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EX-10.2 - EX-10.2 - CTI BIOPHARMA CORPctic-ex102_20140930621.htm
EX-10.1 - EX-10.1 - CTI BIOPHARMA CORPctic-ex101_20140930817.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

x

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

For the quarterly period ended: September 30, 2014

OR

¨

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

For the transition period from                      to                     

Commission File Number 001-12465

 

CTI BIOPHARMA CORP.

(Exact name of registrant as specified in its charter)

 

 

Washington

 

91-1533912

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

 

 

3101 Western Avenue, Suite 600

 

 

Seattle, Washington

 

98121

(Address of principal executive offices)

 

(Zip Code)

(206) 282-7100

(Registrant’s telephone number, including area code)

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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

 

Large accelerated filer

 

¨

  

Accelerated filer

 

x

 

 

 

 

Non-accelerated filer

 

¨  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

Class

 

Outstanding at October 24, 2014

Common Stock, no par value

 

150,091,946

 

 

 

 

 

 

 


CTI BIOPHARMA CORP.

TABLE OF CONTENTS

 

 

  

PAGE

PART I - FINANCIAL INFORMATION

  

 

 

 

ITEM 1: Financial Statements                                                                                                                                                    

  

3

 

 

Condensed Consolidated Balance Sheets at September 30, 2014 (unaudited) and December 31, 2013

  

3

 

 

Condensed Consolidated Statements of Operations – Three and Nine Months Ended September 30, 2014 and 2013 (unaudited)

  

4

 

 

Condensed Consolidated Statements of Comprehensive Loss – Three and Nine Months Ended September 30, 2014 and 2013 (unaudited)

  

5

 

 

Condensed Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2014 and 2013 (unaudited)

  

6

 

 

Notes to Condensed Consolidated Financial Statements

  

7

 

 

ITEM 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

16

 

 

ITEM 3: Quantitative and Qualitative Disclosures about Market Risk

 

31

 

 

ITEM 4: Controls and Procedures

 

31

 

 

 

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

ITEM 1: Legal Proceedings

 

32

 

 

ITEM 1A: Risk Factors

 

33

 

 

ITEM 2: Unregistered Sales of Equity Securities and Use of Proceeds

 

47

 

 

ITEM 3: Defaults Upon Senior Securities

 

47

 

 

ITEM 4: Mine Safety Disclosures

 

47

 

 

ITEM 5: Other Information

 

47

 

 

ITEM 6: Exhibits

 

48

 

 

Signatures

 

52

 

 

 

2


PART 1 – FINANCIAL INFORMATION

 

ITEM 1.

Financial Statements

 

CTI BIOPHARMA CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

 

 

September 30,

 

 

December 31,

 

 

2014

 

 

2013

 

 

(unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

29,910

 

 

$

71,639

 

Accounts receivable

 

1,177

 

 

 

235

 

Other receivable

 

17,674

 

 

 

 

Inventory

 

4,542

 

 

 

5,074

 

Prepaid expenses and other current assets

 

2,635

 

 

 

3,567

 

Total current assets

 

55,938

 

 

 

80,515

 

Property and equipment, net

 

4,841

 

 

 

5,478

 

Other assets

 

7,815

 

 

 

7,730

 

Total assets

$

68,594

 

 

$

93,723

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

6,297

 

 

$

5,051

 

Accrued expenses

 

15,350

 

 

 

9,469

 

Warrant liability

 

 

 

 

991

 

Current portion of deferred revenue

 

903

 

 

 

1,010

 

Current portion of long-term debt

 

5,865

 

 

 

3,155

 

Other current liabilities

 

396

 

 

 

393

 

Total current liabilities

 

28,811

 

 

 

20,069

 

Deferred revenue, less current portion

 

2,011

 

 

 

1,626

 

Long-term debt, less current portion

 

7,846

 

 

 

10,152

 

Other liabilities

 

5,989

 

 

 

5,657

 

Total liabilities

 

44,657

 

 

 

37,504

 

Commitments and contingencies

 

 

 

 

 

 

 

Common stock purchase warrants

 

7,890

 

 

 

13,461

 

Shareholders' equity:

 

 

 

 

 

 

 

Common stock, no par value:

 

 

 

 

 

 

 

Authorized shares - 215,000,000

 

 

 

 

 

 

 

Issued and outstanding shares -  150,135,446 and 145,508,767

   at September 30, 2014 and December 31, 2013, respectively

 

1,957,696

 

 

 

1,933,305

 

Accumulated other comprehensive loss

 

(7,216

)

 

 

(8,429

)

Accumulated deficit

 

(1,931,501

)

 

 

(1,879,703

)

Total CTI shareholders' equity

 

18,979

 

 

 

45,173

 

Noncontrolling interest

 

(2,932

)

 

 

(2,415

)

Total shareholders' equity

 

16,047

 

 

 

42,758

 

Total liabilities and shareholders' equity

$

68,594

 

 

$

93,723

 

 


3


CTI BIOPHARMA CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(unaudited)

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product sales, net

$

2,021

 

 

$

362

 

 

$

4,437

 

 

$

1,794

 

License and contract revenue

 

37,513

 

 

 

 

 

 

37,851

 

 

 

 

Total revenues

 

39,534

 

 

 

362

 

 

 

42,288

 

 

 

1,794

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of product sold

 

252

 

 

 

13

 

 

 

599

 

 

 

104

 

Research and development

 

16,528

 

 

 

7,245

 

 

 

42,725

 

 

 

23,620

 

Selling, general and administrative

 

12,563

 

 

 

8,529

 

 

 

43,104

 

 

 

29,774

 

Settlement expense

 

 

 

 

60

 

 

 

 

 

 

155

 

Other operating expense

 

2,719

 

 

 

 

 

 

2,719

 

 

 

 

Total operating costs and expenses

 

32,062

 

 

 

15,847

 

 

 

89,147

 

 

 

53,653

 

Income (loss) from operations

 

7,472

 

 

 

(15,485

)

 

 

(46,859

)

 

 

(51,859

)

Non-operating income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(472

)

 

 

(316

)

 

 

(1,403

)

 

 

(680

)

Amortization of debt discount and issuance costs

 

(185

)

 

 

(162

)

 

 

(547

)

 

 

(349

)

Foreign exchange gain (loss)

 

(2,455

)

 

 

547

 

 

 

(2,621

)

 

 

(199

)

Other non-operating expense

 

 

 

 

(268

)

 

 

(885

)

 

 

(433

)

Total non-operating expense, net

 

(3,112

)

 

 

(199

)

 

 

(5,456

)

 

 

(1,661

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) before noncontrolling interest

 

4,360

 

 

 

(15,684

)

 

 

(52,315

)

 

 

(53,520

)

Noncontrolling interest

 

243

 

 

 

140

 

 

 

517

 

 

 

581

 

Net income (loss) attributable to CTI

$

4,603

 

 

$

(15,544

)

 

$

(51,798

)

 

$

(52,939

)

Deemed dividends on preferred stock

 

 

 

 

(6,900

)

 

 

 

 

 

(6,900

)

Net income (loss) attributable to CTI common shareholders

$

4,603

 

 

$

(22,444

)

 

$

(51,798

)

 

$

(59,839

)

Net income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.03

 

 

$

(0.20

)

 

$

(0.36

)

 

$

(0.55

)

Diluted

$

0.03

 

 

$

(0.20

)

 

$

(0.36

)

 

$

(0.55

)

Shares used in calculation of earnings (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

145,138

 

 

 

110,996

 

 

 

143,920

 

 

 

108,489

 

Diluted

 

147,097

 

 

 

110,996

 

 

 

143,920

 

 

 

108,489

 

 


4


CTI BIOPHARMA CORP.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

(unaudited)

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Net income (loss) before noncontrolling interest

$

4,360

 

 

$

(15,684

)

 

$

(52,315

)

 

$

(53,520

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

1,214

 

 

 

(291

)

 

 

1,261

 

 

 

196

 

Net unrealized gain (loss) on securities available-for-sale:

 

10

 

 

 

(28

)

 

 

(48

)

 

 

(195

)

Other comprehensive income (loss)

 

1,224

 

 

 

(319

)

 

 

1,213

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss)

 

5,584

 

 

 

(16,003

)

 

 

(51,102

)

 

 

(53,519

)

Comprehensive loss attributable to noncontrolling interest

 

243

 

 

 

140

 

 

 

517

 

 

 

581

 

Comprehensive income (loss) attributable to CTI

$

5,827

 

 

$

(15,863

)

 

$

(50,585

)

 

$

(52,938

)

 


5


CTI BIOPHARMA CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)

 

 

Nine Months Ended

September 30,

 

 

2014

 

 

2013

 

Operating activities

 

 

 

 

 

 

 

Net loss

$

(52,315

)

 

$

(53,520

)

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

 

 

 

 

 

 

 

Share-based compensation expense

 

17,022

 

 

 

6,324

 

Depreciation and amortization

 

875

 

 

 

1,207

 

Noncash interest expense

 

547

 

 

 

349

 

Change in value of warrant liability

 

886

 

 

 

187

 

Other

 

317

 

 

 

145

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

(1,033

)

 

 

(525

)

Other receivable

 

(17,674

)

 

 

 

Inventory

 

115

 

 

 

(1,995

)

Prepaid expenses and other current assets

 

851

 

 

 

5,749

 

Other assets

 

(753

)

 

 

(857

)

Accounts payable

 

1,384

 

 

 

(763

)

Accrued expenses

 

6,106

 

 

 

(2,468

)

Deferred revenue

 

278

 

 

 

 

Other liabilities

 

(5

)

 

 

(26

)

Total adjustments

 

8,916

 

 

 

7,327

 

Net cash used in operating activities

 

(43,399

)

 

 

(46,193

)

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

 

Purchases of property and equipment

 

(258

)

 

 

(1,373

)

Proceeds from sales of property and equipment

 

 

 

 

123

 

Net cash used in investing activities

 

(258

)

 

 

(1,250

)

 

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

 

Issuance of long-term debt, net

 

(73

)

 

 

9,501

 

Proceeds from issuance of Series 18 preferred stock, net of issuance costs

 

 

 

 

15,000

 

Other

 

(106

)

 

 

(326

)

Net cash provided by (used in) financing activities

 

(179

)

 

 

24,175

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

2,107

 

 

 

8

 

 

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(41,729

)

 

 

(23,260

)

Cash and cash equivalents at beginning of period

 

71,639

 

 

 

50,436

 

Cash and cash equivalents at end of period

$

29,910

 

 

$

27,176

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

Cash paid during the period for interest

$

1,383

 

 

$

618

 

 

 

 

 

 

 

 

 

Supplemental disclosure of noncash financing and investing activities

 

 

 

 

 

 

 

Conversion of Series 18 preferred stock to common stock

$

 

 

$

14,859

 

Issuance of common stock upon exercise of common stock purchase warrants

$

1,877

 

 

$

 

 

 

 

6


CTI BIOPHARMA CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

1.

Description of Business and Summary of Significant Accounting Policies

CTI BioPharma Corp., also referred to in this Quarterly Report on Form 10-Q as CTI, the Company, we, us or our, is a biopharmaceutical company focused on the acquisition, development and commercialization of novel targeted therapies covering a spectrum of blood-related cancers that offer a unique benefit to patients and healthcare providers. Our goal is to build a profitable company by generating income from products we develop and commercialize, either alone or with partners. We are currently concentrating our efforts on treatments that target blood-related cancers where there is an unmet medical need. In particular, we are primarily focused on commercializing PIXUVRI® (pixantrone), or PIXUVRI, in the European Union, or the E.U., for multiply relapsed or refractory aggressive B-cell non-Hodgkin lymphoma, and conducting a Phase 3 clinical trial program of pacritinib for the treatment of patients with myelofibrosis to support regulatory submission for approval in the United States, or the U.S., and Europe.

We operate in a highly regulated and competitive environment. The manufacturing and marketing of pharmaceutical products require approval from, and are subject to, ongoing oversight by the Food and Drug Administration, or the FDA, in the U.S., the European Medicines Agency in the E.U. and comparable agencies in other countries. Obtaining approval for a new therapeutic product is never certain and may take many years and may involve expenditure of substantial resources.

Basis of Presentation

The accompanying unaudited financial information of CTI as of September 30, 2014 and for the three and nine months ended September 30, 2014 and 2013 has been prepared in accordance with accounting principles generally accepted in the U.S. for interim financial information and with the instructions to Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, such financial information includes all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of our financial position at such date and the operating results and cash flows for such periods. Operating results for the three and nine months ended September 30, 2014 are not necessarily indicative of the results that may be expected for the entire year or for any other subsequent interim period.

Certain information and footnote disclosure normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to the rules of the U.S. Securities and Exchange Commission, or the SEC. These unaudited financial statements and related notes should be read in conjunction with our audited annual financial statements for the year ended December 31, 2013 included in our Annual Report on Form 10-K filed with the SEC on March 4, 2014.

The condensed consolidated balance sheet at December 31, 2013 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles in the U.S. for complete financial statements.

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of CTI and its wholly-owned subsidiaries, which include Systems Medicine LLC and CTI Life Sciences Limited, or CTILS. We also retain ownership of our branch, Cell Therapeutics Inc. – Sede Secondaria, or CTI (Europe); however, we ceased operations related to this branch in September 2009. In addition, CTI Commercial LLC, a wholly-owned subsidiary, was included in the consolidated financial statements until dissolution in March 2012.

As of September 30, 2014, we also had a 61% interest in our majority-owned subsidiary, Aequus Biopharma, Inc., or Aequus. The remaining interest in Aequus not held by CTI is reported as noncontrolling interest in the consolidated financial statements.

All intercompany transactions and balances are eliminated in consolidation.

Accounts Receivable

Our accounts receivable balance includes trade receivables related to PIXUVRI sales. We estimate an allowance for doubtful accounts based upon the age of outstanding receivables and our historical experience of collections, which includes adjustments for risk of loss for specific customer accounts. We periodically review the estimation process and make changes to our assumptions as necessary. When it is deemed probable that a customer account is uncollectible, the account balance is written off against the existing allowance. We also consider the customers’ country of origin to determine if an allowance is required. We continue to monitor economic conditions, including the volatility associated with international economies, the sovereign debt crisis in certain European countries and associated impacts on the financial markets and our business. As of September 30, 2014 and December 31, 2013, our

7


accounts receivable did not include any balance from a customer in a country that has exhibited financial stress that would have had a material impact on our financial results. We did not record an allowance for doubtful accounts as of September 30, 2014 and December 31, 2013.

Liquidity

The accompanying condensed consolidated financial statements have been prepared assuming that we will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business for the twelve-month period following the date of these condensed consolidated financial statements. However, we have incurred net losses since inception and expect to generate losses for the next few years primarily due to research and development costs for pacritinib, PIXUVRI, Opaxio, tosedostat and brostallicin.

Our available cash and cash equivalents were $29.9 million as of September 30, 2014. Subsequent to period end, we borrowed $5.0 million in additional outstanding principal under our senior secured term loan agreement, and we received an upfront payment of €14.0 million (or $17.8 million using the currency exchange rate as of the date we received the funds in October 2014) in connection with our exclusive license and collaboration agreement with Servier.  See Note 4, Long-term Debt, and Note 9, Collaborations, for additional information. We believe that our present financial resources (including the $17.8 million we received in October 2014 under the Servier Agreement), together with additional milestone payments projected to be received under certain of our contractual agreements, our ability to control costs and expected net contribution from commercial operations in connection with PIXUVRI, will only be sufficient to fund our operations into the third quarter of 2015. This raises substantial doubt about our ability to continue as a going concern.

Accordingly, we will need to raise additional funds and are currently exploring alternative sources of financing. We may seek to raise such capital through public or private equity financings, partnerships, joint ventures, disposition of assets, debt financings or restructurings, bank borrowings or other sources of financing. However, we have a limited number of authorized shares of common stock available for issuance and additional funding may not be available on favorable terms or at all. If additional funds are raised by issuing equity securities, substantial dilution to existing shareholders may result. If we fail to obtain additional capital when needed, we may be required to delay, scale back or eliminate some or all of our research and development programs, reduce our selling, general and administrative expenses, be unable to attract and retain highly qualified personnel, refrain from making our contractually required payments when due (including debt payments) and/or may be forced to cease operations, liquidate our assets and possibly seek bankruptcy protection. The accompanying condensed consolidated financial statements do not include any adjustments that may result from the outcome of this uncertainty.

Value Added Tax Receivable

Our European operations are subject to a value added tax, or VAT, which is usually applied to all goods and services purchased and sold throughout Europe. The VAT receivable is approximately $5.3 million and $5.7 million as of September 30, 2014 and December 31, 2013, of which $5.1 million and $5.6 million is included in other assets and $0.2 million and $0.1 million is included in prepaid expenses and other current assets as of September 30, 2014 and December 31, 2013, respectively. The collection period of VAT receivable for our European operations ranges from approximately three months to five years. For our Italian VAT receivable, the collection period is approximately three to five years. As of September 30, 2014, the VAT receivable related to operations in Italy is approximately $5.1 million. We review our VAT receivable balance for impairment whenever events or changes in circumstances indicate the carrying amount might not be recoverable.

Inventory

We carry inventory at the lower of cost or market. The cost of finished goods and work in process is determined using the standard-cost method, which approximates actual cost based on a first-in, first-out method. Inventory includes the cost of materials, third-party contract manufacturing and overhead costs, quality control costs and shipping costs from the manufacturers to the final distribution warehouse associated with the production and distribution of PIXUVRI. Production costs for our other product candidates continue to be charged to research and development expense as incurred prior to regulatory approval or until our estimate for regulatory approval becomes probable. We regularly review our inventories for impairment and reserves are established when necessary. Estimates of excess inventory consider our projected sales of the product and the remaining shelf lives of product. In the event we identify excess, obsolete or unsaleable inventory, the value is written down to the net realizable value.

Revenue Recognition

We currently have conditional marketing authorization for PIXUVRI in the E.U. Revenue is recognized when there is persuasive evidence of the existence of an agreement, delivery has occurred, prices are fixed or determinable, and collectability is assured. Where the revenue recognition criteria are not met, we defer the recognition of revenue by recording deferred revenue until such time that all criteria under the provision are met.

8


Product sales

We sell PIXUVRI directly to health care providers and through a limited number of distributors. We generally record product sales upon receipt of the product by the health care providers and certain distributors at which time title and risk of loss pass. Product sales are recorded net of distributor discounts, estimated government-mandated rebates, trade discounts, and estimated product returns. Reserves are established for these deductions and actual amounts incurred are offset against the applicable reserves. We reflect these reserves as either a reduction in the related account receivable or as an accrued liability depending on the nature of the sales deduction. These estimates are periodically reviewed and adjusted as necessary.

Government-mandated discounts and rebates

Our products are subject to certain programs with government entities in the E.U. whereby pricing on products is discounted below distributor list price to participating health care providers. These discounts are provided to participating health care providers either at the time of sale or through a claim by the participating health care providers for a rebate. Due to estimates and assumptions inherent in determining the amount of government-mandated discounts and rebates, the actual amount of future claims may be different from our estimates, at which time we would adjust our reserves accordingly.

Product returns and other deductions

At the time of sale, we also record estimates for certain sales deductions such as product returns and distributor discounts and incentives. We offer certain customers a limited right of return or replacement of product that is damaged in certain instances. When we cannot reasonably estimate the amount of future product returns and/or other sales deductions, we do not recognize revenue until the risk of product return and additional sales deductions have been substantially eliminated. To date, there have been no PIXUVRI product returns.

Collaboration agreements

We evaluate collaboration agreements to determine whether the multiple elements and associated deliverables can be considered separate units of accounting in accordance with ASC 605-25 Revenue Recognition – Multiple-Element Arrangements. If it is determined that the deliverables under the collaboration agreement are a single unit of accounting, all amounts received or due, including any upfront payments, are recognized as revenue over the performance obligation periods of each agreement. Following the completion of the performance obligation period, such amounts will be recognized as revenue when collectability is reasonably assured.

The assessment of multiple element arrangements requires judgment in order to determine the allocation of revenue to each deliverable and the appropriate point in time, or period of time, that revenue should be recognized. In order to account for these agreements, we identify deliverables included within the agreement and evaluate which deliverables represent separate units of accounting based on whether certain criteria are met, including whether the delivered element has standalone value to the collaborator. The consideration received is allocated among the separate units of accounting, and the applicable revenue recognition criteria are applied to each of the separate units.

Milestone payments under the collaboration agreement are generally aggregated into three categories for reporting purposes: (i) development milestones, (ii) regulatory milestones, and (iii) sales milestones. Development milestones are typically payable when a product candidate initiates or advances into different clinical trial phases. Regulatory milestones are typically payable upon submission for marketing approval with the FDA, or with the regulatory authorities of other countries, or on receipt of actual marketing approvals for the compound or for additional indications. Sales milestones are typically payable when annual sales reach certain levels.

At the inception of each agreement that includes milestone payments, we evaluate whether each milestone is substantive and at risk to both parties on the basis of the contingent nature of the milestone. This evaluation includes an assessment of whether (a) the consideration is commensurate with either (1) the entity's performance to achieve the milestone, or (2) the enhancement of the value of the delivered item(s) as a result of a specific outcome resulting from the entity's performance to achieve the milestone, (b) the consideration relates solely to past performance and (c) the consideration is reasonable relative to all of the deliverables and payment terms within the arrangement. We evaluate factors such as the scientific, regulatory, commercial and other risks that must be overcome to achieve the respective milestone, the level of effort and investment required to achieve the respective milestone and whether the milestone consideration is reasonable relative to all deliverables and payment terms in the arrangement in making this assessment. Non-refundable development and regulatory milestones that are expected to be achieved as a result of our efforts during the period of substantial involvement are considered substantive and are recognized as revenue upon the achievement of the milestone, assuming all other revenue recognition criteria are met.

9


Cost of Product Sold

Cost of product sold includes third-party manufacturing costs, shipping costs, contractual royalties and other costs of PIXUVRI product sold. Cost of product sold also includes any necessary allowances for excess inventory that may expire and become unsalable. We did not record an allowance for excess inventory as of September 30, 2014 and 2013.

Net Loss Per Share

Basic net income (loss) per share is calculated based on the net income (loss) attributable to common shareholders divided by the weighted average number of shares outstanding for the period excluding any dilutive effects of options, warrants, unvested share awards and convertible securities. Diluted net income (loss) per common share assumes the conversion of all dilutive convertible securities, such as convertible debt and convertible preferred stock using the if-converted method, and assumes the exercise or vesting of other dilutive securities, such as options, warrants and restricted stock using the treasury stock method.

Fair Value Measurement

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Fair value measurements are based on a three-tier hierarchy that prioritizes the inputs used to measure fair value. There are three levels of inputs used to measure fair value with Level 1 having the highest priority and Level 3 having the lowest:

Level 1 – Observable inputs, such as unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2 – Observable inputs other than Level 1 inputs, such as quoted prices for similar assets or liabilities, or other inputs that are observable directly or indirectly.

Level 3 – Unobservable inputs that are supported by little or no market activity, requiring an entity to develop its own assumptions.

If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

Concentrations of Credit Risk

Financial instruments which potentially subject us to concentrations of credit risk consist of accounts receivable. We have accounts receivable from the sale of PIXUVRI from a small number of distributors and health care providers. Further, we do not require collateral on amounts due from our distributors and are therefore subject to credit risk. We have not experienced any significant credit losses to date as a result of credit risk concentration and do not consider an allowance for doubtful accounts to be necessary.

Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board, or the FASB, issued a new financial accounting standard which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance. The accounting standard is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2016. Early adoption is not permitted. We are currently evaluating the impact of this accounting standard.

In August 2014, the FASB issued a new accounting standard which requires management to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern for each annual and interim reporting period and to provide related footnote disclosures in certain circumstances. The accounting standard is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2016. Early adoption is permitted. We are currently evaluating the impact of this accounting standard.

Recently Adopted Accounting Standards

In March 2013, the FASB issued guidance to clarify when to release cumulative foreign currency translation adjustments when an entity ceases to have a controlling financial interest in a subsidiary or group of assets within a foreign entity. The amendment is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013 and should be applied prospectively to derecognition events occurring after the effective date, with early adoption permitted. The adoption of this guidance did not have an impact on our consolidated financial statements.

10


In July 2013, the FASB issued guidance on the presentation of an unrecognized tax benefit when a net operating loss carryforward, similar tax loss or tax carryforward exists. The FASB concluded that an unrecognized tax benefit should be presented as a reduction of a deferred tax asset except in certain circumstances the unrecognized tax benefit should be presented as a liability and should not be combined with deferred tax assets. The amendment is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013, with early adoption permitted. The adoption of this guidance did not have an impact on our consolidated financial statements.

Reclassifications

Certain prior year items have been reclassified to conform to current year presentation.

 

2.

Earnings (Loss) Per Share

The numerator for both basic and diluted earnings (loss) per share, or EPS, is net income (loss). The denominator for basic EPS (referred to as basic shares) is the weighted-average number of common shares outstanding during the period, whereas the denominator for diluted EPS (referred to as diluted shares) also takes into account the dilutive effect of outstanding stock options and restricted stock awards using the treasury stock method. Basic and diluted shares as of the three and nine months ended September 30, 2014 are as follows (in thousands):

 

 

Three months ended

September 30,

 

 

Nine months ended

September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Basic shares

 

145,138

 

 

 

110,996

 

 

 

143,920

 

 

 

108,489

 

Effect of dilutive securities

 

1,959

 

 

 

 

 

 

 

 

 

 

Diluted shares

 

147,097

 

 

 

110,996

 

 

 

143,920

 

 

 

108,489

 

 

The effect of dilutive securities included unexercised stock options and unvested restricted stock. The computation of diluted EPS excluded equity awards, warrants and unvested share rights aggregating 9.4 million shares for the three months ended September 30, 2014, as their inclusion would have been anti-dilutive. Equity awards, warrants, and unvested share rights aggregating 12.6 million shares, 15.1 million shares and 11.3 million shares for the three months ended September 30, 2013 and the nine months ended September 30, 2014 and 2013, respectively, prior to the application of the treasury stock method, are excluded from the calculation of diluted EPS because they are anti-dilutive.

 

 

3.

Inventory

The components of PIXUVRI inventory consisted of the following as of September 30, 2014 and December 31, 2013 (in thousands):

 

 

September 30,

 

 

December 31,

 

 

2014

 

 

2013

 

Finished goods

$

885

 

 

$

601

 

Work-in-process

 

3,657

 

 

 

4,473

 

Total inventories

$

4,542

 

 

$

5,074

 

 

 

4.

  Long-term Debt

In March 2014, we entered into a First Amendment, or the Amendment, to Loan and Security Agreement, or the Original Loan Agreement (and as amended by the Amendment, the Loan Agreement) with Hercules Capital Funding Trust 2012-1, or Hercules, which was assigned from the original lender, Hercules Technology Growth Capital, Inc. The Amendment modified certain terms applicable to the loan balance then-outstanding of $15.0 million, or the Original Loan, as described below and provided us with the option to borrow an additional $5.0 million, or the 2014 Term Loan, through October 31, 2014, subject to certain conditions. We exercised such option and received the funds in October 2014. In connection with the Amendment, we paid a facility charge of $72,500 of which $35,000 was refunded to us in October 2014 pursuant to the terms of the Amendment.

Pursuant to the Amendment, the interest-only period of the Original Loan has been extended by six months such that the 24 equal monthly installments of principal and interest (mortgage style) will now commence on November 1, 2014 (rather than May 1, 2014). In addition, the interest rate on the Original Loan (which is currently 12.25% plus the amount by which the prime rate exceeds 3.25%) will, upon Hercules’ receipt of evidence of the achievement of positive Phase 3 data in connection with our PERSIST-1

11


clinical trial for pacritinib, be reduced to 11.25% plus the amount by which the prime rate exceeds 3.25%. The modified terms were not considered substantially different pursuant to ASC 470-50, Modification and Extinguishment.

The interest on the 2014 Term Loan floats at a rate per annum equal to 10.00% plus the amount by which the prime rate exceeds 3.25%. The 2014 Term Loan is repayable in 24 equal monthly installments of principal and interest (mortgage style) commencing on November 1, 2014.

Subject to certain exceptions, all loan obligations under the Loan Agreement are secured by a first priority security interest on substantially all of our personal property (excluding our intellectual property).

As of December 31, 2013, the fair value of the warrant issued in connection with the consummation of the Original Loan Agreement in March 2013 was $1.0 million and was classified as a liability since it did not meet the considerations necessary for equity classification. The warrant was categorized as Level 2 in the fair value hierarchy as the significant inputs used in determining fair value were considered observable market data. In January 2014, all of the warrant was exercised into 0.5 million shares of common stock via cashless exercise.

As of September 30, 2014 and December 31, 2013, unamortized debt discount was $1.3 million and $1.7 million, unamortized issuance costs were $0.2 million and $0.3 million, respectively.

 

5.

Legal Proceedings

On December 10, 2009, the Commissione Nazionale per le Società e la Borsa (which is the public authority responsible for regulating the Italian securities markets), or CONSOB, sent us a notice claiming, among other things, violation of the provisions of Section 114, paragraph 1 of the Italian Legislative Decree no. 58/98 due to the asserted late disclosure of the contents of the opinion expressed by Stonefield Josephson, Inc., an independent registered public accounting firm, with respect to our 2008 financial statements. The sanctions established by Section 193, paragraph 1 of the Italian Legislative Decree no. 58/98 for such violations could require us to pay a pecuniary administrative sanction amounting to between $6,000 and $631,000 upon conversion from euros as of September 30, 2014. Until CONSOB’s right is barred, CONSOB may, at any time, confirm the occurrence of the asserted violation and apply a pecuniary administrative sanction within the foregoing range. To date, we have not received any such notification.

The Italian Tax Authority, or the ITA, issued notices of assessment to CTI (Europe) based on the ITA’s audit of CTI (Europe)’s VAT returns for the years 2003, 2005, 2006 and 2007, or, collectively, the VAT Assessments. The ITA audits concluded that CTI (Europe) did not collect and remit VAT on certain invoices issued to non-Italian clients for services performed by CTI (Europe). We believe that the services invoiced were non-VAT taxable consultancy services and that the VAT returns are correct as originally filed. We are defending ourselves against the assessments both on procedural grounds and on the merits of the case. As of December 31, 2012, we reversed the entire reserve we had previously recorded relating to the VAT Assessments after having received favorable court rulings. In January 2013, our then remaining deposit for the VAT Assessments was refunded to us. The current status of the legal proceedings surrounding each respective VAT year return at issue is as follows:

2003. In June 2013, the Regional Tax Court issued decision no. 119/50/13 in regards to the 2003 VAT assessment, which accepted the appeal of the ITA and reversed the previous decision of the Provincial Tax Court. In January 2014, we were notified that the ITA requested partial payment of the 2003 VAT assessment in the amount of €430,118, which we paid in March 2014. We believe that the decision of the Regional Tax Court did not carefully take into account our arguments and the documentation we filed, and in January 2014, we appealed such decision to the Supreme Court both on procedural grounds and on the merits of the case.

2005, 2006 and 2007. The ITA has appealed to the Supreme Court the decisions of the respective appellate court with respect to each of the 2005, 2006 and 2007 VAT returns.

If the final decisions of the Supreme Court for the VAT Assessments are unfavorable to us, we may incur up to $11.9 million in losses for the VAT amount assessed including penalties, interest and fees upon conversion from euros as of September 30, 2014.

In July 2014, Joseph Lopez and Gilbert Soper, shareholders of the Company, filed a derivative lawsuit purportedly on behalf of the Company, which is named a nominal defendant, against all current and one past member of the Company’s Board of Directors in King County Superior Court in the State of Washington, docketed as Lopez & Gilbert v. Nudelman, et al., Case No. 14-2-18941-9 SEA. The lawsuit alleges that the directors exceeded their authority under the Company’s 2007 Equity Incentive Plan, or the Plan, by improperly transferring 4,756,137 shares of the Company’s common stock from the Company to themselves. It alleges that the directors breached their fiduciary duties by granting themselves fully vested shares of Company common stock, which the plaintiffs allege were not among the six types of grants authorized by the Plan, and that the non-employee directors were unjustly enriched by these grants. The lawsuit also alleges that from 2011 through 2014, the non-employee members of the Board of Directors granted themselves grossly excessive compensation, and in doing so breached their fiduciary duties and were unjustly enriched. Among other remedies, the lawsuit seeks a declaration that the specified grants of common stock violated the Plan, rescission of the granted shares,

12


disgorgement of the compensation awards to the non-employee directors from 2011 through 2014, disgorgement of all compensation and other benefits received by the defendant directors in the course of their breaches of fiduciary duties, damages, an order for certain corporate reforms and plaintiffs’ costs and attorneys’ fees. Because the complaint is derivative in nature, it does not seek monetary damages from the Company. In September 2014, the director defendants moved to dismiss the complaint.  The motion to dismiss is scheduled to be heard on November 21, 2014. At this stage of the litigation, no probability of loss can be predicted.

 

6.

Share-based Compensation Expense

The following table summarizes share-based compensation expense for the three and nine months ended September 30, 2014 and 2013, which was allocated as follows (in thousands):

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Research and development

$

801

 

 

$

685

 

 

$

2,617

 

 

$

1,540

 

Selling, general and administrative

 

3,036

 

 

 

1,243

 

 

 

14,405

 

 

 

4,784

 

Total share-based compensation expense

$

3,837

 

 

$

1,928

 

 

$

17,022

 

 

$

6,324

 

 

For the three and nine months ended September 30, 2014 and 2013, we incurred share-based compensation expense due to the following types of awards (in thousands):

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Performance rights

$

427

 

 

$

280

 

 

$

1,121

 

 

$

885

 

Restricted stock

 

2,864

 

 

 

1,394

 

 

 

12,512

 

 

 

4,845

 

Options

 

546

 

 

 

254

 

 

 

3,389

 

 

 

594

 

Total share-based compensation expense

$

3,837

 

 

$

1,928

 

 

$

17,022

 

 

$

6,324

 

 

 

7.

Other Comprehensive Income (Loss)

Total accumulated other comprehensive income (loss) consisted of the following (in thousands):

 

 

Net Unrealized

Loss on

Securities

Available-For-

Sale

 

 

Foreign

Currency

Translation

Adjustments

 

 

Accumulated

Other

Comprehensive

Loss

 

December 31, 2013

$

(422

)

 

$

(8,007

)

 

$

(8,429

)

Current period other comprehensive income (loss)

 

(48

)

 

 

1,261

 

 

 

1,213

 

September 30, 2014

$

(470

)

 

$

(6,746

)

 

$

(7,216

)

 

 

8.

Leases

Our deferred rent balance was $4.5 million as of September 30, 2014, of which $0.4 million was included in other current liabilities and $4.1 million was included in other liabilities. As of December 31, 2013, our deferred rent balance was $4.8 million, of which $0.4 million was included in other current liabilities and $4.4 million was included in other liabilities.

 

 

9.

Collaborations

In September 2014, we entered into an Exclusive License and Collaboration Agreement, or the Servier Agreement, with Les Laboratoires Servier and Institut de Recherches Internationales Servier, or collectively, Servier. Under the Servier Agreement, we granted Servier an exclusive and sublicensable (subject to certain conditions) royalty-bearing license with respect to the development and commercialization of PIXUVRI for use in pharmaceutical products outside of the CTI Territory (defined below). We retained rights to PIXUVRI in Austria, Denmark, Finland, Germany, Israel, Norway, Sweden, Turkey, the United Kingdom and the U.S., or collectively, the CTI Territory.

In October 2014, we received a non-refundable, non-creditable cash upfront payment of €14.0 million (or $17.7 million using the currency exchange rate as of September 30, 2014, which is recorded as Other receivable in the balance sheet as of September 30, 2014). In addition, subject to the achievement of certain conditions, we are eligible to receive milestone payments under the Servier

13


Agreement in the approximate aggregate amount of up to €89.0 million, which is comprised of the following: up to €49.0 million in potential clinical and regulatory milestone payments (of which €9.5 million is payable upon occurrence of certain enrollment events in connection with the ongoing confirmatory Phase 3 clinical trial for PIXUVRI); and up to €40.0 million in potential sales-based milestone payments. All of these milestones were determined to be substantive at the inception of the arrangement. For a number of years following the first commercial sale of a product containing PIXUVRI in the respective country, regardless of patent expiration or expiration of regulatory exclusivity rights, we are eligible to receive tiered royalty payments ranging from a low double digit percentage up to a percentage in the mid-twenties based on net sales of products containing PIXUVRI, subject to certain reductions of up to mid-double digit percentages under certain circumstances. As previously disclosed, we owe royalties on net sales of products containing PIXUVRI as well as other payments to certain third parties, including the €2.1 million payment (or $2.7 million using the currency exchange rate as of September 30, 2014) due to Novartis International Pharmaceutical Ltd., which is recorded in Accrued expenses as of September 30, 2014.

Unless otherwise agreed by the parties, (i) certain development costs incurred pursuant to a development plan and (ii) certain marketing costs incurred pursuant to a marketing plan will, in each case, be shared equally by the parties, subject to a maximum dollar obligation of each party. We record reimbursements received from Servier as revenue and record the full amount of costs as operating expenses in the statements of operations.

The Servier Agreement will expire on a country-by-country basis upon the expiration of the royalty terms in the countries outside of the CTI Territory, at which time all licenses granted to Servier would become perpetual and royalty-free. Each party may terminate the Servier Agreement in the event of an uncured repudiatory breach (as defined under English law) of the other party’s obligations. Servier may terminate the Servier Agreement without cause on a country-by-country basis upon written notice to us within a specified time period or upon written notice within a certain period of days in the event of (i) certain safety or public health issues involving PIXUVRI or (ii) cessation of certain marketing authorizations. In the event of a termination prior to the expiration date, rights granted to Servier will terminate, subject to certain exceptions.

Pursuant to accounting guidance under ASC 605-25 Revenue Recognition – Multiple-Element Arrangements, we identified the following non-contingent deliverables with standalone value at the inception of the Servier Agreement:

·

a license with respect to the development and commercialization of PIXUVRI in certain countries; and

·

development services under the development plans.

We have determined that our regulatory, commercial, and manufacturing and supply responsibilities, as well as our joint committee obligations also have standalone value but are insignificant.

The license deliverable has standalone value because it is sublicensable and can be used for its intended purpose without the receipt of the remaining deliverables. The service deliverables have standalone value because these services are not proprietary in nature, and other vendors could provide the same services to derive value from the license. Further, there is no general right of return associated with these deliverables. As such, the deliverables meet the criteria for separation and qualify as separate units of accounting.

We allocated the arrangement consideration of $18.1 million (€14.0 million converted into U.S. dollar using the currency exchange rate as of September 16, 2014, the date of the Servier Agreement) based on the percentage of the relative selling price of each unit of accounting as follows (in thousands):

 

License

$

17,277

 

Development and other services

 

852

 

Total upfront payment

$

18,129

 

 

We estimated the selling price of the license using the income approach that values the license by discounting direct cash flow expected to be generated over the remaining life of the license, net of cash flow adjustments related to working capital. The estimates and assumptions include, but are not limited to, estimated market opportunity, expected market share, and contractual royalty rates. We estimated the selling price of the development services deliverable, which includes personnel costs as well as third party costs for applicable services and supplies, by discounting estimated expenditures for services to the date of the Servier Agreement. We concluded that a change in the key assumptions used to determine the best estimate of selling price for the license deliverable would not have a significant effect on the allocation of the arrangement consideration.

During the three and nine months ended September 30, 2014, we recognized $17.3 million of the arrangement consideration allocated to the license as revenue since the delivery of the license occurred upon the execution of the Servier Agreement in September 2014 and the remaining revenue recognition criteria were satisfied. The amount allocated to the development and other services is expected to be recognized as revenue through approximately 2022 on a straight-line basis. During the three and nine

14


months ended September 30, 2014, $4,000 of development services was recognized as revenue, and the remaining $0.8 million was recorded as deferred revenue in the balance sheet as of September 30, 2014.

 

 

10.

Subsequent Event

In October 2014, we entered into an Asset Purchase Agreement, or the Chroma APA, with Chroma Therapeutics Limited, or Chroma, pursuant to which we acquired all of Chroma’s right, title and interest in the compound tosedostat and certain related assets. Concurrently, we and Chroma terminated our Co-Development and License Agreement relating to tosedostat, or the Chroma License Agreement, previously entered into on March 11, 2011, thereby eliminating potential future milestone payments thereunder of up to $209.0 million, and we acquired an exclusive worldwide license with respect to tosedostat directly from Vernalis R&D Limited, or Vernalis (as discussed below). Pursuant to the Chroma License Agreement, we had held an exclusive license with respect to tosedostat, including the right to develop and commercialize tosedostat in North, Central and South America. The Chroma License Agreement was effectively a sublicense of rights to us, as Chroma had held its rights to tosedostat pursuant to an exclusive license agreement between Vernalis and Chroma, or the Vernalis/Chroma Agreement.

As consideration under the Chroma APA, we issued an aggregate of 9,000 shares of our Series 20 preferred stock convertible into shares of common stock, or the Series 20 Preferred Stock, of which 7,920 shares have been delivered to Chroma. The remaining 1,080 shares are being held in escrow for nine months and will be applied towards any indemnification obligations of Chroma as set forth in the Chroma APA.

Concurrently with the termination of the Chroma License Agreement and the consummation of the Chroma APA, we also entered into an amended and restated license agreement with Vernalis, or the Vernalis License Agreement, for the exclusive worldwide right to use certain patents and other intellectual property rights to develop, market and commercialize tosedostat and certain other compounds, as well as a deed of novation pursuant to which all rights of Chroma under the Vernalis/Chroma Agreement were novated to us. Under the Vernalis License Agreement, we have agreed to make tiered royalty payments of no more than a high single digit percentage of net sales of products containing licensed compounds, with such obligation to continue on a country-by-country basis for the longer of ten years following commercial launch or the expiry of relevant patent claims.

The Vernalis License Agreement will terminate when the royalty obligations expire, although the parties have early termination rights under certain circumstances, including the following: (i) we have the right to terminate, with three months’ notice, upon the belief that the continued development of tosedostat or any of the other licensed compounds is not commercially viable; (ii) Vernalis has the right to terminate in the event of our uncured failure to pay sums due; and (iii) either party has the right to terminate in event of the other party’s uncured material breach or insolvency.

 

 

 

15


Item 2.

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

This Quarterly Report on Form 10-Q may contain, in addition to historical information, “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and should be read in conjunction with the Condensed Consolidated Financial Statements and the related Notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q. When used in this Quarterly Report on Form 10-Q, terms such as “anticipates,” “believes,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should,” or “will” or the negative of those terms or other comparable terms are intended to identify such forward-looking statements. Such statements, which include statements concerning sufficiency of cash resources and related projections, product sales, research and development expenses, selling, general and administrative expenses, additional financings and additional losses, are subject to known and unknown risks and uncertainties, including, but not limited to, those discussed below and elsewhere in this Quarterly Report on Form 10-Q and our 2013 Annual Report on Form 10-K, or the 2013 Form 10-K, particularly in “Factors Affecting Our Operating Results and Financial Condition,” that could cause actual results, levels of activity, performance or achievements to differ significantly from those projected. Although we believe that expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We will not update any of the forward-looking statements after the date of this Quarterly Report on Form 10-Q to conform these statements to actual results or changes in our expectations. Readers are cautioned not to place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q.

OVERVIEW

We are a biopharmaceutical company focused on the acquisition, development and commercialization of novel targeted therapies covering a spectrum of blood-related cancers that offer a unique benefit to patients and healthcare providers. Our goal is to build a profitable company by generating income from products we develop and commercialize, either alone or with partners. We are currently concentrating our efforts on treatments that target blood-related cancers where there is an unmet medical need. In particular, we are primarily focused on commercializing PIXUVRI® (pixantrone), or PIXUVRI, in the European Union, or the E.U., for multiply relapsed or refractory aggressive B-cell non-Hodgkin lymphoma, or NHL, and conducting a Phase 3 clinical trial program of pacritinib for the treatment of patients with myelofibrosis to support regulatory submission for approval in the United States, or the U.S., and Europe.

PIXUVRI

PIXUVRI is a novel aza-anthracenedione with unique structural and physiochemical properties. In May 2012, the European Commission granted conditional marketing authorization in the E.U. for PIXUVRI as a monotherapy for the treatment of adult patients with multiply relapsed or refractory aggressive B-cell NHL. PIXUVRI is the first approved treatment in the E.U. for patients with multiply relapsed or refractory aggressive B-cell NHL who have failed two or three prior lines of therapy. In connection with the conditional marketing authorization, we are conducting the required post-approval commitment trial, which compares pixantrone and rituximab with gemcitabine and rituximab in the setting of aggressive B-cell NHL. As of the date of this filing, PIXUVRI was available in Austria, Denmark, Finland, France, Germany, Israel, Italy, Netherlands, Norway, Sweden and the United Kingdom, or the U.K., and has achieved reimbursement decisions under varying conditions in England/Wales, Italy, France, Germany and the Netherlands. We have established a commercial organization, including sales, marketing, supply chain management and reimbursement capabilities, to commercialize PIXUVRI in certain countries in the E.U. PIXUVRI is not approved in the U.S.

In September 2014, we entered into an Exclusive License and Collaboration Agreement, or the Servier Agreement, with Les Laboratoires Servier and Institut de Recherches Internationales Servier, or collectively, Servier, to develop and commercialize PIXUVRI. Under the Servier Agreement, we retain full commercialization rights to PIXUVRI in Austria, Denmark, Finland, Germany, Israel, Norway, Sweden, Turkey, the U.K. and the U.S., with Servier having exclusive rights to commercialize PIXUVRI in all other countries. In October 2014, we received an upfront payment from Servier of €14.0 million (or $17.8 million using the currency exchange rate as of the date we received the funds in October 2014), and as a result of having received such payment, we were obligated to pay Novartis International Pharmaceutical Ltd., or Novartis, €2.1 million (or $2.7 million using the currency exchange rate as of the date of payment in October 2014) under the terms of the Novartis Termination Agreement. We also have the potential to receive milestone payments under the Servier Agreement of up to €89.0 million, which is comprised of the following: up to €49.0 million in potential clinical and regulatory milestone payments (of which €9.5 million is payable upon occurrence of certain enrollment events in connection with the ongoing confirmatory Phase 3 clinical trial for PIXUVRI); and up to €40.0 million in sales-based milestone payments. We are also eligible to receive tiered royalty payments ranging from a low-double digit percentage up to a percentage in the mid-twenties based on net sales of products containing PIXUVRI (subject to reduction in certain instances). We also agreed to share certain development expenses and certain marketing costs equally with Servier. For additional information on our collaboration with Servier, please see the discussion in Part I, Item 2, License Agreements and Additional Milestone Activities – Servier.

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Pacritinib

Our lead development candidate, pacritinib, is an oral tyrosine kinase inhibitor with dual activity against Janus Kinase 2, or JAK2, and FMS-like tyrosine kinase (also known as FLT3), which demonstrated meaningful clinical benefit and good tolerability in myelofibrosis patients in Phase 2 clinical trials. Myelofibrosis is a blood-related cancer caused by the accumulation of malignant bone marrow cells that triggers an inflammatory response, scarring the bone marrow and limiting its ability to produce red blood cells prompting the spleen and liver to take over this function. Symptoms that arise from this disease include enlargement of the spleen, anemia, extreme fatigue, itching and pain. We believe pacritinib may offer an advantage over other JAK inhibitors through effective relief of symptoms with less treatment-emergent thrombocytopenia and anemia.

In collaboration with Baxter International, Inc., or Baxter, pursuant to our worldwide license agreement to develop and commercialize pacritinib, or the Baxter Agreement, we are pursuing a broad approach to advancing pacritinib for patients with myelofibrosis by conducting two Phase 3 clinical trials: one in a broad set of patients without limitations on blood platelet counts, or PERSIST-1, and the other in patients with low platelet counts, or PERSIST-2. PERSIST-1 enrollment has completed and top-line results are expected in the first quarter of 2015. In October 2013, we reached an agreement with the U.S. Food and Drug Administration, or FDA, on a Special Protocol Assessment for PERSIST-2, which is actively enrolling patients. The two clinical trials are intended to support a New Drug Application, or NDA, planned regulatory submission in the U.S. in late 2015, followed by a planned Marketing Authorization Application submission in Europe in 2016. In August 2014, pacritinib was granted Fast Track designation by the FDA for the treatment of intermediate and high risk myelofibrosis, including but not limited to patients with disease-related thrombocytopenia, patients experiencing treatment-emergent thrombocytopenia on other JAK2 therapy or patients who are intolerant of, or whose symptoms are sub-optimally managed on, other JAK2 therapy. The FDA’s Fast Track process is designed to facilitate the development and expedite the review of drugs to treat serious conditions and fill an unmet medical need.

In August 2014, we received a $20 million development milestone payment under the Baxter Agreement following completion of enrollment in PERSIST-1. For additional information on our collaboration with Baxter, please see the discussion in Part I, Item 2, License Agreements and Additional Milestone Activities – Baxter.

We are also currently evaluating pacritinib in acute myeloid leukemia, or AML, through an ongoing investigator-sponsored trial, or IST, and intend to evaluate it in other blood cancers in the future.

Tosedostat

Tosedostat is a novel oral aminopeptidase inhibitor that has demonstrated significant responses in patients with AML. It is currently being evaluated in several Phase 2 cooperative group-sponsored trials and ISTs. These trials are evaluating tosedostat in combination with hypomethylating agents in AML and myelodysplastic syndrome, which are cancers of the blood and bone marrow. We anticipate data from these signal-finding trials may be used to determine the appropriate design for a Phase 3 trial.

In October 2014, we acquired worldwide rights with respect to tosedostat through concurrent transactions with Vernalis R&D Limited, or Vernalis, and Chroma Therapeutics Limited, or Chroma. Prior to these transactions, we previously held a limited sublicense with respect to tosedostat in North, Central and South America. As a result of these transactions, we terminated such sublicense agreement with Chroma and entered into a direct license agreement with Vernalis, the originator of tosedostat, pursuant to which we acquired exclusive worldwide rights with respect to tosedostat. For further information on these transactions, including a discussion of the equity consideration we paid to Chroma and our future royalty obligations to Vernalis, see the discussion under the headings “Chroma” and “Vernalis” in Part I, Item 2, License Agreements and Additional Milestone Activities.

Paclitaxel Poliglumex (Opaxio)

Opaxio is a novel biologically-enhanced chemotherapeutic agent that links paclitaxel to a biodegradable polyglutamate polymer, resulting in a new chemical entity. Development of Opaxio is currently being conducted through cooperative group trials and ISTs focusing on certain solid tumors. Opaxio is being evaluated in a Phase 3 trial, GOG-0212, as a potential maintenance therapy for women with advanced stage ovarian cancer who achieve a complete remission following first-line therapy with paclitaxel and carboplatin. This trial is being conducted and managed by the Gynecologic Oncology Group, or the GOG, which is one of the National Cancer Institute’s funded cooperative cancer research groups focused on the study of gynecologic malignancies. The first interim analysis was conducted in January 2013, which passed the futility boundary and continued with no changes. In January 2014, we were informed by the GOG that enrollment in the trial had been completed with 1,150 patients enrolled.

Financial summary

Our product sales are currently generated solely from the sales of PIXUVRI in Europe. We recorded $2.0 million in total net product sales for the three months ended September 30, 2014. Our product sales may vary significantly from period to period as the commercialization and reimbursement negotiations for PIXUVRI progress. Total revenues were $39.5 million for the three months

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ended September 30, 2014 compared to $0.4 million for the same period in 2013. Total revenues for the nine months ended September 30, 2014 included $37.9 million in license and contract revenue comprised of a $20.0 million development milestone earned and received under the Baxter Agreement following completion of enrollment in PERSIST-1, the recognition of $0.6 million of the upfront payment under the Baxter Agreement and the recognition of $17.3 million of the upfront payment under the Servier Agreement. Our income from operations for the three months ended September 30, 2014 was $7.5 million, compared to a loss of $15.5 million for the same period in 2013. Our results of operations may vary substantially from year to year and from quarter to quarter and, as a result, you should not rely on them as being indicative of our future performance.

As of September 30, 2014, we had cash and cash equivalents of $29.9 million. For accounting purposes, due to the timing of the consummation of the Servier Agreement, we recognized license and contract revenue from the upfront licensing fee in the third quarter of 2014, while the associated payment of $17.8 million subsequently received in October 2014 will be reflected in the year-end cash balance.

As of September 30, 2014, we had an outstanding principal balance under our senior secured term loan agreement of $15.0 million, and on October 28, 2014, we borrowed an additional $5.0 million. Consequently, we have a presently outstanding balance under our senior secured term loan agreement of $20.0 million. Such agreement contains customary events of default (subject, in certain instances, to specified grace periods) including, but not limited to, the failure to make payments of interest or premium, if any, on, or principal under, the agreement, the failure to comply with certain covenants and agreements, the occurrence of a material adverse effect, defaults in respect of certain other indebtedness and certain events of insolvency. If any event of default occurs, the principal, premium, if any, interest and any other monetary obligations on all the then-outstanding amounts may become due and payable immediately. For further information relating to our senior secured term loan agreement, including the recently funded $5.0 million, please refer to Note 4, Long-term Debt, under Part I, Item 1 in this Quarterly Report on Form 10-Q, which note is incorporated herein by reference.

 

 

RESULTS OF OPERATIONS

Three months ended September 30, 2014 and 2013

Product sales, net. Net product sales from PIXUVRI for the three months ended September 30, 2014 and 2013 were $2.0 million and $0.4 million, respectively. We sell PIXUVRI directly to health care providers and through a limited number of wholesale distributors in the E.U. Of our product sales during the three months ended September 30, 2014, forty-seven percent were made to a single customer. All sales of PIXUVRI during the periods presented were made in Europe. We generally record product sales upon receipt of the product by the health care provider or distributor at which time title and risk of loss pass. Product sales are recorded net of distributor discounts, estimated government-mandated discounts and rebates, trade discounts and estimated product returns. Any future revenues are dependent on market acceptance of PIXUVRI, the reimbursement decisions made by governmental authorities in each country where PIXUVRI is available for sale and other factors.

As of September 30, 2014, the balance from activity in returns, discounts and rebates is reflected in accounts receivable and accrued expenses. Balances and activity for the components of our gross to net sales adjustments for the three months ended September 30, 2014 and 2013 are as follows (in thousands) where gross sales is defined as our contracted reimbursement price in each country:

 

 

Product

returns

 

 

Discounts,

rebates and

other

 

 

Total

 

Balance at June 30, 2014

$

77

 

 

$

101

 

 

$

178

 

Provision for current period sales

 

 

 

 

32

 

 

 

32

 

Adjustments to provision for prior period sales

 

 

 

 

 

 

 

 

Payments/credits for current period sales

 

 

 

 

(32

)

 

 

(32

)

Payments/credits for prior period sales

 

 

 

 

(11

)

 

 

(11

)

Balance at September 30, 2014

$

77

 

 

$

90

 

 

$

167

 

 

 

 

Product

returns

 

 

Discounts,

rebates and

other

 

 

Total

 

Balance at June 30, 2013

$

37

 

 

$

142

 

 

$

179

 

Provision for current period sales

 

1

 

 

 

50

 

 

 

51

 

Adjustments to provision for prior period sales

 

 

 

 

5

 

 

 

5

 

Payments/credits for current period sales

 

 

 

 

(45

)

 

 

(45

)

Payments/credits for prior period sales

 

 

 

 

 

 

 

 

Balance at September 30, 2013

$

38

 

 

$

152

 

 

$

190

 

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Provision for product returns relates to a limited right of return or replacement that we offer to certain customers. To date, there have been no PIXUVRI product returns.

Provision for discounts and rebates decreased $11,000 during the three months ended September 30, 2014 as compared to an increase of $10,000 during the three months ended September 30, 2013 due to a decline in rebates and discounts offered on products sold. Provision for discounts, rebates and other during the three months ended September 30, 2014 and 2013 primarily relates to distributor discounts and government-mandated rebates on PIXUVRI product sold. All rebate payments made during the three months ended September 30, 2014 relate to 2013 sales activity.

Please refer to Note 1, Description of Business and Summary of Significant Accounting Policies, under Part I, Item 1 in this Quarterly Report on Form 10-Q, which note is incorporated herein by reference, for further information.

License and contract revenue.

License and contract revenue was $37.5 million for the three months ended September 30, 2014. We had no such revenue during the three months ended September 30, 2013. The following table illustrates the components of license and contract revenue (in thousands):

 

 

 

Three Months Ended

September 30,

 

 

 

2014

 

Baxter

License revenue

$

18,183

 

 

Development services revenue

 

2,049

 

 

Total Baxter

 

20,232

 

 

 

 

 

 

Servier

License revenue

 

17,277

 

 

Development services revenue

 

4

 

 

Total Servier

 

17,281

 

 

 

 

 

 

Total license and contract revenue

$

37,513

 

 

 

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In August 2014, we received a $20 million milestone payment from Baxter in connection with the first treatment dosing of the last patient enrolled in PERSIST-1. Of the $20 million milestone payment, $18.2 million was allocated to license revenue and $1.8 million was allocated to development services revenue in the table above based on the relative-selling-price percentages originally used to allocate the arrangement consideration under the Baxter Agreement.

In connection with the execution of the Baxter Agreement in 2013, we allocated and recorded $2.7 million of the upfront payment we received under the Baxter Agreement to deferred revenue. For the Baxter Agreement, we recognize revenue based on a proportional performance method, by which revenue is recognized in proportion to the development costs incurred. The development services under the Baxter Agreement are expected to be performed through approximately 2018, with the majority of development services expected to be completed by approximately the end of 2015. During the three months ended September 30, 2014, approximately $0.2 million was recognized as revenue and included in development services revenue in the table above. We had no such revenue during the three months ended September 30, 2013.     

In addition, in connection with the execution of the Servier Agreement in September 2014, we allocated and recorded $17.3 million and $0.8 million from the upfront payment we received under the Servier Agreement to license revenue and deferred revenue, respectively. For deferred revenue under the Servier Agreement, we recognize revenue based on a straight-line method through approximately 2022. During the three months ended September 30, 2014, $4,000 was recognized as revenue and included in development services revenue in the table above. We had no such revenue during the three months ended September 30, 2013.

The following table illustrates such balances of deferred revenue under each of the Baxter Agreement and the Servier Agreement as of September 30, 2014 and December 31, 2013 (in thousands):

 

 

 

September 30,

2014

 

 

December 31,

2013

 

Current portion of deferred revenue

 

 

 

 

 

 

 

 

Baxter

$

800

 

 

$

1,010

 

 

Servier

 

103

 

 

 

 

Total current portion of deferred revenue

 

903

 

 

 

1,010

 

 

 

 

 

 

 

 

 

 

Deferred revenue, less current portion

 

 

 

 

 

 

 

 

Baxter

 

1,266

 

 

 

1,626

 

 

Servier

 

745

 

 

 

 

Total deferred revenue, less current portion

 

2,011

 

 

 

1,626

 

 

 

 

 

 

 

 

 

 

Total deferred revenue

$

2,914

 

 

$

2,636

 

 

 

Operating costs and expenses

Cost of product sold. Cost of product sold is related to sales of PIXUVRI. This expense increased to $252,000 for the three months ended September 30, 2014 as compared to $13,000 for the three months ended September 30, 2013, primarily due to an increase in sales activity. We began capitalizing costs related to the production of PIXUVRI in February 2012 upon receiving a positive opinion for conditional marketing authorization by the Committee for Medicinal Products for Human Use, or the CHMP, which is a committee of the European Medicines Agency, or the EMA. The manufacturing costs of PIXUVRI product prior to receipt of the CHMP’s positive opinion was expensed as research and development as incurred. While we tracked the quantities of individual PIXUVRI product lots, we did not track manufacturing costs in our inventory system prior to capitalization, and therefore, the manufacturing cost of PIXUVRI produced prior to capitalization is not reasonably determinable. Most of this reduced-cost inventory is expected to be available for us to use commercially. The timing of the sales of such reduced-cost inventory and its impact on gross margin is dependent on the level of PIXUVRI sales as well as our ability to utilize this inventory prior to its expiration date. We expect that our cost of product sold as a percentage of product revenue will increase in future periods as PIXUVRI product manufactured and expensed prior to capitalization is sold. At this time, we cannot reasonably estimate the timing or rate of consumption of reduced-cost PIXUVRI product manufactured and expensed prior to capitalization, and we are unable to provide our estimate of cost of goods sold as a percentage of product revenue once such inventory is exhausted.

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Research and development expenses. Our research and development expenses for compounds under development and preclinical development for the three months ended September 30, 2014 and 2013 were as follows (in thousands):

 

 

Three Months Ended

September 30,

 

 

2014

 

 

2013

 

Compounds:

 

 

 

 

 

 

 

PIXUVRI

$

1,761

 

 

$

1,038

 

Pacritinib

 

9,444

 

 

 

2,148

 

Opaxio

 

29

 

 

 

(147

)

Tosedostat

 

123

 

 

 

287

 

Brostallicin

 

1

 

 

 

(5

)

Operating expenses

 

4,908

 

 

 

3,833

 

Research and preclinical development

 

262

 

 

 

91

 

Total research and development expenses

$

16,528

 

 

$

7,245

 

Costs for our compounds include external direct expenses such as principal investigator fees, clinical research organization charges and contract manufacturing fees incurred for preclinical, clinical, manufacturing and regulatory activities associated with preparing the compounds for submissions of NDAs or similar regulatory filings to the FDA, the EMA or other regulatory agencies outside the U.S. and Europe, as well as upfront license fees for acquired technology. Subsequent to receiving a positive opinion for conditional marketing authorization of PIXUVRI in the E.U. from the EMA’s CHMP, costs associated with commercial batch production, quality control, stability testing and certain other manufacturing costs of PIXUVRI were capitalized as inventory. Operating expenses include our personnel and an allocation of occupancy, depreciation and amortization expenses associated with developing these compounds. Research and preclinical development costs primarily include costs associated with external laboratory services associated with other compounds. We are not able to capture the total cost of each compound because we do not allocate operating expenses to all of our compounds. External direct costs incurred by us as of September 30, 2014 were $90.6 million for PIXUVRI (excluding costs prior to our merger with Novuspharma S.p.A in January 2004), $35.3 million for pacritinib (excluding costs for pacritinib prior to our acquisition of certain assets from S*BIO Pte Ltd, or S*BIO, in May 2012 and $29.1 million of in-process research and development expenses associated with such acquisition), $227.2 million for Opaxio, $11.2 million for tosedostat (excluding costs for tosedostat prior to the effectiveness of our now terminated sublicense arrangement with Chroma (see License Agreements and Additional Milestone Activities – Chroma below)) and $9.6 million for brostallicin (excluding costs for brostallicin prior to our acquisition of Systems Medicine, LLC in July 2007).

Research and development expenses increased to $16.5 million for the quarter ended September 30, 2014 compared to $7.2 million for the quarter ended September 30, 2013. This $9.3 million increase was primarily due to development costs for the pacritinib program, which includes the initiation of clinical and non-clinical studies in support of the planned U.S. regulatory submission, an increase in start-up costs for PERSIST-2 and an increase in manufacturing activity. The increase in operating expenses is primarily due to additional non-cash share-based compensation and discretionary bonus expense between the periods. The increase in PIXUVRI research and development expenses is primarily associated with European medical affairs activities.  

Regulatory agencies, including the FDA and EMA, regulate many aspects of a product candidate’s life cycle, including research and development and preclinical and clinical testing. We will need to commit significant time and resources to develop our current and any future product candidates. Our drug candidates pacritinib, tosedostat and Opaxio are currently in clinical development, and our product PIXUVRI, which is currently being commercialized in parts of Europe, is undergoing a post-approval commitment study. Many drugs in human clinical trials fail to demonstrate the desired safety and efficacy characteristics. We are unable to provide the nature, timing and estimated costs of the efforts necessary to complete the development of pacritinib, tosedostat and Opaxio, and to complete the post-approval commitment study of PIXUVRI, because, among other reasons, we cannot predict with any certainty the pace of patient enrollment of our clinical trials, which is a function of many factors, including the availability and proximity of patients with the relevant condition. We rely on third parties to conduct clinical trials, which may result in delays or failure to complete trials if the third parties fail to perform or meet applicable standards. Even after a clinical trial is enrolled, preclinical and clinical data can be interpreted in different ways, which could delay, limit or preclude regulatory approval and advancement of this compound through the development process. We or regulatory authorities may suspend clinical trials at any time on the basis that the participants are being exposed to unacceptable health risks. Even if our drugs progress successfully through initial human testing in clinical trials, they may fail in later stages of development. A number of companies in the pharmaceutical industry, including us, have suffered significant setbacks in advanced clinical trials, even after reporting promising results in earlier trials. For these reasons, among others, we cannot estimate the date on which clinical development of our product candidates will be completed, if ever, or when we will generate material net cash inflows from PIXUVRI or be able to begin commercializing pacritinib, tosedostat or Opaxio to generate material net cash inflows. In order to generate revenue from these products, our product candidates need to be developed to a stage that will enable us to commercialize, sell or license related marketing rights to third parties.

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We are also unable to control the amount and timing of resources any of our collaborators devote to product candidates, where applicable, which may result in delays in the development or marketing of products. Because of these risks and uncertainties, we cannot accurately predict when or whether we will successfully complete the development of our product candidates or the ultimate product development cost.

The risks and uncertainties associated with completing development on schedule and the consequences to operations, financial position and liquidity if the project is not timely completed are discussed in more detail in our risk factors, which begin on page 33 of this Quarterly Report on Form 10-Q and, in particular, in the following risk factors: “If our development and commercialization collaborations are not successful, or if we are unable to enter into additional collaborations, we may not be able to effectively develop and/or commercialize the applicable compound(s), which could have a material adverse effect on our business.”, “Product candidates that appear promising in research and development may fail to reach later stages of development for a number of reasons, including, among others, that clinical trials may take longer to complete than expected or may not be completed at all.”; “We or our collaboration partners may not obtain or maintain the regulatory approvals required to develop or commercialize some or all of our compounds.”; “Even if our drug candidates are successful in clinical trials and receive regulatory approvals, we or our collaboration partners may not be able to successfully commercialize them.”; and “Post-approval regulatory reviews and obligations often result in significant expense and marketing limitations, and any failure to satisfy such ongoing obligations, including, in particular, our post-approval commitment trial for PIXUVRI, could negatively affect our business, financial condition, operating results or prospects.

Selling, general and administrative expenses. Selling, general and administrative expenses were $12.6 million for the three months ended September 30, 2014 as compared to $8.5 million for the three months ended September 30, 2013. This increase was due in part to a $1.8 million increase in non-cash share-based compensation. The remaining increase includes operating expenses supporting our marketing and sales program for PIXUVRI, pre-commercial activity for pacritinib and other administrative and legal expenses associated with the Baxter Agreement and the Servier Agreement.

Other operating expense. Other operating expense for the three months ended September 30, 2014 relates to the payment owed to Novartis as a result of the upfront payment we received under the Servier Agreement. We had no such amount for the three months ended September 30, 2013. Certain payments are required under the Novartis Termination Agreement. See Part I, Item I2, License Agreements and Ad