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EX-23.1 - CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - OncoMed Pharmaceuticals Incd344523dex231.htm
Table of Contents

As filed with the Securities and Exchange Commission on November 30, 2012

Registration No. 333-181331

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 5

TO

FORM S-1

REGISTRATION STATEMENT

Under

The Securities Act of 1933

 

 

ONCOMED PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   2834   38-3572512

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

800 Chesapeake Drive

Redwood City, CA 94063

(650) 995-8200

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Paul J. Hastings

President & Chief Executive Officer

OncoMed Pharmaceuticals, Inc.

800 Chesapeake Drive

Redwood City, CA 94063

(650) 995-8200

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

Alan C. Mendelson, Esq.

Mark V. Roeder, Esq.

Latham & Watkins LLP

140 Scott Drive

Menlo Park, CA 94025

(650) 328-4600

 

Dr. Alicia J. Hager, Esq.

Vice President, Legal Affairs & Chief Patent Counsel

OncoMed Pharmaceuticals, Inc.

800 Chesapeake Drive

Redwood City, CA 94063

(650) 995-8200

 

Donald J. Murray, Esq.

Covington & Burling LLP

620 Eighth Avenue

New York, NY 10018

(212) 841-1000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box:    ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.     ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.     ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.     ¨

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

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED NOVEMBER 30, 2012

 

 

PRELIMINARY PROSPECTUS

            Shares

 

LOGO

OncoMed Pharmaceuticals, Inc.

Common Stock

We are offering                  shares of our common stock. This is our initial public offering and no public market currently exists for our common stock. We expect the initial public offering price to be between $             and $             per share.

We have applied to list our common stock on The NASDAQ Global Market under the symbol “OMED.” We are an “emerging growth company” as defined by the Jumpstart Our Business Startups Act of 2012 and, as such, we have elected to comply with certain reduced public company reporting requirements for this prospectus and future filings.

Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 10 of this prospectus.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

 

     PER SHARE      TOTAL  

Public Offering Price

   $                        $                    

Underwriting Discounts and Commissions

   $         $     

Proceeds to OncoMed Pharmaceuticals, Inc., before expenses

   $         $     

 

 

Delivery of the shares of common stock purchased in this offering is expected to be made on or about                  , 2012. We have granted the underwriters an option for a period of 30 days to purchase up to                 additional shares of common stock solely to cover their overallotment.

Joint Book-Running Managers

 

Jefferies    Leerink Swann

Co-Managers

 

Piper Jaffray       BMO Capital Markets

Prospectus dated                 , 2012


Table of Contents

TABLE OF CONTENTS

 

 

 

     PAGE  

PROSPECTUS SUMMARY

     1   

RISK FACTORS

     10   

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

     43   

USE OF PROCEEDS

     44   

DIVIDEND POLICY

     45   

CAPITALIZATION

     46   

DILUTION

     48   

SELECTED FINANCIAL DATA

     50   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     52   

BUSINESS

     70   

MANAGEMENT

     101   

EXECUTIVE AND DIRECTOR COMPENSATION

     110   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     123   

PRINCIPAL STOCKHOLDERS

     125   

DESCRIPTION OF CAPITAL STOCK

     128   

SHARES ELIGIBLE FOR FUTURE SALE

     132   

MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS

     135   

UNDERWRITING

     139   

NOTICE TO INVESTORS

     143   

LEGAL MATTERS

     146   

EXPERTS

     147   

WHERE YOU CAN FIND MORE INFORMATION

     148   

INDEX TO FINANCIAL STATEMENTS

     F-1   

 

 

 

 

Neither we nor the underwriters have authorized anyone to provide you with any information other than that contained in this prospectus or in any free writing prospectus we may authorize to be delivered or made available to you. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus may only be used where it is legal to offer and sell shares of our common stock. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of shares of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date. Neither we nor the underwriters are making an offer of these securities in any jurisdiction where the offer is not permitted.

Until        , 2012 (25 days after the commencement of this offering), all dealers that buy, sell or trade shares of our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

For investors outside the United States: Neither we nor the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of common stock and the distribution of this prospectus outside the United States.


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PROSPECTUS SUMMARY

This summary does not contain all of the information you should consider before buying our common stock. You should read the entire prospectus carefully, especially the “Risk Factors” section beginning on page 10 and our financial statements and the related notes appearing at the end of this prospectus, before deciding to invest in our common stock.

Overview

OncoMed is a clinical development-stage biopharmaceutical company focused on discovering and developing first-in-class monoclonal antibody therapeutics targeting cancer stem cells, or CSCs. Our approach has been to target CSCs, which are the subpopulation of cells in a tumor responsible for driving growth and metastasis of the tumor. CSCs, also known as tumor-initiating cells, exhibit certain properties which include the capacity to divide and give rise to new CSCs via a process called self-renewal and the capacity to differentiate or change into the other cells that form the bulk of the tumor. Common cancer drugs target bulk tumor cells but have limited impact on CSCs, thereby providing a path for recurrence of the tumor. Our product candidates target CSCs by blocking self-renewal and driving differentiation of CSCs toward a non-tumorigenic state, and also impact bulk tumor cells. We believe our product candidates are distinct from the current generations of chemotherapies and targeted therapies, and have the potential to significantly impact cancer treatment and the clinical outcome of patients with cancer.

We utilize our proprietary technologies to (1) identify, isolate and evaluate CSCs, (2) identify and/or validate multiple potential targets and pathways critical to CSC self-renewal and differentiation, and (3) develop targeted antibody and other protein-based therapeutics that are designed to modulate these CSC targets and inhibit the growth of CSCs. These targets are in pathways implicated in cancer biology and stem cell biology, including the Notch, Wnt and other fundamental CSC pathways. We believe our suite of proprietary CSC and antibody platform technologies provides a competitive advantage in cancer drug discovery. All of our product candidates were discovered internally in our own research laboratories.

We have five anti-CSC product candidates in clinical development. Additionally, two other antibodies are in preclinical development with Investigational New Drug, or IND, filings planned for as early as 2013. We are also pursuing discovery of additional novel anti-CSC product candidates. The following summarizes the status of our product candidates and preclinical programs, each of which will be described and discussed in further detail below under “Business—Our Product Candidates and Preclinical Programs.”

 

 

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OncoMed Pipeline

 

LOGO

 

  n  

Anti-DLL4 (demcizumab, OMP-21M18). Demcizumab (OMP-21M18) is a humanized monoclonal antibody that inhibits Delta Like Ligand 4, or DLL4, in the Notch signaling pathway. We completed a single-agent Phase Ia trial in advanced solid tumor patients in 2011, which showed promising evidence of single-agent activity in heavily pretreated patients, with a disease control rate, or DCR, of 64% in the highest dose cohort, but also showed adverse events, including hypertension and a few cardiovascular events. We are conducting two Phase Ib combination trials of demcizumab. The first trial is in combination with standard-of-care gemcitabine in first-line advanced pancreatic cancer patients and the second trial is in combination with standard-of-care carboplatin and pemetrexed (Alimta®) in first-line advanced non-small-cell lung cancer, or NSCLC, patients. In both Phase Ib trials, we have employed less frequent or lower dosing of the antibody in combination with chemotherapy in an effort to minimize toxicity while maintaining efficacy. Initial demcizumab Phase Ib data from these ongoing trials suggest a tolerable safety profile, with manageable hypertension as a common treatment-related adverse event. We have not encountered clinically evident cardiac toxicity with this new dosing approach and we have seen encouraging anti-tumor activity. Additional data from these trials will be available in 2013. We plan to initiate Phase II trials in 2013. We have worldwide rights to this program.

 

  n  

Anti-DLL4/Anti-VEGF Bispecific. Anti-DLL4/anti-VEGF bispecific is a novel monoclonal antibody that targets and inhibits both DLL4 and vascular endothelial growth factor, or VEGF. VEGF is the target of Avastin®, a monoclonal antibody marketed by Genentech (Roche). Preclinical testing suggests that the efficacy of our bispecific antibody could potentially exceed the efficacy of either anti-DLL4 therapy or anti-VEGF therapy alone. Pending the successful completion of preclinical experiments, including drug safety studies, we intend to advance this program to clinical trials in 2013. We have worldwide rights to this program.

 

  n  

Anti-Notch2/3 (OMP-59R5). OMP-59R5 is a fully human monoclonal antibody that targets the Notch2 and Notch3 receptors. Initially discovered by screening a phage display library against the Notch2 receptor, the antibody binds to a conserved epitope on Notch2 and Notch3. The program is in a Phase Ib/II trial in pancreatic cancer patients, and a single-agent Phase I trial in advanced solid tumor patients. Data for the Phase I trial were presented at the American Society of Clinical Oncology, or ASCO, conference in June 2012. Additional Phase I clinical data will be presented in a plenary session at the EORTC-NCI-AACR Symposium on Molecular Targets and Cancer Therapeutics in

 

 

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November 2012. OMP-59R5 is part of our collaboration with GlaxoSmithKline LLC (formerly SmithKline Beecham Corporation), or GSK, which is discussed below under “Business—Collaboration and License Agreements—Strategic Alliance with GSK.” GSK retains an option through the end of certain Phase II trials to obtain an exclusive license to OMP-59R5.

 

  n  

Anti-Notch1 (OMP-52M51). OMP-52M51 is a humanized monoclonal antibody targeted to the Notch1 receptor that we believe may have utility in certain solid tumors and certain hematologic malignancies. We filed an IND application for OMP-52M51 that was accepted in September 2012, and the product candidate is advancing in clinical development to evaluate OMP-52M51 in patients with certain hematologic malignancies. OMP-52M51 is part of our GSK collaboration. GSK retains an early option through the end of certain Phase I trials to obtain an exclusive license to this anti-Notch1 antibody or a standard option through the end of certain Phase II trials.

 

  n  

Anti-Fzd7 (OMP-18R5). OMP-18R5 is a fully human monoclonal antibody, identified by screening against the Frizzled7 receptor, or Fzd7, that binds a conserved epitope on five Frizzled receptors and inhibits Wnt signaling. OMP-18R5 is in a Phase I single-agent trial in advanced solid tumor patients, and we expect to report data for this trial in 2013. We believe OMP-18R5 is the first monoclonal antibody designed to inhibit Wnt signaling to enter clinical testing. OMP-18R5 is part of our Wnt pathway collaboration with Bayer Pharma AG (formerly Bayer Schering Pharma AG), or Bayer, which is discussed below under “Business—Collaboration and License Agreements—Strategic Alliance with Bayer.” Bayer retains an option to exclusively license OMP-18R5 at any point through completion of certain Phase I trials.

 

  n  

Fzd8-Fc (OMP-54F28). OMP-54F28, our second product candidate targeting the Wnt pathway, is a proprietary fusion protein based on a truncated form of the Frizzled8 receptor, or Fzd8. We filed an IND application for this product candidate that was accepted in May 2012, and are currently enrolling patients in a Phase I single-agent clinical trial to evaluate OMP-54F28 in patients with advanced solid tumors. OMP-54F28 is part of our Bayer collaboration. Bayer retains an option to exclusively license OMP-54F28 at any point through completion of certain Phase I trials.

 

  n  

Wnt biologic #3. As part of our Bayer collaboration, we are also advancing an additional biologic product candidate in preclinical studies.

 

  n  

Wnt small molecule inhibitors. We are also working with Bayer to discover small molecule Wnt pathway inhibitors.

 

 

  n  

RSPO-LGR. We identified that the R-spondin, or RSPO, ligands signal through the LGR receptor family, which is emerging as an important CSC pathway. Recent studies have demonstrated that certain LGR receptors are distributed specifically on adult stem cells in mammalian tissues and these LGR-expressing cells have been linked to the development of cancer. We are conducting preclinical studies of antibodies that modulate the RSPO-LGR pathway and we plan to enter clinical trials with our first product candidate targeting the RSPO-LGR pathway as early as 2013. We have worldwide rights to these programs.

Strategic Alliance with GSK

In December 2007, we entered into a strategic alliance with GSK to develop anti-CSC antibody therapeutics targeting the Notch signaling pathway. Upon signing, we received $35.0 million in cash, comprised of $17.5 million in an upfront payment and $17.5 million in the form of an equity investment.

In July 2011, we amended the terms of our research and development agreement with GSK, and the collaboration is now focused entirely on the development of two product candidates, anti-Notch2/3 (OMP-59R5) and anti-Notch1 (OMP-52M51). Under this collaboration, GSK may exercise an option during defined time periods through completion of Phase II proof-of-concept trials to obtain an exclusive license to develop and commercialize such product candidates. We lead research and development efforts for these product candidates prior to GSK’s exercise of its option with respect to such candidates. We are eligible to receive from GSK, (1) with respect to OMP-59R5, aggregate payments of up to $344.5 million, including an option exercise fee and development, regulatory and commercialization milestones, in addition to percentage royalties in the low double digits to high teens on net product sales, and (2) with respect to OMP-52M51,

 

 

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aggregate payments of up to $349.5 million, including an option exercise fee and development, regulatory and commercialization milestones, in addition to percentage royalties in the low double digits to high teens on net product sales. If GSK elects not to exercise its options for OMP-59R5 and/or OMP-52M51 during the relevant option periods, or if GSK terminates those programs, we will have worldwide rights to such program(s), subject to, under certain circumstances, GSK’s right of first negotiation to obtain an exclusive license to develop and commercialize OMP-52M51.

In July 2012, we amended our agreement to revise the structure of the milestone payments to reflect the decision to initiate a Phase Ib/II trial for OMP-59R5. See “Business—Collaboration and License Agreements—Strategic Alliance with GSK” below for additional details regarding our collaboration with GSK.

Strategic Alliance with Bayer

In June 2010, we entered into a strategic alliance with Bayer to discover, develop and commercialize novel anti-CSC biologic and small molecule therapeutics targeting the Wnt signaling pathway. We received a $40.0 million upfront cash payment when we entered this alliance. Under this collaboration, Bayer may exercise its option to obtain an exclusive license to develop and commercialize certain biologic therapeutics at any point up to the completion of Phase I trials. We and Bayer also agreed to jointly conduct research to discover potential new small molecule therapeutics targeting the Wnt pathway. Under our collaboration, we lead the discovery and development of biologic therapeutic products prior to Bayer’s exercise of its option, and Bayer leads discovery, development, and upon advancement of the small molecule therapeutics, commercialization of the small molecule therapeutics. We are eligible to receive option fees and research, development, regulatory and commercial milestone payments of up to $387.5 million per program for each biologic therapeutic product successfully developed, in addition to royalties on net product sales. Percentage royalties for certain biologic product candidates are in the low double digits to high teens. For certain other biologic product candidates, percentage royalties are in the mid-single digits to low double digits. Bayer is also obligated to make payments to us upon achievement of research, development, regulatory and commercial milestones, plus advancement fees, for small molecule therapeutics that could total up to $112.0 million per program, in addition to single-digit percentage royalties on net product sales. If Bayer elects not to exercise its options for any class of biologic therapeutic products under the collaboration during the relevant option periods, or if Bayer terminates such program(s), we will have worldwide rights to such program(s).

In August 2012, we amended our agreement with Bayer to reallocate payment amounts between two payments applicable to our biologic product candidates and to modify the trigger for a certain payment applicable to certain biologic product candidates. See “Business—Collaboration and License Agreements—Strategic Alliance with Bayer” below for additional details regarding our collaboration with Bayer.

Strategy

We believe that a key reason for the limitations of many current cancer treatments is that they fail to impede CSCs, which we believe are responsible for the initiation, metastasis and recurrence of many cancers. Our goal is to build a leading biopharmaceutical company to discover, develop and potentially commercialize novel therapies targeting CSCs in a capital-efficient manner. Key elements of our strategy to achieve this goal are:

 

  n  

Continue to discover and advance novel cancer therapeutics based on our proprietary discovery and drug development platform. Our proprietary CSC and antibody scientific platforms continue to result in novel product programs, and we plan to continue discovery activities to identify new potential CSC pathways and cancer therapeutic product candidates. These efforts have led to the discovery of multiple proprietary anti-CSC product candidates, five of which are in clinical development, with additional IND filings anticipated in future years.

 

  n  

Advance demcizumab (OMP-21M18) to determine its utility as a treatment for solid tumors. We are conducting Phase Ib trials of demcizumab in first-line pancreatic and lung cancers in combination with standard-of-care chemotherapy. We plan to assess data from these ongoing trials to determine the best path forward in these indications, including potential commercialization if the investment and

 

 

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return profile appears attractive. We also have extensive preclinical data in multiple other indications, and are actively considering opportunities to broaden development of demcizumab over time.

 

  n  

Collaborate with our partners, GSK and Bayer, to advance specific Notch and Wnt pathway programs forward in clinical development. We have multiple agents under our GSK and Bayer collaborations and are working closely with our partners to advance programs in development. Under our GSK collaboration focused on the Notch pathway, we are developing anti-Notch2/3 (OMP-59R5), currently in a Phase Ib/II trial, and anti-Notch1 (OMP-52M51), with respect to which an IND was accepted in September 2012. Under our Bayer collaboration focused on the Wnt pathway, we are developing anti-Fzd7 (OMP-18R5), currently in Phase I trials, and Fzd8-Fc (OMP-54F28), which entered Phase I in July 2012. We also collaborate with Bayer on Wnt pathway small molecule discovery. Under our collaborations, GSK and Bayer have certain options during certain time periods through the end of specified Phase I or Phase II trials to obtain exclusive licenses to antibody or protein-based product candidates. In the event that these options are not exercised at the end of the relevant option periods, we will have worldwide rights to these programs.

 

  n  

Where possible, utilize biomarker approaches to identify subsets of cancer patients most likely to benefit from our therapies. In some of our programs, such as our anti-Notch2/3 and anti-Notch1 programs, we identified predictive biomarkers that have the potential to assist in patient selection. In other programs, such as our demcizumab and anti-Fzd7 programs, we have extensive biomarker identification/validation research underway. We are working on developing these biomarkers through the course of our current clinical trials for all of our programs, with the plan to potentially utilize those biomarkers in Phase II and subsequent trials to improve patient outcomes. Where biomarker approaches are successfully utilized in clinical testing, we may elect to develop companion diagnostics in conjunction with suitable third-party development and commercialization partners. Our current efforts on our demcizumab, OMP-59R5, OMP-52M51 and OMP-18R5 product candidates could potentially lead to development of future companion diagnostics.

 

  n  

Utilize pharmaceutical collaborations as appropriate to provide funding, create value and leverage partners’ expertise to bring medicines to patients. We believe that our GSK and Bayer collaborations have provided validation of our scientific approach, significant funding to advance our pipeline and access to development and commercial expertise for our partnered assets. To facilitate the capital-efficient development and commercialization of our independent programs, we may consider entering into additional partnerships with biopharmaceutical companies.

We have assembled a strong team of scientific, clinical and business leadership. Paul Hastings, our President and Chief Executive Officer, has over 25 years of biopharmaceutical experience, including roles as Chief Executive Officer at multiple public companies. John Lewicki, Ph.D., our Executive Vice President and Chief Scientific Officer, has over 25 years of research experience in biotechnology. Jakob Dupont, M.D., our Senior Vice President and Chief Medical Officer, has played a key role in the clinical development of a number of cancer agents, including recent clinical leadership on Avastin® development at Genentech (Roche).

Since our founding in August 2004, we have raised approximately $313 million, consisting of approximately $187 million in the form of equity financings, approximately $125 million in the form of collaboration funding from our pharmaceutical partnerships, and $1.2 million in grants. As of June 30, 2012, we had $75.8 million of cash, cash equivalents and short-term investments.

We believe that our broad, novel pipeline of antibody and protein-based therapeutics, our leadership in the field of CSC biology, and our experienced scientific, clinical and business management team provide us with distinct advantages that enable us to continue to discover and advance novel programs targeting CSCs.

 

 

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Risks Related to Our Business

Our ability to implement our current business strategy is subject to numerous risks, as more fully described in the section entitled “Risk Factors” immediately following this prospectus summary. These risks include, among others:

 

  n  

our dependence on the successful development of our programs and our product candidates;

 

  n  

any need to suspend or discontinue clinical trials due to side effects or other safety risks, or any need to conduct studies on the long-term effects associated with the use of our product candidates;

 

  n  

our ability to raise capital to advance development of our independent programs, or product candidates over which GSK or Bayer do not exercise an option, or to secure partnerships with partners that have the capital and expertise to bring products to market;

 

  n  

any failure by GSK or Bayer to exercise their options or any termination by them of any development program under their partnerships with us;

 

  n  

our dependence on the development and marketing efforts of GSK and Bayer for the success of the product candidates for which they exercise their options;

 

  n  

our reliance on third parties to conduct some of our preclinical studies and all of our clinical trials;

 

  n  

failure of any approved product to achieve significant market acceptance or commercial success; and

 

  n  

any inadequacy of our proprietary rights to protect our technologies and product candidates.

In addition, neither we nor our collaboration partners are permitted to market our product candidates in the United States until we receive regulatory approval from the FDA, and approval by foreign regulatory agencies will be required to market our product candidates in other countries. Neither we nor our collaboration partners have submitted an application for or received marketing approval for any of our product candidates. Regulatory approval of our product candidates is not guaranteed, and the approval process is expensive and may take several years.

We are a clinical development-stage biopharmaceutical company with a limited operating history. Biopharmaceutical product development is a highly speculative undertaking and involves a substantial degree of risk. We do not currently have any product candidates in pivotal clinical trials or approved for sale, and we continue to incur significant research and development and general and administrative expenses related to our operations. We are not profitable and have incurred losses in each year since our founding in 2004. Our net losses for the years ended December 31, 2009, 2010 and 2011 were $21.1 million, $27.0 million and $15.0 million, respectively. Our net loss for the six months ended June 30, 2012 was $14.3 million. As of June 30, 2012, we had an accumulated deficit of $140.4 million. We expect to continue to incur significant losses for the foreseeable future. Even if we achieve profitability in the future, we may not be able to sustain profitability in subsequent periods.

Corporate Information

We were incorporated in Delaware in 2004. Our principal executive offices are located at 800 Chesapeake Drive, Redwood City, California 94063, and our telephone number is (650) 995-8200. Our website address is http://www.oncomed.com. The information contained in, or that can be accessed through, our website is not part of this prospectus.

Unless the context requires otherwise, in this prospectus the terms “OncoMed,” “OncoMed Pharmaceuticals,” “we,” “us” and “our” refer to OncoMed Pharmaceuticals, Inc., a Delaware corporation, unless otherwise noted.

OncoMed, OncoMed Pharmaceuticals and the OncoMed Pharmaceuticals logo are our trademarks. Each of the other trademarks, trade names or service marks appearing in this prospectus belongs to its respective holder.

 

 

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THE OFFERING

 

Common stock offered by us in this offering

               shares

Common stock to be outstanding after this offering

               shares

Use of proceeds

   We estimate that the net proceeds from this offering will be approximately $             million, or approximately $             million if the underwriters exercise their overallotment option in full, at an assumed initial public offering price of $             per share (the midpoint of the range set forth on the cover page of this prospectus), after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. We currently expect to use substantially all of our net proceeds from this offering to advance demcizumab (OMP-21M18) through Phase II clinical trials, advance a bispecific antibody through Phase II clinical trials, advance an antibody targeting the RSPO-LGR pathway through Phase I clinical trials and to fund our research and drug discovery activities related to additional product candidates. We will use any remaining proceeds for working capital and general corporate expenditures. See “Use of Proceeds.”

Proposed ticker symbol on The NASDAQ Global Market

   OMED

The number of shares of common stock to be outstanding after this offering is based on 126,721,575 shares of common stock outstanding as of June 30, 2012 and excludes the following:

 

  n  

13,622,512 shares of common stock issuable upon exercise of stock options outstanding under our 2004 Stock Incentive Plan, at a weighted average exercise price of $0.57 per share;

 

  n  

67,098 shares of common stock outstanding subject to vesting;

 

  n  

1,703,525 shares of common stock reserved for issuance pursuant to future awards under our 2004 Stock Incentive Plan;

 

  n  

            shares of common stock reserved for issuance pursuant to future awards under our 2012 Equity Incentive Award Plan;

 

  n  

            shares of common stock reserved for issuance pursuant to future awards under our Employee Stock Purchase Plan; and

 

  n  

272,813 shares of common stock issuable upon the exercise of warrants outstanding to purchase convertible preferred stock, assuming the conversion to common stock immediately prior to the completion of this offering, at a weighted average exercise price of $1.37 per share.

Except as otherwise indicated, all information contained in this prospectus:

 

  n  

reflects the conversion of all of our outstanding shares of convertible preferred stock and Class B common stock into an aggregate of 120,772,311 shares of Class A common stock immediately prior to the completion of this offering;

 

  n  

reflects the redesignation of our Class A common stock as “common stock” immediately prior to the completion of this offering;

 

  n  

assumes the adoption of our amended and restated certificate of incorporation and amended and restated bylaws upon the completion of this offering;

 

  n  

assumes that the underwriters do not exercise their overallotment option; and

 

  n  

reflects a one-for             reverse stock split of our Class A common stock and Class B common stock to be effected prior to the completion of this offering.

 

 

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SUMMARY FINANCIAL DATA

The following summary financial data for the years ended December 31, 2009, 2010 and 2011 are derived from our audited financial statements appearing elsewhere in this prospectus. The summary financial data for the six months ended June 30, 2011 and 2012 and as of June 30, 2012 are derived from our unaudited financial statements appearing elsewhere in this prospectus and are not indicative of results to be expected for the full year. The unaudited financial statements have been prepared on the same basis as the audited financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly our financial position as of June 30, 2012 and the results of operations for the six months ended June 30, 2011 and 2012. You should read this data together with our audited financial statements and related notes appearing elsewhere in this prospectus and the information under the captions “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our historical results are not necessarily indicative of our future results.

 

 

 

(In thousands, except share and per share
amounts)
  YEAR ENDED DECEMBER 31,     SIX MONTHS ENDED
JUNE 30,
 
  2009     2010     2011     2011     2012  
                      (Unaudited)  

STATEMENT OF OPERATIONS DATA:

         

Revenue:

         

Collaboration revenue—related party

  $ 14,363      $ 13,363      $ 3,365      $ 2,181      $ 5,985   

Collaboration revenue

           4,355        28,000        24,000        4,000   

Grant revenue

                  44               22   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    14,363        17,718        31,409        26,181        10,007   

Operating expenses:

         

Research and development (1)

    30,889        39,703        40,058        18,220        20,895   

General and administrative (1)

    4,621        6,552        6,591        3,519        3,477   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    35,510        46,255        46,649        21,739        24,372   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    (21,147     (28,537     (15,240     4,442        (14,365

Interest and other income, net

    288        1,640        244        84        86   

Interest expense

    (201     (118     (38     (32     (6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (21,060   $ (27,015   $ (15,034   $ 4,494      $ (14,285
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per common share (2):

         

Basic

  $ (4.92   $ (5.35   $ (2.70   $ 0.00      $ (2.45
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  $ (4.92   $ (5.35   $ (2.70   $ 0.00      $ (2.45
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Shares used to compute net income (loss) per common share (2):

         

Basic

    4,280,409        5,054,082        5,565,300        5,469,196        5,830,493   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

    4,280,409        5,054,082        5,565,300        8,029,986        5,830,493   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per common share, basic and diluted (2)(3)

      $ (0.12     $ (0.11
     

 

 

     

 

 

 

Shares used to compute pro forma net loss per common share, basic and diluted (2)(3)

        126,293,171          126,558,364   
     

 

 

     

 

 

 

 

 

 

 

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(1) 

Included in the statement of operations data above are the following non-cash stock-based compensation expenses (in thousands):

 

 

     YEAR ENDED
DECEMBER 31,
     SIX MONTHS
ENDED

JUNE 30,
 
     2009      2010      2011      2011      2012  
                          (Unaudited)  

Research and development

   $ 372       $ 453       $ 499       $ 244       $ 244   

General and administrative

     302         396         347         191         172   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $ 674       $ 849       $ 846       $ 435       $ 416   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(2) 

See Notes 2 and 16 to our audited financial statements included elsewhere in this prospectus for an explanation of the calculations of our basic and diluted net loss per common share and pro forma net loss per common share.

 

(3) 

We have presented pro forma net loss per common share information for the year ended December 31, 2011 and the six months ended June 30, 2012 to reflect (1) the conversion of all of our outstanding shares of convertible preferred stock into an aggregate of 120,727,871 shares of common stock; and (2) the reclassification to additional paid-in capital of our convertible preferred stock warrant liability in connection with the conversion of our outstanding convertible preferred stock warrants into common stock warrants.

The table below presents our balance sheet as of June 30, 2012:

 

  n  

on an actual basis;

 

  n  

on a pro forma basis to give effect to (1) the conversion of all of our outstanding shares of convertible preferred stock into an aggregate of 120,727,871 shares of common stock; and (2) the reclassification to additional paid-in capital of our convertible preferred stock warrant liability in connection with the conversion of our outstanding convertible preferred stock warrants into common stock warrants; and

 

  n  

on a pro forma as adjusted basis to give further effect to the sale of shares of common stock in this offering at an assumed initial public offering price of $             per share, the midpoint of the estimated price range set forth on the cover of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

 

 

 

     AS OF JUNE 30, 2012
(In thousands)    ACTUAL     PRO FORMA      PRO FORMA
AS ADJUSTED (1)
     (Unaudited)

BALANCE SHEET DATA:

       

Cash, cash equivalents and short-term investments

   $ 75,793      $                   

Working capital

     61,725        

Total assets

     85,362        

Notes payable

     144        

Convertible preferred stock warrant liability

     174        

Convertible preferred stock

     182,773        

Accumulated deficit

     (140,405     

Total stockholders’ (deficit) equity

     (136,730     

 

 

(1) 

Each $1.00 increase or decrease in the assumed initial public offering price of $             would increase or decrease, respectively, the amount of cash, cash equivalents and short-term investments, working capital, total assets and total stockholders’ (deficit) equity by $             million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

 

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. Before deciding to invest in our common stock, you should carefully consider each of the following risk factors and all other information set forth in this prospectus and any related free writing prospectus. The following risks and the risks described elsewhere in this prospectus, including in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” could materially harm our business, financial condition, operating results, cash flow and prospects. If that occurs, the trading price of our common stock could decline, and you may lose all or part of your investment.

Risks Related to Our Business

We anticipate that we will continue to incur significant losses for the foreseeable future, and if we are unable to achieve and sustain profitability, the market value of our common stock will likely decline.

We are a clinical development-stage biopharmaceutical company with a limited operating history. Biopharmaceutical product development is a highly speculative undertaking and involves a substantial degree of risk. We do not currently have any product candidates in pivotal clinical trials or approved for sale, and we continue to incur significant research and development and general and administrative expenses related to our operations. We are not profitable and have incurred losses in each year since our founding in 2004. Our net losses for the years ended December 31, 2009, 2010 and 2011 were $21.1 million, $27.0 million and $15.0 million, respectively. Our net loss for the six months ended June 30, 2012 was $14.3 million. As of June 30, 2012, we had an accumulated deficit of $140.4 million.

We expect to continue to incur significant losses for the foreseeable future. We expect these losses and our cash utilization to increase in the near term as we continue to conduct clinical trials for demcizumab (OMP-21M18, anti-DLL4), anti-Notch2/3 (OMP-59R5), anti-Fzd7 (OMP-18R5), Fzd8-Fc (OMP-54F28) and anti-Notch1 (OMP-52M51), and conduct research and development of our other product candidates. We are collaborating with GlaxoSmithKline LLC (formerly SmithKline Beecham Corporation), or GSK, to develop therapeutic antibody product candidates targeting the Notch signaling pathway, including our anti-Notch2/3 (OMP-59R5) product candidate and our anti-Notch1 (OMP-52M51) product candidate, and with Bayer Pharma AG (formerly Bayer Schering Pharma AG), or Bayer, to develop biologic and small molecule therapeutic product candidates targeting the Wnt signaling pathway, including anti-Fzd7 (OMP-18R5) and our proprietary fusion protein based on a truncated form of the Frizzled8 receptor, Fzd8-Fc (OMP-54F28). Under these agreements, GSK and Bayer have certain options to obtain exclusive licenses for the development and commercialization of the product candidates being developed in the collaboration. If either GSK or Bayer exercises its option to obtain a license to develop and commercialize such product candidates, Bayer or GSK, as applicable, will assume responsibility for funding obligations with respect to further clinical development and commercialization of such product candidates. However, if Bayer or GSK do not exercise their options, or if our collaborations with our partners terminate, we will be responsible for funding further development of these product candidates unless we enter into another collaboration for such product candidates.

All of our product candidates are in development, and none has been approved for sale. To date, we have derived all of our revenues from upfront payments, milestone payments and other payments we received under our collaborations with GSK and Bayer, and have also supported our research and development efforts by utilizing government grants for research and development. We do not anticipate that we will generate revenue from the sale of our product candidates for the foreseeable future. If any of our product candidates receive regulatory approval, we may incur significant costs to commercialize our product candidates. Even after obtaining such regulatory approval, our products may never gain sufficient market acceptance and adequate market share. If our product candidates fail to demonstrate safety and efficacy in clinical trials, do not gain regulatory approval, or do not achieve market acceptance following regulatory approval and commercialization, we may never become profitable. Even if we achieve profitability in the future, we may not be able to sustain profitability in subsequent periods. If we are unable to achieve and sustain profitability, the market value of our common stock will likely decline. Because of the numerous risks and uncertainties associated with developing biopharmaceutical products, we are unable to predict the extent of any future losses or whether we will become profitable.

 

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We are heavily dependent on the success of our five most advanced product candidates. All of our product candidates are still in preclinical or clinical development. If we are unable to commercialize our product candidates or if we experience significant delays in obtaining regulatory approval for, or commercializing, any or all of our product candidates, our business will be materially and adversely affected.

We have invested a significant portion of our efforts and financial resources in the development of our five most advanced product candidates, namely, demcizumab (OMP-21M18, anti-DLL4), anti-Notch2/3 (OMP-59R5), anti-Notch1 (OMP-52M51), anti-Fzd7 (OMP-18R5) and Fzd8-Fc (OMP-54F28), for the treatment of various types of cancer.

All of our product candidates are still in preclinical and clinical development. Our ability to generate product revenues will depend heavily on our ability to successfully develop and commercialize these product candidates. We do not expect that such commercialization of any of our product candidates will occur for at least the next several years, if ever. Our ability to commercialize our product candidates effectively will depend on several factors, including the following:

 

  n  

successful completion of preclinical studies and clinical trials, including the ability to demonstrate safety and efficacy of our product candidates;

 

  n  

receipt of marketing approvals from the U.S. Food and Drug Administration, or FDA, and similar regulatory authorities outside the United States;

 

  n  

establishing commercial manufacturing capabilities, for example, by making arrangements with third-party manufacturers;

 

  n  

successfully launching commercial sales of the product, whether alone or in collaboration with others;

 

  n  

acceptance of the product by patients, the medical community and third-party payors;

 

  n  

establishing market share while competing with other therapies;

 

  n  

a continued acceptable safety and adverse event profile of our products following regulatory approval; and

 

  n  

qualifying for, identifying, registering, maintaining, enforcing and defending intellectual property rights and claims covering our product candidates.

If we, or our collaborators, do not achieve one or more of these factors in a timely manner or at all, we could experience significant delays or an inability to commercialize our product candidates, which would materially and adversely affect our business, financial condition and results of operations.

We depend on the successful development of our programs and product candidates. The development of new drugs and biologics is a highly risky undertaking, which involves a lengthy process, and the results of preclinical and early clinical trials are not necessarily predictive of future results. Our product discovery and development activities therefore may not be successful on the time schedule we have planned, or at all.

Our programs and product candidates are in the early stages of drug discovery or clinical trials and are subject to the risks of failure inherent in drug development. As of the date of this prospectus, only four of our current product candidates, demcizumab (OMP-21M18, anti-DLL4), anti-Notch2/3 (OMP-59R5), anti-Fzd7 (OMP-18R5) and Fzd8-Fc (OMP-54F28), have been tested in human beings. We will need to conduct significant additional preclinical studies and clinical trials before we can demonstrate that any of our product candidates is safe and effective to the satisfaction of the FDA and other regulatory authorities. Preclinical studies and clinical trials are expensive and uncertain processes that take years to complete. For example, we incurred significant expenses related to the IND filing and the completed single-agent dose escalation Phase Ia clinical trial for demcizumab, our most advanced product candidate. Demcizumab has not yet advanced into Phase II clinical trials despite having entered Phase Ia in 2008. The delay of entry into Phase II trials is attributable to the occurrence of cardiovascular events in Phase Ia, including hypertension, which required the administration of one or more anti-hypertensive medications. Further, in a few patients, decreases in left ventricular ejection fraction, or LVEF, mostly within the normal range, were seen, particularly in patients who were treated with high doses of demcizumab with frequent administration for prolonged periods of time (more than 100 days). These events were considered treatment-related and resulted in demcizumab being put on partial clinical hold, meaning that patients on study could continue to receive treatment but new patients could not be started on study, in the United States during the Phase Ia development program. We have subsequently completed the Phase Ia trial, we have presented the interim results at the 22nd EORTC-NCI-AACR Symposium on Molecular Targets and Cancer Therapeutics in Berlin in 2010, and we intend to submit for

 

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publication the full results by 2013. When the toxicity events occurred, we also paused the ongoing Phase Ib trials and amended the trials in Australia and New Zealand to include a risk mitigation plan to enhance the therapeutic index of demcizumab in an effort to maximize efficacy and manage tolerability. These Phase Ib trials had been initiated in 2010 during the conduct of the Phase Ia trial. The risk mitigation plan included intermittent dosing of the drug, cardiac monitoring using B-type natriuretic peptide (BNP) blood testing and echocardiography, and intervention with cardioprotective medication like angiotensin-converting enzyme inhibitors (ACE inhibitors). We presented this plan to the Phase Ib investigators and the Independent Ethics Committees in Australia, New Zealand and Europe where the trials were being conducted. The investigators and Independent Ethics Committees supported our approach and conduct of the Phase Ib trials, and the relevant clinical authorities were notified. We have recently completed enrollment of the first cohorts of patients on the non-small-cell lung cancer, or NSCLC, Phase lb trial. An independent Data Safety Monitoring Board, or DSMB, consisting of six academic thoracic oncologists, has reviewed the safety and efficacy data from the second and third cohorts of patients in the NSCLC Phase Ib trial. Based on the results of the third cohort, the DSMB has unanimously approved proceeding with enrollment of patients in the expansion cohort of this Phase lb trial and as of October 31, 2012, the expansion cohort is still enrolling patients. Similarly, the DSMB on the pancreatic cancer Phase Ib trial has reviewed patient data and unanimously approved dose escalation for the pancreatic cancer trial as well. We intend to use the data generated from our ongoing Phase Ib trials to obtain authorization from regulatory authorities, including the FDA, to advance demcizumab to Phase II clinical trials in the United States and other countries. We plan to share this data when we submit our future Phase II trial designs to the FDA and other regulatory authorities, which we anticipate will occur in 2013. Although we believe that the data that we have generated in the Phase Ib trials utilizing our risk mitigation plan will be satisfactory to the FDA to allow re-initiation of dosing of demcizumab in the United States, we cannot assure you that the FDA will agree. Failure can occur at any stage of the drug development process, and we cannot assure you that demcizumab or any of our product candidates will reach the point where they are able to be successfully commercialized.

Success in preclinical studies and early clinical trials does not ensure that later clinical trials will generate adequate data to demonstrate the efficacy and safety of an investigational biologic. A number of companies in the biotechnology industry, including those with greater resources and experience than us, have suffered significant setbacks in Phase III clinical trials, despite promising results in earlier clinical trials. We do not know whether any Phase II, Phase III or other clinical trials we may conduct will demonstrate adequate efficacy and safety to result in regulatory approval to market any of our product candidates. If later stage clinical trials do not produce favorable results, our ability to achieve regulatory approval for any of our product candidates may be adversely impacted.

Delays in the commencement or completion of clinical testing could significantly affect our product development costs. We do not know whether planned clinical trials will begin on time or be completed on schedule, if at all. The commencement and completion of clinical trials can be delayed for a number of reasons, including delays related to:

 

  n  

obtaining regulatory authorization to commence a clinical trial or complying with conditions imposed by a regulatory authority regarding the scope or design of a clinical trial;

 

  n  

reaching agreement on acceptable terms with prospective clinical research organizations, or CROs, and trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;

 

  n  

manufacturing, including manufacturing sufficient quantities of a product candidate or other materials for use in clinical trials;

 

  n  

obtaining IRB approval or the approval of other reviewing entities to conduct a clinical trial at a prospective site;

 

  n  

recruiting and enrolling patients to participate in clinical trials for a variety of reasons, including size of patient population, complexity of clinical trial protocol, the availability of approved effective treatments for the relevant disease, changed standards of care during the conduct of the trial, and competition from other clinical trial programs for similar indications;

 

  n  

severe or unexpected drug-related adverse effects experienced by patients in a clinical trial; and

 

  n  

retaining patients who have initiated a clinical trial, but may withdraw due to treatment protocol, adverse effects from the therapy, lack of efficacy from the treatment, personal issues or who are lost to further follow-up.

 

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Clinical trials may also be delayed, suspended or terminated as a result of ambiguous or negative interim results, or results that are inconsistent with earlier results. In addition, a clinical trial may be suspended or terminated by us, the FDA, the IRB or other reviewing entity overseeing the clinical trial at issue, any of our clinical trial sites with respect to that site, or other regulatory authorities due to a number of factors, including:

 

  n  

failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols;

 

  n  

inspection of the clinical trial operations or trial sites by the FDA or other regulatory authorities resulting in the imposition of a clinical hold;

 

  n  

unforeseen safety issues or any determination that a clinical trial presents unacceptable health risks; and

 

  n  

lack of adequate funding to continue the clinical trial, including the incurrence of unforeseen costs due to enrollment delays, requirements to conduct additional clinical trials and increased expenses associated with the services of our CROs and other third parties.

Product development costs to us and our collaborators will increase if we have delays in testing or approval of our product candidates or if we need to perform more or larger clinical trials than planned. Additionally, changes in regulatory requirements and policies may occur in any jurisdiction and we may need to amend clinical trial protocols to reflect these changes. Amendments may require us to resubmit our clinical trial protocols to IRBs for reexamination, which may impact the costs, timing or successful completion of a clinical trial. If we experience delays in completion of, or if we, the FDA or other regulatory authorities, the IRB or other reviewing entities, or any of our clinical trial sites suspend or terminate any of our clinical trials, the commercial prospects for our product candidates may be harmed and our ability to generate product revenues will be delayed. In addition, many of the factors that cause, or lead to, termination or suspension of, or a delay in the commencement or completion of, clinical trials may also ultimately lead to the denial of regulatory approval of a product candidate. Also, if one or more clinical trials are delayed, our competitors may be able to bring products to market before we do, and the commercial viability of our product candidates could be significantly reduced.

If we are required to suspend or discontinue clinical trials due to side effects or other safety risks, or if we are required to conduct studies on the long-term effects associated with the use of our product candidates, our ability to commercialize our product candidates could be adversely affected.

Our clinical trials may be suspended or terminated at any time for a number of safety-related reasons. For example, we may voluntarily suspend or terminate our clinical trials if at any time we believe that our product candidates present an unacceptable safety risk to the clinical trial patients. In addition, IRBs or regulatory agencies may order the temporary discontinuation or termination of our clinical trials at any time if they believe that the clinical trials are not being conducted in accordance with applicable regulatory requirements, including if they present an unacceptable safety risk to patients. Administering any product candidate to humans may produce undesirable side effects. The existence of undesirable side effects resulting from our product candidates could cause us or regulatory authorities, such as the FDA, to interrupt, delay or halt clinical trials of our product candidates and could result in the FDA or other regulatory agencies denying further development or approval of our product candidates for any or all targeted indications. This, in turn, could affect whether GSK and/or Bayer exercise their development options under our strategic collaborative partnerships and could prevent us from commercializing our product candidates. Further, our programs modulate novel classes of targets. As a result, we may experience unforeseen adverse side effects with our existing and future product candidates, including demcizumab.

The pharmacokinetic profile of preclinical studies may not be indicative of results in any clinical trial. As of the date of this prospectus, four of our current product candidates have been tested in human beings. We have observed adverse events in clinical trials for three of our product candidates. Our fourth candidate is progressing in early clinical development and we have observed limited adverse events to date. For demcizumab (OMP-21M18), based on a data cut-off of January 19, 2012 for our Phase Ia trial, the toxicity profile of demcizumab included cardiovascular events, including hypertension which was generally manageable. Hypertension was the most common treatment-related adverse event and was seen in approximately a third of patients. Other treatment-related demcizumab adverse events (for all Common Terminology Criteria for Adverse Events, or CTCAE, grades) in the Phase Ia trial across the dose levels tested that occurred in at least 10% of patients were: fatigue, anemia, diarrhea, headache, nausea, hypoalbuminemia, blood pressure increase, dizziness, and dyspnea. While it is difficult to compare across the Phase Ib trials where demcizumab is combined with different chemotherapy regimens, as of the database analysis of July 19, 2012, across the dose levels tested, fatigue was the most common treatment-related

 

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adverse event and was seen in approximately 37% of patients. Other treatment-related demcizumab adverse events (for all CTCAE grades) that occurred in at least 10% of patients were: nausea, vomiting, diarrhea, decreased appetite, hypertension, neutropenia, pulmonary hypertension, dyspnea and rash. For anti-Notch2/3 (OMP-59R5), as assessed at the time of the last database analysis on September 26, 2012 for our Phase Ia trial, diarrhea was the most common treatment-related adverse event and was seen in approximately two-thirds of patients. Other treatment-related adverse events that occurred in at least 10% of patients were: fatigue, nausea, decreased appetite, and vomiting. All of these events were CTCAE grade 1, 2 or 3 events. No grade 4 or 5 events have occurred on that Phase Ia trial to date. For anti-Fzd7 (OMP-18R5), we have limited clinical data on our Phase Ia trial to date. Based on a database analysis cut-off date of September 20, 2012 for this Phase Ia trial, the treatment-related adverse events across the dose levels tested included, for example, vomiting, diarrhea, fatigue, anemia and a case of compression fracture. For a more detailed discussion, see “Business—Our Product Candidates and Preclinical Programs.”

We currently believe these adverse events are manageable given that we have implemented a risk mitigation plan and given that similar events are observed with other agents used in oncology indications, including successfully marketed drugs and products under development by others. Nevertheless, such adverse events may cause challenges in development, approval and/or commercialization. For example, the toxicity profile of demcizumab has been shown to include cardiovascular events, including hypertension that was generally manageable. In a few patients treated with demcizumab in Phase Ia trials, however, decreases in LVEF were observed, resulting in the implementation of intermittent dosing and modified patient monitoring in our Phase Ib trials so as to optimize the therapeutic index, to maximize efficacy while managing tolerability, of the product candidate. We have not conducted complete studies on the long-term effects associated with the use of all of our product candidates. Studies of these long-term effects may be required for regulatory approval and such requirement would delay our introduction of our product candidates, including those under our collaborations with GSK and/or Bayer, into the market. These studies could also be required at any time after regulatory approval of any of our product candidates. Absence of long-term data may also limit the approved uses of our products, if any, to short-term use. Some or all of our product candidates may prove to be unsafe for human use, which would materially harm our business.

The successful development and commercialization of our independent programs, including demcizumab, and any product candidate over which GSK or Bayer declines to exercise an option, or for which we do not obtain anticipated research or development milestone payments prior to a decision by GSK or Bayer to exercise such option, will depend in large part on our ability either to raise capital to advance development of those programs on our own or to secure partnerships with partners that have the capital and expertise to bring products to market. We may be unable to secure such funds and/or secure such future partnerships.

Our current strategy is to continue to advance the development of our unpartnered product candidates and programs, including demcizumab, which will require substantial funds. If any of our product candidates receive regulatory approval and are commercialized, substantial expenditures will also be required. In order to advance any of our unpartnered programs beyond a stage funded by the proceeds of this offering, or if GSK or Bayer decline to exercise their options with respect to one or more product candidates covered by their respective collaboration agreements, we will need to secure funding to advance development of those programs and/or secure relationships with partners that have the necessary capital and expertise. In addition, if we are unable to achieve anticipated research or development milestones, and to obtain the applicable milestone payments, for any product candidate under our collaboration agreements with GSK and Bayer, we are likely to need additional funding to advance such product candidate prior to our partners’ decisions regarding option exercise with respect to such product candidate.

As of June 30, 2012, we had $75.8 million in cash, cash equivalents and short-term investments. We believe that our available cash, cash equivalents and short-term investments, together with the net proceeds of this offering, will be sufficient to fund our anticipated level of operations for at least the next 18 months. Our future financing requirements will depend on many factors, some of which are beyond our control, including:

 

  n  

the rate of progress and cost of our clinical trials, preclinical studies and other discovery and research and development activities;

 

  n  

the timing of, and costs involved in, seeking and obtaining FDA and other regulatory approvals;

 

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  n  

the continuation and success of our strategic alliances with GSK and Bayer and future collaboration partners, including the exercise or non-exercise of further development options by GSK and/or Bayer under their respective agreements;

 

  n  

the costs of preparing, filing, prosecuting, maintaining and enforcing any patent claims and other intellectual property rights, including litigation costs and the results of such litigation;

 

  n  

our ability to enter into additional collaboration, licensing, government or other arrangements and the terms and timing of such arrangements;

 

  n  

the potential need to acquire, by acquisition or in-licensing, other products or technologies; and

 

  n  

the emergence of competing technologies or other adverse market developments.

Future capital requirements will also depend on the extent to which we acquire or invest in additional complementary businesses, products and technologies. We currently have no understandings, commitments or agreements relating to any of these types of transactions.

Until we can generate a sufficient amount of product revenue to finance our cash requirements, which we may never do, we expect to finance future cash needs primarily through public or private equity offerings, debt financings, a credit facility, government grants and contracts and/or strategic collaborations. Additional financing may not be available to us when we need it or it may not be available to us on favorable terms, if at all. Additionally, to the extent that we seek a partner to develop any of our programs, we may not be able to secure a collaboration on favorable terms, if at all. A partnership may not provide sufficient funding or value to bring a product to market, and further funding and/or partnerships may be required. The terms of any such partnership may also significantly limit our share of potential future profits from the associated program, may require us to relinquish potentially valuable rights to our current product candidates, potential products or proprietary technologies, or may grant licenses on terms that are not favorable to us. If we are unable to obtain adequate financing or form favorable collaborations, 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 our commercialization efforts.

If GSK and/or Bayer do not exercise their options or if they terminate any development program under their collaborations with us, whether as a result of our inability to meet milestones or otherwise, any potential revenue from those collaborations will be significantly reduced or non-existent, and our results of operations and financial condition will be materially and adversely affected.

Since our founding, we have invested a significant portion of our time and financial resources in the development of multiple product candidates that are now included in our Bayer and GSK collaborations. The programs included in our GSK collaboration include anti-Notch2/3 (OMP-59R5) and anti-Notch1 (OMP-52M51). The programs included in our Bayer collaboration include anti-Fzd7 (OMP-18R5) and Fzd8-Fc (OMP-54F28), plus additional biologic and small molecule programs. Our ability to continue to advance these programs in development prior to option exercise by Bayer or GSK is highly dependent on achieving certain development milestones in these programs, which will result in milestone fees payable to us.

Under our collaboration with GSK, during certain time periods through completion of proof-of-concept trials, or in the case of one scenario, with respect to the OMP-52M51 program, during certain time periods through completion of Phase I trials, GSK is entitled to exercise an option to obtain an exclusive license for further development and commercialization of the applicable product candidate on a worldwide basis.

Under the agreement with GSK, we are eligible to receive from GSK, (1) with respect to OMP-59R5, aggregate payments of up to $344.5 million, including an option exercise fee and development, regulatory and commercialization milestones, in addition to percentage royalties in the low double digits to high teens on net product sales, and (2) with respect to OMP-52M51, aggregate payments of up to $349.5 million, including an option exercise fee and development, regulatory and commercialization milestones, in addition to percentage royalties in the low double digits to high teens on net product sales. We have received milestone payments related to these programs to date. However, there is no guarantee that we will be able to successfully continue to advance programs and receive milestone payments related to OMP-59R5 or OMP-52M51. Even if we successfully advance these product candidates through Phase II proof-of-concept trials, GSK is under no obligation to exercise its option to progress either OMP-59R5 or OMP-52M51 development, and even if one or both of these product candidates are

 

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progressed, there is no guarantee that either product candidate will achieve the relevant regulatory filing or approval milestones. Further, in the event that GSK is required to obtain Hart-Scott-Rodino, or HSR, clearance after exercising any of its options, and such clearance is not obtained, GSK will not participate in further development of these product candidates and the product rights would revert to us. We would then have worldwide rights to those assets and be responsible for funding the development of the assets.

GSK may terminate the entire collaboration agreement or any collaboration program on a program-by-program basis for any or no reason upon written notice to us after expiration of a defined notice period. The agreement or any program under the agreement may also be terminated by either party for material breach by the other party that remains uncured after a specified notice period. The agreement may also be terminated by either party for insolvency of the other party, or by us if GSK challenges the licensed patents. Depending on the timing of any such termination we may not be entitled to receive the option exercise fees, or potential near-term milestone payments, as these payments terminate with termination of the agreement.

There are similar provisions in our Bayer Wnt pathway agreement. In this collaboration, Bayer has the option to obtain an exclusive license to Wnt pathway biologic product candidates within defined classes at any point up through the completion of certain Phase I trials. Bayer may decide not to exercise its options.

As our product candidates targeting the Wnt pathway advance, we would be entitled to receive, per product candidate, (1) an aggregate of up to $387.5 million for each biologics program in development, regulatory, and commercial milestones and option fees, plus royalties on net product sales, and (2) for each small molecule product candidate, up to $112.0 million in the aggregate for development, regulatory, and commercial milestones and advancement fees, plus single-digit percentage royalties on net product sales. Percentage royalties for certain biologic product candidates are in the low double digits to high teens. For certain other biologic product candidates, percentage royalties are in the mid-single digits to low double digits. To date, we have received $20.0 million in milestone payments for IND acceptance for OMP-18R5 and a $5.0 million option extension fee for Fzd8-Fc (OMP-54F28). However, there is no guarantee that we will be able to successfully continue to advance programs and receive milestone payments related to OMP-18R5 or any other Wnt pathway product candidates. Even if we are able to successfully complete Phase I trials with OMP-18R5 or our other Wnt pathway product candidates, Bayer is under no obligation to exercise its option to obtain an exclusive license to develop and commercialize any such product candidate, and there is no guarantee that any such product candidate will achieve the relevant further development, regulatory filing or approval, or commercial milestones. Furthermore, in the event that Bayer is required to obtain HSR clearance with respect to such options, and such clearance is unable to be obtained, Bayer will not participate in further development of the relevant product candidates.

Bayer may terminate, for any or no reason, the collaboration agreement in its entirety, or may terminate with respect to a therapeutic class or specified product candidate, in each case upon prior written notice to us. The agreement may also be terminated in its entirety, or with respect to a therapeutic class, by either party for material breach by the other party that is not cured within a specified cure period. Either party may terminate the agreement for insolvency by the other party, and we may terminate the agreement if Bayer challenges the licensed patents. Depending on the timing of any such termination we may not be entitled to receive the option fees, or potential near-term milestone payments, as these payments terminate with termination of the agreement.

If (1) GSK does not exercise its options with respect to OMP-59R5 or OMP-52M51, or terminates its rights and obligations with respect to a program or the entire agreement, or (2) Bayer does not exercise its options with respect to OMP-18R5, OMP-54F28 or other development candidates under its agreement, or terminates its rights and obligations with respect to a program or the entire agreement, then depending on the timing of such event:

 

  n  

in the case of GSK, under certain circumstances, we may owe GSK single-digit percentage royalties with respect to product candidates covered by our agreement with GSK that we elect to continue to commercialize, dependent upon the stage of development at which such product commercialization rights reverted back to us, or additional payments if we license such product candidates to third parties;

 

  n  

in the case of Bayer, under certain circumstances, we may owe Bayer single-digit percentage royalties on Wnt product candidates successfully commercialized;

 

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  n  

the development of our product candidates subject to the GSK agreement or Bayer agreement, as applicable, may be terminated or significantly delayed;

 

  n  

our cash expenditures could increase significantly if it is necessary for us to hire additional employees and allocate scarce resources to the development and commercialization of product candidates that were previously funded by GSK or Bayer, as applicable;

 

  n  

we would bear all of the risks and costs related to the further development and commercialization of product candidates that were previously the subject of the GSK agreement or Bayer agreement, as applicable, including the reimbursement of third parties; and

 

  n  

in order to fund further development and commercialization, we may need to seek out and establish alternative collaboration arrangements with third-party partners; this may not be possible, or we may not be able to do so on terms which are acceptable to us, in which case it may be necessary for us to limit the size or scope of one or more of our programs or increase our expenditures and seek additional funding by other means.

Any of these events would have a material adverse effect on our results of operations and financial condition.

The commercial success of our partnered product candidates in our Notch and Wnt pathway programs, which are part of our collaboration agreements with GSK and Bayer, respectively, will depend in large part on the development and marketing efforts of our partners, if and when our partners exercise their options on those programs. If our partners are unable to perform in accordance with the terms of our agreements, our potential to generate future revenue from these programs would be significantly reduced and our business would be materially and adversely harmed.

If GSK or Bayer opt to exercise their options to license any of the Notch or Wnt pathway product candidates, respectively, on which we are collaborating, we will have limited influence and/or control over their approaches to development and commercialization. While we will have potential milestone and royalty streams payable as these partners or their sublicensees advance development of these product candidates, we are likely to have limited ability to influence our partners’ development and commercialization efforts. If GSK, Bayer, or any potential future collaboration partners do not perform in the manner that we expect or fulfill their responsibilities in a timely manner, or at all, the clinical development, regulatory approval and commercialization efforts related to product candidates we have licensed to such collaboration partners could be delayed or terminated.

If we terminate either of our collaborations, or any program thereunder due to a material breach by GSK and Bayer, we have the right to assume the responsibility at our own expense for the development of the applicable biologic product candidates. Assumption of sole responsibility for further development will increase our expenditures, and may mean we need to limit the size and scope of one or more of our programs, seek additional funding and/or choose to stop work altogether on one or more of the affected product candidates. This could result in a limited potential to generate future revenue from such product candidates and our business could be materially and adversely affected. Further, under certain circumstances, we may owe GSK or Bayer, as applicable, a single-digit percentage royalty on a product candidate successfully commercialized, subject to a cap.

We rely on third parties to conduct some of our preclinical studies and all of our clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may be unable to obtain regulatory approval for or commercialize any of our product candidates.

Although we conduct certain preclinical studies, we currently do not have the ability to independently conduct preclinical studies that comply with good laboratory practices, or GLP. We also do not currently have the ability to independently conduct any clinical trials. We rely on medical institutions, clinical investigators, contract laboratories, collaborative partners and other third parties, such as CROs, to conduct GLP compliant preclinical studies and clinical trials on our product candidates. The third parties with which we contract for execution of our GLP preclinical studies and our clinical trials play a significant role in the conduct of these studies and trials and the subsequent collection and analysis of data. These third parties are not our employees and, except for restrictions imposed by our contracts with such third parties, we have limited ability to control the amount or timing of resources that they devote to our programs. Although we rely on these third parties to conduct our GLP compliant preclinical studies and clinical trials, we remain responsible for ensuring that each of our GLP preclinical studies and clinical trials is conducted in accordance with its investigational plan and protocol. The FDA and regulatory authorities in

 

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other jurisdictions require us to comply with regulations and standards, commonly referred to as current good clinical practices, or cGCPs, for conducting, monitoring, recording and reporting the results of clinical trials, in order 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.

Many of the third parties with whom we contract may also have relationships with other commercial entities, some of which may compete with us. If the third parties conducting our GLP preclinical studies or our clinical trials do not perform their contractual duties or obligations, experience work stoppages, do not meet expected deadlines, terminate their agreements with us or need to be replaced, or if the quality or accuracy of the clinical data they obtain is compromised due to their failure to adhere to our clinical trial protocols or to cGCPs, or for any other reason, we may need to enter into new arrangements with alternative third parties. This could be costly, and our preclinical studies or clinical trials may need to be extended, delayed, terminated or repeated, and we may not be able to obtain regulatory approval in a timely fashion, or at all, for the applicable product candidate, or to commercialize such product candidate being tested in such studies or trials.

We rely on single source third-party contract manufacturing organizations to manufacture and supply our product candidates for us. If one of our suppliers or manufacturers fails to perform adequately or fulfill our needs, or if these agreements are terminated by the third parties, we may be required to incur significant costs and devote significant efforts to find new suppliers or manufacturers. We may also face delays in the development and commercialization of our product candidates.

We currently have limited experience in, and we do not own facilities for, manufacturing our product candidates. We rely upon single source third-party contract manufacturing organizations to manufacture and supply large quantities of our product candidates. We currently utilize Lonza Sales AG, or Lonza, for the bulk manufacturing of our product candidates, except for our Fzd8-Fc (OMP-54F28) program, for which Bayer provides bulk manufacturing. We have also utilized Synco Bio Partners B.V. for fill/finish services (e.g., filling vials with drug substance, sealing and inspecting vials and performance of release assays).

The manufacture of pharmaceutical products in compliance with current good manufacturing practice, or cGMP, regulations requires significant expertise and capital investment, including the development of advanced manufacturing techniques and process controls. Manufacturers of pharmaceutical products often encounter difficulties in production, including difficulties with production costs and yields, quality control, including stability of the product candidate and quality assurance testing, or shortages of qualified personnel. If our manufacturers were to encounter any of these difficulties or otherwise fail to comply with their obligations to us or under applicable regulations, our ability to provide study materials in our preclinical studies and clinical trials would be jeopardized. Any delay or interruption in the supply of preclinical study or clinical trial materials could delay the completion of our preclinical studies and clinical trials, increase the costs associated with maintaining our preclinical study and clinical trial programs and, depending upon the period of delay, require us to commence new trials at significant additional expense or terminate the studies and trials completely.

All manufacturers of our product candidates must comply with cGMP requirements enforced by the FDA through its facilities inspection program. These requirements include, among other things, quality control, quality assurance and the maintenance of records and documentation. Manufacturers of our component materials may be unable to comply with these cGMP requirements and with other FDA, state and foreign regulatory requirements. The FDA or similar foreign regulatory agencies at any time may also implement new standards, or change their interpretation and enforcement of existing standards for manufacture, packaging or testing of products. We have little control over our manufacturers’ compliance with these regulations and standards. A failure to comply with these requirements may result in fines and civil penalties, suspension of production, suspension or delay in product approval, product seizure or recall, or withdrawal of product approval. If the safety of any product supplied is compromised due to our manufacturers’ failure to adhere to applicable laws or for other reasons, we may not be able to obtain regulatory approval for or successfully commercialize our products, and we may be held liable for any injuries sustained as a result. Any of these factors could cause a delay of clinical trials, regulatory submissions, approvals or commercialization of our product candidates or entail higher costs or impair our reputation.

Our current agreements with our suppliers do not provide for the entire supply of the bulk drug necessary for additional clinical trials or for full-scale commercialization. In the event that we and our suppliers cannot agree to

 

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the terms and conditions for them to provide some or all of our bulk drug clinical and commercial supply needs, or if any single-source supplier terminates the agreement in response to a breach by us, we would not be able to manufacture the bulk drug on a commercial scale until a qualified alternative supplier is identified, which could also delay the development of, and impair our ability to commercialize, our product candidates.

Although we believe that appropriate alternative sources of supply exist for each of our current product candidates, the number of third-party suppliers with the necessary manufacturing and regulatory expertise and facilities is limited, and it could be expensive and take a significant amount of time to arrange for alternative suppliers, which could have a material adverse effect on our business. New suppliers of any bulk drug would be required to qualify under applicable regulatory requirements and would need to have sufficient rights under applicable intellectual property laws to the method of manufacturing such ingredients. Obtaining the necessary FDA approvals or other qualifications under applicable regulatory requirements and ensuring non-infringement of third-party intellectual property rights could result in a significant interruption of supply and could require the new manufacturer to bear significant additional costs which may be passed on to us. In addition, we may be required to pay potential fees and royalties to Lonza if we utilize other suppliers for bulk drug, given that we have utilized their proprietary production cell lines in our programs.

The failure of third-party manufacturers or suppliers to perform adequately or the termination of our arrangements with any of them may negatively and adversely affect our business.

Failure to successfully validate, develop and obtain regulatory approval for companion diagnostics could harm our product development strategy.

An important element of our clinical development strategy for certain of our product candidates such as demcizumab (OMP-21M18), anti-Notch2/3 (OMP-59R5), anti-Notch1 (OMP-52M51), anti-Fzd7 (OMP-18R5) and Fzd8-Fc (OMP-54F28) is that we seek to identify patient subsets within a disease category who may derive selective and meaningful benefit from the product candidates we are developing. In collaboration with our partners, we plan to develop companion diagnostics for selected product candidates to help us to more accurately identify patients within a particular subset. Such companion diagnostics would be utilized during our clinical trials as well as in connection with the commercialization of our product candidates. Companion diagnostics are subject to regulation by the FDA and comparable foreign regulatory authorities as medical devices and therefore require separate regulatory approval prior to commercialization. The clinical development of novel therapeutics with a companion diagnostic is complex from an operational and regulatory perspective because of the need for both the drug and the diagnostic to receive regulatory approval.

We will be dependent on identifying suitable third-party development partners, and on entering into appropriate agreements with such third parties, and on the sustained cooperation and effort of our future collaborators in developing and obtaining approval for these companion diagnostics. It may be necessary to resolve issues such as selectivity/specificity, analytical validation, reproducibility, or clinical validation of companion diagnostics during the development and regulatory approval processes. We and our future collaborators may encounter difficulties in developing, obtaining regulatory approval for, manufacturing and commercializing companion diagnostics similar to those we face with respect to our product candidates themselves, including issues with achieving regulatory approval, production of sufficient quantities at commercial scale and with appropriate quality standards, and in gaining market acceptance. Failure to overcome these hurdles would have an adverse effect on our ability to derive revenues from sales of our diagnostic products. Any delay or failure by us or our future collaborators to develop or obtain regulatory approval of the companion diagnostics where required in connection with obtaining approval of our product candidates could delay or prevent approval of our product candidates. In addition, a diagnostic company with whom we contract may decide to discontinue selling or manufacturing the companion diagnostic test that we anticipate using in connection with development and commercialization of our product candidates or our relationship with such diagnostic company may otherwise terminate. We may not be able to enter into arrangements with another diagnostic company to obtain supplies of an alternative diagnostic test for use in connection with the development and commercialization of our product candidates or do so on commercially reasonable terms, which could adversely affect and/or delay the development or commercialization of our product candidates.

 

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Even if our product candidates do obtain regulatory approval they may never achieve market acceptance or commercial success.

Even if we obtain FDA or other regulatory approvals, and are able to launch our product candidates commercially, our product candidates may not achieve market acceptance among physicians, patients and third-party payors and, ultimately, may not be commercially successful. Market acceptance of our product candidates for which we receive approval depends on a number of factors, including:

 

  n  

the efficacy and safety of the product candidates as demonstrated in clinical trials;

 

  n  

the clinical indications for which the product candidate is approved;

 

  n  

acceptance by physicians, operators of treatment facilities and parties responsible for reimbursement of the product as a safe and effective treatment;

 

  n  

the potential and demonstrable advantages of our product candidates, including the cost of treatment and benefits over alternative treatments;

 

  n  

the safety of product candidates seen in a broader patient group, including use outside the approved indications;

 

  n  

the cost of treatment in relation to alternative treatments;

 

  n  

the availability of adequate reimbursement and pricing by third-party payors and government authorities;

 

  n  

relative convenience and ease of administration;

 

  n  

the tolerance of the products by patients, including prevalence and severity of adverse side effects; and

 

  n  

the effectiveness of our sales and marketing efforts.

Any failure by our product candidates that obtain regulatory approval to achieve market acceptance or commercial success would adversely affect our financial results.

If any of our product candidates receives marketing approval and we or others later identify undesirable side effects caused by the product candidate, our ability to market and derive revenue from the product candidates could be compromised.

In the event that any of our product candidates receive regulatory approval and we or others identify undesirable side effects caused by one of our products, any of the following adverse events could occur:

 

  n  

regulatory authorities may withdraw their approval of the product or seize the product;

 

  n  

we may be required to recall the product or change the way the product is administered to patients;

 

  n  

additional restrictions may be imposed on the marketing of the particular product or the manufacturing processes for the product or any component thereof;

 

  n  

we may be subject to fines, injunctions or the imposition of civil or criminal penalties;

 

  n  

regulatory authorities may require the addition of labeling statements, such as a “black box” warning or a contraindication;

 

  n  

we may be required to create a Medication Guide outlining the risks of such side effects for distribution to patients;

 

  n  

we could be sued and held liable for harm caused to patients;

 

  n  

the product may become less competitive; and

 

  n  

our reputation may suffer.

Any of the foregoing events could result in the loss of significant revenues to us, which would materially and adversely affect our results of operations and business.

We currently have no sales and marketing staff or distribution organization. If we are unable to develop a sales and marketing and distribution capability on our own or through our collaborations with GSK, Bayer or other potential marketing partners, we will not be successful in commercializing our future products.

We currently have no sales, marketing or distribution capabilities or experience. If our Notch or Wnt product candidates are approved for sale, we intend to rely on GSK and/or Bayer to market and distribute our products for which they have exercised an option under our agreements, but there is no guarantee that GSK or Bayer will elect to market and distribute our products or that either party will not elect to terminate our collaboration arrangement, which they have a right to do

 

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at any time under our agreements with them. Further, if GSK and/or Bayer do elect to exercise their options to obtain exclusive development and commercialization rights for product candidates, we are likely to have limited control over such activities. If GSK or Bayer do not exercise their respective remaining options, and we develop the product candidates under the GSK and Bayer agreements ourselves, or if we develop our unpartnered product candidates to the point of commercialization, we may need to enter into distribution or co-marketing arrangements with other third parties. If we need to rely on third parties for marketing and distributing our approved products, any revenue we receive will depend upon the efforts of third parties, which may not be successful and are only partially within our control and our product revenue may be lower than if we directly marketed or sold our products. If we are unable to enter into arrangements with third parties to sell, market and distribute product candidates for which we have received regulatory approval on acceptable terms or at all, we will need to market these products ourselves. This is likely to be expensive and logistically difficult, as it would require us to build our own sales force. We have no experience in this area, and if such efforts were necessary, we may not be able to successfully commercialize our future products. If we are not successful in commercializing our future products, either on our own or through collaborations with GSK, Bayer, or one or more third parties, or by co-promoting products with marketing partners, any future product revenue will be materially and adversely affected.

We may need to increase the size of our organization, and we may experience difficulties in managing growth.

As of June 30, 2012, we had 83 full-time employees. We may need to expand our managerial, operational, financial and other resources in order to manage our operations and clinical trials, continue our development activities and commercialize our product candidates. Our management and personnel, systems and facilities currently in place may not be adequate to support this future growth. Our need to effectively execute our business strategy requires that we:

 

  n  

manage our clinical trials effectively, including a Phase Ib/II trial for anti-Notch2/3 (OMP-59R5), Phase Ib trials for demcizumab, and Phase I trials for anti-Fzd7 (OMP-18R5), Fzd8-Fc (OMP-54F28) and anti-Notch1 (OMP-52M51), which are being conducted at multiple trial sites;

 

  n  

manage our internal development efforts effectively while carrying out our contractual obligations to licensors, contractors, collaborators, government agencies and other third parties;

 

  n  

continue to improve our operational, financial and management controls, reporting systems and procedures; and

 

  n  

identify, recruit, maintain, motivate and integrate additional employees.

If we are unable to expand our managerial, operational, financial and other resources to the extent required to manage our development and commercialization activities, our business will be materially adversely affected.

If we are not successful in discovering, developing and commercializing additional product candidates, our ability to expand our business and achieve our strategic objectives would be impaired.

Although a substantial amount of our efforts will focus on the continued clinical testing and potential approval of our five most advanced product candidates, which are demcizumab, anti-Notch2/3 (OMP-59R5), anti-Fzd7 (OMP-18R5), Fzd8-Fc (OMP-54F28) and anti-Notch1 (OMP-52M51), a key element of our strategy is to discover, develop and potentially commercialize a portfolio of antibody-based products and other biologics useful in the treatment of cancer. We are seeking to do so through our internal research programs and intend to explore strategic partnerships for the development of new products. All of our other potential product candidates remain in the discovery and preclinical study stages. Research programs to identify product candidates require substantial technical, financial and human resources, whether or not any product candidates are ultimately identified. Our research programs may initially show promise in identifying potential product candidates, yet fail to yield product candidates for clinical development for many reasons, including the following:

 

  n  

the research methodology used may not be successful in identifying potential product candidates;

 

  n  

competitors may develop alternatives that render our product candidates obsolete;

 

  n  

a product candidate may, on further study, be shown to have harmful side effects or other characteristics that indicate it is unlikely to be effective or otherwise does not meet applicable regulatory criteria;

 

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  n  

a product candidate may not be capable of being produced in commercial quantities at an acceptable cost, or at all; and

 

  n  

a product candidate may not be accepted as safe and effective by patients, the medical community or third-party payors.

If we are unsuccessful in identifying and developing additional product candidates, our potential for growth may be impaired.

Key elements of our product discovery technologies, such as our human tumor xenograft models, antibody display technology and single cell analysis platform, are new approaches to the discovery and development of new product candidates and may not result in the discovery of any products of commercial value.

We have developed a suite of discovery technologies to enable generation and testing of novel product candidates. For example, we have created a bank of over 150 patient-derived human tumors that we routinely utilize in human tumor xenograft models to screen our product candidates for evidence of activity. We have also developed a mammalian display antibody technology that we use routinely to select antibody product candidates for in vivo testing. In addition, we have created a single-cell gene expression analysis platform that we are utilizing to identify genes that are critical to CSC self-renewal and differentiation. We cannot assure you that any of these technologies will yield product candidates of commercial value.

We face substantial competition and our competitors may discover, develop or commercialize products faster or more successfully than us.

The biotechnology and pharmaceutical industries are highly competitive, and we face significant competition from companies in the biotechnology, pharmaceutical and other related markets that are researching and marketing products designed to address solid tumors and hematologic malignancies. Established pharmaceutical and biotechnology companies that are known to be involved in oncology research and currently sell or are developing drugs in our markets of interest include Amgen, Astellas, AstraZeneca, Bayer, BMS, Celgene, Genentech (Roche), GSK, Johnson & Johnson, Lilly, MerckSerono, Onyx, Pfizer, Regeneron, Sanofi, Teva and others. There are also biotechnology companies of various sizes that are developing therapies against CSCs, including Stemline Therapeutics, Inc. and Verastem, Inc., among others.

It is possible that our competitors will develop and market drugs or other treatments that are less expensive and more effective than our product candidates, or that will render our product candidates obsolete. It is also possible that our competitors will commercialize competing drugs or treatments before we or our partners can launch any products developed from our product candidates. If approved for marketing by the FDA or other regulatory agencies worldwide, demcizumab, or our other product candidates, would compete against existing cancer treatments such as Avastin®, Erbitux®, Yervoy, chemotherapies and potentially against other novel drug candidates or treatments that are currently in development. Additionally, there are several additional monoclonal antibodies in development for cancer, such as anti-DLL4 antibodies in Phase I trials from Regeneron/Sanofi (REGN421, also known as SAR153192) and MedImmune (MEDI0639). In the Notch pathway, several companies, including Merck, Lilly, Pfizer and others, have attempted to advance small molecule gamma-secretase inhibitors, or GSIs, in clinical development. With respect to the Wnt pathway, we believe that there may be some early stage small molecules programs from other companies. See “Business—Competition.” We also anticipate that we will face increased competition in the future as new companies enter into our target markets and scientific developments surrounding the cancer stem cell field continue to develop.

Many of our competitors have materially greater name recognition and financial, manufacturing, marketing, research and drug development resources than we do. Additional mergers and acquisitions in the biotechnology and pharmaceutical industries may result in even more resources being concentrated in our competitors. Large pharmaceutical companies in particular have extensive expertise in preclinical and clinical testing and in obtaining regulatory approvals for drugs. In addition, academic institutions, government agencies, and other public and private organizations conducting research may seek patent protection with respect to potentially competitive products or technologies. These organizations may also establish exclusive collaborative or licensing relationships with our competitors.

 

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We may form additional strategic alliances in the future with respect to our independent programs, and we may not realize the benefits of such alliances.

We may form strategic alliances, create joint ventures or collaborations or enter into licensing arrangements with third parties with respect to our independent programs that we believe will complement or augment our existing business. For example, we may attempt to find a partner for licensing, development and/or commercialization of demcizumab, or our other unpartnered research and preclinical assets. We face significant competition in seeking appropriate strategic partners, and the negotiation process to secure appropriate terms is time-consuming and complex. Any delays in identifying suitable development partners and entering into agreements to develop our product candidates could also delay the commercialization of our product candidates, which may reduce their competitiveness even if they reach the market. Moreover, we may not be successful in our efforts to establish such a strategic partnership for any future product candidates and programs on terms that are acceptable to us, or at all. This may be because our product candidates and programs may be deemed to be at too early of a stage of development for collaborative effort, our research and development pipeline may be viewed as insufficient, and/or third parties may not view our product candidates and programs as having sufficient potential for commercialization, including the likelihood of an adequate safety and efficacy profile. Even if we are successful in entering into a strategic alliance or license arrangement, there is no guarantee that the collaboration will be successful, or that any future partner will commit sufficient resources to the development, regulatory approval, and commercialization effort for such products, or that such alliances will result in us achieving revenues that justify such transactions.

We may engage in strategic transactions that could impact our liquidity, increase our expenses and present significant distractions to our management.

From time to time, we may consider strategic transactions, such as acquisitions of companies, asset purchases, and out-licensing or in-licensing of products, product candidates or technologies. Additional potential transactions that we may consider include a variety of different business arrangements, including spin-offs, strategic partnerships, joint ventures, restructurings, divestitures, business combinations and investments. Any such transaction may require us to incur non-recurring or other charges, may increase our near- and long-term expenditures and may pose significant integration challenges or disrupt our management or business, which could adversely affect our operations and financial results. For example, these transactions may entail numerous operational and financial risks, including:

 

  n  

exposure to unknown liabilities;

 

  n  

disruption of our business and diversion of our management’s time and attention in order to develop acquired products, product candidates or technologies;

 

  n  

incurrence of substantial debt or dilutive issuances of equity securities to pay for acquisitions;

 

  n  

higher-than-expected acquisition and integration costs;

 

  n  

write-downs of assets or goodwill or impairment charges;

 

  n  

increased amortization expenses;

 

  n  

difficulty and cost in combining the operations and personnel of any acquired businesses with our operations and personnel;

 

  n  

impairment of relationships with key suppliers or customers of any acquired businesses due to changes in management and ownership; and

 

  n  

inability to retain key employees of any acquired businesses.

Accordingly, although there can be no assurance that we will undertake or successfully complete any transactions of the nature described above, any transactions that we do complete may be subject to the foregoing or other risks, could have a material adverse effect on our business, results of operations, financial condition and prospects.

We are highly dependent on the services of our President and Chief Executive Officer, Paul J. Hastings, our Executive Vice President and Chief Scientific Officer, John Lewicki, Ph.D., our Senior Vice President and Chief Medical Officer, Jakob Dupont, M.D., and other key executives, and if we are not able to retain these members of our management or recruit additional management, clinical and scientific personnel, our business will suffer.

We may not be able to attract or retain qualified management and scientific and clinical personnel in the future due to the intense competition for qualified personnel among biotechnology, pharmaceutical and other businesses,

 

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particularly in the San Francisco Bay area. Our industry has experienced a high rate of turnover of management personnel in recent years. If we are not able to attract, retain and motivate necessary personnel to accomplish our business objectives, we may experience constraints that will significantly impede the achievement of our development objectives, our ability to raise additional capital and our ability to implement our business strategy.

We are highly dependent on the principal members of our management and scientific staff. The loss of service of any of our management could harm our business. In addition, we are dependent on our continued ability to attract, retain and motivate highly qualified additional management, clinical and scientific personnel. The competition for qualified personnel in the pharmaceutical industry is intense. Due to our limited resources, we may not be able to effectively attract and recruit additional qualified personnel. If we are not able to retain our management, particularly our President and Chief Executive Officer, Mr. Hastings, our Executive Vice President and Chief Scientific Officer, Dr. Lewicki, and our Senior Vice President and Chief Medical Officer, Dr. Dupont, and to attract, on acceptable terms, additional qualified personnel necessary for the continued development of our business, we may not be able to sustain our operations or grow. Although we have executed employment agreements with each member of our current executive management team, including Mr. Hastings and Drs. Lewicki and Dupont, these agreements are terminable at will with or without notice and, therefore, we may not be able to retain their services as expected. In addition to the competition for personnel, the San Francisco Bay area in particular is characterized by a high cost of living. As such, we could have difficulty attracting experienced personnel to our company and may be required to expend significant financial resources in our employee recruitment and retention efforts.

In addition, we have scientific and clinical advisors who assist us in formulating our product development and clinical strategies. These advisors are not our employees and may have commitments to, or consulting or advisory contracts with, other entities that may limit their availability to us, or may have arrangements with other companies to assist in the development of products that may compete with ours.

We may be subject to costly product liability claims related to our clinical trials and product candidates and, if we are unable to obtain adequate insurance or are required to pay for liabilities resulting from a claim excluded from, or beyond the limits of, our insurance coverage, a material liability claim could adversely affect our financial condition.

Because we conduct clinical trials with human patients, we face the risk that the use of our product candidates may result in adverse side effects to patients in our clinical trials. We face even greater risks upon any commercialization of our product candidates. Although we have product liability insurance, which covers our clinical trials, for up to $10.0 million, our insurance may be insufficient to reimburse us for any expenses or losses we may suffer, and we will be required to increase our product liability insurance coverage for our advanced clinical trials that we plan to initiate. We do not know whether we will be able to continue to obtain product liability coverage and obtain expanded coverage if we require it, on acceptable terms, or at all. We may not have sufficient resources to pay for any liabilities resulting from a claim excluded from, or beyond the limits of, our insurance coverage. Where we have provided indemnities in favor of third parties under our agreements with them, there is also a risk that these third parties could incur liability and bring a claim under such indemnities. An individual may bring a product liability claim against us alleging that one of our product candidates or products causes, or is claimed to have caused, an injury or is found to be unsuitable for consumer use. Any product liability claim brought against us, with or without merit, could result in:

 

  n  

withdrawal of clinical trial volunteers, investigators, patients or trial sites;

 

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the inability to commercialize our product candidates;

 

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decreased demand for our product candidates;

 

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regulatory investigations that could require costly recalls or product modifications;

 

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loss of revenues;

 

  n  

substantial costs of litigation;

 

  n  

liabilities that substantially exceed our product liability insurance, which we would then be required to pay ourselves;

 

  n  

an increase in our product liability insurance rates or the inability to maintain insurance coverage in the future on acceptable terms, if at all;

 

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the diversion of management’s attention from our business; and

 

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damage to our reputation and the reputation of our products.

 

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Product liability claims may subject us to the foregoing and other risks, which could have a material adverse effect on our business, results of operations, financial condition and prospects.

Our business involves the use of hazardous materials and we and our third-party manufacturers must comply with environmental laws and regulations, which may be expensive and restrict how we do business.

Our third-party manufacturers’ activities and our own activities involve the controlled storage, use and disposal of hazardous materials, including the components of our pharmaceutical product candidates, test samples and reagents, biological materials and other hazardous compounds. We and our manufacturers are subject to federal, state, local and foreign laws and regulations governing the use, generation, manufacture, storage, handling and disposal of these hazardous materials. We currently carry no insurance specifically covering environmental claims relating to the use of hazardous materials. Although we believe that our safety procedures for handling and disposing of these materials and waste products comply with the standards prescribed by these laws and regulations, we cannot eliminate the risk of accidental injury or contamination from the use, storage, handling or disposal of hazardous materials. In the event of an accident, state or federal or other applicable authorities may curtail our use of these materials and/or interrupt our business operations. In addition, if an accident or environmental discharge occurs, or if we discover contamination caused by prior operations, including by prior owners and operators of properties we acquire, we could be liable for cleanup obligations, damages and fines. If such unexpected costs are substantial, this could significantly harm our financial condition and results of operations.

Our internal computer systems, or those of our CROs or other contractors or consultants, may fail or suffer security breaches, which could result in a material disruption of our product development programs.

Despite the implementation of security measures, our internal computer systems and those of our CROs and other contractors and consultants are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. While we have not experienced any such system failure, accident or security breach to date, if such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our programs. For example, the loss of clinical trial data from completed or ongoing clinical trials for any of our product candidates could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. To the extent that any disruption or security breach results in a loss of or damage to our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability and the further development of our product candidates could be delayed.

Our employees may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements.

We are exposed to the risk of employee fraud or other misconduct. Misconduct by employees could include intentional failures to comply with FDA regulations, provide accurate information to the FDA, comply with manufacturing standards we have established, comply with federal and state healthcare fraud and abuse laws and regulations, report financial information or data accurately or disclose unauthorized activities to us. In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Employee misconduct could also involve the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to our reputation. It is not always possible to identify and deter employee misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of significant fines or other sanctions.

Requirements associated with being a public company will increase our costs significantly, as well as divert significant company resources and management attention.

Prior to this offering, we have not been subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, or the other rules and regulations of the SEC or any securities exchange

 

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relating to public companies. We are working with our legal, independent accounting and financial advisors to identify those areas in which changes should be made to our financial and management control systems to manage our growth and our obligations as a public company. These areas include corporate governance, corporate control, disclosure controls and procedures and financial reporting and accounting systems. We have made, and will continue to make, changes in these and other areas. However, the expenses that will be required in order to adequately prepare for being a public company could be material, particularly after we cease to be an “emerging growth company.” Compliance with the various reporting and other requirements applicable to public companies will also require considerable time and attention of management. In addition, the changes we make may not be sufficient to allow us to satisfy our obligations as a public company on a timely basis.

However, for as long as we remain an “emerging growth company” as defined in the Jumpstart our Business Startups Act, or the JOBS Act, we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We may take advantage of these reporting exemptions until we are no longer an “emerging growth company.” Because the JOBS Act has only recently been enacted, it is not yet clear whether investors will accept the more limited disclosure requirements that we may be entitled to follow while we are an “emerging growth company.” If they do not, we may end up electing to comply with disclosure requirements as if we were not an “emerging growth company,” in which case we would incur the greater expenses associated with such disclosure requirements.

We will remain an “emerging growth company” for up to five years after the completion of this offering, although if the market value of our common stock that is held by non-affiliates exceeds $700 million as of any June 30 before that time or if we have total annual gross revenues of $1 billion or more during any fiscal year before that time, we would cease to be an “emerging growth company” as of the end of that fiscal year, or if we issue more than $1 billion in non-convertible debt in a three-year period, we would cease to be an “emerging growth company” immediately.

In addition, being a public company could make it more difficult or more costly for us to obtain certain types of insurance, including directors’ and officers’ liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers.

If we are not able to implement the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 in a timely manner or with adequate compliance, we may be subject to sanctions by regulatory authorities.

Section 404 of the Sarbanes-Oxley Act of 2002 requires that we evaluate and determine the effectiveness of our internal controls over financial reporting and, beginning with our annual report for fiscal year 2013, provide a management report on the internal control over financial reporting. If we have a material weakness in our internal control over financial reporting, we may not detect errors on a timely basis and our financial statements may be materially misstated. We will be evaluating our internal controls systems to allow management to report on, and eventually allow our independent auditors to attest to, our internal controls. We will be performing the system and process evaluation and testing (and any necessary remediation) required to comply with the management certification and eventual auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002. The aforementioned auditor attestation requirements will not apply to us until we are not an “emerging growth company.”

We cannot be certain as to the timing of completion of our evaluation, testing and remediation actions or the impact of the same on our operations. If we are not able to implement the requirements of Section 404 in a timely manner or with adequate compliance, we may be subject to sanctions or investigation by regulatory authorities, such as the SEC or The NASDAQ Stock Market LLC, or NASDAQ. Any such action could adversely affect our financial results or investors’ confidence in us and could cause our stock price to fall. Moreover, if we are not able to comply with the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm identifies deficiencies in our internal controls that are deemed to be material weaknesses, we could be subject to sanctions or investigations by NASDAQ, the SEC or other regulatory authorities, which would entail expenditure of

 

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additional financial and management resources and could materially adversely affect our stock price. Inferior internal controls could also cause us to fail to meet our reporting obligations or cause investors to lose confidence in our reported financial information, which could have a negative effect on our stock price.

Our ability to utilize our net operating loss carryforwards and certain other tax attributes may be limited.

We have incurred substantial losses during our history and do not expect to become profitable in 2012 and may never achieve profitability. To the extent that we continue to generate taxable losses, unused losses will carry forward to offset future taxable income, if any, until such unused losses expire. We may be unable to use these losses to offset income before such unused losses expire. Under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, if a corporation undergoes an “ownership change” (generally defined as a greater than 50% change (by value) in its equity ownership over a three-year period), the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes to offset its post-change income may be further limited. We do not believe that we will experience an ownership change as a result of this initial public offering. However, we may experience ownership changes in the future as a result of subsequent shifts in our stock ownership. As of December 31, 2011, we had federal and California net operating loss carryforwards of $88.6 million and $93.7 million, respectively, that could be limited if we experience an ownership change, which could have an adverse effect on our results of operations. These federal and California net operating loss carryforwards will expire commencing 2024 and 2014, respectively, if not utilized.

We may be adversely affected by the current global economic environment.

Our ability to attract and retain collaboration partners or customers, invest in and grow our business and meet our financial obligations depends on our operating and financial performance, which, in turn, is subject to numerous factors, including the prevailing economic conditions and financial, business and other factors beyond our control, such as the rate of unemployment, the number of uninsured persons in the United States and inflationary pressures. Our results of operations could be adversely affected by general conditions in the global economy and in the global financial markets. The recent global financial crisis caused extreme volatility and disruptions in the capital and credit markets. We cannot anticipate all the ways in which the current global economic climate and global financial market conditions could adversely impact our business.

We are exposed to risks associated with reduced profitability and the potential financial instability of our collaboration partners or customers, many of which may be adversely affected by volatile conditions in the financial markets. For example, unemployment and underemployment, and the resultant loss of insurance, may decrease the demand for healthcare services and pharmaceuticals. If fewer patients are seeking medical care because they do not have insurance coverage, our collaboration partners or customers may experience reductions in revenues, profitability and/or cash flow that could lead them to reduce their support of our programs or financing activities. If collaboration partners or customers are not successful in generating sufficient revenue or are precluded from securing financing, they may not be able to pay, or may delay payment of, accounts receivable that are owed to us. In addition, the volatility in the financial markets could cause significant fluctuations in the interest rate and currency markets. We currently do not hedge for these risks. The foregoing events, in turn, could adversely affect our financial condition and liquidity. In addition, if economic challenges in the United States result in widespread and prolonged unemployment, either regionally or on a national basis, prior to the effectiveness of certain provisions of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, collectively known as the Affordable Care Act, a substantial number of people may become uninsured or underinsured. To the extent economic challenges result in fewer individuals pursuing or being able to afford our product candidates once commercialized, our business, results of operations, financial condition and cash flows could be adversely affected.

Business disruptions could seriously harm our future revenues and financial condition and increase our costs and expenses.

Our operations could be subject to earthquakes, power shortages, telecommunications failures, floods, hurricanes, typhoons, fires, extreme weather conditions, medical epidemics and other natural or manmade disasters or business interruptions. The occurrence of any of these business disruptions could seriously harm our operations and financial condition and increase our costs and expenses. Our corporate headquarters is located in California and certain

 

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clinical sites for our product candidates, operations of our existing and future partners and suppliers are or will be located in California near major earthquake faults and fire zones. The ultimate impact on us, our significant partners, suppliers and our general infrastructure of being located near major earthquake faults and fire zones and being consolidated in certain geographical areas is unknown, but our operations and financial condition could suffer in the event of a major earthquake, fire or other natural or manmade disaster.

Risks Related to Intellectual Property

We or our collaborators may become subject to third parties’ claims alleging infringement of their patents and proprietary rights or seeking to invalidate our patents or proprietary rights, or we may need to become involved in lawsuits to protect or enforce our patents, which could be costly, time consuming, delay or prevent the development and commercialization of our product candidates, or put our patents and other proprietary rights at risk.

Litigation relating to infringement or misappropriation of patent and other intellectual property rights in the pharmaceutical and biotechnology industries is common. We or our collaborators may be subject to third-party claims in the future that would cause us to incur substantial expenses and which, if successful, could cause us to pay substantial damages, if we or our collaborators are found to be infringing a third party’s patent rights. These damages potentially include increased damages and attorneys’ fees if we are found to have infringed such rights willfully. Further, if a patent infringement suit is brought against us or our collaborators, our research, development, manufacturing or sales activities relating to the product or product candidate that is the subject of the suit may be delayed or terminated. As a result of patent infringement claims, or in order to avoid potential infringement claims, we or our collaborators may choose to seek, or be required to seek, a license from the third party, which would be likely to include a requirement to pay license fees or royalties or both. These licenses may not be available on acceptable terms, or at all. Even if a license can be obtained on acceptable terms, the rights may be nonexclusive, which would give our competitors access to the same intellectual property rights. If we are unable to enter into a license on acceptable terms, we or our collaborators could be prevented from commercializing one or more of our product candidates, or forced to modify such product candidates, or to cease some aspect of our business operations, which could harm our business significantly.

We are aware of U.S. and foreign issued patents and pending patent applications controlled by third parties that may relate to the areas in which we are developing product candidates. Because all issued patents are entitled to a presumption of validity in many countries, including the United States and many European countries, issued patents held by others that claim our products or technology may limit our freedom to operate unless and until these patents expire or are declared invalid or unenforceable in a court of applicable jurisdiction, if we do not obtain a license or other right to practice the claimed inventions. Pending patent applications controlled by third parties may result in additional issued patents claiming our products and technology. In addition, the publication of patent applications occurs with a certain delay after the date of filing, so we may not be aware of all relevant patent applications of third parties at a given point in time. Further, publication of discoveries in the scientific or patent literature often lags behind actual discoveries, so we may not be able to determine whether inventions claimed in patent applications of third parties have been made before or after the date on which inventions claimed in our patent applications and patents have been made. If third parties prepare and file patent applications in the United States that also claim technology or therapeutics claimed by our patent applications or patents, we may have to participate in interference proceedings in the U.S. Patent and Trademark Office, or USPTO, to determine the priority of invention. An unfavorable outcome could require us to attempt to license rights from the prevailing party, or to cease using the related technology or developing or commercializing the related product candidate. We may also become involved in opposition proceedings in the European Patent Office regarding our intellectual property rights with respect to our product candidates and technology.

Competitors may infringe our patents, or misappropriate or violate our other intellectual property rights. To counter infringement or unauthorized use, we may find it necessary to file infringement or other claims to protect our intellectual property rights. In addition, in any infringement proceeding brought by us against a third party to enforce our rights, a court may decide that a patent of ours is invalid or unenforceable, or may refuse to stop the other party from using the technology at issue on the basis that our patents do not cover the technology in question. An adverse result in any such litigation proceeding could put one or more of our patents at risk of being invalidated or interpreted narrowly, which could open us up to additional competition and have a material adverse effect on our business.

 

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The cost to us of any patent litigation or other proceedings, such as interference proceedings, which are meant to determine who first invented any of the claims covered by the patent, even if resolved in our favor, could be substantial. Such litigation or proceedings could substantially increase our operating losses and reduce our resources available for development activities. We may not have sufficient financial or other resources to adequately conduct such litigation or proceedings. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their substantially greater financial resources. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments, and, if securities analysts or investors perceive these results to be negative, there could be a substantial adverse effect on the price of our common stock. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace. Patent litigation and other proceedings may also require significant time and attention of management and technical staff, which may materially and adversely impact our financial position and results of operations. Furthermore, because of the substantial amount of discovery required in connection with any intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation.

Our proprietary rights may not adequately protect our technologies and product candidates. If we are unable to protect our product candidates and our intellectual property rights, it may materially and adversely affect our position in the market.

Our commercial success will depend on our ability to obtain patents and maintain adequate protection for our technologies, intellectual property and product candidates in the United States and other countries. As of March 31, 2012, our patent estate, including the patents and patent applications that we have exclusively licensed from the Regents of the University of Michigan, included approximately 29 issued patents or allowed patent applications and approximately 188 additional pending patent applications on a worldwide basis, which, as a whole, include claims relating to our current clinical stage product candidates. There is no guarantee that any of our patent applications will result in issued patents, or that any patents, if issued, will include claims that are sufficiently broad to cover our product candidates or products, or to provide meaningful protection from our competitors. We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary technologies and future products are covered by valid and enforceable patents or are effectively maintained as trade secrets within our organization. If third parties disclose or misappropriate our proprietary rights, it may materially and adversely impact our position in the market.

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 using our technologies or from developing competing products and technologies. Moreover, the patent positions of numerous biotechnology and pharmaceutical companies are highly uncertain and involve complex legal and factual questions for which important legal principles remain unresolved. As a result, the validity and enforceability of our patents cannot be predicted with certainty. In addition, we cannot guarantee you that:

 

  n  

we were the first to make the inventions covered by each of our issued patents and pending patent applications;

 

  n  

we were the first to file patent applications for these inventions;

 

  n  

others will not independently develop similar or alternative technologies or duplicate any of our technologies by inventing around our claims;

 

  n  

a third party will not challenge our proprietary rights, and if challenged that a court will hold that our patents are valid and enforceable;

 

  n  

any patents issued to us or our collaboration partners will cover our product as ultimately developed, or provide us with any competitive advantages, or will not be challenged by third parties;

 

  n  

we will develop additional proprietary technologies that are patentable; or

 

  n  

the patents of others will not have an adverse effect on our business.

In addition, there are numerous recent changes to the patent laws and proposed changes to the rules of the USPTO which may have a significant impact on our ability to protect our technology and enforce our intellectual property

 

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rights. For example, on September 16, 2011, President Obama signed the Leahy-Smith America Invents Act which codifies several significant changes to the U.S. patent laws, including, among other things, changing from a “first to invent’ to a “first inventor to file” system, limiting where a patentee may file a patent suit, eventually eliminating interference proceedings while maintaining derivation actions, and creating a post-grant opposition process to challenge patents after they have issued. The effects of these changes are currently uncertain as the USPTO must still implement various regulations, and the courts have yet to address any of these provisions in the context of a dispute. Further, we have not assessed the applicability of the act and new regulations on the specific patents discussed herein. As another example, the U.S. Supreme Court issued a decision on March 20, 2012 in Mayo Collaborative Services, DBA Mayo Medical Laboratories, et al. v. Prometheus Laboratories, Inc., holding that several claims drawn to measuring drug metabolite levels from patient samples and correlating them to drug doses were not patentable subject matter. The decision appears to impact diagnostics patents that merely apply a law of nature via a series of routine steps, but the full impact of the decision is not yet known and it has created uncertainty around the ability to patent certain biomarker-related claims.

Restrictions on our patent rights relating to our product candidates may limit our ability to prevent third parties from competing against us.

Our success will depend, in part, on our ability to obtain and maintain patent protection for our product candidates, preserve our trade secrets, prevent third parties from infringing upon our proprietary rights and operate without infringing upon the proprietary rights of others. Composition-of-matter patents on the biological or chemical active pharmaceutical ingredient are generally considered to be the strongest form of intellectual property protection for pharmaceutical products, as such patents provide protection without regard to any method of use. We have filed composition-of-matter patent applications for all of our product candidates. However, we cannot be certain that the claims in our patent applications to inventions covering our product candidates will be considered patentable by the USPTO and courts in the United States or by the patent offices and courts in foreign countries.

In addition to composition-of-matter patents and patent applications, we also have filed method-of-use patent applications. This type of patent protects the use of the product only for the specified method. However, this type of patent does not prevent a competitor from making and marketing a product that is identical to our product for an indication that is outside the scope of the patented method. Moreover, even if these competitors do not actively promote their product for our targeted indication, physicians may prescribe these products “off-label.” Although off-label prescriptions may infringe or contribute to the infringement of method-of-use patents, the practice is common and such infringement is difficult to prevent or prosecute.

Patent applications in the United States and most other countries are confidential for a period of time until they are published, and publication of discoveries in scientific or patent literature typically lags actual discoveries by several months or more. As a result, we cannot be certain that we and the inventors of the issued patents and applications that we may in-license were the first to conceive of the inventions covered by such patents and pending patent applications or that we and those inventors were the first to file patent applications covering such inventions. Also, we have a number of issued patents and numerous patent applications pending before the USPTO and foreign patent offices and the patent protection may lapse before we manage to obtain commercial value from them, which might result in increased competition and materially affect our position in the market.

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 and technologies 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 where enforcement is not as strong as that in the United States. These products may compete with our future 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

 

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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.

If we fail to comply with our obligations in our intellectual property licenses with third parties, we could lose license rights that are important to our business.

We are a party to intellectual property license agreements with third parties, including with respect to demcizumab, anti-Notch2/3 (OMP-59R5), anti-Notch1 (OMP-52M51), anti-Fzd7 (OMP-18R5) and the production of all of our biologic product candidates, and expect to enter into additional license agreements in the future. Our existing license agreements impose, and we expect that our future license agreements will impose, various diligence, milestone payment, royalty, insurance, indemnification and other obligations on us. If we fail to comply with these obligations, our licensors may have the right to terminate these agreements, in which event we, or our collaborators, might not be able to develop and market any product candidate that is covered by these agreements. Termination of these licenses or reduction or elimination of our licensed rights may result in our having to negotiate new or reinstated licenses with less favorable terms, or in the inability to obtain access to the licensed technology at all. The occurrence of such events could materially harm our business.

Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.

The USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other provisions during the patent process. There are situations in which noncompliance can result in abandonment or lapse of a patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, competitors might be able to enter the market earlier than would otherwise have been the case.

If our trademarks and trade names are not adequately protected, then we may not be able to build name recognition in our markets of interest and our business may be adversely affected.

Our registered or unregistered trademarks or trade names may be challenged, infringed, circumvented or declared generic or determined to be infringing on other marks. We may not be able to protect our rights to these trademarks and trade names, which we need to build name recognition by potential partners or customers in our markets of interest. Over the long term, if we are unable to establish name recognition based on our trademarks and trade names, then we may not be able to compete effectively and our business may be adversely affected.

We may be subject to claims that we or our employees or consultants have wrongfully used or disclosed alleged trade secrets of our employees’ or consultants’ former employers or their clients. These claims may be costly to defend and if we do not successfully do so, we may be required to pay monetary damages and may lose valuable intellectual property rights or personnel.

Many of our employees were previously employed at universities or biotechnology or pharmaceutical companies, including our competitors or potential competitors. Although no claims against us are currently pending, we may be subject to claims that these employees or we have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. If we fail in defending such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. A loss of key research personnel or their work product could hamper our ability to commercialize, or prevent us from commercializing our product candidates, which could severely harm our business. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management.

If we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed.

In addition to seeking patents for some of our technology and product candidates, we also rely on trade secrets, including unpatented know-how, technology and other proprietary information, to maintain our competitive position. We seek to protect these trade secrets, in part, by entering into non-disclosure and confidentiality agreements with

 

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parties who have access to them, such as our employees, corporate collaborators, outside scientific collaborators, contract manufacturers, consultants, advisors and other third parties. We also enter into confidentiality and invention or patent assignment agreements with our employees and consultants that obligate them to assign their inventions to us. Despite these efforts, any of these parties may breach the agreements and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, some courts inside and outside the United States, including in foreign jurisdictions, are less willing or unwilling to protect trade secrets. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor, we would have no right to prevent them from using that technology or information to compete with us. If any of our trade secrets were to be disclosed to or independently developed by a competitor, our competitive position would be harmed.

Risks Related to Government Regulation

The regulatory approval process is expensive, time consuming and uncertain and may prevent us or our collaboration partners from obtaining approvals for the commercialization of some or all of our product candidates.

The development, research, testing, manufacturing, labeling, approval, selling, import, export, marketing and distribution of drug and biologic products are subject to extensive and evolving regulation by federal, state and local governmental authorities in the United States, principally by the FDA, and foreign regulatory authorities. which regulations differ from country to country. Neither we nor our collaboration partners are permitted to market our product candidates in the United States until we receive regulatory approval from the FDA. Our product candidates are subject to regulation as biologics, and we will require approval of a BLA from the FDA before we may market our product candidates. Neither we nor our collaboration partners have submitted an application for or received marketing approval for any of our product candidates. Obtaining approval of a BLA can be a lengthy, expensive and uncertain process. In addition, failure to comply with FDA and other applicable U.S. and foreign regulatory requirements may subject us to administrative or judicially imposed sanctions, including:

 

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warning letters;

 

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civil and criminal penalties;

 

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injunctions;

 

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withdrawal of approved products;

 

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product seizure or detention;

 

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product recalls;

 

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total or partial suspension of production; and

 

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refusal to approve pending BLAs or supplements to approved BLAs.

Prior to receiving approval to commercialize any of our product candidates in the United States or abroad, we and our collaboration partners must demonstrate with substantial evidence from well-controlled clinical trials, and to the satisfaction of the FDA and other regulatory authorities abroad, that such product candidates are safe and effective for their intended uses. Preclinical testing and clinical trials are long, expensive and uncertain processes. We may spend several years completing our testing for any particular product candidate, and failure can occur at any stage. Negative or inconclusive results or adverse medical events during a clinical trial could also cause the FDA or us to terminate a clinical trial or require that we repeat it or conduct additional clinical trials. Additionally, data obtained from preclinical studies and clinical trials can be interpreted in different ways and the FDA or other regulatory authorities may interpret the results of our studies and trials less favorably than we do. Even if we and our collaboration partners believe the preclinical or clinical data for our product candidates are promising, such data may not be sufficient to support approval by the FDA and other regulatory authorities. Administering any of our product candidates to humans may produce undesirable side effects, which could interrupt, delay or halt clinical trials of our product candidates and result in the FDA or other regulatory authorities denying approval of our product candidates for any or all targeted indications.

Regulatory approval of our product candidates is not guaranteed, and the approval process is expensive and may take several years. The FDA and foreign regulatory entities also have substantial discretion in the approval process.

 

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Despite the time and expense exerted, failure can occur at any stage, and we could encounter problems that cause us to abandon or repeat clinical trials, or perform additional preclinical studies and clinical trials. The number of preclinical studies and clinical trials that will be required for FDA approval varies depending on the product candidate, the disease or condition that the product candidate is designed to address, and the regulations applicable to any particular product candidate. The FDA can delay, limit or deny approval of a product candidate for many reasons, including, but not limited to, the following:

 

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a product candidate may not be deemed safe or effective;

 

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FDA officials may not find the data from preclinical studies and clinical trials sufficient;

 

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the FDA might not approve our or our third-party manufacturer’s processes or facilities; or

 

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the FDA may change its approval policies or adopt new regulations.

If any of our product candidates fails to demonstrate safety and efficacy in clinical trials or does not gain regulatory approval, our business and results of operations will be materially and adversely harmed.

Even if we or our collaboration partners receive regulatory approval for a product candidate, we and our collaboration partners will be subject to ongoing regulatory obligations and continued regulatory review, which may result in significant additional expense and subject us to penalties if we fail to comply with applicable regulatory requirements.

Once regulatory approval has been granted, the approved product and its manufacturer are subject to continual review by the FDA and/or non-U.S. regulatory authorities. Any regulatory approval that we or our collaboration partners receive for our product candidates may be subject to limitations on the indicated uses for which the product may be marketed or contain requirements for potentially costly post-marketing follow-up studies to monitor the safety and efficacy of the product. In addition, if the FDA and/or non-U.S. regulatory authorities approve any of our product candidates, we will be subject to extensive and ongoing regulatory requirements by the FDA and other regulatory authorities with regard to the labeling, packaging, adverse event reporting, storage, advertising, promotion and recordkeeping for our products. Manufacturers of our products are required to comply with cGMP regulations, which include requirements related to quality control and quality assurance as well as the corresponding maintenance of records and documentation. Further, regulatory authorities must approve these manufacturing facilities before they can be used to manufacture our products, and these facilities are subject to continual review and periodic inspections by the FDA and other regulatory authorities for compliance with cGMP regulations. If we, a collaboration partner or a regulatory authority discovers previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured, a regulatory authority may impose restrictions on that product, the collaboration partner, the manufacturer or us, including requiring withdrawal of the product from the market or suspension of manufacturing. If we, our product candidates or the manufacturing facilities for our product candidates fail to comply with regulatory requirements of the FDA and/or other non-U.S. regulatory authorities, we could be subject to administrative or judicially imposed sanctions, including:

 

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warning letters;

 

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civil or criminal penalties;

 

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injunctions;

 

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suspension of or withdrawal of regulatory approval;

 

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suspension of any ongoing clinical trials;

 

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voluntary or mandatory product recalls and publicity requirements;

 

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refusal to approve pending applications for marketing approval of new products or supplements to approved applications filed by us;

 

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restrictions on operations, including costly new manufacturing requirements; or

 

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seizure or detention of our products or import bans.

The regulatory requirements and policies may change and additional government regulations may be enacted for which we may also be required to comply. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the United States or in other

 

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countries. If we or our collaboration partners are not able to maintain regulatory compliance, we or our collaboration partners, as applicable, will not be permitted to market our future products and our business will suffer.

The availability of adequate third-party coverage and reimbursement for newly approved products is uncertain, and failure to obtain adequate coverage and reimbursement from third-party payors could impede our ability to market any future products we may develop and could limit our ability to generate revenue.

There is significant uncertainty related to the third-party payor coverage and reimbursement of newly approved medical products. The commercial success of our future products in both domestic and international markets depends on whether such third-party coverage and reimbursement is available for our future products. Governmental payors, including Medicare and Medicaid, health maintenance organizations and other third-party payors are increasingly attempting to manage their healthcare expenditures by limiting both coverage and the level of reimbursement of new drugs and biologics and, as a result, they may not cover or provide adequate reimbursement for our future products. These payors may not view our future products as cost-effective, and coverage and reimbursement may not be available to our customers or may not be sufficient to allow our future products to be marketed on a competitive basis. Third-party payors are exerting increasing influence on decisions regarding the use of, and coverage and reimbursement levels for, particular treatments. Such third-party payors, including Medicare, are challenging the prices charged for medical products and services, and many third-party payors limit or delay coverage and reimbursement for newly approved healthcare products. In particular, third-party payors may limit the covered indications. Cost-control initiatives could cause us to decrease the price we might establish for products, which could result in lower than anticipated product revenues. If we decrease the prices for our product candidates because of competitive pressures or if governmental and other third-party payors do not provide adequate coverage or reimbursement, our prospects for revenue and profitability will suffer.

Failure to obtain regulatory approvals in foreign jurisdictions will prevent us from marketing our product candidates internationally.

We may seek a distribution and marketing partner for demcizumab or our other unpartnered programs outside North America and may market future products in international markets. In order to market our product candidates in the European Economic Area, or EEA (which is comprised of the 27 Member States of the EU plus Norway, Iceland and Liechtenstein), and many other foreign jurisdictions, we or our collaboration partners must obtain separate regulatory approvals. More concretely, in the EEA, medicinal products can only be commercialized after obtaining a Marketing Authorization, or MA. There are two types of marketing authorizations:

 

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The Community MA, which is issued by the European Commission through the Centralized Procedure, based on the opinion of the Committee for Medicinal Products for Human Use of the European Medicines Agency, or EMA, and which is valid throughout the entire territory of the EEA. The Centralized Procedure is mandatory for certain types of products, such as biotechnology medicinal products, orphan medicinal products, and medicinal products indicated for the treatment of AIDS, cancer, neurodegenerative disorders, diabetes, auto-immune and viral diseases. The Centralized Procedure is optional for products containing a new active substance not yet authorized in the EEA, or for products that constitute a significant therapeutic, scientific or technical innovation or which are in the interest of public health in the EU.

 

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National MAs, which are issued by the competent authorities of the Member States of the EEA and only cover their respective territory, are available for products not falling within the mandatory scope of the Centralized Procedure. Where a product has already been authorized for marketing in a Member State of the EEA, this National MA can be recognized in another Member State through the Mutual Recognition Procedure. If the product has not received a National MA in any Member State at the time of application, it can be approved simultaneously in various Member States through the Decentralized Procedure.

Under the above described procedures, before granting the MA, the EMA or the competent authorities of the Member States of the EEA make an assessment of the risk-benefit balance of the product on the basis of scientific criteria concerning its quality, safety and efficacy.

We have had limited interactions with foreign regulatory authorities, and the approval procedures vary among countries and can involve additional clinical testing, and the time required to obtain approval may differ from that required to obtain FDA approval. Clinical trials conducted in one country may not be accepted by regulatory

 

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authorities in other countries. Approval by the FDA does not ensure approval by regulatory authorities in other countries, and approval by one or more foreign regulatory authorities does not ensure approval by regulatory authorities in other foreign countries or by the FDA. However, a failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory process in others. The foreign regulatory approval process may include all of the risks associated with obtaining FDA approval. We or our collaboration partners may not obtain foreign regulatory approvals on a timely basis, if at all. We or our collaboration partners may not be able to file for regulatory approvals and even if we or our collaboration partners file, we may not receive necessary approvals to commercialize our product candidates in any market.

Healthcare reform measures could hinder or prevent our product candidates’ commercial success.

In the United States, there have been, and we expect there will continue to be, a number of legislative and regulatory changes to the healthcare system that could affect our future revenues and profitability and the future revenues and profitability of our potential customers. Federal and state lawmakers regularly propose and, at times, enact legislation that results in significant changes to the healthcare system, some of which are intended to contain or reduce the costs of medical products and services. For example, in March 2010, the President signed one of the most significant healthcare reform measures in decades, the Affordable Care Act. It contains a number of provisions, including those governing enrollment in federal healthcare programs, reimbursement changes and fraud and abuse measures, all of which will impact existing government healthcare programs and will result in the development of new programs. The Affordable Care Act, among other things:

 

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imposes a non-deductible annual fee on pharmaceutical manufacturers or importers who sell “branded prescription drugs”;

 

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increases the minimum level of Medicaid rebates payable by manufacturers of brand-name drugs from 15.1% to 23.1%;

 

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requires collection of rebates for drugs paid by Medicaid managed care organizations;

 

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requires manufacturers to participate in a coverage gap discount program, under which they must agree to offer 50% point-of-sale discounts off negotiated prices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for the manufacturer’s outpatient drugs to be covered under Medicare Part D; and

 

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mandates a further shift in the burden of Medicaid payments to the states.

The mandatory purchase of insurance has been strenuously opposed by a number of state governors, resulting in lawsuits challenging the constitutionality of these provisions, which are still pending final adjudication in several jurisdictions. On June 28, 2012, the United States Supreme Court upheld the constitutionality of these provisions of the Affordable Care Act. Congress has also proposed a number of legislative initiatives, including possible repeal of the Affordable Care Act. At this time, it remains unclear whether there will be any changes made to the Affordable Care Act, whether to certain provisions or its entirety. We cannot assure you that the Affordable Care Act, as currently enacted or as amended in the future, will not adversely affect our business and financial results and we cannot predict how future federal or state legislative or administrative changes relating to healthcare reform will affect our business.

In addition, other legislative changes have been proposed and adopted since the Affordable Care Act was enacted. Most recently, on August 2, 2011, the President signed into law the Budget Control Act of 2011, which, among other things, created the Joint Select Committee on Deficit Reduction to recommend proposals in spending reductions to Congress. The Joint Select Committee did not achieve its targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, triggering the legislation’s automatic reductions to several government programs. These reductions include aggregate reductions to Medicare payments to providers of up to 2% per fiscal year, starting in 2013. More recently, on September 19, 2011, President Obama presented his Plan for Economic Growth and Deficit Reduction to the Joint Select Committee, which includes $248 billion in Medicare savings over ten years ($240 billion of which comes from reducing and collecting Medicare payments incorrectly paid) and $73 billion in savings in Medicaid and other health programs. Beginning in 2017, the President’s proposal also shifts more of the Medicare costs to newly enrolled beneficiaries, including an increase in patient deductibles under Medicare Part B for certain beneficiaries, and increases Part B and Part D premiums for higher-income beneficiaries.

 

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There likely will continue to be legislative and regulatory proposals at the federal and state levels directed at containing or lowering the cost of health care. We cannot predict the initiatives that may be adopted in the future or their full impact. The continuing efforts of the government, insurance companies, managed care organizations and other payors of healthcare services to contain or reduce costs of health care may adversely affect:

 

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our ability to set a price we believe is fair for our products;

 

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our ability to generate revenues and achieve or maintain profitability; and

 

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the availability of capital.

In light of widely publicized events concerning the safety risk of certain drug products, regulatory authorities, members of Congress, the Governmental Accounting Office, medical professionals and the general public have raised concerns about potential drug safety issues. These events have resulted in the withdrawal of drug products, revisions to drug labeling that further limit use of the drug products and establishment of risk management programs that may, for instance, restrict distribution of drug products. The increased attention to drug safety issues may result in a more cautious approach by the FDA to clinical trials and the drug approval process. Data from clinical trials may receive greater scrutiny with respect to safety, which may make the FDA or other regulatory authorities more likely to terminate clinical trials before completion, or require longer or additional clinical trials that may result in substantial additional expense and a delay or failure in obtaining approval or approval for a more limited indication than originally sought. In, addition, because of the serious public health risks of high profile adverse safety events with certain products, the FDA may require, as a condition of approval, costly risk management programs which may include safety surveillance, restricted distribution and use, patient education, enhanced labeling, special packaging or labeling, expedited reporting of certain adverse events, preapproval of promotional materials and restrictions on direct-to-consumer advertising.

Our therapeutic product candidates for which we intend to seek approval as biologic products may face competition sooner than anticipated.

With the enactment of the Biologics Price Competition and Innovation Act of 2009, or BPCIA, as part of the Affordable Care Act, an abbreviated pathway for the approval of biosimilar and interchangeable biological products was created. The new abbreviated regulatory pathway establishes legal authority for the FDA to review and approve biosimilar biologics, including the possible designation of a biosimilar as “interchangeable” based on their similarity to existing brand product. Under the BPCIA, an application for a biosimilar product cannot be approved by the FDA until 12 years after the original branded product was approved under a BLA. The new law is complex and is only beginning to be interpreted and implemented by the FDA. As a result, its ultimate impact, implementation and meaning is subject to uncertainty. While it is uncertain when any such processes may be fully adopted by the FDA, any such processes could have a material adverse effect on the future commercial prospects for our biological products.

We believe that any of our product candidates approved as a biological product under a BLA should qualify for the 12-year period of exclusivity. However, there is a risk that the U.S. Congress could amend the BPCIA to significantly shorten this exclusivity period, which has been proposed by President Obama, or that the FDA will not consider our product candidates to be reference products for competing products, potentially creating the opportunity for generic competition sooner than anticipated. Moreover, the extent to which a biosimilar, once approved, will be substituted for any one of our reference products in a way that is similar to traditional generic substitution for non-biological products is not yet clear, and will depend on a number of marketplace and regulatory factors that are still developing.

In addition, foreign regulatory authorities may also provide for exclusivity periods for approved biological products. For example, biological products in Europe may be eligible for a 10-year period of exclusivity. However, biosimilar products have been approved under a sub-pathway of the centralized procedure since 2006. The pathway allows sponsors of a biosimilar product to seek and obtain regulatory approval based in part on the clinical trial data of an originator product to which the biosimilar product has been demonstrated to be “similar.” In many cases, this allows biosimilar products to be brought to market without conducting the full suite of clinical trials typically required of originators. It is unclear whether we would face competition to our products in European markets sooner than anticipated.

 

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If we fail to comply with healthcare regulations, we could face substantial penalties and our business, operations and financial condition could be adversely affected.

Even though we do not and will not control referrals of healthcare services or bill directly to Medicare, Medicaid or other third-party payors, certain federal and state healthcare laws and regulations pertaining to fraud and abuse and patients’ rights are and will be applicable to our business. We could be subject to healthcare fraud and abuse and patient privacy regulation by both the federal government and the states in which we conduct our business. The regulations that may affect our ability to operate include, without limitation:

 

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the federal Anti-Kickback Statute, which prohibits, among other things, any person from knowingly and willfully offering, soliciting, receiving or providing remuneration, directly or indirectly, to induce either the referral of an individual, for an item or service or the purchasing or ordering of a good or service, for which payment may be made under federal healthcare programs such as the Medicare and Medicaid programs;

 

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the federal False Claims Act, which prohibits, among other things, individuals or entities from knowingly presenting, or causing to be presented, false claims, or knowingly using false statements, to obtain payment from the federal government, and which may apply to entities that provide coding and billing advice to customers;

 

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federal criminal laws that prohibit executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters;

 

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the federal Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act, which governs the conduct of certain electronic healthcare transactions and protects the security and privacy of protected health information; and

 

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state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payor, including commercial insurers.

The recently enacted Affordable Care Act, among other things, amends the intent requirement of the Federal Anti-Kickback Statute and criminal healthcare fraud statutes. A person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it. In addition, the Affordable Care Act provides that the government may assert that a claim including items or services resulting from a violation of the Federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims Act.

If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines and the curtailment or restructuring of our operations. Any penalties, damages, fines, curtailment or restructuring of our operations could adversely affect our ability to operate our business and our financial results. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. Moreover, achieving and sustaining compliance with applicable federal and state privacy, security and fraud laws may prove costly.

Risks Related to Our Common Stock and This Offering

The price of our common stock may be volatile, and you may not be able to resell your shares at or above the initial public offering price.

The initial public offering price for the shares of our common stock sold in this offering has been determined by negotiation between the underwriters and us. This price may not reflect the market price of our common stock following this offering. You may be unable to sell your shares of common stock at or above the initial public offering price due to fluctuations in the market price of our common stock. Factors that could cause volatility in the market price of our common stock include, but are not limited to:

 

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ability to commercialize or obtain regulatory approval for our product candidates, or delays in commercializing or obtaining regulatory approval;

 

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results from, or any delays in, clinical trial programs relating to our product candidates, including the ongoing and planned clinical trials for demcizumab (OMP-21M18), anti-Notch2/3 (OMP-59R5), anti-Fzd7 (OMP-18R5), Fzd8-Fc (OMP-54F28), anti-Notch1 (OMP-52M51) and other product candidates;

 

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  n  

any need to suspend or discontinue clinical trials due to side effects or other safety risks, or any need to conduct studies on the long-term effects associated with the use of our product candidates;

 

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announcements relating to future collaborations or our existing collaborations with GSK and/or Bayer, including decisions regarding the exercise by GSK or Bayer of their options or any termination by them of any development program under their partnerships with us;

 

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manufacturing issues related to our product candidates for clinical trials or future products for commercialization;

 

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commercial success and market acceptance of our product candidates following regulatory approval;

 

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undesirable side effects caused by product candidates after they have entered the market;

 

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ability to discover, develop and commercialize additional product candidates;

 

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success of our competitors in discovering, developing or commercializing products;

 

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strategic transactions undertaken by us;

 

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additions or departures of key personnel;

 

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product liability claims related to our clinical trials or product candidates;

 

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prevailing economic conditions;

 

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business disruptions caused by external factors, such as natural disasters and other crises;

 

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disputes concerning our intellectual property or other proprietary rights;

 

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FDA or other U.S. or foreign regulatory actions affecting us or our industry;

 

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healthcare reform measures in the United States;

 

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sales of our common stock by our officers, directors or significant stockholders;

 

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future sales or issuances of equity or debt securities by us;

 

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fluctuations in our quarterly operating results; and

 

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the issuance of new or changed securities analysts’ reports or recommendations regarding us.

In addition, the stock markets in general, and the markets for pharmaceutical, biopharmaceutical and biotechnology stocks in particular, have experienced extreme volatility that have 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.

Our principal stockholders and management own a significant percentage of our stock and will be able to exert significant control over matters subject to stockholder approval.

After this offering, our officers and directors, together with holders of 5% or more of our outstanding common stock and their respective affiliates, will beneficially own approximately             % of our common stock (assuming no exercise of the underwriters’ overallotment option). Accordingly, these stockholders, acting as a group, will continue to have significant influence over the outcome of corporate actions requiring stockholder approval, including the election of directors, any merger, consolidation or sale of all or substantially all of our assets or any other significant corporate transaction. The interests of these stockholders may not be the same as or may even conflict with your interests. For example, these stockholders could delay or prevent a change of control of our company, even if such a change of control would benefit our other stockholders, which could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company or our assets and might affect the prevailing market price of our common stock. The significant concentration of stock ownership may adversely affect the trading price of our common stock due to investors’ perception that conflicts of interest may exist or arise.

We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act, and may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth

 

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companies” including not being required to comply with the auditor attestation requirements of section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

In addition, Section 102 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. An “emerging growth company” can therefore delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we are choosing to “opt out” of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

Future sales of our common stock or securities convertible or exchangeable for our common stock may depress our stock price.

If our existing stockholders or holders of our options or warrants sell, or indicate an intention to sell, substantial amounts of our common stock in the public market after the lock-up and legal restrictions on resale discussed in this prospectus lapse, the trading price of our common stock could decline. The perception in the market that these sales may occur could also cause the trading price of our common stock to decline. Based on 126,721,575 shares of common stock outstanding as of June 30, 2012, upon the completion of this offering at an assumed initial public offering price of $                 per share, the midpoint of the range set forth on the cover page of this prospectus, we will have outstanding a total of                  shares of common stock, assuming no exercise of the underwriters’ overallotment option. Of these shares, only the shares of common stock sold by us in this offering, plus any shares sold upon exercise of the underwriters’ overallotment option, will be freely tradable without restriction, unless held by our affiliates, in the public market immediately following this offering. The underwriters may, however, in their sole discretion, permit our officers, directors and other stockholders and the holders of our outstanding options and warrants who are subject to the lock-up agreements to sell shares prior to the expiration of the lock-up agreements.

We expect that the lock-up agreements pertaining to this offering will expire 180 days from the date of this prospectus. After the lock-up agreements expire, up to an additional                  shares of common stock will be eligible for sale in the public market, subject to volume limitations under Rule 144 under the Securities Act of 1933, as amended, or the Securities Act, with respect to shares held by directors, executive officers and other affiliates. In addition,                  shares of common stock that are either subject to outstanding options or reserved for future issuance under our employee benefit plans will become eligible for sale in the public market to the extent permitted by the provisions of various vesting schedules, the lock-up agreements and Rule 144 and Rule 701 under the Securities Act and, in any event, we plan to file a registration statement permitting shares of common stock issued on exercise of options to be freely sold in the public market. If these additional shares of common stock are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline.

Certain holders of shares of our common stock, warrants to purchase our capital stock and the shares of common stock issuable upon exercise of those warrants will be entitled to rights with respect to the registration of their shares under the Securities Act, subject to the lock-up agreements described above. See “Description of Capital Stock—Registration Rights.” Registration of these shares under the Securities Act would result in the shares becoming freely tradable without restriction under the Securities Act, except for shares purchased by affiliates. In addition, after the lock-up agreements described above expire, our directors may and we expect that our executive officers will establish programmed selling plans under Rule 10b5-1 of the Exchange Act, for the purpose of effecting sales of our common stock. Any sales of securities by these stockholders, or the perception that those sales may occur, including the entry into such programmed selling plans, could have a material adverse effect on the trading price of our common stock.

 

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If there is no viable public market for our common stock, you may not be able to sell your shares at or above the initial public offering price.

Prior to this offering, there has been no public market for our common stock, and there can be no assurance that a regular trading market will develop and continue after this offering or that the market price of our common stock will not decline below the initial public offering price. The initial public offering price was determined through negotiations between us and the underwriters and may not be indicative of the market price of our common stock following this offering. Among the factors considered in such negotiations were prevailing market conditions, certain of our financial information, market valuations of other companies that we and the underwriters believe to be comparable to us, estimates of our business potential, the present state of our development and other factors deemed relevant. See “Underwriting” for additional information.

Investors in this offering will suffer immediate and substantial dilution of their investment.

If you purchase common stock in this offering, you will pay more for your shares than our pro forma as adjusted net tangible book value per share. Based upon an assumed initial public offering price of $             per share, the midpoint of the range on the cover page of this prospectus, you will incur immediate and substantial dilution of $             per share, representing the difference between our assumed initial public offering price and our pro forma as adjusted net tangible book value per share. Based upon an assumed initial public offering price of $             per share, the midpoint of the range on the cover page of this prospectus, purchasers of common stock in this offering will have contributed approximately             % of the aggregate purchase price paid by all purchasers of our stock but will own only approximately             % of our common stock outstanding after this offering.

To the extent outstanding stock options or warrants are exercised, there will be further dilution to new investors.

We issued warrants and options in the past to acquire common stock at prices significantly below the initial offering price. As of June 30, 2012, there were 272,813 shares of convertible preferred stock subject to outstanding warrants with a weighted average exercise price of $1.37 per share (such warrants will be converted into warrants for 272,813 shares of common stock with a weighted average exercise price of $1.37 as a result of this offering) and 13,622,512 shares of common stock subject to outstanding options with a weighted average exercise price of $0.57 per share. To the extent that these outstanding warrants and options are ultimately exercised, you will incur further dilution, and our stock price may decline.

Future sales and issuances of equity and debt securities could result in additional dilution to our stockholders and could place restrictions on our operations and assets, and such securities could have rights, preferences and privileges senior to those of our common stock.

We expect that significant additional capital will be needed in the future to continue our planned operations. To raise capital, we may from time to time issue additional shares of common stock at a discount from the then-current trading price of our common stock. As a result, our common stockholders would experience immediate dilution upon the purchase of any shares of our common stock sold at such discount. In addition, as opportunities present themselves, we may enter into financing or similar arrangements in the future, including the issuance of debt securities, preferred stock or common stock. Whether or not we issue additional shares of common stock at a discount, any issuance of common stock will, and any issuance of other equity securities or of options, warrants or other rights to purchase common stock may, result in additional dilution of the percentage ownership of our stockholders and could cause our stock price to decline. New investors could also gain rights, preference and privileges senior to those of holders of our common stock, which could cause the price of our common stock to decline. Debt securities may also contain covenants that restrict our operational flexibility or impose liens or other restrictions on our assets, which could also cause the price of our common stock to decline.

Pursuant to our equity incentive plans, we are authorized to grant equity-based incentive awards to our employees, directors and consultants. The number of shares of our common stock available for future grant under our 2012 Equity Incentive Award Plan, or the 2012 Plan, which will become effective immediately prior to the completion of this offering, is             plus the number of shares of our common stock reserved for issuance under our Stock Incentive Plan, or the 2004 Plan, as of the effective date of the 2012 Plan. As of June 30, 2012, there were 1,703,525 shares of our common stock reserved for future issuance under our 2004 Plan. Thereafter, the number of shares of our common stock reserved for issuance under our 2012 Plan will be increased (i) from time to time by the

 

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number of shares of our common stock forfeited upon the expiration, cancellation, forfeiture, cash settlement or other termination of awards under our 2004 Plan following the effective date of the 2012 Plan, and (ii) at the discretion of our board of directors, on the date of each annual meeting of our stockholders, by up to the lesser of (x) a number of additional shares of our common stock representing             % of our then-outstanding shares of common stock on such date and (y)             shares of our common stock. Future option grants and issuances of common stock under our 2012 Plan may have an adverse effect on the market price of our common stock.

Our quarterly operating results may fluctuate significantly or may fall below the expectations of investors or securities analysts, each of which may cause our stock price to fluctuate or decline.

We expect our operating results to be subject to quarterly fluctuations. Our net loss and other operating results will be affected by numerous factors, including:

 

  n  

variations in the level of expenses related to our product candidates or future development programs;

 

  n  

if any of our product candidates receives regulatory approval, the level of underlying demand for these product candidates and wholesalers’ buying patterns;

 

  n  

addition or termination of clinical trials or funding support;

 

  n  

our execution of any collaborative, licensing or similar arrangements, and the timing of payments we may make or receive under these arrangements or existing such arrangements, such as our collaboration agreements with GSK and Bayer;

 

  n  

any intellectual property infringement lawsuit or opposition, interference, or cancellation proceeding in which we may become involved; and

 

  n  

regulatory developments affecting our product candidates or those of our competitors.

If our quarterly operating results fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially. Furthermore, any quarterly fluctuations in our operating results may, in turn, cause the price of our stock to fluctuate substantially. We believe that quarterly comparisons of our financial results are not necessarily meaningful and should not be relied upon as an indication of our future performance.

We will have broad discretion in the use of the net proceeds of this offering and may not use them effectively.

Our management will have broad discretion over the use of the net proceeds from this offering. Because of the number and variability of factors that will determine our use of such proceeds, you may not agree with how we allocate or spend the proceeds from this offering. We may pursue collaborations or clinical trials that do not result in an increase in the market value of our common shares and that may increase our losses. Our failure to allocate and spend the net proceeds from this offering effectively would have a material adverse effect on our financial condition and business. Until the net proceeds are used, they may be placed in investments that do not produce significant investment returns or that may lose value.

Provisions of our charter documents or Delaware law could delay or prevent an acquisition of our company, even if the acquisition would be beneficial to our stockholders, and could make it more difficult for you to change management.

Provisions in our amended and restated certificate of incorporation and our amended and restated bylaws that will become effective upon the closing of this offering may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. In addition, these provisions may frustrate or prevent any attempt by our stockholders to replace or remove our current management by making it more difficult to replace or remove our board of directors. These provisions include:

 

  n  

a classified board of directors so that not all directors are elected at one time;

 

  n  

a prohibition on stockholder action through written consent;

 

  n  

a requirement that special meetings of stockholders be called only by the board of directors, the chairman of the board of directors, the chief executive officer or, in the absence of a chief executive officer, the president;

 

  n  

an advance notice requirement for stockholder proposals and nominations;

 

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  n  

the authority of our board of directors to issue preferred stock with such terms as our board of directors may determine; and

 

  n  

a requirement of approval of not less than 66 2/3% of all outstanding shares of our capital stock entitled to vote to amend any bylaws by stockholder action, or to amend specific provisions of our certificate of incorporation.

In addition, Delaware law prohibits a publicly held Delaware corporation from engaging in a business combination with an interested stockholder, generally a person who, together with its affiliates, owns or within the last three years has owned 15% or more of our voting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. Accordingly, Delaware law may discourage, delay or prevent a change in control of our company.

Provisions in our charter and other provisions of Delaware law could limit the price that investors are willing to pay in the future for shares of our common stock.

Our employment agreements with our officers may require us to pay severance benefits to any of those persons who are terminated in connection with a change of control of us, which could harm our financial condition or results.

Our officers are parties to employment agreements providing for aggregate cash payments of up to approximately $4.5 million for severance and other benefits and acceleration of vesting of stock options with a value of approximately $1.7 million (as of June 30, 2012) in the event of a termination of employment in connection with a change of control of us. The accelerated vesting of options could result in dilution to our existing stockholders and harm the market price of our common stock. The payment of these severance benefits could harm our financial condition and results. In addition, these potential severance payments may discourage or prevent third parties from seeking a business combination with us.

We do not anticipate paying any cash dividends on our capital stock in the foreseeable future; therefore capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.

We have never declared or paid cash dividends on our capital stock. We do not anticipate paying any cash dividends on our capital stock in the foreseeable future. We currently intend to retain all available funds and any future earnings to fund the development and growth of our business. In addition, the terms of any future debt financing arrangement may contain terms prohibiting or limiting the amount of dividends that may be declared or paid on our common stock. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.

If securities or industry analysts do not publish research, or publish inaccurate or unfavorable research, about our business, our stock price and trading volume could decline.

The trading market for our common stock will depend, in part, on the research and reports that securities or industry analysts publish about us or our business. Securities and industry analysts do not currently, and may never, publish research on our company. If no securities or industry analysts commence coverage of our company, the trading price for our stock would likely be negatively impacted. In the event securities or industry analysts initiate coverage, if one or more of the analysts who cover us downgrade our stock or publish inaccurate or unfavorable research about our business, our stock price would likely decline. In addition, if our operating results fail to meet the forecast of analysts, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our stock could decrease, which might cause our stock price and trading volume to decline.

Changes in, or interpretations of, accounting rules and regulations could result in unfavorable accounting charges or require us to change our compensation policies.

Accounting methods and policies for biopharmaceutical companies, including policies governing revenue recognition, research and development and related expenses and accounting for stock-based compensation, are subject to further review, interpretation and guidance from relevant accounting authorities, including the SEC. Changes to, or interpretations of, accounting methods or policies may require us to reclassify, restate or otherwise change or revise our financial statements, including those contained in this filing.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that involve risks and uncertainties. All statements other than statements of historical facts contained in this prospectus are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “could,” “will,” “would,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “intend,” “predict,” “seek,” “contemplate,” “potential” or “continue” or the negative of these terms or other comparable terminology. These forward-looking statements include, but are not limited to, statements about:

 

  n  

the initiation, timing, progress and results of our preclinical studies and clinical trials, and our research and development programs;

 

  n  

our ability to advance product candidates into, and successfully complete, clinical trials;

 

  n  

our collaborators’ exercise of their license options;

 

  n  

the commercialization of our product candidates;

 

  n  

the implementation of our business model, strategic plans for our business, product candidates and technology;

 

  n  

the scope of protection we are able to establish and maintain for intellectual property rights covering our product candidates and technology;

 

  n  

estimates of our expenses, future revenues, capital requirements and our needs for additional financing;

 

  n  

the timing or likelihood of regulatory filings and approvals;

 

  n  

our ability to maintain and establish collaborations or obtain additional government grant funding;

 

  n  

our use of proceeds from this offering;

 

  n  

our financial performance; and

 

  n  

developments relating to our competitors and our industry.

These statements relate to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under “Risk Factors” and elsewhere in this prospectus.

Any forward-looking statement in this prospectus reflects our current views with respect to future events and is subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, industry and future growth. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

This prospectus also contains estimates, projections and other information concerning our industry, our business, and the markets for certain drugs, including data regarding the estimated size of those markets, their projected growth rates and the incidence of certain medical conditions. Information that is based on estimates, forecasts, projections or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly stated, we obtained this industry, business, market and other data from reports, research surveys, studies and similar data prepared by third parties, industry, medical and general publications, government data and similar sources. In some cases, we do not expressly refer to the sources from which this data is derived. In that regard, when we refer to one or more sources of this type of data in any paragraph, you should assume that other data of this type appearing in the same paragraph is derived from the same sources, unless otherwise expressly stated or the context otherwise requires.

 

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USE OF PROCEEDS

We estimate that the net proceeds from the sale of             shares of common stock in this offering will be approximately $             million at an assumed initial public offering price of $             per share, the midpoint of the estimated range shown on the cover page of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters exercise their overallotment option in full, we estimate that the net proceeds will be approximately $             million after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. Each $1.00 increase or decrease in the assumed initial public offering price of $             would increase or decrease, respectively, our net proceeds by $             million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

We currently expect to use our net proceeds from this offering as follows:

 

  n  

approximately $20.0 to $25.0 million for clinical expenditures to advance demcizumab (OMP-21M18) through Phase II clinical trials;

 

  n  

approximately $20.0 to $25.0 million for clinical and manufacturing expenditures to advance a bispecific antibody through Phase II clinical trials;

 

  n  

approximately $10.0 million for clinical and manufacturing expenditures to advance an antibody targeting the RSPO/LGR pathway through Phase I clinical trials;

 

  n  

approximately $10.0 million to fund our research and drug discovery activities related to additional product candidates; and

 

  n  

any remaining proceeds for working capital and general corporate expenditures.

However, due to the uncertainties inherent in the product development process, it is difficult to estimate with certainty the exact amounts of the net proceeds from this offering that may be used for the above purposes. Additionally, we may use a portion of the proceeds for our collaborations with GSK and Bayer, although we currently plan to use our current cash, cash equivalents and short-term investment balances, along with future program payments from GSK and Bayer, to progress those collaborations. Our management will have sole and broad discretion over the use of the net proceeds from this offering, as well as future cash payments received (if any) from our collaborations with GSK and Bayer. The amounts and timing of our expenditures will depend upon numerous factors including the results of our research and development efforts, the timing and success of preclinical studies and any ongoing clinical trials or clinical trials we may commence in the future, the timing of regulatory submissions and the amount of cash, if any, generated by our collaboration agreements.

Pending the use of the proceeds from this offering as described above, we intend to invest the net proceeds in short-term, interest-bearing investment-grade securities or government securities.

 

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DIVIDEND POLICY

We have never declared or paid cash dividends on our capital stock. We intend to retain all available funds and any future earnings, if any, to fund the development and expansion of our business and we do not anticipate paying any cash dividends in the foreseeable future. Any future determination related to dividend policy will be made at the discretion of our board of directors.

 

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CAPITALIZATION

The following table sets forth our cash, cash equivalents and short-term investments and capitalization as of June 30, 2012:

 

  n  

on an actual basis;

 

  n  

on a pro forma basis to reflect (1) conversion of all outstanding shares of our convertible preferred stock into an aggregate of 120,727,871 shares of Class A common stock immediately prior to the completion of this offering; (2) the conversion of all outstanding shares of Class B common stock into an aggregate of 44,440 shares of Class A common stock immediately prior to the completion of this offering; and (3) the reclassification to additional paid-in capital of our convertible preferred stock warrant liability in connection with the conversion of our outstanding convertible preferred stock warrants into common stock warrants; and

 

  n  

on a pro forma as adjusted basis to give further effect to the sale of shares of common stock in this offering at an assumed initial public offering price of $         per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, after deducting the underwriting discount and commissions, and estimated offering expenses payable by us.

You should read this information together with our audited financial statements and related notes appearing elsewhere in this prospectus and the information set forth under the heading “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

 

 

     AS OF JUNE 30, 2012  
(In thousands, except share and per share data)    ACTUAL     PRO FORMA      PRO FORMA AS
ADJUSTED (1)
 
     (Unaudited)  

Cash, cash equivalent and short-term investments

   $ 75,793      $                    $                
  

 

 

   

 

 

    

 

 

 

Notes payable

   $ 144      $         $     

Convertible preferred stock warrant liability

     174        

Convertible preferred stock, par value $0.001 per share: 126,344,544 shares authorized, 120,727,871 shares issued and outstanding, actual;              shares authorized, issued and outstanding, pro forma and pro forma as adjusted

     182,773        

Stockholders’ equity (deficit):

       

Class A common stock, $0.001 par value per share: 142,675,102 shares authorized, 5,949,264 shares issued and outstanding, actual;              shares authorized, 126,721,575 shares issued and outstanding, pro forma and pro forma as adjusted (2)

     6        

Convertible Class B common stock, par value $0.001 per share: 44,440 shares authorized, 44,440 shares issued and outstanding, actual; no shares authorized, issued and outstanding, pro forma and pro forma as adjusted

            

Additional paid-in capital

     3,644        

Accumulated other comprehensive income

     25        

Accumulated deficit

     (140,405     
  

 

 

   

 

 

    

 

 

 

Total stockholders’ (deficit) equity

     (136,730     
  

 

 

   

 

 

    

 

 

 

Total capitalization

   $ 46,361      $         $     
  

 

 

   

 

 

    

 

 

 

 

 

(1)

Each $1.00 increase or decrease in the assumed initial public offering price of $             per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, would increase or decrease, respectively, the amount of cash, cash equivalents and short-term investments, additional paid-in capital, total stockholder’s (deficit) equity and total capitalization by $             million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discount and commissions, and estimated offering expenses payable by us.

 

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(2)

Upon the conversion of the Class B common stock into Class A common stock, which will occur immediately prior to the completion of this offering, all shares of Class A common stock will be redesignated as “common stock” and there will thereby cease to be any specially designated class of common stock.

The number of shares of common stock issued and outstanding actual, pro forma and pro forma as adjusted in the table above excludes the following shares as of June 30, 2012:

 

  n  

13,622,512 shares of common stock issuable upon exercise of stock options outstanding under our 2004 Stock Incentive Plan, at a weighted average exercise price of $0.57 per share;

 

  n  

67,098 shares of common stock outstanding subject to vesting;

 

  n  

1,703,525 shares of common stock reserved for issuance pursuant to future awards under our 2004 Stock Incentive Plan;

 

  n  

            shares of common stock reserved for issuance pursuant to future awards under our 2012 Equity Incentive Award Plan;

 

  n  

            shares of common stock reserved for issuance pursuant to future awards under our Employee Stock Purchase Plan; and

 

  n  

272,813 shares of common stock issuable upon the exercise of warrants outstanding to purchase convertible preferred stock, assuming the conversion to common stock immediately prior to the completion of this offering, at a weighted average exercise price of $1.37 per share.

 

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DILUTION

If you invest in our common stock in this offering, your ownership interest will be diluted to the extent of the difference between the assumed initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering.

Net tangible book value per share is determined by dividing our total tangible assets less our total liabilities by the number of shares of common stock outstanding. Our historical net tangible book value as of June 30, 2012 was $             million, or $             per share. Our pro forma net tangible book value as of June 30, 2012 was $             million, or $             per share, based on the total number of shares of our common stock outstanding as of June 30, 2012, after giving effect to the automatic conversion of all outstanding shares of our convertible preferred stock as of June 30, 2012 into an aggregate of 120,727,871 shares of common stock immediately prior to the completion of this offering.

Net tangible book value dilution per share to new investors represents the difference between the amount per share paid by purchasers of shares of common stock in this offering and the pro forma as adjusted net tangible book value per share of common stock immediately after completion of this offering. After giving effect to our sale of shares of common stock in this offering at an assumed initial public offering price of $             per share, the mid-point of the price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of June 30, 2012 would have been $            , or $             per share. This represents an immediate increase in net tangible book value of $             per share to existing stockholders and an immediate dilution in net tangible book value of $             per share to purchasers of common stock in this offering, as illustrated in the following table:

 

 

 

Assumed initial public offering price per share

      $            

Historical net tangible book value per share as of June 30, 2012 assuming the conversion of the convertible preferred stock into common stock

   $        

Pro forma net tangible book value per share as of June 30, 2012

   $        

Increase in pro forma net tangible book value per share attributable to new investors

     
  

 

 

    

Pro forma as adjusted net tangible book value per share after this offering

     
     

 

 

 

Dilution per share to investors participating in this offering

      $     
     

 

 

 

 

 

Each $1.00 increase (decrease) in the assumed public offering price of $             per share, the mid-point of the price range set forth on the cover page of this prospectus, would increase (decrease) our pro forma as adjusted net tangible book value by $             million, or $             per share, and the pro forma dilution per share to investors in this offering by $             per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions, and estimated offering expenses payable by us. If the underwriters’ overallotment option to purchase additional shares from us is exercised in full, the pro forma as adjusted net tangible book value per share after this offering would be $             per share, the increase in pro forma as adjusted net tangible book value per share to existing stockholders would be $             per share and the dilution to new investors purchasing shares in this offering would be $             per share.

 

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The following table presents, on a pro forma as adjusted basis as of June 30, 2012, after giving effect to the conversion of all outstanding shares of convertible preferred stock into common stock assuming the conversion occurs immediately prior to the completion of this offering, the differences between the existing stockholders and the purchasers of shares in this offering with respect to the number of shares purchased from us, the total consideration paid, which includes net proceeds received from the issuance of common and preferred stock, cash received from the exercise of stock options and warrants and the value of any stock issued for services and the average price paid per share (in thousands, except per share amounts and percentages):

 

 

 

     SHARES PURCHASED     TOTAL CONSIDERATION     AVERAGE PRICE
PER SHARE
 
     NUMBER    PERCENT     AMOUNT    PERCENT    

Existing stockholders

                                   $            

New investors

            
  

 

  

 

 

   

 

  

 

 

   

Totals

            
  

 

  

 

 

   

 

  

 

 

   

 

 

The foregoing calculations exclude the following shares as of June 30, 2012:

 

  n  

13,622,512 shares of common stock issuable upon exercise of stock options outstanding under our 2004 Stock Incentive Plan, at a weighted average exercise price of $0.57 per share;

 

  n  

67,098 shares of common stock outstanding subject to vesting;

 

  n  

1,703,525 shares of common stock reserved for issuance pursuant to future awards under our 2004 Stock Incentive Plan;

 

  n  

            shares of common stock reserved for issuance pursuant to future awards under our 2012 Equity Incentive Award Plan;

 

  n  

            shares of common stock reserved for issuance pursuant to future awards under our Employee Stock Purchase Plan; and

 

  n  

272,813 shares of common stock issuable upon the exercise of warrants outstanding to purchase convertible preferred stock, assuming the conversion to common stock immediately prior to the completion of this offering, at a weighted average exercise price of $1.37 per share.

If the underwriters exercise their option to purchase additional shares of our common stock in full, our existing stockholders would own             % and our new investors would own             % of the total number of shares of our common stock outstanding upon completion of this offering. The total consideration paid by our existing stockholders would be approximately $             million, or             %, and the total consideration paid by our new investors would be $             million, or             %.

 

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SELECTED FINANCIAL DATA

The selected statement of operations data for the years ended December 31, 2009, 2010 and 2011 and the selected balance sheet data as of December 31, 2010 and 2011 are derived from our audited financial statements included elsewhere in this prospectus. The selected statement of operations data for the years ended December 31, 2007 and 2008 and the selected balance sheet data as of December 31, 2007, 2008 and 2009 are derived from our audited financial statements which are not included in this prospectus.

The selected statement of operations data for the six months ended June 30, 2011 and 2012 and the selected balance sheet data as of June 30, 2012 have been derived from our unaudited condensed financial statements included elsewhere in this prospectus. The unaudited interim financial information has been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly our financial position as of June 30, 2012 and the results of operations for the six months ended June 30, 2011 and 2012.

Our historical results are not necessarily indicative of the results that may be expected in the future and interim results are not necessarily indicative of results to be expected for the full year. You should read the selected historical financial data below in conjunction with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and related notes included elsewhere in this prospectus.

 

 

 

(In thousands, except share and
per share data)
  YEAR ENDED DECEMBER 31,     SIX MONTHS ENDED
JUNE 30,
 
  2007     2008     2009     2010     2011     2011     2012  
                                  (Unaudited)  

Statement of Operations Data:

             

Revenue:

             

Collaboration revenue— related party

  $ 299      $ 13,363      $ 14,363      $ 13,363      $ 3,365      $ 2,181      $ 5,985   

Collaboration revenue

                         4,355        28,000        24,000        4,000   

Grant revenue

                                44               22   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    299        13,363        14,363        17,718        31,409        26,181        10,007   

Operating expenses:

             

Research and development (1)

    19,648        30,330        30,889        39,703        40,058        18,220        20,895   

General and administrative (1)

    4,151        4,814        4,621        6,552        6,591        3,519        3,477   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    23,799        35,144        35,510        46,255        46,649        21,739        24,372   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    (23,500     (21,781     (21,147     (28,537     (15,240     4,442        (14,365

Interest and other income, net

    1,689        1,506        288        1,640        244        84        86   

Interest expense

    (161     (216     (201     (118     (38     (32     (6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (21,972   $ (20,491   $ (21,060   $ (27,015   $ (15,034   $ 4,494      $ (14,285
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per common share (2):

             

Basic

  $ (11.72   $ (6.49   $ (4.92   $ (5.35   $ (2.70   $ 0.00      $ (2.45
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  $ (11.72   $ (6.49   $ (4.92   $ (5.35   $ (2.70   $ 0.00      $ (2.45
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Shares used to compute net income (loss) per common share (2):

             

Basic

    1,874,409        3,159,445        4,280,409        5,054,082        5,565,300        5,469,196        5,830,493   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

    1,874,409        3,159,445        4,280,409        5,054,082        5,565,300        8,029,986        5,830,493   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per common share, basic and diluted (2) (3)

          $ (0.12     $ (0.11
         

 

 

     

 

 

 

Shares used to compute pro forma net loss per common share, basic and diluted (2)(3)

            126,293,171          126,558,364   
         

 

 

     

 

 

 

 

 

 

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(1) 

Included in the statement of operations data above are the following non-cash stock-based compensation expenses (in thousands):

 

     YEAR ENDED DECEMBER 31,      SIX MONTHS ENDED
JUNE 30,
 
     2007      2008      2009      2010      2011      2011      2012  
                                        (Unaudited)  

Research and development

   $ 137       $ 152       $ 372       $ 453       $ 499       $ 244       $ 244   

General and administrative

     116         125         302         396         347         191         172   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $ 253       $ 277       $ 674       $ 849       $ 846       $ 435       $ 416   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(2) 

See Notes 2 and 16 to our audited financial statements included elsewhere in this prospectus for an explanation of the calculations of our basic and diluted net loss per common share and pro forma net loss per common share.

(3)

We have presented pro forma net loss per common share information for the year ended December 31, 2011 and the six months ended June 30, 2012 to reflect (1) the conversion of all of our outstanding shares of convertible preferred stock into an aggregate of 120,727,871 shares of common stock and (2) the reclassification to additional paid-in capital of our convertible preferred stock warrant liability in connection with the conversion of our outstanding convertible preferred stock warrants into common stock warrants.

 

 

 

     AS OF DECEMBER 31,     AS OF
JUNE 30,
2012
 
(In thousands)    2007     2008     2009     2010     2011    
                                   (Unaudited)  

Balance Sheet Data:

            

Cash, cash equivalents and short-term investments

   $ 57,066      $ 135,931      $ 111,797      $ 114,400      $ 100,410      $ 75,793   

Working capital

     47,930        125,504        106,855        103,753        82,096        61,725   

Total assets

     66,301        144,822        124,430        129,894        107,205        85,362   

Notes payable

     2,118        2,140        1,773        1,048        346        144   

Convertible preferred stock warrant liability

     211        229        240        210        199        174   

Convertible preferred stock

     74,088        176,773        182,773        182,773        182,773        182,773   

Accumulated deficit

     (42,519     (63,026     (84,071     (111,086     (126,120     (140,405

Total stockholders’ deficit

     (42,199     (62,618     (82,754     (108,839     (122,934     (136,730

 

 

 

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with the section entitled “Selected Financial Data” and our financial statements and related notes included elsewhere in this prospectus. This discussion and other parts of this prospectus contain forward-looking statements that involve risks and uncertainties, such as our plans, objectives, expectations, intentions and beliefs. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section entitled “Risk Factors” included elsewhere in this prospectus.

Overview

OncoMed is a clinical development-stage biopharmaceutical company focused on discovering and developing first-in-class monoclonal antibody therapeutics targeting cancer stem cells, or CSCs. Our approach has been to target CSCs, also known as tumor-initiating cells. Common cancer drugs target bulk tumor cells but have limited impact on CSCs, thereby providing a path for recurrence of the tumor. We utilize our proprietary technologies to identify and validate multiple potential targets critical to CSC self-renewal and differentiation. These targets are in pathways implicated in cancer biology and stem cell biology, including the Notch, Wnt and other fundamental CSC pathways. We believe our product candidates are quite distinct from current generations of chemotherapies and targeted therapies, and have the potential to significantly impact cancer treatment and the clinical outcome of patients with cancer. All of our product candidates were discovered internally in our own research laboratories.

We have five anti-CSC product candidates in clinical development. Additionally, two other antibodies are in preclinical development with Investigational New Drug, or IND, filings planned for as early as 2013. The first candidate, demcizumab, has completed single-agent Phase Ia safety and dose escalation trials and is currently in Phase Ib combination therapy trials in patients with non-small cell lung cancer and pancreatic cancer. The second candidate, anti-Notch2/3 (OMP-59R5), is in a Phase Ib/II trial in pancreatic cancer in combination therapy with gemcitabine. The third, fourth, and fifth candidates, anti-Fzd7 (OMP-18R5), Fzd8-Fc (OMP-54F28) and anti-Notch1 (OMP-52M51), are in single-agent Phase I safety and dose escalation trials. The clinical trials for all five product candidates are ongoing, with the intent of gathering additional data required to proceed to later stage clinical trials and product approval.

In December 2007, we entered into a strategic alliance with SmithKline Beecham Corporation (now GlaxoSmithKline LLC), or GSK, to develop anti-CSC antibody therapeutics targeting the Notch signaling pathway. Upon signing, we received $35.0 million in cash, comprised of $17.5 million in an upfront payment and $17.5 million in the form of an equity investment. We achieved $10.0 million and $9.0 million in development milestone payments from GSK during the years ended December 31, 2009 and 2010, respectively, and $5.0 million in development milestone payments from GSK during the six months ended June 30, 2012, which were each recognized in the period the associated milestones were achieved.

In July 2011, we amended the terms of our development agreement with GSK, and the collaboration is now focused entirely on the development of two product candidates, anti-Notch2/3 (OMP-59R5) and anti-Notch1 (OMP-52M51). Under this collaboration, GSK may exercise an option during defined time periods through completion of Phase II proof-of-concept trials to obtain an exclusive license to develop and commercialize such product candidates. We lead research and development efforts for these product candidates prior to GSK’s exercise of its option with respect to such candidates. We are eligible to receive from GSK, (1) with respect to OMP-59R5, aggregate payments of up to $344.5 million, including an option exercise fee and development, regulatory and commercialization milestones, in addition to percentage royalties in the low double digits to high teens on net product sales, and (2) with respect to OMP-52M51, aggregate payments of up to $349.5 million, including an option exercise fee and development, regulatory and commercialization milestones, in addition to percentage royalties in the low double digits to high teens on net product sales. If GSK elects not to exercise its options for OMP-59R5 and/or OMP-52M51 during the relevant option periods, or if GSK terminates those programs, we will have worldwide rights to such program(s), subject to, under certain circumstances, GSK’s right of first negotiation to obtain an exclusive license to develop and commercialize OMP-52M51.

 

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In July 2012, we amended our agreement to revise the structure of the milestone payments to reflect the decision to initiate a Phase Ib/II trial for OMP-59R5. See “Business—Collaboration and License Agreements—Strategic Alliance with GSK” for additional details regarding our collaboration with GSK.

In June 2010, we entered into a strategic alliance with Bayer Pharma AG (formerly Bayer Schering Pharma AG), or Bayer, to discover, develop and commercialize novel anti-CSC biologic and small molecule therapeutics targeting the Wnt signaling pathway. We received a $40.0 million upfront cash payment when we entered into this alliance.

Under this collaboration, Bayer may exercise its option to obtain an exclusive license to develop and commercialize certain biologic therapeutics at any point up to the completion of Phase I trials. We and Bayer also agreed to jointly conduct research to discover potential new small molecule therapeutics targeting the Wnt pathway. Under our collaboration, we lead the discovery and development of biologic therapeutic products prior to Bayer’s exercise of its option, and Bayer leads discovery, development, and upon advancement of the small molecule therapeutics, commercialization of the small molecule therapeutics. We are eligible to receive option fees and research, development, regulatory and commercial milestone payments of up to $387.5 million per program for each biologic therapeutic product successfully developed, in addition to royalties on net product sales. Percentage royalties for certain biologic product candidates are in the low double digits to high teens. For certain other biologic product candidates, percentage royalties are in the mid-single digits to low double digits. Bayer is obligated to make payments to us upon achievement of research, development, regulatory and commercial milestones, plus advancement fees, for small molecule therapeutics that could total up to $112.0 million per program, in addition to single-digit percentage royalties on net product sales. If Bayer elects not to exercise its options for any class of biologic therapeutic products under the collaboration during the relevant option periods, or if Bayer terminates such program(s), we will have worldwide rights to such program(s). We achieved a $20.0 million development milestone under the Bayer arrangement during the year ended December 31, 2011 that was recognized in the period the milestone was achieved.

In August 2012, we amended our agreement with Bayer to reallocate payment amounts between two payments applicable to our biologic product candidates and to modify the trigger for a certain payment applicable to certain biologic product candidates. See “Business—Collaboration and License Agreements—Strategic Alliance with Bayer” for additional details regarding our collaboration with Bayer.

Since commencing our operations in 2004, our efforts have been focused on research, development and the advancement of our product candidates into clinical trials. As a result we have incurred significant losses. We have funded our operations primarily through the sale of convertible preferred stock and common stock and with revenue from our collaboration arrangements. As of December 31, 2011 and June 30, 2012, we had an accumulated deficit of $126.1 million and $140.4 million, respectively. We expect to continue to incur net losses as we develop our product candidates, expand clinical trials for our product candidates currently in clinical development, expand our research and development activities for the product candidates that are currently unpartnered and seek regulatory approvals. Significant capital is required for the research and development of a product candidate and many expenses are incurred before revenues are received. We are unable to predict the extent of any future losses or when we will become profitable, if at all.

Financial Operations Overview

Revenue

We have not generated any revenue from product sales. Our revenue to date has been primarily derived from upfront payments and development milestones received from GSK and Bayer. We recognize revenue from upfront payments ratably over the term of our estimated period of performance under the agreements. In addition to receiving upfront payments, we may also be entitled to milestone and other contingent payments upon achieving predefined objectives. Such payments are recorded as revenue when we achieve the underlying milestone if there is substantive uncertainty at the date the arrangement is entered into that the event will be achieved.

 

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The following table summarizes our revenue for the years ended December 31, 2009, 2010 and 2011 and the six months ended June 30, 2011 and 2012.

 

 

 

     YEAR ENDED DECEMBER 31,      SIX MONTHS
ENDED JUNE 30,
 
(In thousands)    2009      2010      2011      2011      2012  
            (Unaudited)  

GSK:

              

Recognition of upfront payment

   $ 4,363       $ 4,363       $ 3,157       $ 2,181       $ 735   

Recognition of contract study

                     208                 250   

Milestone revenue

     10,000         9,000                         5,000   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

GSK total

     14,363         13,363         3,365         2,181         5,985   

Bayer:

              

Recognition of upfront payment

             4,355         8,000         4,000         4,000   

Milestone revenue

                     20,000         20,000           
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Bayer total

             4,355         28,000         24,000         4,000   

Grant revenue

                     44                 22   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

   $ 14,363       $ 17,718       $ 31,409       $ 26,181       $ 10,007   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

We expect that any revenue we generate will fluctuate from quarter to quarter as a result of the timing and amount of milestones and other payments from our collaborations with GSK and Bayer and any new government grants that we may receive in the future.

Research and Development

Research and development expenses represent costs incurred to conduct research such as the discovery and development of clinical candidates for GSK and Bayer as well as discovery and development of our proprietary unpartnered product candidates. We expense all research and development costs as they are incurred. Our research and development expenses consist of employee salaries and related benefits, including stock-based compensation, third-party contract costs relating to research, manufacturing, preclinical studies, clinical trial activities, laboratory consumables, and allocated facility costs.

At any point in time, we typically have various early stage research and drug discovery projects. Our internal resources, employees and infrastructure are not directly tied to any one research or drug discovery project and are typically deployed across multiple projects. As such, we do not maintain information regarding these costs incurred for these early stage research and drug discovery programs on a project-specific basis.

 

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The following table summarizes our research and development expenses during the years ended December 31, 2009, 2010 and 2011 and the six months ended June 30, 2011 and 2012. The internal costs include personnel, facility costs, laboratory consumables and discovery and research related activities associated with our pipeline. The external program costs reflect external costs attributable to our clinical development candidates and preclinical candidates selected for further development. Such expenses include third-party contract costs relating to manufacturing, clinical trial activities, translational medicine and toxicology activities.

 

 

 

     Year Ended December 31,        Six Months Ended June 30,  
     2009      2010      2011        2011        2012  
  

 

 

      

 

 

 
(In thousands)                              

Internal Costs:

                  

Cancer biology

   $ 8,744       $ 8,588       $ 9,816         $ 4,537         $ 5,328   

Molecular and cellular biology

     8,426         8,300         8,210           4,777           3,260   

Process development and manufacturing

     3,788         4,103         4,370           2,022           2,765   

Product development

     1,497         2,493         3,244           1,481           1,753   

Pathology and toxicology

     450         1,310         1,226           727           639   
  

 

 

    

 

 

    

 

 

      

 

 

      

 

 

 

Subtotal internal costs

     22,905         24,794         26,866           13,544           13,745   
  

 

 

    

 

 

    

 

 

      

 

 

      

 

 

 

External Program Costs:

                  

Manufacturing

     4,487         8,912         7,076           1,872           2,744   

Clinical

     2,104         2,173         3,290           1,938           1,923   

Translational medicine

     498         391         714           341           403   

Toxicology

     895         3,433         2,112           525           2,080   
  

 

 

    

 

 

    

 

 

      

 

 

      

 

 

 

Subtotal external program costs

     7,984         14,909         13,192           4,676           7,150   
  

 

 

    

 

 

    

 

 

      

 

 

      

 

 

 

Total research and development expense

   $ 30,889       $ 39,703       $ 40,058         $ 18,220         $ 20,895   
  

 

 

    

 

 

    

 

 

      

 

 

      

 

 

 

 

 

We expect our research and development expenses will increase in the future as we progress our unpartnered product candidates, conduct our development activities under our agreements with GSK and Bayer, advance our discovery research projects into the preclinical stage and continue our early stage research. The process of conducting preclinical studies and clinical trials necessary to obtain regulatory approval is costly and time consuming. We or our partners may never succeed in achieving marketing approval for any of our product candidates. The probability of success of each product candidate may be affected by numerous factors, including preclinical data, clinical data, competition, manufacturing capability and commercial viability. For the biologic programs covered under our strategic alliances with GSK and Bayer, we are responsible for development of each product candidate prior to the exercise of GSK’s or Bayer’s option to exclusively license such product candidate. GSK and Bayer may exercise such an option on a product-by-product basis during certain time periods through the end of Phase I or Phase II trials for a product candidate. If GSK exercises its option for a product candidate, all further development obligations for such product candidate are assumed by GSK. If Bayer exercises its option for a product candidate, all development obligations for such product candidate after such product candidate reaches a defined early development stage are assumed by Bayer. See “Business—Collaboration and License Agreements” for additional information on the GSK and Bayer collaborations.

Most of our product development programs are at an early stage; therefore, the successful development of our product candidates is highly uncertain and may not result in approved products. Completion dates and completion costs can vary significantly for each product candidate and are difficult to predict. Given the uncertainty associated with clinical trial enrollments and the risks inherent in the development process, we are unable to determine the duration and completion costs of current or future clinical trials of our product candidates or if and to what extent we will generate revenues from the commercialization and sale of any of our product candidates. We anticipate that we and our strategic alliance partners will make determinations as to which programs to pursue and how much funding to direct to each program on an ongoing basis in response to the scientific and clinical success of each

 

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product candidate, as well as an ongoing assessment as to each product candidate’s commercial potential. We will need to raise additional capital or may seek additional strategic alliances in the future in order to complete the development and commercialization of our product candidates.

General and Administrative

Our general and administrative expenses consist primarily of personnel costs, allocated facilities costs and other expenses for outside professional services, including legal, human resource, audit and accounting services. Personnel costs consist of salaries, benefits and stock-based compensation. We expect to incur additional expenses as a result of operating as a public company, including costs to comply with the rules and regulations applicable to companies listed on a national securities exchange and costs related to compliance and reporting obligations pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC. In addition, as a public company, we expect to incur increased expenses related to additional insurance, investor relations and other increases related to needs for additional human resources and professional services.

Interest and Other Income, net

Interest income consists primarily of interest received on our cash, cash equivalents and short-term investments balances.

Other income (expense) primarily includes gains and losses from the remeasurement of our liabilities related to our convertible preferred stock warrants. We will continue to record adjustments to the estimated fair value of the convertible preferred stock warrants until they are exercised, expire or convert into warrants to purchase shares of our common stock. At that time, the convertible preferred stock warrant liability will be reclassified to additional paid-in capital and we will no longer record any related periodic fair value adjustments.

Other income (expense) also includes five Section 48D grants we received in the year ended December 31, 2010, as a result of the Patient Protections and Affordable Care Act’s creation of a therapeutic discovery project tax credit for qualifying investments in qualifying therapeutic discovery projects during 2009.

Interest Expense

Interest expense consists primarily of interest on our outstanding borrowings. We expect interest expense to decrease as the outstanding debt balance will be fully paid in 2012.

Critical Accounting Polices and Estimates

Our financial statements are prepared in accordance with generally accepted accounting principles in the United States, or GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. In many instances, we could have reasonably used different accounting estimates, and in other instances changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from the estimates made by our management. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.

Revenue Recognition

We generate revenue from two principal sources: (1) collaborative research and development agreements with pharmaceutical companies and (2) government contracts and grants.

Under collaboration agreements, we may receive non-refundable upfront payments, funding for research and development services, milestones, other contingent payments and royalties. In assessing the appropriate revenue recognition related to a collaboration agreement, we first determine whether an arrangement includes multiple elements, such as the delivery of intellectual property rights and research and development services. Typically, we have not granted licenses to collaborators at the beginning of our arrangements and thus there are no delivered items

 

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separate from the research and development services provided. As such, upfront payments are recorded as deferred revenue in the balance sheet and are recognized as collaboration revenue over the estimated period of performance that is consistent with the terms of the research and development obligations contained in the collaboration agreement. We periodically review the estimated period of performance based on the progress made under each arrangement.

In January 2011, we adopted new authoritative guidance on revenue recognition for multiple element arrangements. This guidance, which applies to multiple element arrangements entered into or materially modified on or after January 1, 2011, amends the criteria for separating and allocating consideration in a multiple element arrangement by modifying the fair value requirements for revenue recognition and eliminating the use of the residual method. The estimated fair value of deliverables under the arrangement may be derived using a best estimate of selling price if vendor-specific objective evidence and third-party evidence are not available. Deliverables under the arrangement will be separate units of accounting provided that a delivered item has value to the customer on a stand-alone basis and if the arrangement does not include a general right of return relative to the delivered item and delivery or performance of the undelivered items is considered probably and substantially in the control of the vendor. The update also provided new guidance regarding how to apply the standard to arrangements that are materially modified following adoption of the update. Due to the amendment to our 2007 collaboration agreement with GSK in July 2011, we evaluated the terms of the amendment relative to the entire arrangement and determined the amendment to be a material modification to the original agreement for financial reporting purposes. As a result, there was a material impact to our financial statements for the year ended December 31, 2011. The potential future impact of the adoption of this update will depend on the nature of any new agreements entered into or material modifications to existing arrangements.

In January 2011, we also adopted the guidance that permits the recognition of revenue contingent upon our achievement of a milestone in its entirety, in the period the milestone is achieved, only if the milestone meets certain criteria and is considered to be substantive. Other contingent payments received for which payment is contingent solely on the results of a collaborative partner’s performance (e.g., bonus payments) are not accounted for using the milestone method. Such bonus payments will be recognized as revenue when collectibility is reasonably assured.

We made judgments which affect the periods over which we recognized revenue. For instance, in our arrangement with GSK, we were obligated to provide research and development services. We recognized revenue over the estimated period of our performance of the research and development services, which was estimated to end in December 2012. In July 2011, we amended the terms of our development agreement with GSK to focus the collaboration entirely on the development of two product candidates, anti-Notch2/3 (OMP-59R5) and anti-Notch1 (OMP-52M51). The amendment was determined to have materially modified our prior GSK agreement. At the modification date, we identified all undelivered elements and determined that there were certain development services we are obligated to provide for OMP-52M51, and the continued development work to get OMP-59R5 through Phase II proof-of-concept trials. We determined that we have a single unit of accounting under the amended arrangement. As a result, the unamortized deferred revenue related to the upfront payment and the additional consideration we will receive for certain development services, an aggregate of $7.9 million, will be recognized ratably over the new estimated period of performance of four years from the modification date.

We recognize revenue under government contracts and grants when the work is performed or the expenses are incurred. Any amounts received in advance of performance are recorded as deferred revenue until earned.

Preclinical Studies and Clinical Trial Accruals

We estimate our preclinical studies and clinical trial expenses based on the services performed pursuant to contracts with research institutions and clinical research organizations that conduct these activities on our behalf. In recording service fees, we estimate the time period over which the related services will be performed and compare the level of effort expended through the end of each period to the cumulative expenses recorded and payments made for such services and, as appropriate, accrue additional service fees or defer any non-refundable advance payments until the related services are performed. If the actual timing of the performance of services or the level of effort varies from the estimate, we will adjust our accrual or deferred advance payment accordingly. If we underestimate or overestimate the level of services performed or the costs of these services, our actual expenses could differ from our

 

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estimates. To date, we have not experienced significant changes in our estimates of preclinical studies and clinical trial accruals.

Estimated Fair Value of Convertible Preferred Stock Warrants

Freestanding warrants for shares that are either puttable or redeemable are classified as liabilities on the balance sheet at their estimated fair value. At the end of each reporting period, changes in estimated fair value during the period are recorded in interest income and other income, net. We will continue to adjust the carrying value of the warrants until the earlier of the exercise of the warrants or the completion of a liquidation event, including the completion of an initial public offering, at which time the liabilities will be reclassified to stockholders’ deficit.

We estimate the fair values of these warrants using the Black-Scholes option-pricing model based on inputs for the estimated fair value of the underlying convertible preferred stock at the valuation measurement dates, the remaining contractual terms of the warrant, risk-free interest rates, expected dividend rates and the expected volatility of the price of the stock.

Stock-Based Compensation

We recognize compensation costs related to stock options granted to employees based on the estimated fair value of the awards on the date of grant, net of estimated forfeitures. We estimate the grant date fair value, and the resulting stock-based compensation expense, using the Black-Scholes option-pricing model. The grant date fair value of the stock-based awards is generally recognized on a straight-line basis over the requisite service period, which is generally the vesting period of the respective awards. Stock-based compensation expense was $0.6 million, $0.8 million, $0.8 million and $0.4 million during the years ended December 31, 2009, 2010 and 2011 and the six months ended June 30, 2012, respectively.

The Black-Scholes option-pricing model requires the use of highly subjective and complex assumptions which determine the fair value of stock-based awards, including the expected term and the price volatility of the underlying stock. These assumptions include:

 

  n  

Expected term—The expected term represents the period that the stock-based awards are expected to be outstanding. We used the simplified method to determine the expected terms as provided by the SEC. The simplified method calculates the expected term as the average of the time-to-vesting and the contractual life of the options.

 

  n  

Volatility—The volatility is derived from historical volatilities of unrelated publicly listed biopharmaceutical companies over a period approximately equal to the expected term of the award because we have limited information on the volatility of our common stock due to our lack of trading history. The comparable companies were chosen based on their similar size, stage in the life cycle, and financial leverage in comparison to us.

 

  n  

Risk-free interest rate—The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of grant for zero coupon U.S. Treasury notes with maturities approximately equal to the expected term of the awards.

 

  n  

Expected dividend—The expected dividend is assumed to be zero as we have never paid dividends and have no current plans to pay any dividends on our common stock.

In addition to the assumptions used in the Black-Scholes option-pricing model, we must also estimate a forfeiture rate to calculate the stock-based compensation for our awards. We will continue to use judgment in evaluating the expected volatility, expected terms and forfeiture rates utilized for our stock-based compensation calculations on a prospective basis.

We are also required to estimate the fair value of the common stock underlying our stock-based awards when performing the fair value calculations with the Black-Scholes option-pricing model. The fair value of the common stock underlying our stock-based awards was determined on each grant date by our board of directors, with input from management. Our board of directors is comprised of a majority of non-employee directors with significant experience investing in and operating companies in the biotechnology industry. As such, we believe that our board of directors has the relevant experience and expertise to determine a fair value of our common stock on each respective grant date. Given the absence of a public trading market of our common stock, and in accordance with the American

 

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Institute of Certified Public Accountants, or AICPA, Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, our board of directors exercised reasonable judgment and considered numerous objective and subjective factors to determine the best estimate of the fair value of our common stock.

Significant Factors, Assumptions and Methodologies Used in Determining Fair Value

To assist our board of directors with the determination of the exercise price of our stock options and the fair value of the common stock underlying the options, we obtained third-party valuations of our common stock as of June 15, 2010, June 15, 2011, December 31, 2011 and June 30, 2012. The independent valuations performed by unrelated third-party specialists were utilized by our board of directors to assist with the valuation of the common stock. However, management and our board of directors have assumed full responsibility for the estimates. The board of directors utilized the fair values of the common stock derived in the third-party valuations as a factor to set the exercise prices for options granted. For grants made on dates for which there was no recent valuation to utilize in setting the exercise price of our common stock, and given the absence of an active market for our common stock, our board of directors determined the fair value of our common stock on the date of grant based on several factors, including:

 

  n  

progress of our research and development efforts;

 

  n  

our operating results and financial condition, including our levels of available capital resources;

 

  n  

rights and preferences of our common stock compared to the rights and preferences of our other outstanding equity securities;

 

  n  

material risks related to our business;

 

  n  

equity market conditions affecting comparable public companies;

 

  n  

the likelihood of achieving a liquidity event for the shares of common stock, such as an initial public offering given prevailing market and biotechnology sector conditions; and

 

  n  

that the grants involved illiquid securities in a private company.

In determining the fair value of our common stock, we used a combination of the market multiple approach and the initial public offering, or IPO, value approach to estimate the enterprise value of our company, each weighted equally. The per share common stock fair value was estimated by allocating the enterprise value using the option pricing method, or OPM, at the June 15, 2010 and June 15, 2011 valuation dates, and the probability-weighted expected return method, or PWERM, beginning with the December 31, 2011 valuation date.

The market multiple approach estimates the value of a business by comparing a company to similar publicly-traded companies. When selecting the comparable companies to be used for the market multiple approaches, we focused on companies within the biopharmaceutical industry and in pre-Phase III clinical development. The mix of comparable companies was reviewed at each valuation date to assess whether to add or delete companies; however, following each review, the comparable companies remained largely unchanged from those used in prior valuation analyses.

A group of comparable publicly-traded companies is selected and market multiples are calculated using each company’s stock price and other financial data. An estimate of value for our company is computed by applying selected market multiples based on forecasted results for both the comparable companies and our company. Given that we are several years away from generating product revenue and we are unable to develop reliable long-term forecasts, our analysis applied the market approach based on our research and development spending results, which was determined to be the most relevant financial measure. We applied a 3.0 to 6.5 market multiple to our forecasted research and development spend and a 1.5 to 2.75 market multiple to our historical spend over the last three years.

The IPO value approach estimates the value of a business by estimating a future value of biopharmaceutical IPOs of similar stage over approximately the preceding two-year period, discounted to the present value, as further discussed below with respect to each valuation. We applied a market multiple to our forecasted research and development spend for the next one to two years of 6.5 to 7.5. Given that both the market multiple approach and the IPO value approach provide relevant estimates of fair value, which did not differ significantly, we applied equal weighting to each of these approaches to determine an initial enterprise value. The initial estimated enterprise value was then allocated to the common stock using the OPM or the PWERM.

 

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The OPM is appropriate to use when the range of possible future outcomes is so difficult to predict that forecasts would be highly speculative. The OPM treats common stock and convertible preferred stock as call options on the enterprise value, with exercise prices based on the liquidation preference of the convertible preferred stock. Therefore, the common stock has value only if the funds available for distribution to the stockholders exceed the value of the liquidation preference at the time of a liquidity event such as a merger, sale or IPO, assuming the enterprise has funds available to make a liquidation preference meaningful and collectible by the stockholders. The common stock is modeled to be a call option with a claim on the enterprise at an exercise price equal to the remaining value immediately after the convertible preferred stock is liquidated. The OPM uses the Black-Scholes option-pricing model to price the call option.

As more certainty developed regarding possible exit event outcomes, including an IPO, the allocation methodology utilized to allocate our enterprise value of our common stock transitioned from the OPM to the PWERM. The PWERM is a scenario-based analysis that estimates the value per share based on the probability-weighted present value of expected future investment returns, considering each of the possible outcomes available to us, as well as the rights of each share class. The PWERM estimates the common stock value to our stockholders under each of four possible future scenarios—IPO, sale, remain a private company and liquidation. The value per share under each scenario was then probability weighted and the resulting weighted values per share were summed to determine the fair value per share of our common stock. In the sale, remain-a-private-company and liquidation scenarios, the value per share was allocated taking into account the liquidation preferences and participation rights of our convertible preferred stock consistent with the method outlined in the AICPA Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. In the IPO scenario, it was assumed all outstanding shares of our convertible preferred stock would convert into common stock.

We also considered the fact that our stockholders cannot freely trade our common stock in the public markets. The estimated fair value of our common stock at each grant date reflected a non-marketability discount partially based on the likelihood and timing of a future liquidity event.

Common Stock Valuations

As summarized in the table below, we have granted the following stock options since January 1, 2011:

 

 

 

GRANT DATE

   NUMBER OF
SHARES
GRANTED
     EXERCISE
PRICE PER

SHARE
     ESTIMATED
FAIR VALUE
PER SHARE OF
COMMON STOCK
 

January 13, 2011

     150,000       $ 0.90       $ 0.90   

March 17, 2011

     110,000         0.90         0.90   

May 26, 2011

     105,000         0.90         0.90   

September 15, 2011

     125,000         0.80         0.80   

October 24, 2011

     1,000,000         0.80         0.80   

November 10, 2011

     30,000         0.80         0.80   

April 20, 2012

     175,000         1.40         1.40   

September 20, 2012

     60,000         1.50         1.50   

 

 

The intrinsic value of all outstanding options as of June 30, 2012 was $         million based on the estimated fair value for our common stock of $         per share, the mid-point of the estimated price range set forth on the cover of this prospectus.

The fair value per share of the common stock in the table above represents the determination by our board of directors of the fair value of our common stock as of the date of the grant, taking into consideration various objective and subjective factors, including the conclusions, if applicable, of contemporaneous valuations of our common stock as discussed below.

June 2010: As of June 2010, our key milestones to date included our alliance with GSK, the initiation of a single-agent Phase Ia clinical trial for demcizumab, which included encouraging early signs of single-agent anti-tumor

 

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activity, and the identification of our second and third clinical product candidates, anti-Notch2/3 (OMP-59R5) and anti-Fzd7 (OMP-18R5). During June 2010, we entered into a strategic alliance with Bayer and received a $40.0 million upfront cash payment. The alliance with Bayer was formed to discover, develop and commercialize novel anti-CSC therapeutics targeting the Wnt pathway. As a consequence of this event, a contemporaneous valuation was performed. The valuation used a risk-adjusted discount rate of 20%, a non-marketability discount of 33% and an estimated time to a liquidity event of 3.5 years. Under the market approach we applied a market multiple of 3.0 to 4.0 to our forecasted research and development spend and of 1.6 to 1.85 to our historical spend over the last three years. Under the IPO approach, we applied a market multiple of 7.5 to our forecasted research and development spend. The expected outcomes were weighted 100% toward remaining a private company. This valuation indicated a fair value of $0.90 per share for our common stock as of June 15, 2010.

January 2011, March 2011 and May 2011: As of January 2011, we continued to progress preclinical and clinical-stage programs including the filing of an IND for anti-Fzd7 (OMP-18R5). In December 2010, we achieved two milestones under our GSK collaboration that resulted in the receipt of $9.0 million in January 2011. The selection of anti-Notch1 (OMP-54F28) as the third clinical candidate under the collaboration was a $5.0 million development milestone and the treatment of our first patient in the Phase I clinical trial for anti-Notch2/3 (OMP-59R5) was a $4.0 million development milestone. In April 2011, our IND for anti-Fzd7 (OMP-18R5) was accepted, which resulted in the achievement of a $20.0 million development milestone under our Bayer collaboration, which we received in May 2011. All milestone payments received were in the normal course of our collaboration agreements and singularly or as a group do not represent significant value creating events. These milestones helped to maintain our cash balance in excess of $100 million. Our board of directors determined that these events did not trigger any material changes to our business. Accordingly, we did not adjust the fair value of our common stock as of January 2011, March 2011 and May 2011.

June 2011: We conducted a contemporaneous valuation as of June 15, 2011. We continued to apply the OPM method to allocate the enterprise value and used a risk-adjusted rate of 18%, a non-marketability discount of 33% and an estimated time to a liquidity event of 2.5 years. Under the market approach we applied a market multiple of 3.0 to 3.5 to our forecasted research and development spend and of 1.5 to 1.75 to our historical spend over the last three years, both reflecting a slight downward trend in spending from the previous year. Under the IPO approach, we applied a market multiple of 7.5 to our forecasted research and development spend as IPO values remained flat from the previous year. The decrease in the fair value of our common stock to $0.80 per share is attributed to the decrease in the market multiples due to the global economy exhibiting signs of strain, which impacted the equity markets, including the biotechnology sector.

September 2011, October 2011 and November 2011: In July 2011, we amended the terms of our development agreement with GSK to focus on the development of the two GSK-selected product candidates, anti-Notch2/3 (OMP-59R5) and anti-Notch1 (OMP-52M51). The changes related to the GSK amendment resulted in us obtaining full rights to demcizumab and our anti-DLL4/anti-VEGF bispecific antibody. As a result of this event, the future value of these programs will inure to us; however, we assume complete responsibility for all future development costs. We continued to advance our Phase Ib combination trials of demcizumab in patients with non-small cell lung cancer and pancreatic cancer and conducted Phase I clinical trials of anti-Notch2/3 (OMP-59R5) and anti-Fzd7 (OMP-18R5), including the testing of several new intermittent dosing regimens. Additionally, we moved two preclinical programs, Fzd8-Fc (OMP-54F28) and anti-Notch1 (OMP-52M51), toward projected 2012 IND filings. Our board of directors determined a fair value of our common stock of $0.80 per share, as there were no events specific to us that would indicate the fair value of our common stock would have materially changed.

December 2011: In December 2011, we began to see encouraging early results from studies of demcizumab, including Phase Ib clinical trials. Also, as a consequence of the increased activity of biotechnology companies in the equity markets, our board of directors began to have discussions regarding our potential IPO filing in 2012. At this time, we initiated the early stages of an IPO evaluation process, although no meetings were held with investment banks. We conducted a contemporaneous valuation as of December 31, 2011. As the potential outcomes for a liquidity event were becoming more certain, we moved to the PWERM for allocating our enterprise value. The probability of an IPO was in the range of 25 to 30%, and for a sale of the company the probability was in the range of 20 to 25%. The probability of remaining a private company was in the range of 45-50% and the probability of liquidating was 0-5%. The valuation used a risk-adjusted rate of 15%, a non-marketability discount of 29% and an

 

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estimated time to a liquidity event of one year. Under the market approach we applied a market multiple of 4.75 to 5.25 to our forecasted research and development spend and of 2.25 to 2.5 to our historical spend over the last three years. These increases from the prior valuation date reflect an upward trend in research spending extending from an access to capital in the second half of 2011. Under the IPO approach, we applied a market multiple of 7.0 to our forecasted research and development spend as this multiple decreased slightly due to downward trends in IPO valuations in the second half of 2011. This valuation indicated a fair value of $1.40 per share for our common stock as of December 31, 2011. The increase in the fair value of our common stock is primarily attributed to the use of the PWERM as the allocation method. In addition, as we are moving towards an IPO event, the time to liquidity decreased from 2.5 years to 1.0 year. Both of these factors contributed to the increase in the fair value of our common stock.

April 2012: Our board of directors determined a fair value of our common stock of $1.40 per share, as there were no events specific to us that would indicate the fair value of our common stock would have materially changed from December 31, 2011.

June 2012: We conducted a contemporaneous valuation as of June 30, 2012. We continued to use the PWERM for allocating our enterprise value. The probability of an IPO was in the range of 35-40%, and for a sale of the company the probability was in the range of 25-30%. The probability of remaining a private company was in the range of 30-35% and the probability of liquidating was 0-5%. The valuation used a risk-adjusted rate of 14%, a non-marketability discount of 25% and an estimated time to a liquidity event of nine months. Under the market approach we applied a market multiple of 6.75 to 7.0 to our forecasted research and development spend and 2.5 to 2.75 to our historical spend over the last three years. This valuation indicated a fair value of $1.50 per share for our common stock as of June 30, 2012. The increase in the fair value of our common stock is primarily attributed to the decrease in time to liquidity and increase in market multiples.

Results of Operations

Comparison of the Six Months Ended June 30, 2011 and 2012

 

 

 

     SIX MONTHS ENDED
JUNE 30,
    DOLLAR
CHANGE
 

(In thousands)

   2011     2012    
    

(Unaudited)

       

Revenue:

      

Collaboration revenue—related party

   $ 2,181      $ 5,985      $ 3,804   

Collaboration revenue

     24,000        4,000        (20,000

Grant revenue

            22        22   
  

 

 

   

 

 

   

 

 

 

Total revenue

     26,181        10,007        (16,174

Operating expenses:

      

Research and development

     18,220        20,895        2,675   

General and administrative

     3,519        3,477        (42
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     21,739        24,372        2,633   
  

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     4,442        (14,365     (18,807

Interest and other income, net

     84        86        2   

Interest expense

     (32     (6     26   
  

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 4,494      $ (14,285   $ (18,779
  

 

 

   

 

 

   

 

 

 

 

 

 

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Revenue

Revenue for the six months ended June 30, 2012 was $10.0 million, a decrease of $16.2 million, or 62%, compared to total revenue of $26.2 million for the six months ended June 30, 2011. The decrease is primarily due to the achievement of a $20.0 million development milestone under the Bayer collaboration agreement related to the acceptance of the IND for anti-Fzd7 (OMP-18R5) in the second quarter of 2011. There was no milestone achieved for Bayer in the six months ended June 30, 2012. This decrease was partially offset by an increase in related-party revenue.

The increase in collaboration revenue—related party is due to the achievement in April 2012 of a $5.0 million proof-of-principle development milestone related to the anti-Notch2/3 (OMP-59R5) program under the GSK collaboration agreement. Offsetting this increase is the decrease in revenue related to the change in the estimated period of performance under the GSK arrangement as the amendment to the GSK agreement in July 2011 was determined to be a material modification. At the modification date, we identified all undelivered elements and determined that there were certain development services we are obligated to provide for anti-Notch1 (OMP-52M51) and for the continued development work to get anti-Notch2/3 (OMP-59R5) through Phase II proof-of-concept trials. We determined that we have a single unit of accounting and our estimated period of performance is four years from the modification date.

Research and Development

Research and development expenses were $20.9 million for the six months ended June 30, 2012, an increase of $2.7 million, or 15%, compared to research and development expenses of $18.2 million for the six months ended June 30, 2011. Our internal program costs increased by $0.2 million, primarily due to $1.2 million in increased costs due to increased headcount and contract services, offset by a decrease of $1.0 million in license fees related to the anti-Fzd7 (OMP-18R5) program. Our external program costs increased $2.5 million, primarily due to a $0.9 million increase in manufacturing costs for our various programs and $1.6 million in expenses incurred in the six months ended June 30, 2012 for toxicology studies for various programs.

General and Administrative

General and administrative expenses were $3.5 million for the six months ended June 30, 2012, a decrease of $42,000, or 1%, compared to general and administrative expenses of $3.5 million for the six months ended June 30, 2011. The decrease is primarily due to a decrease in legal fees.

Interest and Other Income, net

Interest and other income, net was $86,000 for the six months ended June 30, 2012, a decrease of $2,000, or 2%, compared to interest and other income, net of $84,000 for the six months ended June 30, 2011.

Interest Expense

Interest expense was $6,000 for the six months ended June 30, 2012, a decrease of $26,000, or 82%, compared to interest expense of $32,000 for the six months ended June 30, 2011. The decrease is due to the decrease in outstanding borrowings under our equipment lease line.

 

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Comparison of the Years Ended December 31, 2010 and 2011

 

 

 

     YEAR ENDED
DECEMBER 31,
    DOLLAR
CHANGE
 
(In thousands)    2010     2011    

Revenue:

      

Collaboration revenue—related party

   $ 13,363      $ 3,365      $ (9,998

Collaboration revenue

     4,355        28,000        23,645   

Grant revenue

            44        44   
  

 

 

   

 

 

   

 

 

 

Total revenue

     17,718        31,409        13,691   

Operating expenses:

      

Research and development

     39,703        40,058        355   

General and administrative

     6,552        6,591        39   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     46,255        46,649        394   
  

 

 

   

 

 

   

 

 

 

Loss from operations

     (28,537     (15,240     13,297   

Interest and other income, net

     1,640        244        (1,396

Interest expense

     (118     (38     80   
  

 

 

   

 

 

   

 

 

 

Net loss

   $ (27,015   $ (15,034   $ 11,981   
  

 

 

   

 

 

   

 

 

 

 

 

Revenue

Revenue for the year ended December 31, 2011 was $31.4 million, an increase of $13.7 million, or 77%, compared to total revenue of $17.7 million for the year ended December 31, 2010. The increase was primarily due to the achievement of a $20.0 million development milestone under the Bayer collaboration agreement related to the acceptance of the IND for anti-Fzd7 (OMP-18R5) in 2011. In addition, we had a full year of revenue in 2011 recognized from the amortization of the $40.0 million upfront payment received under the Bayer collaboration agreement compared to only six months in 2010, which contributed $3.6 million to the increase. The decrease in collaboration revenue—related party is due to our achieving development milestones under our GSK arrangement related to the selection of anti-Notch1 (OMP-52M51) as a clinical candidate and for the first patient dosed in the anti-Notch2/3 (OMP-59R5) clinical trials of $9.0 million in 2010 and none in 2011. The GSK collaboration revenue also decreased due to the change in the estimated period of performance under the GSK arrangement as the amendment to the agreement in July 2011 was determined to be a material modification. At the modification date, we identified all undelivered elements and determined that there were certain development services we are obligated to provide for anti-Notch1 (OMP-52M51), and the continued development work to get anti-Notch2/3 (OMP-59R5) through Phase II proof-of-concept trials. We determined that we have a single unit of accounting and our estimated period of performance is four years from the modification date.

Research and Development

Research and development expenses were $40.1 million for the year ended December 31, 2011, an increase of $0.4 million, or 1%, compared to research and development expenses of $39.7 million for the year ended December 31, 2010. The increase in our internal costs is primarily due to a $1.3 million increase in personnel costs due to increases in headcount in research and clinical staff and a $0.6 million increase in contract services. In addition, our external program costs in clinical have increased $1.1 million primarily for our Notch2/3 and Fzd8-Fc programs. The increases were offset by a decrease of $1.8 million in manufacturing expenditures for our external programs as we had additional manufacturing runs for clinical trial supplies in 2010 and a $1.3 million decrease in toxicology studies initiated in 2010 and completed in 2011.

 

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General and Administrative

General and administrative expenses were $6.6 million for the year ended December 31, 2011, an increase of $39,000, or 1%, compared to general and administrative expenses of $6.6 million for the year ended December 31, 2010. Professional fees—related expenses decreased by $0.2 million due to the decrease in legal expenditures. This decrease was offset by the increase in facility-related costs as we expanded our office space in 2011.

Interest and Other Income, net

Interest and other income, net was $0.2 million for the year ended December 31, 2011, a decrease of $1.4 million, or 85%, compared to interest and other income, net of $1.6 million for the year ended December 31, 2010. We received five Section 48D grants aggregating to $1.2 million in the year ended December 31, 2010, as a result of the Patient Protections and Affordable Care Act’s creation of a therapeutic discovery project tax credit for qualifying investments in qualifying therapeutic discovery projects during 2009. We did not receive any similar funds in 2011.

Interest Expense

Interest expense was $38,000 for the year ended December 31, 2011, a decrease of $80,000, or 68%, compared to interest expense of $118,000 for the year ended December 31, 2010. The decrease is due to the decrease in outstanding borrowings under our equipment lease line.

Comparison of the Years Ended December 31, 2009 and 2010

 

 

 

     YEAR ENDED
DECEMBER 31,
    DOLLAR
CHANGE
 
(In thousands)    2009     2010    

Revenue:

      

Collaboration revenue—related party

   $ 14,363      $ 13,363      $ (1,000

Collaboration revenue

            4,355        4,355   
  

 

 

   

 

 

   

 

 

 

Total revenue

     14,363        17,718        3,355   

Operating expenses:

      

Research and development

     30,889        39,703        8,814   

General and administrative

     4,621        6,552        1,931   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     35,510        46,255        10,745   
  

 

 

   

 

 

   

 

 

 

Loss from operations

     (21,147     (28,537     (7,390

Interest and other income, net

     288        1,640        1,352   

Interest expense

     (201     (118     83   
  

 

 

   

 

 

   

 

 

 

Net loss

   $ (21,060   $ (27,015   $ (5,955
  

 

 

   

 

 

   

 

 

 

 

 

Revenue

Revenue for the year ended December 31, 2010 was $17.7 million, an increase of $3.4 million, or 23%, compared to revenues of $14.4 million for the year ended December 31, 2009. The increase was primarily due to the recognition of $4.4 million from the June 2010 collaboration agreement with Bayer. Under the terms of this agreement, we received an upfront payment of $40.0 million, which we are amortizing over our estimated period of performance of five years. Partially offsetting the increase is a decrease in our GSK milestone revenue. We recognized $9.0 million in milestone revenue from GSK in 2010 due to the achievement of two development milestones for the selection of anti-Notch1 (OMP-52M51) as a clinical candidate and for the first patient dosed in the anti-Notch2/3 (OMP-59R5) clinical trials. We recognized $10.0 million in development milestones in 2009 for the completion of the proof-of-principle work related to the demcizumab program and the selection of OMP-59R5 as a clinical candidate.

 

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Research and Development

Research and development expenses were $39.7 million for the year ended December 31, 2010, an increase of $8.8 million, or 29%, compared to research and development expenses of $30.9 million for the year ended December 31, 2009. The increase was primarily due to increased external costs of $6.9 million for manufacturing, clinical and toxicity studies to support the filing of INDs for our anti-Notch2/3 (OMP-59R5) and OMP-18R5 programs. In addition, our personnel-related costs increased by $0.9 million due to the increase in research and clinical staff, and our consulting costs increased $0.6 million as we expanded our research activities.

General and Administrative

General and administrative expenses were $6.6 million for the year ended December 31, 2010, an increase of $1.9 million, or 42%, compared to general and administrative expenses of $4.6 million for the year ended December 31, 2009. The increase in expenses was due to an increase of $0.7 million in personnel-related costs due to an increase in headcount, an increase of $0.7 million in legal costs related to contract preparation, $0.2 million in professional fees and $0.3 million in facility-related costs.

Interest and Other Income, net

Interest and other income, net was $1.6 million for the year ended December 31, 2010, an increase of $1.4 million, compared to interest and other income, net of $0.3 million for the year ended December 31, 2009. The increase was due to $1.2 million in research grants we received in 2010, as a result of the Patient Protections and Affordable Care Act’s creation of a therapeutic discovery project tax credit for qualifying investments in qualifying therapeutic discovery projects during 2009. In addition, we earned $0.1 million more in interest income in 2010 as our invested cash balance was higher due to the $40.0 million upfront payment received from Bayer.

Interest Expense

Interest expense was $118,000 for the year ended December 31, 2010, a decrease of $83,000, or 41%, compared to interest expense of $201,000 for the year ended December 31, 2009. Interest expense decreased due to the decrease in our outstanding borrowings year-over-year.

Liquidity and Capital Resources

Liquidity and Capital Expenditures

Since inception, as of June 30, 2012, our operations have been financed primarily by net proceeds of $187.1 million from the sales of shares of our convertible preferred stock and $112.0 million from the upfront and milestone payments received under the GSK and Bayer collaborative arrangements. As of December 31, 2011 and June 30, 2012, we had $100.4 million and $75.8 million of cash, cash equivalents and short-term investments, respectively.

Our primary uses of cash are to fund operating expenses, primarily research and development expenditures. Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the change in our outstanding accounts payable and accrued expenses. We acquired property and equipment of $1.5 million, $0.8 million, $2.2 million and $0.6 million during the years ended December 31, 2009, 2010, and 2011 and the six months ended June 30, 2012, respectively.

We believe that our existing cash, cash equivalents and short-term investments as of June 30, 2012, along with the estimated net proceeds from this offering, will be sufficient to meet our anticipated cash requirements for at least the next 12 months. However, our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially.

 

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Our future capital requirements are difficult to forecast and will depend on many factors, including:

 

  n  

the achievement of milestones and/or exercise of options under our agreements with GSK and Bayer;

 

  n  

the initiation, progress, timing and completion of preclinical studies and clinical trials for our product candidates and potential product candidates;

 

  n  

the number and characteristics of product candidates that we pursue;

 

  n  

the progress, costs and results of our clinical trials;

 

  n  

the outcome, timing and cost of regulatory approvals;

 

  n  

delays that may be caused by changing regulatory requirements;

 

  n  

the costs and timing of hiring new employees to support our continued growth; and

 

  n  

the costs and timing of procuring clinical supplies of our product candidates.

The following table summarizes our cash flows for the periods indicated (in thousands):

 

 

 

     YEAR ENDED DECEMBER 31,     SIX MONTHS
ENDED JUNE 30,
 
     2009     2010     2011     2011     2012  
                       (Unaudited)  

Cash (used in) provided by operating activities

   $ (28,633   $ 4,502      $ (11,286   $ 6,772      $ (23,958

Cash provided by (used in) investing activities

     15,851        (1,541     7,407        (4,035     25,077   

Cash provided by (used in) financing activities

     5,714        (704     (681     (276     (79

 

 

Cash Flows from Operating Activities

Cash used in operating activities for the six months ended June 30, 2012 was $24.0 million. The net loss of $14.3 million was offset by non-cash charges of $0.7 million for depreciation and amortization and $0.4 million for stock-based compensation. The decrease in net operating assets of $10.7 million was due to the decrease in deferred revenue of $4.5 million from amortization of upfront payments from the GSK and Bayer arrangements. In addition, accounts payable and accrued liabilities decreased by $3.2 million as a result of the timing of our payments, and other assets increased by $2.0 million due to the capitalization of IPO costs related to this offering.

Cash provided by operating activities for the six months ended June 30, 2011 was $6.8 million. Income was $4.5 million, including non-cash charges of $0.5 million for depreciation and amortization and $0.4 million for stock-based compensation. The increase in net operating assets of $1.4 million was due to the receipt of funds from our $9.0 million receivable with GSK as a result of achievement of two development milestones in 2010. The decrease in deferred revenue of $6.2 million is from amortization of the upfront payments from the GSK and Bayer arrangements. In addition, accounts payable and accrued liabilities decreased by $1.6 million as a result of the timing of our payments.

Cash used in operating activities for the year ended December 31, 2011 was $11.3 million. The net loss of $15.0 million was offset by non-cash charges of $1.2 million for depreciation and amortization and $0.8 million of stock-based compensation. The decrease in net operating assets of $1.9 million was due to a decrease in deferred revenue, as we recognized revenue in 2011 related to the upfront payments previously received from GSK and Bayer. Offsetting the decrease in deferred revenue was the receipt of the $9.0 million receivable from GSK related to the achievement of two development milestones in 2010. Accounts payable and accrued liabilities increased by $1.3 million as we continued to increase our research and development related activities.

Cash provided by operating activities for the year ended December 31, 2010 was $4.5 million. The net loss of $27.0 million was offset by non-cash charges of $2.3 million for depreciation and amortization and $0.8 million for stock-based compensation. The increase in net operating assets of $28.1 million was due to the increase in the deferred revenue of $31.3 million. In June 2010, we entered into a collaboration arrangement with Bayer and we received $40.0 million as an upfront payment for the arrangement. Offsetting the increase in the deferred revenue was the amortization to revenue from the GSK arrangement and six months for the Bayer arrangement. Also offsetting the increase in deferred revenue was a net change of $4.0 million in the receivable from GSK related to

 

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the achievement of two development milestones in 2010. Accounts payable and accrued liabilities increased by $2.2 million due to the timing of our payments and incurrence of costs and increases in our research and development related activities in 2010.

Cash used in operating activities for the year ended December 31, 2009 was $28.6 million. The net loss of $21.1 million was offset by non-cash charges of $2.8 million for depreciation and amortization and $0.7 million for stock-based compensation. The decrease in net operating assets of $11.0 million was primarily due to the decrease of $4.4 million in deferred revenue as we have recognized revenue related to the upfront payments previously received from GSK and the increase of $5.0 million in receivables from GSK due to the achievement of a development milestone in 2009.

Cash Flows from Investing Activities

Cash from investing activities is related to our acquisition of property and equipment amounting to $0.3 million and $0.6 million for the six months ended June 30, 2011 and 2012, respectively, and purchases of short-term securities amounting to $54.9 million and $24.0 million for the six months ended June 30, 2011 and 2012, respectively. These outflows were offset by the maturities of short-term investments amounting to $51.2 million and $49.7 million for the six months ended June 30, 2011 and 2012, respectively. Purchases of property and equipment are primarily related to the expansion of our laboratory and related equipment.

Cash from investing activities is related to our acquisition of property and equipment amounting to $1.5 million, $0.8 million and $2.2 million for the years ended December 31, 2009, 2010 and 2011, respectively, and purchases of short-term securities amounting to $116.5 million, $188.0 million and $103.9 million for the years ended December 31, 2009, 2010 and 2011, respectively. These outflows were offset by the maturities of short-term investments amounting to $131.4 million, $187.3 million and $113.5 million for the years ended December 31, 2009, 2010 and 2011, respectively. Purchases of property and equipment are primarily related to the expansion of our laboratory and related equipment.

Cash flows from Financing Activities

Cash used in financing activities for the six months ended June 30, 2011 of $276,000, was primarily related to repayments on our borrowings. For the six months ended June 30, 2012, the repayments on borrowings of $202,000 was offset by proceeds of $123,000 from the issuance of common stock upon the exercise of stock options.

Cash used in financing activities for the years ended December 31, 2010 and 2011 of $0.7 million and $0.7 million, respectively, was primarily related to repayments on our borrowings.

Cash provided by financing activities for the year ended December 31, 2009 of $5.7 million was due primarily to the receipt of $6.0 million in proceeds from the issuance of shares of Series B-1 convertible preferred stock, which was partially offset by $0.4 million in net repayments of borrowings.

Contractual Obligations and Other Commitments

The following table summarizes our contractual obligations as of December 31, 2011 (in thousands):

 

 

 

     PAYMENTS DUE BY PERIOD  

CONTRACTUAL OBLIGATIONS:

   LESS THAN
1 YEAR
     1 TO 3
YEARS
     3 TO 5
YEARS
     MORE THAN
5 YEARS
     TOTAL  

Notes payable (1)

   $ 205       $       $       $       $ 205   

Purchase option (2)

     145                                 145   

Operating leases (3)

     1,811         3,715         3,944         4,361         13,831   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual obligations

   $ 2,161       $ 3,715       $ 3,944       $ 4,361       $ 14,181   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

(1) 

Notes payable includes $4.0 (in thousands) of interest payable.

(2) 

The purchase option is related to leased equipment for which we may exercise the option to purchase the equipment in 2012.

(3) 

Operating leases include total future minimum rent payments under non-cancelable operating lease agreements.

 

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Off-Balance Sheet Arrangements

We have not entered into any off-balance sheet arrangements and do not have any holdings in variable interest entities.

Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate and foreign exchange sensitivities as follows:

Interest Rate Risk

We had cash, cash equivalents and short-term investments of $100.4 million and $75.8 million as of December 31, 2011 and June 30, 2012, respectively, which consist of bank deposits, money market funds and U.S. Treasury Bills. Such interest-earning instruments carry a degree of interest rate risk; however, historical fluctuations in interest income have not been significant. We had total outstanding debt of $0.3 million as of December 31, 2011, which is due within 12 months. All of our debt obligations carry fixed interest rates.

We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure. We have not been exposed nor do we anticipate being exposed to material risks due to changes in interest rates. A hypothetical 10% change in interest rates during any of the periods presented would not have had a material impact on our financial statements.

Foreign Exchange Risk

We face foreign exchange risk as a result of entering into transactions denominated in currencies other than U.S. dollars, particularly in Euro and British Sterling. Due to the uncertain timing of expected payments in foreign currencies, we do not utilize any forward foreign exchange contracts. All foreign transactions settle on the applicable spot exchange basis at the time such payments are made.

An adverse movement in foreign exchange rates could have a material effect on payments we make to foreign suppliers. The impact of an adverse change in foreign exchange rates may be offset in the event we receive a milestone payment from a foreign partner. A hypothetical 10% change in foreign exchange rates during any of the preceeding periods presented would not have a material impact on our financial statements.

Recent Accounting Pronouncements

In May 2011, an amendment to an accounting standard was issued that amends the fair value measurement guidance and includes some expanded disclosure requirements. The most significant change is the disclosure information required for Level 3 measurements based on unobservable inputs. This standard became effective for us on January 1, 2012 and did not have a material impact on our financial statements.

In June 2011, an update to an accounting standard was issued that requires that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This update is to be applied retrospectively and is effective for financial statements issued for fiscal years, and interim periods within those years, beginning after December 15, 2011, and interim and annual periods thereafter. We adopted this pronouncement early and the adoption of this guidance did not have a material impact on our financial statements.

 

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BUSINESS

Overview

OncoMed is a clinical development-stage biopharmaceutical company focused on discovering and developing first-in-class monoclonal antibody therapeutics targeting cancer stem cells, or CSCs. Our approach has been to target CSCs, which are the subpopulation of cells in a tumor responsible for driving growth and metastasis of the tumor. CSCs, also known as tumor-initiating cells, exhibit certain properties which include the capacity to divide and give rise to new CSCs via a process called self-renewal and the capacity to differentiate or change into the other cells that form the bulk of the tumor. Common cancer drugs target bulk tumor cells but have limited impact on CSCs, thereby providing a path for recurrence of the tumor. Our product candidates target CSCs by blocking self-renewal and driving differentiation of CSCs toward a non-tumorigenic state, and also impact bulk tumor cells. We believe our product candidates are distinct from the current generations of chemotherapies and targeted therapies, and have the potential to significantly impact cancer treatment and the clinical outcome of patients with cancer.

We utilize our proprietary technologies to (1) identify, isolate and evaluate CSCs, (2) identify and/or validate multiple potential targets and pathways critical to CSC self-renewal and differentiation, and (3) develop targeted antibody and other protein-based therapeutics that are designed to modulate these CSC targets and inhibit the growth of CSCs. These targets are in pathways implicated in cancer biology and stem cell biology, including the Notch, Wnt and other fundamental CSC pathways. We believe our suite of proprietary CSC and antibody platform technologies provides a competitive advantage in cancer drug discovery. All of our product candidates were discovered internally in our own research laboratories.

We have five anti-CSC product candidates in clinical development. Additionally, two other antibodies are in preclinical development with Investigational New Drug, or IND, filings planned for as early as 2013. We are also pursuing discovery of additional novel anti-CSC product candidates. The following summarizes the status of our product candidates and preclinical programs, each of which will be described and discussed in further detail below under “—Our Product Candidates and Preclinical Programs.”

 

  n  

Anti-DLL4 (demcizumab, OMP-21M18). Demcizumab (OMP-21M18) is a humanized monoclonal antibody that inhibits Delta Like Ligand 4, or DLL4, in the Notch signaling pathway. We completed a single-agent Phase Ia trial in advanced solid tumor patients in 2011, which showed promising evidence of single-agent activity in heavily pretreated patients, with a disease control rate, or DCR, of 64% in the highest dose cohort, but also showed adverse events, including hypertension and a few cardiovascular events. We are conducting two Phase Ib combination trials of demcizumab. The first trial is in combination with standard-of-care gemcitabine in first-line advanced pancreatic cancer patients and the second trial is in combination with standard-of-care carboplatin and pemetrexed (Alimta®) in first-line advanced non-small-cell lung cancer, or NSCLC, patients. In both Phase Ib trials, we have employed less frequent or lower dosing of the antibody in combination with chemotherapy in an effort to minimize toxicity while maintaining efficacy. Initial demcizumab Phase Ib data from these ongoing trials suggest a tolerable safety profile, with manageable hypertension as a common treatment-related adverse event. We have not encountered clinically evident cardiac toxicity with this new dosing approach and we have seen encouraging anti-tumor activity. Additional data from these trials will be available in 2013. We plan to initiate Phase II trials in 2013. We have worldwide rights to this program.

 

  n  

Anti-DLL4/Anti-VEGF Bispecific. Anti-DLL4/anti-VEGF bispecific is a novel monoclonal antibody that targets and inhibits both DLL4 and vascular endothelial growth factor, or VEGF. VEGF is the target of Avastin®, a monoclonal antibody marketed by Genentech (Roche). Preclinical testing suggests that the efficacy of our bispecific antibody could potentially exceed the efficacy of either anti-DLL4 therapy or anti-VEGF therapy alone. Pending the successful completion of preclinical experiments, including drug safety studies, we intend to advance this program to clinical trials in 2013. We have worldwide rights to this program.

 

  n  

Anti-Notch2/3 (OMP-59R5). OMP-59R5 is a fully human monoclonal antibody that targets the Notch2 and Notch3 receptors. Initially discovered by screening a phage display library against the Notch2 receptor, the antibody binds to a conserved epitope on Notch2 and Notch3. The program is in a Phase Ib/II trial in pancreatic cancer patients, and a single-agent Phase I trial in advanced solid tumor patients. Data for the

 

Phase I trial were presented at the American Society of Clinical Oncology, or ASCO, conference in June

 

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2012. Additional Phase I clinical data will be presented in a plenary session at the EORTC-NCI-AACR Symposium on Molecular Targets and Cancer Therapeutics in November 2012. OMP-59R5 is part of our collaboration with GlaxoSmithKline LLC (formerly SmithKline Beecham Corporation), or GSK, which is discussed below under “—Collaboration and License Agreements—Strategic Alliance with GSK.” GSK retains an option through the end of certain Phase II trials to obtain an exclusive license to OMP-59R5.

 

  n  

Anti-Notch1 (OMP-52M51). OMP-52M51 is a humanized monoclonal antibody targeted to the Notch1 receptor that we believe may have utility in both certain solid tumors and certain hematologic malignancies. We filed an IND application for OMP-52M51 that was accepted in September 2012, and the product candidate is advancing in clinical development to evaluate OMP-52M51 in patients with certain hematologic malignancies. OMP-52M51 is part of our GSK collaboration. GSK retains an early option through the end of certain Phase I trials to obtain an exclusive license to this anti-Notch1 antibody or a standard option through the end of certain Phase II trials.

 

  n  

Anti-Fzd7 (OMP-18R5). OMP-18R5 is a fully human monoclonal antibody, identified by screening against the Frizzled7 receptor, or Fzd7, that binds a conserved epitope on five Frizzled receptors and inhibits Wnt signaling. OMP-18R5 is in a Phase I single-agent trial in advanced solid tumor patients, and we expect to report data for this trial in 2013. We believe OMP-18R5 is the first monoclonal antibody designed to inhibit Wnt signaling to enter clinical testing. OMP-18R5 is part of our Wnt pathway collaboration with Bayer Pharma AG (formerly Bayer Schering Pharma AG), or Bayer, which is discussed below under “—Collaboration and License Agreements—Strategic Alliance with Bayer.” Bayer retains an option to exclusively license OMP-18R5 at any point through completion of certain Phase I trials.

 

  n  

Fzd8-Fc (OMP-54F28). OMP-54F28, our second product targeting the Wnt pathway, is a proprietary fusion protein based on a truncated form of the Frizzled8 receptor, or Fzd8. We filed an IND application for this product candidate that was accepted in May 2012, and are currently enrolling patients in a Phase I single-agent clinical trial to evaluate OMP-54F28 in patients with advanced solid tumors. OMP-54F28 is part of our Bayer collaboration. Bayer retains an option to exclusively license OMP-54F28 at any point through completion of certain Phase I trials.

 

  n  

Wnt biologic #3. As part of our Bayer collaboration, we are also advancing an additional biologic product candidate in preclinical studies.

 

  n  

Wnt small molecule inhibitors. We are also working with Bayer to discover small molecule Wnt pathway inhibitors.

 

  n  

RSPO-LGR. We identified that the R-spondin, or RSPO, ligands signal through the LGR receptor family, which is emerging as an important CSC pathway. Recent studies have demonstrated that certain LGR receptors are distributed specifically on adult stem cells in mammalian tissues and these LGR-expressing cells have been linked to the development of cancer. We are conducting preclinical studies of antibodies that modulate the RSPO-LGR pathway and we plan to enter clinical trials with our first product candidate targeting the RSPO-LGR pathway as early as 2013. We have worldwide rights to these programs.

Strategic Alliance with GSK

In December 2007, we entered into a strategic alliance with GSK to develop anti-CSC antibody therapeutics targeting the Notch signaling pathway. Upon signing, we received $35.0 million in cash, comprised of $17.5 million in an upfront payment and $17.5 million in the form of an equity investment.

In July 2011, we amended the terms of our development agreement with GSK, and the collaboration is now focused entirely on the development of two product candidates, anti-Notch2/3 (OMP-59R5) and anti-Notch1 (OMP-52M51). Under this collaboration, GSK may exercise an option during defined time periods through completion of Phase II proof-of-concept trials to obtain an exclusive license to develop and commercialize such product candidates. We lead research and development efforts for these product candidates prior to GSK’s exercise of its option with respect to such candidates. We are eligible to receive from GSK, (1) with respect to OMP-59R5, aggregate payments of up to $344.5 million, including an option exercise fee and development, regulatory and commercialization milestones, in addition to percentage royalties in the low double digits to high teens on net product sales, and (2) with respect to OMP-52M51, aggregate payments of up to $349.5 million, including an option exercise fee and development, regulatory and commercialization milestones, in addition to percentage royalties in the low double digits to high

 

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teens on net product sales. If GSK elects not to exercise its options for OMP-59R5 and/or OMP-52M51 during the relevant option periods, or if GSK terminates those programs, we will have worldwide rights to such program(s), subject to, under certain circumstances, GSK’s right of first negotiation to obtain an exclusive license to develop and commercialize OMP-52M51.

In July 2012, we amended our agreement to revise the structure of the milestone payments to reflect the decision to initiate a Phase Ib/II trial for OMP-59R5. See “—Collaboration and License Agreements—Strategic Alliance with GSK” below for additional details regarding our collaboration with GSK.

Strategic Alliance with Bayer

In June 2010, we entered into a strategic alliance with Bayer to discover, develop and commercialize novel anti-CSC biologic and small molecule therapeutics targeting the Wnt signaling pathway. We received a $40.0 million upfront cash payment when we entered this alliance. Under this collaboration, Bayer may exercise its option to obtain an exclusive license to develop and commercialize certain biologic therapeutics at any point up to the completion of Phase I trials. We and Bayer also agreed to jointly conduct research to discover potential new small molecule therapeutics targeting the Wnt pathway. Under our collaboration, we lead the discovery and development of biologic therapeutic products prior to Bayer’s exercise of its option, and Bayer leads discovery, development, and upon advancement of the small molecule therapeutics, commercialization of the small molecule therapeutics. We are eligible to receive option fees and research, development, regulatory and commercial milestone payments of up to $387.5 million per program for each biologic therapeutic product successfully developed, in addition to royalties on net product sales. Percentage royalties for certain biologic product candidates are in the low double digits to high teens. For certain other biologic product candidates, percentage royalties are in the mid-single digits to low double digits. Bayer is also obligated to make payments to us upon achievement of research, development, regulatory and commercial milestones, plus advancement fees, for small molecule therapeutics that could total up to $112.0 million per program, in addition to single-digit percentage royalties on net product sales. If Bayer elects not to exercise its options for any class of biologic therapeutic products under the collaboration during the relevant option periods, or if Bayer terminates such program(s), we will have worldwide rights to such program(s).

In August 2012, we amended our agreement with Bayer to reallocate payment amounts between two payments applicable to our biologic product candidates and to modify the trigger for a certain payment applicable to certain biologic product candidates. See “—Collaboration and License Agreements—Strategic Alliance with Bayer” below for additional details regarding our collaboration with Bayer.

Strategy

We believe that a key reason for the limitations of many current cancer treatments is that they fail to impede the growth of CSCs, which we believe are responsible for the initiation, metastasis and recurrence of many cancers. Our goal is to build a leading biopharmaceutical company to discover, develop and potentially commercialize novel therapies targeting CSCs in a capital-efficient manner. Key elements of our strategy to achieve this goal are:

 

  n  

Continue to discover and advance novel cancer therapeutics based on our proprietary discovery and drug development platform. Our proprietary CSC and antibody scientific platforms continue to result in novel product programs, and we plan to continue discovery activities to identify new potential CSC pathways and cancer therapeutic product candidates. These efforts have led to the discovery of multiple proprietary anti-CSC product candidates, five of which are in clinical development, with additional IND filings anticipated in future years.

 

  n  

Advance demcizumab (OMP-21M18) to determine its utility as a treatment for solid tumors. We are conducting Phase Ib trials of demcizumab in first-line pancreatic and non-small-cell lung cancer in combination with standard-of-care chemotherapy. We plan to assess data from these ongoing trials to determine the best path forward in these indications, including potential commercialization if the investment and return profile appears attractive. We also have extensive preclinical data in multiple other indications, and are actively considering opportunities to broaden development of demcizumab over time.

 

  n  

Collaborate with our partners, GSK and Bayer, to advance specific Notch and Wnt pathway programs forward in clinical development. We have multiple agents under our GSK and Bayer collaborations and are working

 

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closely with our partners to advance programs in development. Under our GSK collaboration focused on the Notch pathway, we are developing anti-Notch2/3 (OMP-59R5), currently in a Phase Ib/II trial, and anti-Notch1 (OMP-52M51), with respect to which an IND was accepted in September 2012. Under our Bayer collaboration focused on the Wnt pathway, we are developing anti-Fzd7 (OMP-18R5), currently in Phase I trials, and Fzd8-Fc (OMP-54F28), which entered Phase I in July 2012. We also collaborate with Bayer on Wnt pathway small molecule discovery. Under our collaborations, GSK and Bayer have certain options during certain time periods through the end of specified Phase I or Phase II trials to obtain exclusive licenses to antibody or protein-based product candidates. In the event that these options are not exercised at the end of the relevant option periods, we will have worldwide rights to these programs.

 

  n  

Where possible, utilize biomarker approaches to identify subsets of cancer patients most likely to benefit from our therapies. In some of our programs, such as our anti-Notch2/3 and anti-Notch1 programs, we identified predictive biomarkers that have the potential to assist in patient selection. In other programs, such as our demcizumab and anti-Fzd7 programs, we have extensive biomarker identification/validation research underway. We are working on developing these biomarkers through the course of our current clinical trials for all of our programs, with the plan to potentially utilize those biomarkers in Phase II and subsequent trials to improve patient outcomes. Where biomarker approaches are successfully utilized in clinical testing, we may elect to develop companion diagnostics in conjunction with suitable third-party development and commercialization partners. Our current efforts on our demcizumab, OMP-59R5, OMP-52M51 and OMP-18R5 product candidates could potentially lead to development of future companion diagnostics.

 

  n  

Utilize pharmaceutical collaborations as appropriate to provide funding, create value and leverage partners’ expertise to bring medicines to patients. We believe that our GSK and Bayer collaborations have provided validation of our scientific approach, significant funding to advance our pipeline and access to development and commercial expertise for our partnered assets. To facilitate the capital-efficient development and commercialization of our independent programs, we may consider entering into additional partnerships with biopharmaceutical companies.

We have assembled a strong team of scientific, clinical and business leadership. Paul Hastings, our President and Chief Executive Officer, has over 25 years of biopharmaceutical experience, including roles as Chief Executive Officer at multiple public companies. John Lewicki, Ph.D., our Executive Vice President and Chief Scientific Officer, has over 25 years of research experience in biotechnology. Jakob Dupont, M.D., our Senior Vice President and Chief Medical Officer, has played a key role in the clinical development of a number of cancer agents, including recent clinical leadership on Avastin® development at Genentech (Roche).

Since our founding in August 2004, we have raised approximately $313 million, consisting of approximately $187 million in the form of equity financings, approximately $125 million in the form of collaboration funding from our pharmaceutical partnerships, and $1.2 million in grants. As of June 30, 2012, we had $75.8 million of cash, cash equivalents and short-term investments.

We believe that our broad, novel pipeline of antibody and protein-based therapeutics, our leadership in the field of CSC biology, and our experienced scientific, clinical and business management team provide us with distinct advantages that enable us to continue to discover and advance novel programs targeting CSCs.

Understanding Cancer

Cancer is a leading cause of death worldwide, with approximately 12 million new cases reported and seven million deaths associated with the disease in 2008 according to the International Agency for Research on Cancer, or IARC. The IARC has projected that by 2030 there will be 20 million to 26 million people annually diagnosed with cancer and 13 million to 17 million deaths worldwide. The medical costs associated with cancer in the United States alone in 2010 have been estimated by the National Cancer Institute at the National Institutes of Health to be over $100 billion and according to IMS Health the amount spent in the United States on drugs to treat cancer exceeded $20 billion.

Cancer is a broad group of diseases in which cells divide and grow in an uncontrolled fashion, forming malignancies that can invade other parts of the body. In normal tissues, the rates of new cell growth and cell death are tightly

 

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regulated and kept in balance. In cancerous tissues, this balance is disrupted as a result of mutations, causing unregulated cell growth that leads to tumor formation and growth. While tumors can grow slowly or rapidly, the dividing cells will nevertheless accumulate and the normal organization of the tissue will become disrupted. Cancers can subsequently spread throughout the body by processes known as invasion and metastasis. Once cancer spreads to sites beyond the primary tumor, it is generally incurable. Cancer can arise in virtually any part of the body, with the most common types arising in the prostate gland, breast, lung, colon and skin. Dysregulated cell growth in vital organs such as the liver, lung or brain can impair their normal function with consequences that may ultimately lead to death.

Chemotherapy, radiation and surgical resection of tumors are the most common approaches for treating cancer. While heightened vigilance, new diagnostic tests, combination therapies, improved treatment regimens and targeted therapies (including monoclonal antibodies such as Herceptin® and Avastin® as well as small molecules such as Nexavar® and Tarceva®), have resulted in improvements in overall survival for many cancer patients, we believe that there is still room for significant improvement in the treatment of cancer. Therapeutic effects of chemotherapy and many targeted therapies are often relatively transient, and acquired resistance to therapies remains a significant clinical problem with patients frequently relapsing and the disease metastasizing to distant organs.

Understanding Cancer Stem Cells

The discovery of solid tumor CSCs in 2000 by our scientific founders provides a new framework for understanding cancer and, more importantly, a promising new therapeutic strategy for attacking cancer. CSCs are a subpopulation of tumor cells that share certain properties with normal stem cells (e.g., the ability to proliferate indefinitely and to differentiate into multiple cell types), but, unlike normal stem cells, their growth control has lost normal restraints as a result of cancer-causing mutations. CSCs are relatively resistant to many common cancer therapies. CSCs are believed to be responsible for tumor growth, recurrence after treatment with conventional therapies and metastatic spread of the disease. The inability of current therapies to efficiently eradicate CSCs may be a key reason for the failure of current treatments to achieve durable clinical responses.

The CSC paradigm is based on the observation that most tumors are highly heterogeneous and comprised of many different cell types. Experimental observations indicate that tumor cells vary greatly in their ability to seed new tumor growth. A subpopulation of tumorigenic cancer cells are capable of continuous proliferation to sustain the growth of a tumor, a process analogous to self-renewal of normal stem cells. In contrast, more differentiated tumor cells are incapable of dividing indefinitely and are therefore less tumorigenic, or non-tumorigenic. Tumorigenic CSCs are a resilient subset of cells found in tumors that share certain features with normal stem cells, but have lost normal constraints on growth control because of cancer-causing mutations, leading to tumor initiation, recurrence and metastasis. Also referred to as “tumor-initiating cells,” CSCs were initially discovered in leukemia, and were subsequently discovered by our scientific founders in solid tumors derived from patients with breast cancer. In studies that defined the existence of breast cancer stem cells, human tumor biopsies were obtained and tumor cells were fractionated into distinct subpopulations based on their expression of two surface markers, CD44+ and CD24-. It was subsequently demonstrated that only the minor subpopulation of cells with the CD44+/CD24- phenotype markers was capable of initiating tumor growth when implanted into appropriate host mice, whereas the bulk tumor cells were non-tumorigenic. Importantly, the tumors harvested from animals injected with tumor-initiating cells recapitulated the cellular heterogeneity of the original tumor biopsy, demonstrating two important properties of CSCs—their ability to self-renew and their ability to generate differentiated, non-tumorigenic progeny. Using similar approaches, CSCs have subsequently been identified in many other solid tumor types, including cancers of the colon, lung, pancreas, brain and skin. CSCs may arise from normal tissue stem cells that have lost the ability to regulate growth, or may arise from differentiated tumor cells that have reacquired the capacity to self-renew. Irrespective of their cell of origin, CSCs possess a number of fundamental properties that enable the growth, proliferation and metastasis of solid tumors.

 

 

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LOGO

CSCs have been shown by us and others to be selectively resistant to cytotoxic chemotherapy, radiotherapy and some targeted therapies. Because of the inherent resistance of CSCs to traditional therapies, many agents currently utilized for cancer treatment are not effective in targeting and eliminating CSCs. Thus, therapies that effectively produce early clinical responses, as noted by reductions in tumor volume, may nevertheless have limited effectiveness if they spare CSCs, as these cells will ultimately promote disease recurrence and spread. Conversely, therapeutic strategies aimed at eliminating CSCs within solid tumors, either specifically or in addition to bulk tumor cells, offer the potential of reducing disease progression and providing durable responses.

We have built a number of proprietary technologies that enable us to characterize CSCs, to identify novel drug targets and to evaluate the effects of our therapeutic product candidates on CSCs. Our expertise in identifying, isolating and monitoring CSCs using specific surface markers and flow cytometry enables our scientists to evaluate the importance of specific targets associated with key biologic pathways implicated in both stem cell biology and cancer. We develop antibodies against these targets using advanced protein engineering technologies, including antibody humanization, phage display, proprietary mammalian display and bispecific antibody platforms. We test our antibodies in proprietary xenograft models derived from freshly resected human tumors subsequently propagated in mice. We believe these patient-derived models are more representative of the clinical features of human tumors than the cell line-based models used in traditional cancer research. Our models also offer the ability to test the effects of therapeutic candidates on human tumors with varied genetic backgrounds.

Our Approach: Targeting Key Pathways of Cancer Stems Cells

Our goal is to significantly improve cancer treatment by specifically targeting the key biologic pathways required for the maintenance, proliferation and survival of CSCs. Among these important regulatory signals, we are initially targeting the Notch, Wnt and RSPO-LGR pathways. Additionally, we are actively researching new pathways that appear to be important in the regulation of CSCs. Our basic approach has been to develop antibodies and other protein-based therapeutics that target the extracellular and cell surface proteins that are critical to the activation of these pathways.

 

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LOGO

The Notch and Wnt pathways play key roles in embryonic development by regulating the fate of cells and tissues in normal organ development. Additionally, these pathways have long been known to be critical for the maintenance of stem cells and have been centrally linked to cancer. For example, Notch proteins are known to be activated by mutations in hematologic malignancies. The Wnt pathway is frequently activated by mutations in colon cancer. Our approach has been to (1) develop specific antibodies against key extracellular proteins that regulate the Notch and Wnt pathways, (2) characterize these antibodies in detail to assess their binding affinities and ability to inhibit the target protein and (3) optimize their biophysical properties to ensure their high quality of production for ultimate development and commercial manufacturing. To support these efforts, we have developed an advanced understanding of Notch- and Wnt-pathway biology and have developed proprietary tools and reagents to aid in the evaluation of candidate antibodies and enhance our understanding of mechanisms underlying pathway inhibition. Through this approach, we have been successful in generating specific antibodies that block the Notch and Wnt pathways, and we believe that we were among the first companies to initiate clinical trials with antibodies targeting these pathways.

The RSPO-LGR pathway is comprised of a family of four cell signaling ligands known as R-spondins 1-4 and three related receptor proteins, LGR4-6. This pathway has been highlighted as a key pathway in adult tissue stem cells and has been linked to the development of cancer. We have identified antibodies targeting this pathway. We are progressing these antibodies in preclinical development.

Inhibition of CSC pathways has been shown to result in synergistic inhibition of tumor growth when combined with chemotherapeutic agents. Furthermore, we have shown that inhibition of these stem cell pathways drives differentiation of CSCs toward a non-tumorigenic state. These CSC-directed agents hold the potential promise of dramatically improving cancer treatment. As a result of our efforts to discover novel antibody and protein-based treatments targeting CSCs, five of our product candidates are in clinical development, and two other antibodies are in preclinical development with IND filings planned for as early as 2013.

 

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Our Product Candidates and Preclinical Programs

The following table summarizes the status of our product candidates and preclinical programs, each of which will be described and discussed in further detail below.

 

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Demcizumab (OMP-21M18, Anti-DLL4)

Demcizumab (OMP-21M18) is a humanized monoclonal antibody that targets DLL4 in the Notch signaling pathway. By binding DLL4, demcizumab inhibits the ability of DLL4 to activate cell signaling via the Notch receptors. Our preclinical studies demonstrated that demcizumab possesses several anti-tumor mechanisms, including the ability to selectively eliminate CSCs and to disrupt the normal tumor vasculature. Demcizumab has shown activity in multiple solid tumor types and is in Phase Ib trials in first-line pancreatic and non-small-cell lung cancers in combination with standard-of-care chemotherapy. We expect that data from the Phase Ib trials will be presented in 2013. We have worldwide rights to this program.

We initiated a single-agent Phase Ia trial in advanced solid tumor patients in 2008 and completed the trial in 2011. A total of 55 patients were treated in the trial. This single-agent trial showed promising evidence of single-agent activity in heavily pretreated patients. This evidence includes a partial response in a refractory pancreatic cancer patient and stable disease in patients with a variety of solid tumors, including refractory NSCLC, rectal cancer and renal cell carcinoma, as measured by the Response Evaluation Criteria in Solid Tumors, or RECIST, criteria, as described in the publication by Therasse et al (JNCI vol. 92, No. 3, 2000). A RECIST partial response means that there has been at least a 30% decrease in the sum of the diameters of measured tumor lesions, taking as reference the baseline sum diameters, and that there has been no growth of new or non-measurable tumor lesions. RECIST stable disease means that there has been less than a 30% decrease and no more than a 20% increase in the sum of the diameters of measured tumor lesions, taking as reference the smallest sum of measured tumor lesions since treatment started, and that there has been no growth of new target or non-measurable tumors. Additionally, a patient with refractory ovarian cancer, who had previously experienced progression on 12 prior chemotherapy regimens, obtained stable disease with demcizumab treatment lasting for over 570 days. At the highest dose of demcizumab tested, or 10 mg/kg every other week, a disease control rate (for this study, the proportion of patients with RECIST partial response or stable disease) was 64% out of 25 evaluable patients. We believe this evidence of anti-tumor activity is encouraging, particularly given that the median number of prior therapies received by this advanced solid tumor patient population was four, with a range of one to 12 prior therapies.

 

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Depicted below is a waterfall plot analysis that reveals the best percent change in measured tumor lesions for the 47 patients enrolled in the Phase Ia trial who had measurements of their target disease at trial entry and at a subsequent tumor assessment timepoint. A waterfall plot assessing best percent change is a commonly used and widely accepted efficacy measure in early oncology clinical trials. In the Phase Ia trial, patients underwent a radiographic assessment of their tumor at baseline (prior to start of treatment), around day 56 of the trial and then every 12 weeks while on the trial. The sum of the size of the target lesions (cm) from each response assessment was compared to the sum of the size of the target lesions (cm) at baseline and a percent change was calculated for each response assessment—this value is the percent change in target lesions size. A percent change in target lesions size is calculated at each tumor assessment time-point on study and the “best percent change in target lesions size” is the lowest percentage calculated out of all of the assessed time-points on study. This result is distinct from RECIST response, which considers non-target (non-measurable) lesions, the occurrence of any new lesions (either target or non-target lesions) and clinical data. Waterfall plot figures utilize this “best percent change in measured target tumor lesions” analysis. Notably, several of the patients in the Phase Ia trial, depicted in the waterfall plot below, had decreases in their tumor measurements.

% Change in Tumor Target Lesions Size

 

LOGO

Doses represent mg/Kg once every other week unless denoted by * representing mg/Kg once weekly dosing

It is important to note that Phase I clinical trials enroll cancer patients with advanced and refractory tumors. These patients have had tumor progression on numerous anti-cancer therapies, and, in some cases, the patients have developed lasting side effects from their prior anti-cancer therapy. Phase I investigators determine, based on a number of factors, whether an adverse event encountered by a patient is related to or not related to the product candidate. The relationship of an adverse event to a product candidate that a patient encounters on a Phase I clinical trial can in some cases be difficult for the investigator to definitively ascertain. Additionally, the lack of a placebo-control comparator arm on Phase I trials further complicates the ability to assess the relationship between an adverse event and a product candidate under study.

Based on a data cut-off of January 19, 2012 for the Phase Ia trial, the toxicity profile of demcizumab included cardiovascular events, including hypertension which was generally manageable. Hypertension was the most common treatment-related adverse event and was seen in approximately a third of patients. Other treatment-related demcizumab adverse events (for all Common Terminology Criteria for Adverse Events, or CTCAE, grades) across the dose levels tested that occurred in at least 10% of patients were: fatigue, anemia, diarrhea, headache, nausea, hypoalbuminemia, blood pressure increase, dizziness, and dyspnea. For the 55 patients on study, the reasons for study discontinuation included the following: progressive disease (31 patients, between days 28 and 219 on study); adverse event (20 patients, between days 3 and 139 on study); investigator decision (two patients, on day 211 and day 518 on study); declining performance status (one patient, on day 42 on study); and withdrew consent (one patient, on day 85 on study). In a few patients on trial, clinical congestive heart failure was seen, particularly in patients who were treated with high doses of demcizumab with more frequent administration for prolonged periods of time (greater than 100 days). Three patients had clinical congestive heart failure (grade 3) with a greater than 10% decline in left ventricular ejection fraction, or LVEF, on echocardiogram that occurred in the normal range in two of

 

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the three patients. One patient had clinical congestive heart failure (CTCAE grade 4) with a decline in LVEF from normal to 37%. All of these patients had improvement in their cardiac function with discontinuation of demcizumab and initiation of cardio-protective medications, like ACE-inhibitors. These events were considered treatment-related and resulted in demcizumab being put on partial clinical hold, meaning that the patients on study could continue to receive treatment but new patients could not be started in the United States during the Phase Ia clinical development program. The Phase Ia trial completed in November 2011 and interim results from this first-in-human trial were presented at the 22nd EORTC-NCI-AACR Symposium on Molecular Targets and Cancer Therapeutics in Berlin in 2010.

Prior to the single-agent Phase Ia partial clinical hold, we had initiated, in 2010, three Phase Ib clinical trials of demcizumab in combination with chemotherapy based on the single-agent data from our Phase Ia trial and our preclinical datasets. One trial is enrolling first-line advanced pancreatic cancer patients, assessing safety and efficacy of demcizumab in combination with standard-of-care gemcitabine, a second trial is enrolling first-line advanced NSCLC patients, assessing safety and efficacy of demcizumab in combination with standard-of-care carboplatin and pemetrexed (Alimta®), and a third trial (which has been closed due to resource prioritization) enrolled first or second-line colorectal cancer, assessing safety and efficacy of demcizumab in combination with standard-of-care FOLFIRI chemotherapy.

When the toxicity events occurred during the Phase Ia trial, we paused the ongoing Phase Ib trials and amended the trials in Australia and New Zealand to include a risk mitigation plan to enhance the therapeutic index of demcizumab in an effort to maximize efficacy and manage tolerability. The risk mitigation plan included intermittent dosing of the drug, cardiac monitoring using B-type natriuretic peptide, or BNP, blood testing and echocardiography, and intervention with cardioprotective medication like angiotensin-converting enzyme inhibitors, or ACE inhibitors. Importantly, increases in BNP levels were noted in patients who developed declines in LVEF. We believe BNP represents a biomarker to monitor cardiac safety allowing for early intervention with cardio protective medication, such as ACE-inhibitors or carvedilol, and we also believe that intermittent dosing of demcizumab may enhance the therapeutic index of the drug, particularly in combination with chemotherapy. We presented this plan to the Phase Ib investigators and the Independent Ethics Committees in Australia, New Zealand and Europe where the trials were being conducted. The investigators and Independent Ethics Committees supported our approach and conduct of the Phase Ib trials, and the relevant clinical authorities were notified.

As of July 19, 2012, 43 patients have been enrolled and treated on Phase Ib trials combining demcizumab with chemotherapy. While it is difficult to compare across the Phase Ib trials where demcizumab is combined with different chemotherapy regimens, as of the database analysis of July 19, 2012, across the dose levels tested, fatigue was the most common treatment-related adverse event and was seen in approximately 37% of the patients. Other treatment-related demcizumab adverse events (for all CTCAE grades) that occurred in at least 10% of patients were: nausea, vomiting, diarrhea, decreased appetite, hypertension, neutropenia, pulmonary hypertension, dyspnea, and rash. For the thirteen discontinued patients in the pancreatic cancer trial as of July 19, 2012, the reasons for patient discontinuation were as follows: progressive disease (five patients, between day 11 and day 112 on study); discontinued when the Phase Ib trial paused (three patients, between days 32 and 58 on study); adverse event (two patients, on day 48 and day 140 on study); withdrew consent (one patient, on day 19 on study); clinical deterioration (one patient, on day 21 on study); and death (one patient on day 50 on study). For the thirteen discontinued patients in the NSCLC trial as of July 19, 2012, six patients discontinued because of progressive disease (between days 35 and 224 on study); five patients discontinued when the Phase Ib trial paused (between days 21 and 133 on study), one patient discontinued because of an adverse event (day 44 on study), and one patient discontinued for clinical deterioration (day 140 on study). For the seven discontinued patients in the colorectal trial, four patients discontinued when the Phase Ib trial paused (between days 56 and 138 on study) and three patients discontinued because of progressive disease (between days 27 and 113 on study). A patient on the Phase Ib NSCLC study encountered a cerebrovascular accident, or CVA, 18 days after the last dose of demcizumab. The patient was 79 years old with advanced NSCLC and had achieved a RECIST stable disease that lasted 140 days. The investigator ultimately assessed this event as not related to demcizumab and possibly related to the patient’s age and hypertension.

In these ongoing trials, we are using intermittent dosing or lower dosing of demcizumab and monitoring approaches to optimize the therapeutic index in an effort to maximize efficacy while managing tolerability. We have also

 

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conducted preclinical experiments using our tumor bank models, which demonstrated that intermittent dosing retains efficacy of demcizumab, while substantially reducing toxicity.

To date in our two ongoing Phase Ib trials, although these trials are still enrolling new cohorts of patients, we have seen multiple early, objective responses and stable disease in the NSCLC and pancreatic cancer trials. In the trials, we have included independent data safety monitoring committees to oversee the trials and assess efficacy and safety and to determine potential dose escalation of demcizumab on a cohort-by-cohort basis. Specifically, in the trial in first-line NSCLC of demcizumab with standard-of-care carboplatin and pemetrexed (Alimta®) chemotherapy, as of the date of the data cut-off of July 19, 2012, 14 patients have been assessable for tumor response around day 56 of the trial. Some tumor shrinkage has been noted in 12 of the 14 patients, with the best percent reduction in the sums of measured tumors ranging from 7% to 69%. Of these 14 assessable patients, seven have achieved a RECIST partial response. Of the remaining seven assessable patients, six have achieved stable disease and one had progressive disease. Some of these patients remain on the trial and continue to have clinical benefit, and to date, as reported by the investigators, two patients have remained progression free for more than 18 months. Importantly, the safety profile of demcizumab in combination with chemotherapy has been tolerable. We are further encouraged by the results to date, in that we have seen no significant LVEF declines or cases of heart failure in patients enrolled.

In the first-line pancreatic cancer trial of demcizumab with standard-of-care gemcitabine chemotherapy, as of the cut-off of July 19, 2012, 11 patients have been assessable for tumor response around day 56 of the trial. Notable tumor shrinkage has been observed in six of the 11 patients, with the best percent reduction in the sums of measured tumors ranging from 3% to 47%. Of these 11 assessable patients, eight have achieved a RECIST partial response or stable disease. Many of these patients remain in the trial and continue to have clinical benefit.

The following reflects data from these trials as of July 19, 2012:

 

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In September 2012, the independent Data Safety Monitoring Board, or DSMB, for the NSCLC Phase Ib trial reviewed the comprehensive safety and efficacy information from the cohort of patients in that trial treated with demcizumab at 5mg/kg every three weeks with carboplatin and pemetrexed. The DSMB determined that demcizumab at 5mg/kg every three weeks in combination with carboplatin and pemetrexed had an acceptable safety profile and thus patients in the expansion cohort of the study should be treated with this regimen. Previously, in April 2012, the DSMB approved dose escalation from 2.5mg/kg every three weeks to 5.0mg/kg every three weeks in combination with carboplatin and pemetrexed.

 

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Also, in August 2012, the DSMB for the pancreatic cancer Phase Ib trial reviewed the comprehensive safety and efficacy information from the cohort of patients in that trial treated with demcizumab at 2.5mg/kg every four weeks in combination with gemcitabine. The DSMB determined that dose escalation to the next cohort in that trial, which will be at a demcizumab dose level of 5mg/kg every four weeks in combination with gemcitabine, should proceed. This cohort is now enrolling patients.

However, these trials are ongoing, and results may change over time as more patients are enrolled. Since intermittent and lower dosing and monitoring have been implemented, as of July 16, 2012, 14 patients have been treated on the Phase Ib NSCLC trial and eight patients have been treated on the Phase Ib pancreatic cancer trial. The number of patients enrolled on the trials after the amendments to the trials is currently small and the follow-up of these patients is still short in several of these patients. Thus, the safety and efficacy data could change over time as more patients are treated for longer periods of time. In total, we plan to enroll approximately 30 patients in each trial.

The results of these Phase Ib trials will inform our plans to enter Phase II with our demcizumab program. We intend to use the data generated from our ongoing Phase Ib trials to obtain authorization from regulatory authorities, including the FDA, to advance demcizumab to Phase II clinical trials in the United States and other countries. We plan to share these data utilizing our risk mitigation plan when we submit our future Phase II trial designs to the FDA and other regulatory authorities. We are currently designing a Phase Ib/II trial of demcizumab in combination with paclitaxel in relapsed or refractory ovarian cancer. This protocol will be part of a submission to the FDA to gain authorization to proceed with enrolling patients in studies in the United States. This study would be conducted in collaboration with investigators at MD Anderson Cancer Center as part of its activities related to its NCI-Ovarian Cancer SPORE grant. We would provide resources for data monitoring, including an industry standard database for the trial. In addition, we are actively evaluating potential Phase II trial designs in other solid tumor settings and expect to commence Phase II trials in 2013.

We believe demcizumab was the first Notch pathway antibody to enter clinical testing. We have completed and published or presented multiple preclinical studies demonstrating robust anti-tumor and anti-CSC activity in multiple solid tumor types, including pancreatic, lung, breast, colon, melanoma and ovarian cancers.

Anti-DLL4/Anti-VEGF Bispecific

We utilized our proprietary bispecific antibody technology to discover a monoclonal antibody that targets both DLL4 and VEGF. VEGF is the target for Avastin®, marketed by Genentech (Roche), which is currently approved and used to treat a number of solid tumors including colorectal, NSCLC, renal cell, brain and ovarian cancers and had worldwide revenues of $5.7 billion in 2011. We are conducting preclinical studies and plan to file an IND for this antibody in 2013. We believe our bispecific approach offers unique opportunity given the related biology of these two factors in regulating new blood vessel formation. We have generated data which suggest that simultaneous targeting of both DLL4 and VEGF can result in substantially improved anti-tumor activity compared to either anti-DLL4 or anti-VEGF alone. We have worldwide rights to this bispecific program.

Anti-Notch2/3 (OMP-59R5)

We identified an antibody, anti-Notch2/3 (OMP-59R5), that binds to both the Notch2 and Notch3 receptors. Originally identified from a screen against Notch2, the antibody cross-reacts with Notch3. Our anti-Notch2/3 antibody is a fully human antibody derived from phage display technology licensed from MorphoSys AG, or MorphoSys. Based on preclinical experiments, we believe OMP-59R5 exhibits two mechanisms of action: (1) by downregulating Notch pathway signaling, OMP-59R5 appears to have anti-CSC effects, and (2) OMP-59R5 affects pericytes, impacting stromal and tumor microenvironment.

We initiated a Phase Ib/II trial in 2012 in pancreatic cancer patients. In this Phase Ib/II clinical trial, called “ALPINE” (Antibody therapy in first-Line Pancreatic cancer Investigating anti-Notch Efficacy and safety), OMP-59R5 is being tested in combination with gemcitabine in first-line advanced pancreatic cancer patients. Following a Phase Ib safety run-in, a randomized Phase II clinical trial will proceed in these patients to compare the efficacy of standard-of-care gemcitabine either with OMP-59R5 or with placebo. Our Phase II trial will include an analysis of a predictive biomarker to identify patients that might derive the greatest benefit from OMP-59R5. OMP-59R5 is part of our collaboration with GSK. GSK has the option through the completion of certain Phase II trials to obtain an exclusive license to OMP-59R5.

 

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We initiated a Phase Ia dose escalation trial in 2010, and are continuing to enroll advanced refractory solid tumor patients on the study. We presented interim results of this trial in a poster discussion session at the annual ASCO meeting in June 2012. Additional Phase I clinical data will be presented in a plenary session at the EORTC-NCI-AACR Symposium on Molecular Targets and Cancer Therapeutics in November 2012. In this trial, 36 patients have been treated in seven dose-escalation cohorts at doses of 0.5, 1, 2.5, and 5mg/kg administered weekly, 5 and 10mg/kg administered every other week and 7.5mg/kg administered every three weeks. OMP-59R5 has been generally well tolerated and has established three maximum tolerated doses (MTDs) of 2.5mg/kg weekly, 5mg/kg every other week and 7.5mg/kg administered every three weeks for the product candidate. The dose limiting toxicity was diarrhea. Diarrhea appeared less pronounced with every other and every three week dosing schedules. As of September 26, 2012, we have enrolled 36 patients in this first-in-human Phase Ia trial. As assessed at the time of the last database analysis in September 26, 2012 for the first 36 patients, across the dose levels tested, diarrhea was the most common treatment-related adverse event and was seen in approximately two-thirds of patients. Other treatment-related adverse events that occurred in at least 10% of patients were: fatigue, nausea, decreased appetite, and vomiting. All of these events were CTCAE grade 1, 2 or 3 events. No grade 4 or 5 events have occurred on the trial to date. The pharmacokinetics of OMP-59R5 in patients was characterized by fast and dose-dependent clearance. However, pharmacodynamic analyses on surrogate and tumor tissue suggest that Notch pathway modulation is sustained for a week or more after dosing. At the time of the ASCO presentation, several patients (Kaposi’s Sarcoma, adenoid cystic carcinoma, liposarcoma, and rectal cancer) had prolonged stable disease for 56 or more days.

Anti-Notch1 (OMP-52M51)

Our anti-Notch1 antibody, OMP-52M51, is a humanized monoclonal antibody, and has shown substantial activity in Notch-dependent tumors in preclinical studies. Our IND was accepted by the FDA in September 2012, and the product candidate is advancing in clinical development to evaluate OMP-52M51 in patients with certain hematologic malignancies. OMP-52M51 may have potential utility in certain hematologic malignancies and other cancers. Certain hematologic malignancies have mutations that increase Notch1 signaling activity and may be a primary driver of tumor growth as well as resistance to chemotherapy. It is possible that diagnostic tests for activated Notch1 may be used to identify patients most likely to benefit from this therapy in certain hematologic malignancies. We are planning to include an analysis of possible predictive biomarkers in future clinical trials for OMP-52M51 to identify patient subsets where activity is likely to be strongest. Certain solid tumors and certain hematologic malignancies may represent ideal opportunities to test our product candidate in focused patient populations. OMP-52M51 is part of our collaboration with GSK. GSK has a standard option during certain time periods through the completion of specified Phase II trials to obtain an exclusive license to OMP-52M51 or, in some cases, an early option during certain time periods through completion of certain Phase I trials to obtain an exclusive license.

Anti-Fzd7 (OMP-18R5)

Our anti-Fzd7 antibody, OMP-18R5, is a fully human monoclonal antibody that modulates Wnt pathway signaling by binding to Frizzled receptors 1, 2, 5, 7 and 8. The antibody was identified from a phage display library licensed from MorphoSys by screening against Fzd7. We initiated Phase I clinical testing of OMP-18R5 in 2011. Preclinically, we have observed strong anti-tumor activity in combination with multiple types of chemotherapies in solid tumor models, including pancreatic, breast, lung, melanoma and other tumors. In addition to synergy in reducing tumor volume with chemotherapy, OMP-18R5 reduces CSC frequency in our preclinical models. It also induces differentiation of tumorigenic cells to cell types that are less tumorigenic and more susceptible to conventional chemotherapy. OMP-18R5 is in a solid tumor, single-agent dose escalation Phase I trial, with data expected to be presented in 2013. This is an ongoing clinical trial that has enrolled a few dose-escalation cohorts. We have limited clinical data to date. Based on a database analysis cut-off date of October 17, 2012, the treatment-related adverse events across the dose levels tested included, for example, nausea, vomiting, diarrhea, constipation, abdominal pain, fatigue, increased alkaline phosphatase and a case of compression fracture. We are actively planning potential Phase Ib and/or Phase II trials, pending further results from the single-agent Phase I trial. OMP-18R5 is part of our collaboration with Bayer. Bayer has an option to license OMP-18R5 at any point through completion of certain Phase Ib trials.

 

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Fzd8-Fc (OMP-54F28)

Fzd8-Fc (OMP-54F28) is our second Wnt pathway modulator. We filed an IND application for OMP-54F28 that was accepted in May 2012 and we began enrolling the Phase I trial in July 2012 to evaluate OMP-54F28 in patients with advanced solid tumors. OMP-54F28 is a fusion protein, or decoy receptor, containing a subset of the Fzd8 receptor fused to human Immunoglobulin Fc domain. It has a distinct mechanism of action versus anti-Fzd7 (OMP-18R5)—binding Wnt ligands rather than binding Frizzled receptors. OMP-54F28 has shown evidence of anti-tumor activity in certain solid tumors and reduction of CSC frequency in multiple preclinical models either as a single agent or when combined with chemotherapy. OMP-54F28 is part of our collaboration with Bayer. Bayer retains an option to license OMP-54F28 at any point through the completion of certain Phase Ib clinical trials. In addition, we entered into a manufacturing services agreement with Bayer HealthCare LLC whereby Bayer HealthCare LLC manufactures bulk drug substance for this program.

Wnt biologic #3

As part of our Bayer collaboration, we are also advancing an additional biologic product candidate in preclinical studies.

Wnt Pathway Small Molecule Inhibitors

As part of our Bayer collaboration, we and Bayer have jointly initiated discovery campaigns to identify small molecule inhibitors of the Wnt pathway. We have developed assay technologies and transferred those to Bayer. Bayer is utilizing its extensive medicinal chemistry assets and capabilities to discover small molecule drug candidates that modulate Wnt signaling, and we are employing our Wnt technology to evaluate candidate compounds as a basis for advancing them into development. The programs were initiated in 2010 and are in the discovery stage.

RSPO-LGR Pathway

In 2007, we identified that the R-spondin, or RSPO, ligands signal through the LGR receptor family and filed patents applications on therapeutic techniques based on this discovery. We believe we have a significant intellectual property position on antibodies that disrupt RSPO-LGR pathway signaling. We have identified antibodies to proteins in this family that modulate RSPO-LGR signaling and have generated preclinical data demonstrating activity. We plan to file our first IND on a RSPO-LGR pathway targeting antibody in 2013. We have worldwide rights to all of our RSPO-LGR pathway programs.

Other Pathways/Discovery Programs

We continue to pursue drug discovery activities based on our scientific expertise and proprietary suite of drug discovery technologies. We have multiple other potential target opportunities that we are elucidating from a biological standpoint, and over time we anticipate future potential product candidates to emerge.

Our Proprietary Drug Discovery Platform

Since our founding, we have developed a suite of proprietary technologies which enables us to identify, isolate and evaluate CSCs, identify and/or validate multiple potential targets critical to CSC self-renewal and differentiation, discover targeted antibody and other protein-based therapeutics that modulate these targets and prevent the growth of CSCs, robustly test for in vivo efficacy and identify potential biomarkers. We believe that the use of these unique technologies described below provides a competitive advantage in cancer drug discovery and development.

Cancer Stem Cell Technologies

We have developed advanced technologies for identifying, isolating and evaluating CSCs. These technologies include proprietary markers and gene signatures for analyzing the subpopulation of CSCs in patient-derived tumor samples.

Our expertise in isolating and monitoring CSCs using specific surface markers enables our scientists to evaluate the importance of specific targets associated with key biologic pathways implicated in both stem cell biology and cancer. To aid new target discovery, we created a novel single-cell gene expression analysis platform to identify genes that are critical to CSC self-renewal and differentiation. This platform originated from our work with Fluidigm Corporation to access their microfluidics technologies. We use our proprietary gene signatures to identify differences between stem cell and progenitor cell populations in normal and cancerous tissues, which can lead to the identification of new anti-CSC targets.

 

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In addition, we have developed proprietary methodologies to functionally define the effect of therapeutics on CSC populations. These methodologies include proprietary assays that can quantitatively measure CSC frequency before and after treatment.

Antibody Technologies

We utilize several robust technologies for the discovery and optimization of our antibody and protein-based therapeutics, including multiple proprietary technologies. We also have significant experience in biologics cell line and process development.

Mammalian Display Technology

We have developed a proprietary mammalian display antibody technology that enhances our ability to find rare and unique antibody product candidates. This technology utilizes flow cytometry to isolate mammalian cells expressing antibodies on the cell surface with desired characteristics from large libraries of candidate antibodies. We can also utilize this technology to fine-tune the characteristics of newly discovered antibodies.

Bispecific Antibody Technology

We have also developed a proprietary bispecific antibody technology, which has been used to generate our anti-DLL4/anti-VEGF antibody and is being used by our research group to generate other novel product candidates. This technology increases the potential for additional innovative antibodies that leverage the potential synergistic activity that we have observed with certain combinations of therapeutic targets.

Hybridoma Technology

We have substantial expertise in hybridoma technologies for isolating antibodies from mice, including proprietary multiplex single-cell screening techniques. This capability includes the ability to often identify antibodies that cross-react with similar affinity to targets in human, cynomolgus monkey, rat, mouse and other species useful to facilitate drug development and toxicology testing. Humanized antibody product candidates derived from this effort include demcizumab and anti-Notch1 (OMP-52M51).

Antibody Production and Manufacturing

We also have assembled significant expertise in biologics production. We conduct cell line development and process development in-house, and utilize contract manufacturing organizations for actual production of drug product and drug substance materials. We believe this approach allows us to generate quality antibody and biologic materials in a capital-efficient manner.

Human Tumor Bank and Xenograft Models

We have developed a proprietary human tumor xenograft bank. This tumor bank consists of over 150 established tumors sourced from patients with various types of cancer, including pancreatic, breast, colon, lung, ovarian, melanoma and other cancers. We implant these tumors in mice and utilize these models to identify and validate genes that drive tumor growth, to screen for anti-tumor activity of our product candidates, to evaluate the effects of product candidates on CSCs and to identify biomarkers that can be used to identify patients most likely to respond to our therapeutic candidates. Additionally, we use our patient-derived tumor xenograft model to identify possible indications and assess various dosing regimens that can be evaluated in our clinical trials. We believe these patient-derived models are more representative of the clinical features of human tumors than the cell line-based models used in traditional cancer research, and our models also offer the ability to test the effects of therapeutic candidates on human tumors with varied genetic backgrounds.

We have characterized these tumor xenografts in detail, including sequencing of key genes that are known to drive cancer, histology analysis, single nucleotide polymorphism (SNP) assessment, characterization of gene amplifications and deletions, and gene expression profiling. This characterization is useful for us to correlate response of our agents in relation to the genetic background and biochemical characteristics of the tumor and in the development of predictive patient selection strategies. For example, we have identified key biomarkers in a subset of our tumor xenografts that appear to strongly correlate with robust single-agent response to our anti-Notch1 (OMP-52M51) product candidate. Additionally, our established tumor xenograft models encompass many of the clinically

 

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relevant patient subgroups (e.g., triple-negative breast cancer, B-Raf mutated melanoma and K-Ras wild-type colorectal cancer) that we can analyze to help inform our clinical development strategies. Our data, as well as other published reports, indicate that these models may be predictive of clinical responses to an antibody.

Biomarker Discovery

We have established capabilities for analyzing both predictive and pharmacodynamic biomarkers extensively in our preclinical studies and also in our clinical trials.

Predictive biomarkers are useful in identifying subsets of cancer patients with an increased probability of responding favorably to a particular treatment. We have utilized our collection of patient-derived xenograft models and discovered predictive biomarkers that correlate with response in preclinical studies for several of our lead molecules.

Pharmacodynamic biomarkers are useful for determining whether a therapeutic is effectively modulating its intended target—information that is critical for optimizing the dose and schedule for delivery of therapeutics. We conduct multiple pharmacodynamic analyses to look at gene, RNA expression and protein changes in response to our agents in tumor biopsies, circulating tumor cells and surrogate tissues. Using state-of-the-art methods, including single-cell gene expression technology, we have demonstrated on-target pharmacodynamic effects for both our demcizumab and anti-Notch2/3 (OMP-59R5) product candidates.

Collaboration and License Agreements

Strategic Alliance with GSK

In December 2007, we entered into a strategic alliance with GSK to develop anti-CSC antibody therapeutics targeting the Notch signaling pathway. Under this collaboration, GSK has an option to obtain an exclusive license to develop and commercialize such antibody therapeutics, which may be exercised during defined time periods through completion of Phase II proof-of-concept trials. We lead research and development efforts for Notch pathway programs prior to GSK’s exercise of its option.

Upon execution of the original collaboration agreement with GSK, we received $35.0 million in cash, comprised of $17.5 million in an upfront payment and $17.5 million in the form of an equity investment. We were originally eligible to receive from GSK payments totaling up to approximately $1.4 billion for up to four product candidates, including the upfront amount and milestone payments in connection with research and development activities, and contingent consideration in connection with further development, regulatory approval and commercialization activities.

In July 2011, we amended the collaboration agreement with GSK. The parties agreed to focus the collaboration on the development of two product candidates, anti-Notch2/3 (OMP-59R5) and anti-Notch1 (OMP-52M51). GSK also agreed to terminate its options to obtain an exclusive license to develop and commercialize demcizumab (OMP-21M18, or anti-DLL4), and bispecific antibodies targeting DLL4 and VEGF. Under certain circumstances we may owe GSK single-digit percentage royalties on net product sales of demcizumab. In the amendment, we and GSK also agreed to cease all further discovery and research activities under the collaboration on programs other than OMP-59R5 and OMP-52M51. Further, the amendment provided additional funding from GSK to support certain of our development activities conducted in relation to one of these product candidates, up to a maximum of $2.0 million. GSK retains its option to exclusively license OMP-59R5, which may be exercised during certain time periods through the end of proof-of-concept Phase II trials. GSK also has an option to exclusively license OMP-52M51, which may be exercised during certain time periods through the end of either Phase I trials or proof-of-concept Phase II trials. If GSK exercises its option with respect to OMP-59R5 or OMP-52M51, GSK will receive an exclusive license to develop and commercialize such product candidate in all indications. We are eligible to receive from GSK, (1) with respect to OMP-59R5, aggregate payments of up to $344.5 million of milestones and contingent consideration, including an option exercise fee and development, regulatory and commercialization payments, of which $9.0 million had been earned through December 31, 2011, in addition to percentage royalties in the low double digits to high teens on net product sales, and (2) with respect to OMP-52M51, aggregate payments of up to $349.5 million of milestones and contingent consideration, including an option exercise fee and development, regulatory and commercialization payments, of which $5.0 million had been earned through

 

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December 31, 2011, in addition to percentage royalties in the low double digits to high teens on net product sales. In addition, we are eligible to receive bonus payments of up to $15.0 million based on clinical success, for a total of $695.0 million of potential future payments. If GSK elects not to exercise its options for OMP-59R5 and/or OMP-52M51 during the relevant option periods, or if GSK terminates those programs, we will have worldwide rights to such program(s), subject to, under certain circumstances, GSK’s right of first negotiation to obtain an exclusive license to develop and commercialize OMP-52M51.

In July 2012, we further amended our agreement to revise the structure of the milestone payments to reflect the decision to initiate a Phase Ib/II trial for OMP-59R5.

Under our amended agreement with GSK, there are several committees, including a Joint Steering Committee, and Joint Clinical Subteam, among others, that meet regularly to discuss our activities in the collaboration. In general, decisions regarding development of a product candidate are made jointly through these committees prior to the exercise of GSK’s option with respect to the product candidate, except for in certain circumstances. For example, GSK has final decision-making authority with respect to the design of OMP-52M51 clinical trials, subject to certain pre-specified guidelines. Also for example, we have sole decision-making authority with respect to manufacture and supply matters for product candidates prior to option exercise. Following the exercise by GSK of its option for a product candidate, GSK generally assumes responsibility for all costs associated with further development of the product candidate and the Joint Steering Committee has no control over decisions relating to development of the product candidate for which the option was exercised.

We are obligated to utilize commercially reasonable efforts to progress both OMP-52M51 and OMP-59R5 into clinical development prior to GSK’s exercise of its option for such product candidates. We are responsible for funding all research activities we conduct under the collaboration prior to GSK’s exercise of its option for such product candidates. We intend to utilize our potential milestone payments from this collaboration towards advancement of our OMP-59R5 and OMP-52M51 programs. In general, while the Joint Steering Committee and other subteams may discuss resource allocation, they have no specific ability to control resource allocation with respect to product candidates being developed under our agreement with GSK and there are no explicit expenditure or investment requirements in our agreement with GSK. There are no provisions in our GSK agreement that would require us to explicitly allocate the proceeds of this offering among particular product candidates.

Our agreement with GSK will expire upon expiration of GSK’s payment obligations or at any time at which no product candidate that is subject to the collaboration agreement is being researched, developed or commercialized. Either party may terminate the agreement for any material breach by the other party that the breaching party fails to cure. GSK may terminate the agreement for any reason or no reason upon prior notice to us, either in its entirety or on a program by program basis. Either party may terminate the agreement upon bankruptcy or insolvency of the other party, and we may terminate the agreement if GSK challenges the licensed patents.

Strategic Alliance with Bayer

In June 2010, we entered into a strategic alliance with Bayer to discover, develop and commercialize novel anti-CSC biologic and small molecule therapeutics targeting the Wnt signaling pathway. Under this collaboration, Bayer may exercise its option to obtain an exclusive license to develop and commercialize biologic therapeutics in one or more defined biologic therapeutic classes. Bayer may exercise its option for such biologic therapeutics at any point up to the completion of Phase I trials. If Bayer exercises its option with respect to a class of biologic therapeutics, Bayer will receive an exclusive license to develop and commercialize all therapeutics in such class in all indications. Under this collaboration, we and Bayer also agreed to jointly conduct research to discover potential new small molecule therapeutics targeting the Wnt pathway, and we granted Bayer a non-exclusive license to our Wnt pathway assay technology for the research and development of such small molecule therapeutics. Bayer may, within a specified time period, elect to advance such small molecule therapeutics into development, and obtain an exclusive license to commercialize such therapeutics. Under our collaboration, we lead the discovery and development of biologic therapeutic products prior to Bayer’s exercise of its option, and Bayer leads discovery, development and commercialization of small molecule therapeutics. In addition to an upfront cash payment of $40.0 million, we are eligible to receive option fees and research, development, regulatory and commercial milestone or post-option contingent consideration payments of up to $387.5 million per program for each biologic therapeutic product

 

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successfully developed, in addition to royalties on net product sales. Percentage royalties for certain biologic product candidates are in the low double digits to high teens. For certain other biologic product candidates, percentage royalties are in the mid-single digits to low double digits. Bayer is obligated to make payments to us upon achievement of research, development, regulatory and commercial milestones, plus advancement fees, for small molecule therapeutics that could total up to $112.0 million per program, in addition to single-digit percentage royalties on net product sales. While the total number of potential programs is uncapped, the parties currently intend to advance up to three biologic and two small molecule candidates. We may co-develop biologic therapeutic products to which Bayer obtains an exclusive license under specified circumstances. If Bayer elects not to exercise its options for any class of biologic therapeutic products under the collaboration during the relevant option periods, we will have worldwide rights to such program(s). In addition, under certain termination circumstances, we would also have worldwide rights to the terminated program(s).

In August 2012, we amended our agreement with Bayer to reallocate payment amounts between two payments applicable to our biologic product candidates and to modify the trigger for a certain payment applicable to certain biologic product candidates.

Under our agreement with Bayer, there are several committees, including a Joint Steering Committee and a Joint Development Sub-Committee, among others, that meet regularly to discuss our activities in the collaboration. Decisions are generally made jointly through these committees through the Phase I stage of development. However, we generally have final decision-making authority with respect to the development of biologic product candidates during research, preclinical, and Phase I stages of development; and Bayer generally has final decision-making authority with respect to development of small molecule projects and also with respect to biologic product candidates in later-stages of development, following Bayer’s exercise of its option with respect to such biologic product candidates.

We are obligated to utilize commercially reasonable efforts to advance a certain number of biologic product candidates into clinical development prior to Bayer’s exercise of its option for such product candidates. We are responsible for funding all research and development activities for a given class of biologic therapeutics under the collaboration prior to completion of certain Phase I trials for that therapeutic class. We intend to utilize our potential milestone payments from this collaboration to advance our Wnt pathway programs. In general, while the Joint Steering Committee and other committees may discuss resource allocation in the course of reviewing development plans, they have no specific ability to control resource allocation with respect to product candidates covered by the collaboration agreement and there are no minimum expenditure or investment requirements with respect to the product candidates covered by our agreement with Bayer. There are no provisions in our Bayer agreement that would require us to explicitly allocate the proceeds of this offering among particular product candidates.

Our agreement with Bayer and their payment obligations thereunder will expire on a product by product and country by country basis on the last to occur of (i) the expiry of certain patent rights covering the product in such country, (ii) the expiration of any regulatory exclusivity period in such country, (iii) ten years from first commercial sale of such product in such country, or (iv) the expiry of our payment obligations with respect to products licensed to Bayer under our agreements with certain third party licensors. Our agreement will also expire if Bayer fails to exercise all of its options within the required time periods. Either party may terminate the agreement for any material breach by the other party that the breaching party fails to cure. Bayer may terminate the agreement for any reason or no reason upon prior notice to us, either in its entirety or with respect to certain classes of compounds subject to the collaboration. Either party may terminate the agreement upon bankruptcy or insolvency of the other party, and we may terminate the agreement if Bayer challenges the licensed patents.

In April 2011, we entered into a clinical manufacturing agreement which expanded our alliance with Bayer. Pursuant to this agreement, Bayer HealthCare LLC agreed to manufacture Fzd8-Fc (OMP-54F28) at its Berkeley, California site to support our clinical development activities.

The University of Michigan

In January 2001, Cancer Stem Cell Genomics, Inc. entered into a license agreement with the Regents of the University of Michigan, or the University of Michigan. In 2004, Cancer Stem Cell Genomics, Inc. merged with and into us, and we assumed this license agreement with the University of Michigan. Under the agreement and in exchange for certain additional consideration, the University of Michigan has granted to us an exclusive, royalty-

 

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bearing, worldwide license under certain patent rights, and a nonexclusive, worldwide license under certain technologies, to make, have made, import, use, market, offer for sale or sell products and to practice processes for any use, including human therapeutic or diagnostic use, that are covered by the licensed patents. Technologies covered by the licensed patents include certain enriched CSC compositions, CSC markers, diagnostic methods, as well as certain therapeutic methods using certain anti-CSC antibodies. Additional details regarding the patent rights exclusively licensed to us under the agreement are described in more detail below under “—Intellectual Property.” The University of Michigan reserved certain rights to the licensed patents for noncommercial research and education purposes. <