foreign regulatory authorities that the product
is both safe and effective for its intended uses, typically takes several years or more depending
upon the type, complexity, novelty and safety profile of the product and requires the expenditure
of substantial resources. Uncertainty with respect to meeting the regulatory requirements governing
our product candidates may result in excessive costs or extensive delays in the regulatory approval
process, adding to the already lengthy review process.
Also, the approval procedure varies among countries and can involve additional testing and
data review. The time and safety and efficacy data required to obtain foreign regulatory approval
may differ from that required to obtain FDA approval. The foreign regulatory approval process may
include all of the risks associated with obtaining FDA approval. We may not obtain foreign
regulatory approvals on a timely basis, if at all. Approval by the FDA does not ensure approval by
regulatory agencies in other countries, and approval by one foreign regulatory authority does not
ensure approval by regulatory agencies in other countries or by the FDA. However, a failure or
delay in obtaining regulatory approval in one jurisdiction may have a negative effect on the
regulatory approval process in other jurisdictions, including approval by the FDA. The failure to
obtain regulatory approval in any jurisdiction could materially harm our business.
We may require substantial additional funding which may not be available to us on
acceptable terms, or at all.
We are advancing multiple product candidates through clinical development. We believe that our
current cash position, including cash equivalents and short term investments is sufficient to fund
the operations, including PROCEED, our phase 3 clinical trial of EC145 and EC20, through the
availability of final primary PFS data from that study, which is anticipated to be in the second
quarter of 2013. If we were to receive conditional marketing authorization in Europe of EC145 and
EC20 prior to the completion of PROCEED, this could impact the enrollment timeline as European
sites would transition from clinical trials to commercial use. This could delay the availability of
final data from the PROCEED trial. We may be able to mitigate this potential delay by adding
clinical trial sites in locations where conditional marketing authorization has not been granted.
We would require additional funding through public or private equity or debt financings or other
sources, such as strategic partnerships or licensing arrangements, to commercialize any of our
SMDCs or companion imaging diagnostics. In addition, if the FDA requires us to undertake a second
phase 3 clinical trial or obtain final OS data from PROCEED we will also require additional
funding.
Our future funding requirements will depend on many factors, including but not limited to:
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our need to expand our research and development activities; |
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the rate of progress and cost of our clinical trials and the need to conduct clinical trials beyond those planned; |
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the outcome of the applications we intend to file
with the EMA for conditional marketing authorization
for EC145 and EC20; |
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the costs associated with establishing a sales force and commercialization capabilities; |
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the costs of acquiring, licensing or investing in businesses, product candidates and technologies; |
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the costs and timing of seeking and obtaining approval from the FDA and non-U.S. regulatory authorities; |
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our ability to maintain, defend and expand the scope of our intellectual property portfolio; |
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our need and ability to hire additional management and scientific and medical personnel; |
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the effect of competing technological and market developments; |
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our need to implement additional internal systems
and infrastructure, including financial and reporting
systems appropriate for a public company; and |
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the economic and other terms and timing of
collaboration, licensing or other arrangements into
which we may enter. |
Until we can generate a sufficient amount of revenue to finance our cash requirements, which
we may never do, we expect to finance future cash needs primarily through public or private equity
or debt financings or other sources, such as strategic partnerships or licensing arrangements. We
do not know whether additional funding will be available on acceptable terms, or at all. If we are
not able to secure additional funding when needed, we may have to delay, reduce the scope of or
eliminate one or more of our clinical trials or research and development programs, or enter into
collaboration or other arrangements with other companies to provide such funding for one or more of
such clinical trials or programs in exchange for our affording such partner commercialization or
other rights to the product candidates that are the subject of such clinical trials or programs.
In addition, our operating plan may change as a result of many factors currently unknown
to us, and we may need additional funds sooner than planned. Also, we may seek additional capital
due to favorable market conditions or strategic considerations even if we believe we have
sufficient funds for our current or future operating plans.
Raising additional capital may cause dilution to existing stockholders, restrict our
operations or require us to relinquish rights.
We may seek the additional capital necessary to fund our operations through public or private
equity or debt financings or other sources, such as strategic partnerships or licensing
arrangements. To the extent that we raise additional capital through the sale of equity or
convertible debt securities, the ownership interest of the current stockholders will be diluted and
the terms may include liquidation or other preferences that adversely affect their rights as a
common stockholder. Debt financing, if available, may involve agreements that include covenants
limiting or restricting our ability to take specific actions such as incurring additional debt,
making capital expenditures, or declaring dividends, or which impose financial covenants on us that
limit our operating flexibility to achieve our business objectives. If we raise additional funds
through collaboration and licensing arrangements with third parties, we may have to relinquish
valuable rights to our technologies or product candidates, or grant licenses on terms that are not
favorable to us. In addition, we cannot assure you that additional funds will be available to us on
favorable terms or at all.
If our competitors develop and market products that are more effective, safer or less
expensive than our product candidates, our commercial opportunities will be negatively impacted.
The life sciences industry is highly competitive, and we face significant competition from
many pharmaceutical, biopharmaceutical and biotechnology companies that are researching and
marketing products designed to address various types of cancer and other indications we treat or
may treat in the future. We are currently developing cancer therapeutics that will compete with
other drugs and therapies that currently exist or are being developed. Also, our lead SMDC, EC145,
is being clinically developed not as a primary therapy but as a therapy for patients whose tumors
have developed resistance to chemotherapy, which limits its potential addressable market. Products
we may develop in the future are also likely to face competition from other drugs and therapies.
Many of our competitors have significantly greater financial, manufacturing, marketing and drug
development resources than we do. Large biopharmaceutical companies, in particular, have extensive
experience in clinical testing and in obtaining regulatory approvals for drugs. Additional mergers
and acquisitions in the biopharmaceutical industry may result in even more resources being
concentrated by our competition. Competition may increase further as a result of advances in the
commercial applicability of technologies currently being developed and a greater availability of
capital investment in those fields. These companies also have significantly greater research and
marketing capabilities than we do. Some of the companies developing products which may compete with
EC145 include Roche Holdings, Eisai Company, Nektar Therapeutics, Sunesis Pharmaceuticals, Eli
Lilly, Sanofi-Aventis, and Amgen. In addition, many
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universities and U.S. private and public research institutes are active in cancer research,
the results of which may result in direct competition with EC145 or other of our product
candidates.
In certain instances, the drugs which will compete with our product candidates are widely
available or established, existing standards of care. To compete effectively with these drugs, our
product candidates will need to demonstrate advantages that lead to improved clinical safety or
efficacy compared to these competitive products. We cannot assure you that we will be able to
achieve competitive advantages versus alternative drugs or therapies. If our competitors market
products that are more effective, safer or less expensive than our product candidates, if any, or
that reach the market sooner than our product candidates, if any, we may not achieve commercial
success.
We believe that our ability to successfully compete will depend on, among other things:
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our ability to design and successfully execute appropriate clinical trials; |
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our ability to recruit and enroll patients for our clinical trials; |
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the results of our clinical trials and the efficacy and safety of our product candidates; |
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the speed at which we develop our product candidates; |
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achieving and maintaining compliance with regulatory requirements applicable to our business; |
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the timing and scope of regulatory approvals, including labeling; |
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adequate levels of reimbursement under private and governmental health insurance plans, including Medicare; |
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our ability to protect intellectual property rights related to our product candidates; |
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our ability to commercialize and market any of our product candidates that may receive regulatory approval; |
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our ability to have our partners manufacture and
sell commercial quantities of any approved product
candidates to the market; |
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acceptance of our product candidates by physicians, other healthcare providers and patients; and |
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the cost of treatment in relation to alternative therapies. |
In addition, the biopharmaceutical industry is characterized by rapid technological change.
Our future success will depend in large part on our ability to maintain a competitive position with
respect to these technologies. Our competitors may render our technologies obsolete by advances in
existing technological approaches or the development of new or different approaches, potentially
eliminating the advantages in our drug discovery process that we believe we derive from our
research approach and proprietary technologies. Also, because our research approach integrates many
technologies, it may be difficult for us to stay abreast of the rapid changes in each technology.
If we fail to stay at the forefront of technological change, we may be unable to compete
effectively.
If we fail to attract and retain key management and scientific personnel, we may be unable to
successfully develop or commercialize our product candidates.
Our success as a specialized scientific business depends on our continued ability to attract,
retain and motivate highly qualified management and scientific and clinical personnel. The loss of
the services of any of our senior management could delay or prevent the commercialization of our
product candidates.
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We may not be able to attract or retain qualified management and scientific personnel in the
future due to the intense competition for a limited number of qualified personnel among
biopharmaceutical, biotechnology, pharmaceutical and other businesses, particularly in Indiana. If
we are not able to attract and retain the necessary personnel to accomplish our business
objectives, we may experience constraints that will impede the achievement of our research and
development objectives, our ability to raise additional capital and our ability to implement our
business strategy.
As we evolve from a company primarily involved in clinical development to a company also
involved in commercialization, we may encounter difficulties in managing our growth and expanding
our operations successfully.
As we advance our product candidates through clinical trials, we will need to expand our
development, regulatory, manufacturing, marketing and sales capabilities or contract with third
parties to provide these capabilities for us. As our operations expand, we expect that we will need
to manage additional relationships with such third parties, as well as additional collaborators and
suppliers.
Maintaining these relationships and managing our future growth will impose significant added
responsibilities on members of our management and other personnel. We must be able to: manage our
development efforts effectively; manage our clinical trials effectively; hire, train and integrate
additional management, development, administrative and sales and marketing personnel; improve our
managerial, development, operational and finance systems; and expand our facilities, all of which
may impose a strain on our administrative and operational infrastructure.
If we are unable to establish sales, marketing and distribution capabilities or to enter into
agreements with third parties to do so, we may be unable to successfully market and sell any
products, even if we are able to obtain regulatory approval.
We currently have no marketing, sales or distribution capabilities. If our product candidates
receive regulatory approval, we intend to establish our sales and marketing organization with
technical expertise and supporting distribution capabilities to commercialize our product
candidates, which will be expensive and time consuming. Any failure or delay in the development of
our internal sales, marketing and distribution capabilities would adversely impact the
commercialization of these products. With respect to our product candidates, we may choose to
collaborate with third parties that have direct sales forces and established distribution systems,
either to augment our own sales force and distribution systems or in lieu of our own sales force
and distribution systems. To the extent that we enter into co-promotion or other licensing
arrangements, our product revenue is likely to be lower than if we directly marketed or sold our
products. In addition, any revenue we receive will depend in whole or in part upon the efforts of
such third parties, which may not be successful and are generally not within our control. If we are
unable to enter into such arrangements on acceptable terms or at all, we may not be able to
successfully commercialize any of our product candidates that receive regulatory approval. If we
are not successful in commercializing our product candidates, either on our own or through
collaborations with one or more third parties, our future product revenue will suffer and we may
incur significant additional losses.
If we do not establish development or commercialization collaborations, we may have to alter
our development and marketing plans.
Our development programs and potential commercialization of our product candidates will
require substantial additional cash to fund expenses. Our strategy includes potentially selectively
collaborating with leading biopharmaceutical, pharmaceutical and biotechnology companies to assist
us in furthering development and potential commercialization of some of our product candidates in
the United States or internationally. Although we are not currently party to any collaboration
agreements, we may enter into collaborations in the future, especially for target indications in
which the potential collaborator has particular therapeutic expertise or for markets outside of the
United States. We face significant competition in seeking appropriate collaborators and these
collaborations are complex and time-consuming to negotiate and document. We may not be able to
negotiate collaborations on acceptable terms, or at all. If that were to occur, we may have to
curtail the development of a product candidate, reduce or delay its development program or one or
more of our other development programs, delay its potential commercialization, reduce the scope of
our sales or marketing activities, or increase our expenditures and undertake development or
commercialization activities at our own expense. If we elect to increase expenditures to fund
development or commercialization activities on our own, we may need to obtain additional capital,
which may not be available to us on acceptable terms, or at all. If we do not have sufficient
funds, we will not be able to bring our product candidates to market and generate product revenue.
In addition, even if we do enter into one or more development or commercialization arrangements, we
cannot assure you that the objectives of such arrangements will be realized or that the arrangement
will not be terminated or expire. For example, we previously entered into an exclusive license
agreement with BMS in a collaboration to develop and commercialize folate conjugates, which was
terminated by BMS in June 2010, we believe as a result of a change in its strategic focus.
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We rely on third parties to conduct clinical trials for our product candidates and plan to
rely on third parties to conduct future clinical trials. If these third parties do not successfully
carry out their contractual duties or meet expected deadlines, it may cause delays in commencing
and completing clinical trials of our product candidates or we may be unable to obtain regulatory
approval for or commercialize our product candidates.
Clinical trials must meet applicable FDA and foreign regulatory requirements. We do not have
the ability to independently conduct phase 2 or phase 3 clinical trials for any of our product
candidates. We rely on third parties, such as contract research organizations, medical
institutions, clinical investigators and contract laboratories, to conduct all of our clinical
trials of our product candidates; however, we remain responsible for ensuring that each of our
clinical trials is conducted in accordance with its investigational plan and protocol. Moreover,
the FDA and other non-U.S. regulatory authorities require us to comply with regulations and
standards, commonly referred to as Good Clinical Practices for conducting, monitoring, recording
and reporting the results of clinical trials to ensure that the data and results are scientifically
credible and accurate and that the trial subjects are adequately informed of the potential risks of
participating in clinical trials. Our reliance on third parties does not relieve us of these
responsibilities and requirements.
We or the third parties we rely on may encounter problems in clinical trials that may cause us
or the FDA or foreign regulatory agencies to delay, suspend or terminate our clinical trials at any
phase. These problems could include the possibility that we may not be able to manufacture
sufficient quantities of materials for use in our clinical trials, conduct clinical trials at our
preferred sites, enroll a sufficient number of patients for our clinical trials at one or more
sites, or begin or successfully complete clinical trials in a timely fashion, if at all.
Furthermore, we, the FDA or foreign regulatory agencies may suspend clinical trials of our product
candidates at any time if we or they believe the subjects participating in the trials are being
exposed to unacceptable health risks, whether as a result of adverse events occurring in our trials
or otherwise, or if we or they find deficiencies in the clinical trial process or conduct of the
investigation.
The FDA and foreign regulatory agencies could also require additional clinical trials before
or after granting of marketing approval for any products, which would result in increased costs and
significant delays in the development and commercialization of such products and could result in
the withdrawal of such products from the market after obtaining marketing approval. Our failure to
adequately demonstrate the safety and efficacy of a product candidate in clinical development could
delay or prevent obtaining marketing approval of the product candidate and, after obtaining
marketing approval, data from post-approval studies could result in the product being withdrawn
from the market, either of which would likely have a material adverse effect on our business.
We rely on third parties to manufacture and supply our product candidates.
We do not currently own or operate manufacturing facilities for clinical or commercial
production of our product candidates. We lack the resources and the capability to manufacture any
of our product candidates on a clinical or commercial scale. We rely on four third-party suppliers
to make the key components of EC145. The linker system for EC145 is currently obtained from a
single source supplier and we have identified two alternate suppliers to prevent a possible
disruption of manufacturing EC145. We believe that we currently have, or have the ability to
access, sufficient supplies of all of the key components of EC145 in sufficient quantities to
conduct and complete our PROCEED clinical trial and any other clinical trials related to EC145. We
also believe that the suppliers we have identified will have the capacity to manufacture EC145 in
the quantities that our development and future commercialization efforts may require. We do not
have any long-term supply arrangements with any of these third parties and obtain our raw materials
on a purchase order-basis. We expect to continue to depend on third-party contract manufacturers
for the foreseeable future.
If for some reason our contract manufacturers cannot perform as agreed, we may be unable to
replace them in a timely manner and the production of our product candidates would be interrupted,
resulting in delays in clinical trials and additional costs. For example, we are currently
obtaining clinical trial quantities of EC145 and our other product candidates from our contract
manufacturers. We have no experience with managing the manufacturing of commercial quantities of
any of our product candidates and scaling-up production to commercial quantities could take us
significant time and result in significant costs, both of which could delay commercialization of
EC145 for PROC, NSCLC or any other indication or of any of our other SMDCs. Switching manufacturers
may be difficult because the number of potential manufacturers is limited and the FDA must approve
any replacement manufacturer prior to manufacturing our product candidates. Such approval would
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 product
candidates after receipt of FDA approval to manufacture any of our product candidates. It may be
difficult or impossible for us to find a replacement manufacturer on acceptable terms quickly, or
at all.
To date, our product candidates have been manufactured in small quantities for preclinical
studies and clinical trials by third-party manufacturers. If the FDA or other regulatory agencies
approve any of our product candidates for commercial sale, we expect that we would continue to
rely, at least initially, on third-party manufacturers to produce commercial quantities of our
approved product
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candidates, as is the case with EC145. These manufacturers may not be able to successfully
increase the manufacturing capacity for any of our approved product candidates in a timely or
economic manner, or at all. Significant scale-up of manufacturing may require additional validation
studies, which the FDA must review and approve. Additionally, any third-party manufacturer we
retain to manufacture our product candidates on a commercial scale must pass an FDA pre-approval
inspection for conformance to the cGMPs before we can obtain approval of our product candidates. If
we are unable to successfully increase the manufacturing capacity for a product candidate in
conformance with cGMPs, the regulatory approval or commercial launch of such products may be
delayed or there may be a shortage in supply.
Our product candidates require precise, high quality manufacturing. Failure by our contract
manufacturers to achieve and maintain high manufacturing standards could result in patient injury
or death, product recalls or withdrawals, delays or failures in testing or delivery, cost overruns,
or other problems that could seriously harm our business. Contract manufacturers may encounter
difficulties involving production yields, quality control and quality assurance. These
manufacturers are subject to ongoing periodic unannounced inspection by the FDA and corresponding
state and non-U.S. authorities to ensure strict compliance with cGMP and other applicable
government regulations and corresponding foreign standards; however, we do not have control over
third-party manufacturers compliance with these regulations and standards.
We are subject to risks associated with the availability of key raw materials, such as
technetium-99m, as well as drugs used in our clinical trials, such as Doxil.
Our EC20 companion imaging diagnostic requires the use of the radioisotope technetium-99m, or
Tc-99m, and there is currently a limited supply of Tc-99m worldwide. Tc-99m for nuclear medicine
purposes is usually extracted from Tc-99m generators, which contain molybdenum-99, or Mo-99, as the
usual parent nuclide for Tc-99m. The majority of Mo-99 produced for Tc-99m medical use comes from
fission of highly enriched uranium from only five reactors around the world located in Canada,
Belgium, South Africa, the Netherlands and France. Although Tc-99m is used in various nuclear
medicine diagnostics utilized by healthcare providers, Tc-99m has a very short half-life (6 hours).
As a result, healthcare providers extract Tc-99m from generators which use Mo-99. Mo-99 itself has
a short half-life (2.75 days) and is sent to the nuclear medicine pharmacy directly from one of the
five reactors. Accordingly, Tc-99m diagnostics are made on-site at the clinic, and neither Tc-99m
nor Mo-99 can be inventoried. Sources of Tc-99m may be insufficient for our clinical trial site
needs due to its limited supply globally. For example, global shortages of Tc-99m emerged in the
past few years because aging nuclear reactors in the Netherlands and Canada that provided about
two-thirds of the worlds supply of Mo-99 were shut down repeatedly for extended maintenance
periods and two replacement Canadian reactors constructed in the 1990s were closed before beginning
operation for safety reasons.
We use, and plan to continue to use, EC20 or other companion imaging diagnostics that employ
Tc-99m in our clinical trials. For example, EC20 is a component of PROCEED and, in the future, if
our clinical trial sites are not able to obtain sufficient quantities of Tc-99m for use in EC20, we
may not be able to gather sufficient data on EC20 during PROCEED and as a result, the approval of
EC20 may be delayed. In addition, to the extent the approval of our product candidates depends on
the screening and monitoring of the patient population with a companion imaging diagnostic such as
EC20 in our clinical trials, we would experience a corresponding delay in approval and
commercialization of these SMDCs if we are not able to obtain sufficient Tc-99m.
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July 2011, the manufacturer of Doxil announced that supplies of the drug are currently
limited and new supplies are estimated to ship in late August. If the supplies of Doxil are limited
for an extended period of time, our PROCEED trial may be delayed.
If a successful product liability claim or series of claims is brought against us for
uninsured liabilities or in excess of insured liabilities, we could be forced to pay substantial
damage awards.
The use of any of our product candidates in clinical trials, and the sale of any approved
products, may expose us to product liability claims. We currently maintain product liability
insurance coverage in an amount which we believe is adequate for our clinical trials currently in
progress and those recently completed. We monitor the amount of coverage we maintain as the size
and design of our clinical trials evolve and intend to adjust the amount of coverage we maintain
accordingly. However, we cannot assure you that such insurance coverage will fully protect us
against some or all of the claims to which we might become subject. We might not be able to
maintain adequate insurance coverage at a reasonable cost or in sufficient amounts or scope to
protect us against potential losses. In the event a claim is brought against us, we might be
required to pay legal and other expenses to defend the claim, as well as uncovered damages awards
resulting from a claim brought successfully against us. Furthermore, whether or not we are
ultimately successful in defending any such claims, we might be required to direct financial and
managerial resources to such defense and adverse publicity could result, all of which could harm
our business.
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Each of our product candidates will remain subject to ongoing regulatory review even if
it receives marketing approval. If we or our contractors fail to comply with continuing
regulations, we or they may be subject to enforcement action that could adversely affect us.
Even if our product candidates become approved products, we and our contractors will continue
to be subject to pervasive regulation by the FDA and other regulatory authorities. We and our
contractors will continue to be subject to FDA requirements governing among other things the
manufacture, packaging, sale, promotion adverse event reporting, storage and recordkeeping of our
approved products. Although we have not received any notice that we are the subject of any FDA
enforcement action, it is possible that we may be in the future and that could have a material
adverse effect on our business. We may be slow to adapt, or may never adapt, to changes in existing
regulatory requirements or adoption of new regulatory requirements. If we or any of our contractors
fail to comply with the requirements of the FDA and other applicable U.S. or foreign governmental
or regulatory authorities or previously unknown problems with our products, manufacturers or
manufacturing processes are discovered, we or the contractor could be subject to administrative or
judicially imposed sanctions, including: restrictions on the products, the manufacturers or
manufacturing processes we use, warning letters, civil or criminal penalties, fines, injunctions,
product seizures or detentions, import bans, voluntary or mandatory product recalls and publicity
requirements, suspension or withdrawal of regulatory approvals, total or partial suspension of
production, and refusal to approve pending applications for marketing approval of new products to
approved applications.
We deal with hazardous materials and must comply with environmental laws and regulations,
which can be expensive and restrict how we do business.
Our activities involve the controlled storage, use, and disposal of hazardous materials,
including corrosive, explosive and flammable chemicals, biologic waste and various radioactive
compounds. We are subject to federal, state, and local laws and regulations governing the use,
manufacture, storage, handling, and disposal of these hazardous materials. Although we believe that
our safety procedures for the handling and disposing of these materials comply with the standards
prescribed by these laws and regulations, we cannot eliminate the risk of accidental contamination
or injury from these materials.
In the event of an accident, state or federal authorities may curtail our use of these
materials, and we could be liable for any civil damages, which may exceed our financial resources
and may seriously harm our business. We currently maintain insurance covering hazardous waste clean
up costs in an amount we believe to be sufficient for typical risks regarding our handling of these
materials, however, this amount of coverage may not be sufficient to cover extraordinary or
unanticipated events. Additionally, an accident could damage, or force us to temporarily shut down,
our operations.
Our ability to use net operating losses to offset future taxable income may be subject to
certain limitations.
Under Section 382 of the U.S. Internal Revenue Code, or Code, a corporation that experiences a
more-than 50 percent ownership change over a three-year testing period is subject to limitations on
its ability to utilize its pre-change NOLs to offset future taxable income. Changes in our stock
ownership could result in an ownership change under Section 382 of the Code and limit the future
use of our NOLs. We have not determined whether our February 2011 initial public offering or our
August 2011 public offering resulted in an ownership change under Section 382 of the Code or the
impact that these offerings may have on this issue. If an ownership change were to occur, we may
not be able to utilize a material portion of our NOLs.
Risks Related to Intellectual Property
Our proprietary rights may not adequately protect our technologies and product candidates.
Our commercial success will depend in part on our ability to obtain additional patents and
protect our existing patent position as well as our ability to maintain adequate protection of
other intellectual property for our technologies, product candidates, and any future products in
the United States and other countries. If we do not adequately protect our intellectual property,
competitors may be able to use our technologies and erode or negate any competitive advantage we
may have, which could harm our business and ability to achieve profitability. The laws of some
foreign countries do not protect our proprietary rights to the same extent or in the same manner as
U.S. laws, and we may encounter significant problems in protecting and defending our proprietary
rights in these countries. We will be able to protect our proprietary rights from unauthorized use
by third parties only to the extent that our proprietary technologies, product candidates and any
future products are covered by valid and enforceable patents or are effectively maintained as trade
secrets.
We apply for patents covering both our technologies and product candidates, as we deem
appropriate. However, we may fail to apply for patents on important technologies or product
candidates in a timely fashion, or at all. Our existing patents and any future patents we obtain
may not be sufficiently broad to prevent others from practicing our technologies or from developing
competing products and technologies. We cannot be certain that our patent applications will be
approved or that any patents issued will adequately
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protect our intellectual property. For example, our issued patents do not claim composition of
matter protection for the drug payloads connected to the linker system and targeting ligand modules
of our SMDCs. In addition, we generally do not control the patent prosecution of subject matter
that we license from others, including those licensed from Purdue Research Foundation, a non-profit
organization which manages the intellectual property of Purdue University. Accordingly, we are
unable to exercise the same degree of control over this intellectual property as we would over our
own and would need to involve Purdue Research Foundation in legal proceedings to enforce these
intellectual property rights. Moreover, the patent positions of biopharmaceutical companies are
highly uncertain and involve complex legal and factual questions for which important legal
principles are often evolving and remain unresolved. As a result, the validity and enforceability
of patents cannot be predicted with certainty. In addition, we do not know whether:
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we or our licensors were the first to make the
inventions covered by each of our issued patents and
pending patent applications; |
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we or our licensors were the first to file patent applications for these inventions; |
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any of our product candidates will be Orange Book eligible; |
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others will independently develop similar or alternative technologies or duplicate any of our technologies; |
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any of our or our licensors pending patent applications will result in issued patents; |
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any of our or our licensors patents will be valid or enforceable; |
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any patents issued to us or our licensors and
collaboration partners will provide us with any
competitive advantages, or will be challenged by third
parties; |
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we will develop additional proprietary technologies that are patentable; |
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the U.S. government will exercise any of its
statutory rights to our intellectual property that was
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our business may infringe the patents or other proprietary rights of others. |
The actual protection afforded by a patent varies based on products or processes, from country
to country and depends upon many factors, including the type of patent, the scope of its coverage,
the availability of regulatory related extensions, the availability of legal remedies in a
particular country, the validity and enforceability of the patents and our financial ability to
enforce our patents and other intellectual property. Our ability to maintain and solidify our
proprietary position for our products will depend on our success in obtaining effective claims and
enforcing those claims once granted. Our issued patents and those that may issue in the future, or
those licensed to us, may be challenged, narrowed, invalidated or circumvented, and the rights
granted under any issued patents may not provide us with proprietary protection or competitive
advantages against competitors with similar products. Due to the extensive amount of time required
for the development, testing and regulatory review of a potential product, it is possible that,
before any of our product candidates can be commercialized, any related patent may expire or remain
in force for only a short period following commercialization, thereby reducing any advantage of the
patent.
We also rely on trade secrets to protect some of our technology, especially where we do not
believe patent protection is appropriate or obtainable. However, trade secrets are difficult to
maintain. While we use reasonable efforts to protect our trade secrets, our or any of our
collaboration partners employees, consultants, contractors or scientific and other advisors may
unintentionally or willfully disclose our proprietary information to competitors and we may not
have adequate remedies in respect of that disclosure. Enforcement of claims that a third party has
illegally obtained and is using trade secrets is expensive, time consuming and uncertain. In
addition, non-U.S. courts are sometimes less willing than U.S. courts to protect trade secrets. If
our competitors independently develop equivalent knowledge, methods and know-how, we would not be
able to assert our trade secrets against them and our business could be harmed.
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The intellectual property protection for our product candidates is dependent on third parties.
With respect to patent applications relating to our product candidates that incorporate
patents licensed from Purdue Research Foundation, the right and obligation to prosecute and
maintain the patents and patent applications covered by these license agreements are retained by
Purdue Research Foundation. Generally, we do not have the right to prosecute and maintain such
patents in our territories, unless Purdue Research Foundation elects not to file, prosecute or
maintain any or all of such patents. We would need to determine, with our other potential partners,
who would be responsible for the prosecution of patents relating to any joint inventions. If any of
our licensing partners fail to appropriately prosecute and maintain patent protection for any of
our product candidates, our ability to develop and commercialize those product candidates may be
adversely affected and we may not be able to prevent competitors from making, using and selling
competing products.
If we breach any of the agreements under which we license commercialization rights to our
product candidates or technology from third parties, we could lose license rights that are
important to our business.
We license the use, development and commercialization rights for some of our product
candidates, and we expect to enter into similar licenses in the future. For example, we licensed
exclusive worldwide rights from Purdue Research Foundation, pursuant to a license agreement, which
enables us to use and administer EC145 in the treatment of cancer. Under this license we are
subject to commercialization and development, diligence obligations, sublicense revenue sharing
requirements, royalty payments and other obligations. If we fail to comply with any of these
obligations or otherwise breach this license agreement or any other current or future licenses, our
licensing partners may have the right to terminate the license in whole or in part or to terminate
the exclusive nature of the license. Generally, the loss of any of current or future licenses or
the exclusivity rights provided therein could materially harm our financial condition and operating
results.
The patent protection for our product candidates may expire before we are able to maximize
their commercial value, which may subject us to increased competition and reduce or eliminate our
opportunity to generate product revenue.
The patents for our product candidates have varying expiration dates and, if these patents
expire, we may be subject to increased competition and we may not be able to recover our
development costs or market any of our approved products profitably. For example, one of our U.S.
patents claims compounds encompassing EC145 and is due to expire in 2026, and two of our other U.S.
patents claim compounds encompassing EC20 and are due to expire in 2024. In some of the larger
potential market territories, such as the United States and Europe, patent term extension or
restoration may be available to compensate for time taken during aspects of the products
development and regulatory review. However, we cannot be certain that such an extension will be
granted, or if granted, what the applicable time period or the scope of patent protection afforded
during any extension period will be. In addition, even though some regulatory authorities may
provide some other exclusivity for a product under their own laws and regulations, we may not be
able to qualify the product or obtain the exclusive time period. If we are unable to obtain patent
term extension/restoration or some other exclusivity, we could be subject to increased competition
and our opportunity to establish or maintain product revenue could be substantially reduced or
eliminated. Furthermore, we may not have sufficient time to recover our development costs prior to
the expiration of our U.S. and non-U.S. patents.
We may not be able to protect our intellectual property rights throughout the world.
Filing, prosecuting and defending patents on all of our product candidates throughout the
world would be prohibitively expensive. Competitors may use our technologies in jurisdictions where
we have not obtained patent protection to develop their own products and further, may export
otherwise infringing products to territories where we have patent protection, but enforcement is
not as strong as that in the United States. These products may compete with our products in
jurisdictions where we do not have any issued patents and our patent claims or other intellectual
property rights may not be effective or sufficient to prevent them from so competing.
Many companies have encountered significant problems in protecting and defending intellectual
property rights in foreign jurisdictions. The legal systems of certain countries, particularly
certain developing countries, do not favor the enforcement of patents and other intellectual
property protection, particularly those relating to biopharmaceuticals, which could make it
difficult for us to stop the infringement of our patents or marketing of competing products in
violation of our proprietary rights generally. Proceedings to enforce our patent rights in foreign
jurisdictions could result in substantial cost and divert our efforts and attention from other
aspects of our business.
34
If we are sued for infringing intellectual property rights of third parties, litigation will
be costly and time-consuming and could prevent us from developing or commercializing our product
candidates.
Our commercial success depends, in part, on our not infringing the patents and proprietary
rights of other parties and not
breaching any collaboration or other agreements we have entered into with regard to our
technologies and product candidates. Numerous third-party U.S. and non-U.S. issued patents and
pending applications exist in the areas of targeted therapy and targeted diagnostics, including
cytotoxic agents and other active compounds and formulations comprising such compounds.
Because patent applications can take several years to issue, if they are issued at all, there
may currently be pending applications, unknown to us, that may result in issued patents that cover
our technologies or product candidates. It is uncertain whether the issuance of any third-party
patent would require us to alter our products or processes, obtain licenses or cease activities
related to the development or commercialization of our product candidates. If we wish to use the
technology or compound claimed in issued and unexpired patents owned by others, we may need to
obtain a license from the owner, enter into litigation to challenge the validity of the patents or
incur the risk of litigation in the event that the owner asserts that any of our product candidates
infringe its patents. The failure to obtain a license to technology or the failure to challenge an
issued patent that we may require to discover, develop or commercialize our products may have a
material adverse impact on us.
There is a substantial amount of litigation involving intellectual property in the
biopharmaceutical industry generally. If a third party asserts that our products or technologies
infringe its patents or other proprietary rights, we could face a number of risks that could
seriously harm our results of operations, financial condition and competitive position, including:
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infringement and other intellectual property
claims, which would be costly and time-consuming to
defend, whether or not the claims have merit, and which
could delay the regulatory approval process and divert
managements attention from our business; |
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substantial damages for past infringement, which
we may have to pay if a court determines that our
product candidates or technologies infringe a
competitors patent or other proprietary rights; |
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a court prohibiting us from selling or licensing
our technologies or our product candidates unless the
third-party licenses its patents or other proprietary
rights to us on commercially reasonable terms, which it
is not required to do; |
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if a license is available from a third party, we
may have to pay substantial royalties or lump sum
payments or grant cross-licenses to our patents or
other proprietary rights to obtain that license; and |
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redesigning our products so they do not infringe,
which may not be possible or may require substantial
monetary expenditure and time. |
Although we are not currently a party to any legal proceedings relating to our intellectual
property, in the future, third parties may file claims asserting that our technologies or products
infringe on their intellectual property. We cannot predict whether third parties will assert these
claims against us or against the current or future licensors of technology licensed to us, or
whether those claims will harm our business. If we are forced to defend against these claims,
whether they are with or without any merit, whether they are resolved in favor of or against us or
our licensors, we may face costly litigation and diversion of managements attention and resources.
As a result of these disputes, we may have to develop costly non-infringing technology, or enter
into licensing agreements. These agreements, if necessary, may be unavailable on terms acceptable
to us, if at all, which could seriously harm our business or financial condition.
One or more third-party patents or patent applications may conflict with patent applications
to which we have rights. Any such conflict may substantially reduce the coverage of any rights that
may issue from the patent applications to which we have rights. If third parties file patent
applications in technologies that also claim technology to which we have rights, we may have to
participate in interference proceedings with the U.S. Patent and Trademark Office, or USPTO, or
non-U.S. patent regulatory authorities, as applicable, to determine priority of invention.
We may become involved in lawsuits to protect enforce our patents or other intellectual
property rights, which could be expensive, time-consuming and unsuccessful.
Competitors may infringe our patents or other intellectual property rights. To counter
infringement or unauthorized use, we may be required to file infringement claims, which can be
expensive and time consuming. To the extent such claims relate to patents held by the Purdue
Research Foundation, it would have to file such an infringement lawsuit since we do not have the
independent right to enforce the Purdue Research Foundations intellectual property. In addition,
in an infringement proceeding, a court may decide that a patent of ours is not valid or is
unenforceable, or may refuse to stop the other party from using the technology at issue on the
grounds that
35
our patents do not cover the technology in question. An adverse result in any litigation or
defense proceedings could put one or more of our patents at risk of being invalidated or
interpreted narrowly and could put our patent applications at risk of not issuing.
Interference proceedings brought by the USPTO may be necessary to determine the priority of
inventions with respect to our patents and patent applications or those of our current or future
collaborators. An unfavorable outcome could require us to cease using the technology or to attempt
to license rights to it from the prevailing party. Our business could be harmed if a prevailing
party does not offer us a license on terms that are acceptable to us. Litigation or interference
proceedings may fail and, even if successful, may result in substantial costs and distraction of
our management and other employees. We may not be able to prevent, alone or with our collaborators,
misappropriation of our proprietary rights, particularly in countries where the laws may not
protect those rights as fully as in the United States.
Furthermore, because of the substantial amount of discovery required in connection with
intellectual property litigation, there is a risk that some of our confidential and proprietary
information could be compromised by disclosure during this type of litigation. In addition, there
could be public announcements of the results of hearings, motions or other interim proceedings or
developments. If securities analysts or investors perceive these results to be negative, it could
have a substantial adverse effect on the price of our common stock.
Risks Related to Ownership of Our Common Stock
The price of our common stock has been volatile and our shares may suffer a decline in value.
We have experienced volatility in the trading price of our common stock which has ranged from
$7.00 per share on February 22, 2011 to $14.80 per share on July 7, 2011. Factors that could cause
volatility in the market price of our common stock include, but are not limited to the risk factors
identified above as well as:
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results from, and any delays in, our current or planned clinical trials, including PROCEED; |
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announcements of FDA non-approval of our product
candidates, including EC145, or delays in FDA or other
non-U.S. regulatory authority review processes; |
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FDA or other U.S. or non-U.S. regulatory actions affecting us or our industry; |
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litigation or public concern about the safety of our product candidates; |
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failure or discontinuation of any of our research or clinical trial programs; |
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delays in the commercialization of our product candidates; |
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our ability to effectively partner with collaborators to develop or sell our products; |
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market conditions in the pharmaceutical,
biopharmaceutical and biotechnology sectors and
issuance of new or changed securities analysts reports
or recommendations; |
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actual and anticipated fluctuations in our quarterly operating results; |
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developments or disputes concerning our intellectual property or other proprietary rights; |
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introduction of technological innovations or new products by us or our competitors; |
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issues in manufacturing our product candidates; |
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market acceptance of our product candidates; |
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deviations in our operating results from the estimates of securities analysts; |
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coverage and reimbursement policies of governments and other third-party payors; |
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sales of our common stock by our officers, directors or significant stockholders; |
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price and volume fluctuations in the overall stock market from time to time; |
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general economic conditions and trends; |
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major catastrophic events; |
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our ability to expand our operations, domestically
and internationally, and the amount and timing of
expenditures related to this expansion; and |
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additions or departures of key personnel. |
In addition, the stock markets in general, and the markets for biopharmaceutical,
pharmaceutical and biotechnology stocks in particular, have experienced extreme volatility that has
been often unrelated to the operating performance of the issuer. These broad market fluctuations
may adversely affect the trading price or liquidity of our common stock. In the past, when the
market price of a stock has been volatile, holders of that stock have sometimes instituted
securities class action litigation against the issuer. If any of our stockholders were to bring
such a lawsuit against us, we could incur substantial costs defending the lawsuit and the attention
of our management would be diverted from the operation of our business, which could result in the
delays of our clinical trials or commercialization efforts.
Sales of substantial amounts of our shares could adversely affect the market price of our
common stock.
Sales of substantial amounts of our common stock in the public market, or the perception that
these sales could occur, could cause the market price of our common stock to decline. These sales
could also make it more difficult for us to raise capital by selling equity or equity-related
securities in the future at a time and price that we deem appropriate.
As of June 30, 2011, we had 29,724,837 of our common stock outstanding. We issued an
additional 5,839,810 shares in the August 2011 public offering which increased the number of
outstanding shares to 35,564,647. These numbers assume no exercise of outstanding warrants or stock
options or payouts of restricted stock units. Of the outstanding shares, the 21,056,420 shares sold in our
public offerings and the 63,223 shares issued upon exercise of stock options since February 9,
2011, are or will be freely transferable without restriction under the Securities Act, unless they
are held by our affiliates as that term is used under the Securities Act and the rules and
regulations promulgated thereunder. The remaining 14,445,004 shares of common stock are restricted
shares which, along with other shares held by our affiliates, may be sold in the public market only
if registered or if they qualify for the exemption from registration under Rule 144 promulgated
under the Securities Act or another exemption from registration.
On August 4, 2011, approximately 1,145,000 of the restricted shares became eligible for
resale, subject to the provisions of Rule 144. A total of approximately 13,300,000 of the
restricted shares remain subject to the 90-day lockup described below. This lockup period is
subject to extension under certain circumstances.
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We, all of our directors and executive officers, and certain non-affiliated investors who
acquired 25,000 or more shares prior to our initial public offering agreed with the underwriters of
the August 2011 public offering that, without the prior written consent of the underwriters, we and
they will not, through October 26, 2011:
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offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or
contract to sell, grant any option, right or warrant to
purchase, lend, or otherwise transfer or dispose of,
directly or indirectly, any shares of our common stock
or securities convertible into or exercisable or
exchangeable for our common stock; or |
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enter into any swap or other arrangement that
transfers to another, in whole or in part, any of the
economic consequences of ownership of our common stock; |
whether any transaction described above is to be settled by delivery of shares of our common stock
or such other securities, in cash or otherwise. This agreement is subject to certain exceptions,
and is also subject to extension for up to an additional 34 days.
In addition, in the event that we propose to register any of our securities under the
Securities Act of 1933, as amended, or the Securities Act, either for our own account or for the
account of other securityholders, certain holders of our common stock and other registrable
securities are entitled to notice of such registration and are entitled to include their common
stock in such registration, subject to certain marketing and other limitations. The holders of at
least 50 percent of these registrable securities have the right to require us, on not more than two
occasions, to file a registration statement on Form S-1 under the Securities Act in order to
register the resale of shares of their common stock, subject to our right, in certain
circumstances, to defer such registrations. Further, these holders may require us to register the
resale of all or a portion of their shares on a registration statement on Form S-3, subject to
certain conditions and limitations. Finally, these holders have certain piggyback registration
rights. If we propose to register any of our equity securities under the Securities Act other than
pursuant to the registration rights noted above or specified excluded registrations, which include
the registration of the shares issued and issuable under our equity incentive plans and shares sold
in this offering, holders may require us to include all or a portion of their registrable
securities in the registration and in any related underwritten offering.
As restrictions on resale end or if these securityholders exercise their registration
rights, the market price of our common stock could decline if the holders of the restricted shares
sell them or are perceived by the market as intending to sell them.
Our existing stockholders have substantial control of our management and affairs, which could
limit your ability to influence the outcome of key transactions, including a change of control.
Our directors, executive officers and each of our stockholders who own greater than five
percent of our outstanding common stock and their affiliates, in the aggregate, beneficially own
approximately 23.3 percent of the outstanding shares of our common stock after giving effect to the
shares sold in the August 2011 public offering. As a result, these stockholders, if acting
together, would be able to influence or control matters requiring approval by our stockholders,
including the election of directors and the approval of mergers, acquisitions or other
extraordinary transactions. This concentration of ownership may have the effect of delaying,
preventing or deterring a change of control of our company, could deprive our stockholders of an
opportunity to receive a premium for their common stock as part of a sale of our company and might
affect the market price of our common stock.
Provisions in our certificate of incorporation and bylaws and under Delaware law might
discourage, delay or prevent a change of control of our company or changes in our management and,
therefore, depress the trading price of our common stock.
Our certificate of incorporation and bylaws contain provisions that could depress the trading
price of our common stock by acting to discourage, delay or prevent a change of control of our
company or changes in our management that our stockholders may deem advantageous. These provisions
include:
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establishing a classified board so that not all members of our Board of Directors are elected at one time; |
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authorizing blank check preferred stock that our
Board of Directors could issue to increase the number
of outstanding shares to discourage a takeover attempt; |
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eliminating the ability of stockholders to call a special stockholder meeting; |
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eliminating the ability of stockholders to act by written consent; |
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being subject to provisions of Section 203 of the Delaware General Corporate Law regulating corporate takeovers; |
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providing that our Board of Directors is expressly authorized to make, alter or repeal our bylaws; and |
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establishing advance notice requirements for
nominations for elections to our Board of Directors or
for proposing other matters that can be acted upon by
stockholders at stockholder meetings. |
If we fail to establish and maintain proper internal controls, our ability to produce
accurate financial statements or comply with applicable regulations could be impaired.
We will become subject to Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley
Act, beginning with our annual report for the year ending December 31, 2011. Section 404 requires
management to assess and report annually on the effectiveness of internal control over financial
reporting and identify any material weaknesses in internal control over financial reporting.
Compliance with Section 404 of the Sarbanes-Oxley Act also requires our independent registered
public accounting firm to issue an attestation report as to managements assessment of the
effectiveness of internal control over financial reporting. Prior to becoming a public company, we
were not required to comply with Section 404 of the Sarbanes-Oxley Act, and as a result we have not
yet evaluated our compliance with these provisions. We anticipate that compliance with Section 404
of the Sarbanes-Oxley Act will increase our legal, accounting and financial compliance costs, may
make related activities more difficult, time-consuming and costly and may also place undue strain
on our personnel, systems and resources.
If we conclude that our internal control over financial reporting is not effective, we cannot
be certain as to the timing of completion of our evaluation, testing and remediation actions or
their effect on our operations because there is presently no precedent available by which to
measure compliance adequacy. As a consequence, we may not be able to remediate in time to meet our
deadline for compliance with Section 404 of the Sarbanes-Oxley Act. Also, there can be no assurance
that we will not identify one or more material weaknesses in our internal controls in connection
with evaluating our compliance with Section 404 of the Sarbanes-Oxley Act. The presence of material
weaknesses could result in financial statement errors which, in turn, could require us to restate
our operating results.
If we are unable to conclude that we have effective internal control over financial reporting
or if our independent auditors are unwilling or unable to provide us with an attestation report on
the effectiveness of internal control over financial reporting as required by Section 404 of the
Sarbanes-Oxley Act, investors may lose confidence in our operating results, our stock price could
decline and we may be subject to litigation or regulatory enforcement actions. In addition, if we
are unable to meet the requirements of Section 404 of the Sarbanes-Oxley Act, we may not be able to
remain listed on The NASDAQ Global Market.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
None.
Use of Proceeds from Registered Securities
Our initial public offering of common stock was effected through a Registration Statement on
Form S-1 (File No. 333-166904) that was declared effective by the SEC on February 4, 2011. We
registered an aggregate of 14,375,000 shares of our common stock at an aggregate offering price of
approximately $86.3 million. On February 9, 2011, we completed the sale of all 14,375,000 shares of
our common stock at a price to the public of $6.00 per share, including the sale of 1,875,000
shares of common stock in connection with the underwriters exercise of their overallotment option,
for aggregate gross proceeds of $86.3 million. The offering commenced on February 4, 2011 and
terminated upon the sale of all of the registered securities in the offering. RBC Capital Markets,
LLC and Leerink Swann LLC acted as joint book-running managers for the offering. Wedbush
Securities, Inc. and Robert W. Baird & Co. acted as co-managers. There were no selling stockholders
in the offering.
We paid $5.5 million in underwriting discounts and commissions to the underwriters in
connection with the offering and incurred additional costs of approximately $2.6 million in
connection with the offering, which when added to the underwriting discounts and commissions paid,
amounts to total expenses of approximately $8.1 million. Thus, the net offering proceeds to us,
after deducting underwriting discounts and offering expenses, were approximately $78.2 million. No
offering expenses were paid directly or indirectly to any of our directors or officers (or their
associates) or persons owning ten percent or more of any class of our equity securities or to any
other affiliates.
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As of June 30, 2011, we have used approximately $15.4 million of the net proceeds from the
initial public offering to fund the phase 3 clinical trial of EC145 and EC20 and for working
capital expenditures and other general corporate purposes. We have invested the unused proceeds
from the offering in short-term interest-bearing, investment grade securities. There has been no
material change in our planned use of proceeds from the offering from that described in the final
prospectus filed with the SEC pursuant to Rule 424(b) on February 9, 2011 other than our announced
plans to prepare marketing authorization applications for filing with the European Medicines
Agency.
Item 5. Other Information
During the quarter ended June 30, 2011, the Audit Committee of our Board of Directors did not
approve the engagement of Ernst & Young LLP, our independent registered public accounting firm, to
perform certain non-audit services and no such services were provided during this period. This
disclosure is made pursuant to Section 10A(i)(2) of the Securities Exchange Act of 1934, as added
by Section 202 of the Sarbanes-Oxley Act of 2002.
Item 6. Exhibits
See the Exhibit Index following the signature page to this Quarterly Report on Form 10-Q.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the
Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
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ENDOCYTE, INC.
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Date: August 12, 2011 |
By: |
/s/ P. Ron Ellis
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P. Ron Ellis |
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President and Chief Executive Officer
(Principal Executive Officer) |
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Date: August 12, 2011 |
By: |
/s/ Michael A. Sherman
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Michael A. Sherman |
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Chief Financial Officer
(Principal
Financial Officer) |
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Date: August 12, 2011 |
By: |
/s/ Beth A. Taylor
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Beth A. Taylor |
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Corporate Controller
(Principal
Accounting Officer) |
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EXHIBIT INDEX
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Exhibit |
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Number |
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Description |
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10.1* |
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Form of Endocyte, Inc. 2010 Equity Incentive Plan Performance-Based Restricted Stock Unit Award Agreement (2011 RSU
Program) (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed June 2, 2011). |
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10.2 |
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Second Loan Modification Agreement dated July 19, 2011 among Endocyte, Inc. and Midcap Funding V, LLC. (incorporated
by reference to Exhibit 10.22 to Amendment No. 1 to Form S-1 (Registration Number 333-175573) filed July 21, 2011). |
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31.1 |
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Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934 of the Chief Executive
Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2 |
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Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934 of the Chief Financial
Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1 |
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Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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101** |
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The following materials from Endocyte, Inc.s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011,
formatted in XBRL (Extensible Business Reporting Language): (1) the Balance Sheets, (2) the Statements of Operations,
(3) Statements of Convertible Preferred Stock, Stockholders Equity (Deficit) And Comprehensive Loss
(4) the Statements of Cash Flows, and (5) the Notes to Unaudited Financial Statements, tagged as blocks of text. |
* Designates
management or compensation plans.
** XBRL
information is furnished and not filed or a part of a registration
statement or prospectus for purposes of Sections 11 or 12 of the
Securities Exchange Act of 1933, as amended, is deemed not filed for
purposes of Section 18 of the Securities Exchange Act of 1934, as
amended, and otherwise is not subject to liability under these
sections.
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