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EX-32.1 - EX-32.1 - ACHIEVE LIFE SCIENCES, INC.ogxi-ex321_7.htm
EX-32.2 - EX-32.2 - ACHIEVE LIFE SCIENCES, INC.ogxi-ex322_9.htm
EX-31.1 - EX-31.1 - ACHIEVE LIFE SCIENCES, INC.ogxi-ex311_6.htm
EX-31.2 - EX-31.2 - ACHIEVE LIFE SCIENCES, INC.ogxi-ex312_8.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 March 31, 2016

or

o

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 033-80623

OncoGenex Pharmaceuticals, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware

 

95-4343413

(State or Other Jurisdiction of

 

(I.R.S. Employer

Incorporation or Organization)

 

Identification Number)

19820 North Creek Parkway, Bothell, Washington 98011

(Address of Principal Executive Offices)

(425) 686-1500

(Registrant’s telephone number, including area code)

Indicate by check 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  o

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

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

 

Large accelerated filer

o

 

Accelerated filer

o

 

 

 

 

 

Non-accelerated filer

o

(Do not check if a smaller reporting company)

Smaller reporting company  

x

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).   Yes  o   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 May 12, 2016

Common Stock, $0.001 par value

 

29,914,226

 

 


OncoGenex Pharmaceuticals, Inc.

Index to Form 10-Q

 

 

Page
Number

 

 

Part I.   Financial Information

3

 

 

 

Item 1

Financial Statements (unaudited)

3

 

 

 

 

Consolidated Balance Sheets as of March 31, 2016 (unaudited) and December 31, 2015

3

 

 

 

 

Consolidated Statements of Loss and Comprehensive Loss (unaudited) for the three months ended March 31, 2016 and March 31, 2015

4

 

 

 

 

Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2016 and March 31, 2015

5

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

6

 

 

 

Item 2.

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

17

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

26

 

 

 

Item 4.

Controls and Procedures

27

 

 

Part II.   Other Information

28

 

 

 

Item 1.

Legal Proceedings

28

 

 

 

Item 1A.

Risk Factors

29

 

 

 

Item 6.

Exhibits

45

 

 

Items 2, 3, 4 and 5 are not applicable and therefore have been omitted.

 

 

 

Signatures

46

 

 

Exhibit Index

47

2


PART I. FINANCIAL INFORMATION

Item 1.

Consolidated Financial Statements

OncoGenex Pharmaceuticals, Inc.

Consolidated Balance Sheets

(In thousands, except per share and share amounts) 

 

 

 

March 31,

 

 

December 31,

 

 

 

2016

 

 

2015

 

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents [note 4]

 

$

18,913

 

 

$

34,310

 

Short-term investments [note 4]

 

 

27,201

 

 

 

20,876

 

Interest receivable

 

 

53

 

 

 

111

 

Prepaid expenses

 

 

1,585

 

 

 

1,987

 

Other current assets

 

 

233

 

 

 

14

 

Total current assets

 

 

47,985

 

 

 

57,298

 

Restricted cash [note 4 and note 7]

 

 

272

 

 

 

272

 

Property and equipment, net

 

 

546

 

 

 

602

 

Other assets

 

 

38

 

 

 

37

 

Total assets

 

$

48,841

 

 

$

58,209

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

592

 

 

$

1,343

 

Accrued liabilities other

 

 

909

 

 

 

641

 

Accrued clinical liabilities

 

 

8,450

 

 

 

9,966

 

Accrued compensation

 

 

744

 

 

 

1,267

 

Current portion of long-term obligations [note 7]

 

 

51

 

 

 

52

 

Lease termination liability [note 7]

 

 

1,250

 

 

 

1,250

 

Deferred collaboration revenue [note 3]

 

 

2,099

 

 

 

5,040

 

Warrant liability [note 4 and note 5]

 

 

438

 

 

 

1,105

 

Total current liabilities

 

 

14,533

 

 

 

20,664

 

Long-term obligations, less current portion [note 7]

 

 

92

 

 

 

105

 

Total liabilities

 

 

14,625

 

 

 

20,769

 

Commitments and contingencies [note 7]

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Common stock, $0.001 par value, 75,000,000 shares authorized, 29,948,219 and

   29,846,991 issued at March 31, 2016 and December 31, 2015, respectively, and

   29,914,226 and 29,812,998 outstanding at March 31, 2016 and December 31, 2015,

   respectively

 

 

30

 

 

 

29

 

Additional paid-in capital

 

 

212,058

 

 

 

211,590

 

Accumulated deficit

 

 

(180,518

)

 

 

(176,811

)

Accumulated other comprehensive income

 

 

2,646

 

 

 

2,632

 

Total stockholders' equity

 

 

34,216

 

 

 

37,440

 

Total liabilities and stockholders' equity

 

$

48,841

 

 

$

58,209

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

 

 

3


OncoGenex Pharmaceuticals, Inc.

Consolidated Statements of Loss and Comprehensive Loss

(Unaudited)

(In thousands, except per share and share amounts)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2016

 

 

2015

 

COLLABORATION REVENUE (note 3)

 

$

2,940

 

 

$

1,374

 

EXPENSES

 

 

 

 

 

 

 

 

Research and development

 

 

4,642

 

 

 

3,673

 

General and administrative

 

 

2,299

 

 

 

2,698

 

Restructuring costs [note 7]

 

 

431

 

 

 

 

Total operating expenses

 

 

7,372

 

 

 

6,371

 

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

 

Interest income

 

 

48

 

 

 

54

 

Other

 

 

10

 

 

 

(39

)

Gain on warrants

 

 

667

 

 

 

465

 

Total other income

 

 

725

 

 

 

480

 

Net loss

 

$

(3,707

)

 

$

(4,517

)

OTHER COMPREHENSIVE INCOME

 

 

 

 

 

 

 

 

Net unrealized gain on securities

 

 

14

 

 

 

13

 

Total other comprehensive income

 

 

14

 

 

 

13

 

Comprehensive loss

 

$

(3,693

)

 

$

(4,504

)

Basic and diluted net loss per common share

 

$

(0.12

)

 

$

(0.20

)

Shares used in computation of basic and diluted net loss per common share

 

 

29,827,824

 

 

 

22,656,022

 

 

See accompanying notes

 

 

4


OncoGenex Pharmaceuticals, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2016

 

 

2015

 

Operating Activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(3,707

)

 

$

(4,517

)

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

 

 

 

 

 

 

 

 

Gain on warrants [note 4 and note 5 [f]]

 

 

(667

)

 

 

(465

)

Depreciation

 

 

56

 

 

 

46

 

Stock-based compensation [note 5 [c] and note 5 [d]]

 

 

468

 

 

 

516

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Interest receivable

 

 

58

 

 

 

42

 

Amounts receivable

 

 

(219

)

 

 

4,117

 

Prepaid expenses and other assets

 

 

401

 

 

 

(842

)

Accounts payable

 

 

(751

)

 

 

916

 

Accrued liabilities other

 

 

268

 

 

 

(1,849

)

Accrued clinical liabilities

 

 

(1,516

)

 

 

(3,797

)

Accrued compensation

 

 

(523

)

 

 

(602

)

Restricted cash

 

 

 

 

 

61

 

Excess lease liability

 

 

 

 

 

(194

)

Lease obligation

 

 

(14

)

 

 

124

 

Deferred collaboration revenue [Note 3]

 

 

(2,941

)

 

 

 

Net cash (used in) operating activities

 

 

(9,087

)

 

 

(6,444

)

Financing Activities:

 

 

 

 

 

 

 

 

Taxes paid related to net share settlement of equity awards

 

 

 

 

 

(52

)

Net cash (used in) provided by financing activities

 

 

 

 

 

(52

)

Investing Activities:

 

 

 

 

 

 

 

 

Purchase of investments

 

 

(24,169

)

 

 

1,071

 

Proceeds from maturities of investments

 

 

17,859

 

 

 

3,011

 

Purchase of property and equipment

 

 

 

 

 

(205

)

Net cash (used in) provided by investing activities

 

 

(6,310

)

 

 

3,877

 

Effect of exchange rate changes on cash

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

 

(15,397

)

 

 

(2,619

)

Cash and cash equivalents at beginning of period

 

 

34,310

 

 

 

27,897

 

Cash and cash equivalents at end of period

 

$

18,913

 

 

$

25,278

 

 

See accompanying notes.

 

5


OncoGenex Pharmaceuticals, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

 

1. NATURE OF BUSINESS AND BASIS OF PRESENTATION

OncoGenex Pharmaceuticals, Inc. (referred to as “OncoGenex,” “we,” “us,” or “our”) is a biopharmaceutical company committed to the development and commercialization of new therapies that address treatment resistance in cancer patients. We were incorporated in the state of Delaware, are headquartered in Bothell, Washington and have a subsidiary in Vancouver, British Columbia. 

The unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States for interim financial information and with the instructions to Form 10-Q.  Accordingly, they do not include all of the information and footnotes required to be presented for complete financial statements. The accompanying unaudited consolidated financial statements reflect all adjustments (consisting only of normal recurring items) which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. The accompanying consolidated Balance Sheet at December 31, 2015 has been derived from the audited consolidated financial statements included in our Annual Report on Form 10-K for the year then ended. The unaudited consolidated financial statements and related disclosures have been prepared with the assumption that users of the interim financial information have read or have access to the audited consolidated financial statements for the preceding fiscal year. Accordingly, these financial statements should be read in conjunction with the audited consolidated financial statements and the related notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2015 and filed with the United States Securities and Exchange Commission, or the SEC, on March 9, 2016.

The consolidated financial statements include the accounts of OncoGenex and our wholly owned subsidiary, OncoGenex Technologies Inc., or OncoGenex Technologies. All intercompany balances and transactions have been eliminated. Certain comparative figures have been reclassified to conform with the financial presentation adopted for the current year.

 

 

2. ACCOUNTING POLICIES

Pending Adoption of Recent Accounting Pronouncements

In March 2016, the Financial Accounting Standards Board, or FASB, issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Some of the areas of simplification apply only to nonpublic entities. For public business entities, the amendments in ASU 2016-09 are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. For all other entities, the amendments are effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted for any entity in any interim or annual period for which financial statements haven’t been issued or made available for issuance. If an entity early adopts the amendments in an interim period, any adjustments must be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. We are currently evaluating the impact of adoption on its financial position and results from operations.

In February 2016, the FASB issued its new leases standard, ASU No. 2016-02, Leases (Topic 842) (ASU 2016-02). ASU 2016-02 is aimed at putting most leases on lessees’ balance sheets, but it would also change aspects of lessor accounting. ASU 2016-02 is effective for public business entities for annual periods beginning after December 15, 2018 and interim periods within that year.  This standard is expected to have a significant impact on our current accounting for our lease arrangements, particularly our current operating lease arrangements, as well as, disclosures.  We are currently evaluating the impact of adoption on its financial position and results from operations.

In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. The standard requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. Entities are currently required to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. The amendments, which require non-current presentation only (by jurisdiction), are effective for financial statements issued for annual periods beginning after December 15, 2016 with earlier application permitted as of the beginning of an interim or annual reporting period. The guidance is to be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. We are currently in the process of evaluating the impact of adoption of ASU No. 2015-17 on our consolidated financial statements and related disclosures

In August 2014, the Financial Accounting Standards Board, or FASB issued Accounting Standards Updated, or ASU No. 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 2015-40) (ASU 2014-15). ASU 2014-15 provides guidance to U.S.

6


GAAP about management’s responsibility to evaluate whether there is a substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. This new rule requires management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles currently in the U.S. auditing standards. Specifically, ASU 2014-15 (1) defines the term substantial doubt, (2) requires an evaluation of every reporting period including interim periods, (3) provides principles for considering the mitigating effect of management’s plans, (5) requires an express statement and other disclosures when substantial doubt is not alleviated, and (6) requires an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). This guidance is effective for annual periods ending after December 15, 2016. We are currently in the process of evaluating the impact of adoption of ASU No. 2014. Depending on our capital resources and forecasted expenses at the time of adoption, the impact of ASU No. 2014-15 could have an impact on our consolidated financial statements and related disclosures.

In May 2014, the FASB, issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606): Revenue from Contracts with Customers, which guidance in this update will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance when it becomes effective. ASU No. 2014-09 affects any entity that enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. The core principal of ASU No. 2014-09 is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under current guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU No. 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, which will be our fiscal year 2018 (or December 31, 2018), and entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. Early adoption is permitted. We are currently in the process of evaluating the impact of adoption of ASU No. 2014-09 on our consolidated financial statements and related disclosures.

Recently Adopted Accounting Policies

In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810) — Amendments to the Consolidation Analysis. ASU 2015-02 eliminates the deferral of FAS 167 and makes changes to both the variable interest model and the voting model. For public business entities, the guidance is effective for annual and interim periods beginning after 15 December 2015. For nonpublic business entities, it is effective for annual periods beginning after December 15, 2016 and interim periods beginning after December 15, 2017. Early adoption is permitted for annual and interim periods. The adoption of this standard did not have a significant impact on our financial position or results of operations.

In January 2015, the FASB issued ASU 2015-01, Income Statement—Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. ASU 2015-01 eliminates the concept of reporting extraordinary items, but retains current presentation and disclosure requirements for an event or transaction that is of an unusual nature or of a type that indicates infrequency of occurrence. Transactions that meet both criteria would now also follow such presentation and disclosure requirements. For all entities, the guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted; however, adoption must occur at the beginning of an annual period and can be applied prospectively or retrospectively. The adoption of this standard did not have a significant impact on our financial position or results of operations.

 

 

3. COLLABORATION AGREEMENT

In December 2009, we, through our wholly-owned subsidiary, OncoGenex Technologies, entered into a collaboration agreement, or Collaboration Agreement, with Teva Pharmaceutical Industries Ltd., or Teva, for the development and global commercialization of custirsen (and related compounds), a pharmaceutical compound designed to inhibit the production of clusterin, a protein we believe is associated with cancer treatment resistance, or the Licensed Product. In December 2014, we and Teva agreed to terminate the Collaboration Agreement upon entry into a termination agreement. In April 2015, OncoGenex Technologies and Teva entered into an agreement, or the Termination Agreement, pursuant to which the Collaboration Agreement was terminated and we regained rights to custirsen.

Pursuant to the Termination Agreement, Teva paid to us, as advanced reimbursement for certain continuing research and development activities related to custirsen, an amount equal to $27.0 million less approximately $3.8 million, which reduction represented a hold-back amount of $3.0 million and $0.8 million for certain third-party expenses incurred by Teva between January 1, 2015 and April 24, 2015, or Closing Date. Teva was permitted to deduct from the $3.0 million hold-back certain costs incurred after January 1, 2015 that arose after the Closing Date. Teva will be responsible for expenses related to custirsen incurred pursuant to the Collaboration Agreement through December 31, 2014. We will be responsible for certain custirsen-related expenses from and after January 1, 2015. Pursuant to the Termination Agreement, one half of the then remaining hold-back amount will be paid to us six months after the

7


Closing Date, one half of the then remaining hold-back amount will be paid to us nine months after the Closing Date and the entire then remaining hold-back amount will be paid to us 12 months after the Closing Date. As of March 31, 2016, the entire amount of the holdback had been almost fully deducted by Teva for certain custirsen-related costs incurred after the Closing Date. We received a nominal amount from the remaining hold-back in October 2015, representing one half of the then remaining amount six months from the Closing Date. We expect to receive only nominal amounts from the remaining hold-back.

In accordance with the Termination Agreement, Teva transferred certain third-party agreements for the ENSPIRIT study and custirsen development activities to us on the Closing Date. If any additional historical third-party agreements are discovered after the Closing Date and are used to conduct the ENSPIRIT study, then Teva will use commercially reasonable effort to assign such agreements to us and will be responsible for any costs invoiced under such agreements in excess of an aggregate of $0.1 million. We will be responsible for the initial $0.1 million of costs under such agreements.

All licenses granted by us to Teva under the Collaboration Agreement were terminated as of the Closing Date. In addition, Teva assigned to us certain patent applications related to custirsen and abandoned certain other patent applications as requested by us. Furthermore, Teva granted to us and our affiliates an exclusive license (except as to Teva and its affiliates) to any know-how created under and during the term of the Collaboration Agreement to develop, manufacture and commercialize custirsen and certain other antisense inhibitors of clusterin, as set forth in more detail in the Termination Agreement. Teva additionally granted to us and our affiliates a non-exclusive license to any intellectual property owned by or licensed to Teva and its affiliates, whether as of the Closing Date or thereafter, to develop, manufacture and commercialize custirsen, subject to certain limitations. Teva also agreed not to challenge the patentability, validity or enforceability of certain of our patents, and agreed not to file any patent applications covering custirsen or any antisense inhibitor of clusterin for 18 months after the Closing Date. We are responsible for any such expenses incurred from and after January 1, 2015. We do not owe Teva any development milestone payments or royalty payments on sales of custirsen, if any.

As part of the termination, Teva assigned to us the investigational new drug application for custirsen and submitted amendments, on a country-by-country basis, transferring sponsorship of the ENSPIRIT study to us. In July 2015, we became the sole trial sponsor for the ENSPIRIT study in all countries.

We and Teva released each other from all claims related to the Collaboration Agreement. In addition, we agreed to indemnify Teva and its affiliates against any third-party claims attributable to the development and commercialization of custirsen prior to the execution of the Collaboration Agreement and after the Closing Date, and any third-party claims attributable to the conduct of the AFFINITY study. Teva agreed to indemnify us and our affiliates against any third-party claims attributable to the development of custirsen during the period between the execution of the Collaboration Agreement and the Closing Date, but excluding the AFFINITY study. The parties’ indemnity obligations cover, among other things, third-party claims brought by current or former patients in the relevant studies and patient product liability claims.

Revenue for the three months ended March 31, 2016 was $2.9 million, which consists of recognition of deferred collaboration revenue representing our efforts in the development of custirsen. As of March 31, 2016, a remaining balance of $2.1 million of the advanced reimbursement payment was recorded in deferred collaboration revenue. The advanced reimbursement payment made by Teva, as part of the Termination Agreement, was deferred and will be recognized as collaboration revenue on a dollar for dollar basis as costs are incurred as part of the continuing research and development activities related to custirsen.

Ionis and UBC License Agreements

Pursuant to the terms of the agreements with Ionis and UBC, we anticipate we will pay royalties to third-parties of 4.0% to 8.0% of net sales, unless our royalties are adjusted for competition from generic compounds, in which case royalties to third parties will also be subject to adjustment on a country-by-country basis. Certain third-party royalties are tiered based on the royalty rate received by us. Minimum royalty rates payable by us assume certain third-party royalties are not paid at the time that the Licensed Product is marketed due to the expiration of patents held by such third parties. Maximum royalty rates assume all third-party royalty rates currently in effect continue in effect at the time the Licensed Product is marketed. We did not make any royalty payments to Ionis in the three months ended March 31, 2016. In addition, pursuant to the terms of the agreement with Ionis, we are required to pay to Ionis up to 20% of all non-royalty revenue (defined to mean revenue not based on net sales of products) we receive from third parties. Pursuant to the terms of agreement with UBC, we are required to pay low single digit royalties on milestones and the revenue from sales of custirsen. We did not make any royalty or milestone payments to UBC under the terms of the agreement in the three months ended March 31, 2016.

In May and November 2015, we received communications from Ionis requesting payment of 30% of the $23.2 million paid by Teva under the Termination Agreement, as well as 30% of any amounts paid by Teva upon release of the $3.0 million holdback amount. In January 2016, Ionis filed a lawsuit and claims that OncoGenex Technologies is in breach of the license agreement for failing to pay Ionis a share of the advance reimbursement payment from Teva and other non-monetary consideration received from Teva in connection with the termination of the Collaboration Agreement. Ionis seeks damages in the amount of at least $10 million and a declaratory judgment that, based on OncoGenex Technologies’ alleged breach, Ionis has the right to terminate the license agreement. We do not believe that

8


any payments are due to Ionis. Under the Ionis license agreement, no payment is due to Ionis on any consideration that we receive for the reimbursement for research and development activities. The amounts paid or payable by Teva under the Termination Agreement constitute an advanced reimbursement for certain continuing research and development activities related to custirsen and certain other antisense inhibitors of clusterin, and therefore, no payments are owed to Ionis. We intend to vigorously defend the lawsuit and, based on our preliminary review, we believe we have valid defenses.

Amendment to Ionis and UBC License Agreements

To facilitate the execution and performance of our prior Collaboration Agreement with Teva, we and Ionis agreed to amend the Ionis License Agreement and we and UBC agreed to amend the UBC License Agreement, in each case, effective December 19 and December 20, 2009, respectively.

The amendment to the Ionis License Agreement provides, among other things, that if we are the subject of a change of control with a third party, where the surviving company immediately following such change of control has the right to develop and sell the product, then (i) a milestone payment of $20.0 million will be due and payable to Ionis 21 days following the first commercial sale of the product in the United States; and (ii) unless such surviving entity had previously sublicensed the product and a royalty rate payable to Ionis by us has been established, the applicable royalty rate payable to Ionis will thereafter be the maximum amount payable under the Ionis License Agreement. Any non-royalty milestone amounts previously paid will be credited toward the $20.0 million milestone if not already paid. As a result of the $10.0 million milestone payment payable to Ionis in relation to the Collaboration Agreement entered into with Teva in 2009, the remaining amount owing in the event of change of control discussed above is a maximum of $10.0 million.

 

 

4. FAIR VALUE MEASUREMENTS

Assets and liabilities recorded at fair value in the balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value. For certain of our financial instruments including amounts receivable and accounts payable the carrying values approximate fair value due to their short-term nature.

ASC 820 “Fair Value Measurements and Disclosures,” specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. In accordance with ASC 820, these inputs are summarized in the three broad levels listed below:

 

·

Level 1 – Quoted prices in active markets for identical securities.

 

·

Level 2 – Other significant inputs that are observable through corroboration with market data (including quoted prices in active markets for similar securities).

 

·

Level 3 – Significant unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability.

As quoted prices in active markets are not readily available for certain financial instruments, we obtain estimates for the fair value of financial instruments through third-party pricing service providers.

In determining the appropriate levels, we performed a detailed analysis of the assets and liabilities that are subject to ASC 820.

We invest our excess cash in accordance with investment guidelines that limit the credit exposure to any one financial institution other than securities issued by the U.S. Government. These securities are not collateralized and mature within one year.

A description of the valuation techniques applied to our financial instruments measured at fair value on a recurring basis follows.

Financial Instruments

Cash

Significant amounts of cash are held on deposit with large well-established U.S. and Canadian financial institutions.

U.S. Government and Agency Securities

U.S. Government Securities U.S. government securities are valued using quoted market prices. Valuation adjustments are not applied. Accordingly, U.S. government securities are categorized in Level 1 of the fair value hierarchy.

9


U.S. Agency Securities U.S. agency securities are comprised of two main categories consisting of callable and non-callable agency issued debt securities. Non-callable agency issued debt securities are generally valued using quoted market prices. Callable agency issued debt securities are valued by benchmarking model-derived prices to quoted market prices and trade data for identical or comparable securities. Actively traded non-callable agency issued debt securities are categorized in Level 1 of the fair value hierarchy. Callable agency issued debt securities are categorized in Level 2 of the fair value hierarchy.

Corporate and Other Debt

Corporate Bonds and Commercial Paper The fair value of corporate bonds and commercial paper is estimated using recently executed transactions, market price quotations (where observable), bond spreads or credit default swap spreads adjusted for any basis difference between cash and derivative instruments. The spread data used are for the same maturity as the bond. If the spread data does not reference the issuer, then data that reference a comparable issuer are used. When observable price quotations are not available, fair value is determined based on cash flow models with yield curves, bond or single name credit default swap spreads and recovery rates based on collateral values as significant inputs. Corporate bonds and commercial paper are generally categorized in Level 2 of the fair value hierarchy; in instances where prices, spreads or any of the other aforementioned key inputs are unobservable, they are categorized in Level 3 of the hierarchy.

Warrants

As of March 31, 2016, we recorded a $0.4 million warrant liability. We reassess the fair value of the common stock warrants classified as liabilities at each reporting date utilizing a Black-Scholes pricing model. Inputs used in the pricing model include estimates of stock price volatility, expected warrant life and risk-free interest rate. The computation of expected volatility was based on the historical volatility of shares of our common stock for a period that coincides with the expected life of the warrants that are classified as liabilities. Warrants that are classified as liabilities are categorized in Level 3 of the fair value hierarchy. A small change in the estimates used may have a relatively large change in the estimated valuation. Warrants that are classified as equity are not considered liabilities and therefor are not reassessed for their fair values at each reporting date.

The following table presents information about our assets and liabilities that are measured at fair value on a recurring basis, and indicates the fair value hierarchy of the valuation techniques we utilized to determine such fair value (in thousands):

 

March 31, 2016

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

4,350

 

 

$

 

 

$

 

 

$

4,350

 

Money market securities

 

 

14,563

 

 

 

 

 

 

 

 

 

14,563

 

Restricted cash (Note 7)

 

 

272

 

 

 

 

 

 

 

 

 

272

 

Corporate bonds and commercial paper

 

 

 

 

 

27,201

 

 

 

 

 

 

27,201

 

Total assets

 

$

19,185

 

 

$

27,201

 

 

$

 

 

$

46,386

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrants

 

$

 

 

$

 

 

$

438

 

 

$

438

 

 

The following table presents the changes in fair value of our total Level 3 financial liabilities for the three months ended March 31, 2016. During the three months ended March 31, 2016, we did not issue any common stock warrants that were classified as liabilities (in thousands):

 

 

 

Liability at

 

 

 

 

 

 

Unrealized

 

 

Liability at

 

 

 

December 31,

 

 

Issuance of

 

 

Gain on

 

 

March 31,

 

 

 

2015

 

 

Warrants

 

 

warrants

 

 

2016

 

Warrant liability

 

$

1,105

 

 

$

 

 

$

(667

)

 

$

438

 

 

10


Cash, cash equivalents and marketable securities consist of the following (in thousands):

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Estimated

 

March 31, 2016

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

Cash

 

$

4,350

 

 

$

 

 

$

 

 

$

4,350

 

Money market securities

 

 

14,563

 

 

 

 

 

 

 

 

 

14,563

 

Total cash and cash equivalents

 

$

18,913

 

 

$

 

 

$

 

 

$

18,913

 

Money market securities (restricted cash)

 

 

272

 

 

 

 

 

 

 

 

 

272

 

Total restricted cash

 

$

272

 

 

$

 

 

$

 

 

$

272

 

Corporate bonds and commercial paper

 

 

27,197

 

 

 

6

 

 

 

(2

)

 

 

27,201

 

Total short-term investments

 

$

27,197

 

 

$

6

 

 

$

(2

)

 

$

27,201

 

 

Our gross realized gains and losses on sales of available-for-sale securities were not material for the three months ended March 31, 2016 and 2015.

All securities included in cash and cash equivalents had maturities of 90 days or less at the time of purchase. All securities included in short-term investments have maturities of within one year of the balance sheet date.  The cost of securities sold is based on the specific identification method.

We only invest in A (or equivalent) rated securities. We do not believe that there are any other than temporary impairments related to our investment in marketable securities at March 31, 2016, given the quality of the investment portfolio and subsequent proceeds collected on sale of securities that reached maturity.

 

 

5. COMMON STOCK

[a]

Authorized

75,000,000 authorized common shares, par value of $0.001, and 5,000,000 preferred shares, par value of $0.001. 

[b]

Issued and outstanding shares

Equity Award Issuances and Settlements

During the three months ended March 31, 2016, we issued no shares of common stock to satisfy stock option exercises and 101,228 shares of common stock to satisfy restricted stock unit settlements, compared with the issuance of no shares of common stock and 82,410 shares of common stock to satisfy stock option exercises and restricted stock unit settlements, respectively, during the three months ended March 31, 2015.

[c]

Stock options

2010 Performance Incentive Plan

As of March 31, 2016, we had reserved, pursuant to various plans, 3,797,923 common shares for issuance upon exercise of stock options and settlement of restricted stock units by employees, directors, officers and consultants of ours, of which 2,960,766 were reserved for options currently outstanding, 501,090 were reserved for restricted stock units currently outstanding and 336,067 were available for future equity grants.

Stock Option Summary

We grant stock options that vest over time in accordance with terms as determined by our Board of Directors, or the Board, which terms are typically four years for employee and consultant grants and one to three years for Board option grants. We also grant stock option awards that vest in conjunction with certain performance conditions to executive officers, employees and consultants. At each reporting date, we are required to evaluate whether achievement of the performance conditions is probable. Compensation expense is recorded over the appropriate service period based upon our assessment of accomplishing each performance condition. The expiry date for each option is set by the Board, which is typically seven to ten years. The exercise price of the options is determined by the Board, but will be at least equal to the fair value of the share at the grant date.

11


Stock option transactions and the number of stock options outstanding are summarized below:

 

 

 

Number of

 

 

Weighted

 

 

 

Optioned

 

 

Average

 

 

 

Common

 

 

Exercise

 

 

 

Shares

 

 

Price

 

Balance,  December 31, 2015

 

 

1,479,221

 

 

$

8.78

 

Granted

 

 

1,513,750

 

 

 

0.85

 

Forfeited

 

 

(32,205

)

 

 

4.11

 

Balance,  March 31, 2016

 

 

2,960,766

 

 

$

4.78

 

 

The fair value of each stock award for employees and directors is estimated on the grant date and for consultants at each reporting period, using the Black-Scholes option-pricing model based on the weighted-average assumptions noted in the following table:

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2016

 

 

2015

 

Risk-free interest rates

 

 

1.52

%

 

 

 

Expected dividend yield

 

 

0

%

 

 

 

Expected life

 

5.3 years

 

 

 

 

Expected volatility

 

 

71.80

%

 

 

 

 

The expected life was calculated based on the simplified method as permitted by the SEC’s Staff Accounting Bulletin 110, Share-Based Payment. We consider the use of the simplified method appropriate because we believe our historical stock option exercise activity may not be indicative of future stock option exercise activity based upon the AFFINITY clinical data results we expect to receive in the third quarter of 2016, the structural changes to our business that may result and the potential impact of that data on our business operations and future stock option exercise activity. The expected volatility of options granted was calculated based on the historical volatility of the shares of our common stock. The risk-free interest rate is based on a U.S. Treasury instrument whose term is consistent with the expected life of the stock options. In addition to the assumptions above, as required under ASC 718, management made an estimate of expected forfeitures and is recognizing compensation costs only for those equity awards expected to vest. Forfeiture rates are estimated using historical actual forfeiture rates. These rates are adjusted on a quarterly basis and any change in compensation expense is recognized in the period of the change. We have never paid or declared cash dividends on our common stock and do not expect to pay cash dividends in the foreseeable future.

The results for the periods set forth below included share-based compensation expense for stock options and restricted stock units in the following expense categories of the consolidated statements of loss (in thousands):

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2016

 

 

2015

 

Research and development

 

$

222

 

 

$

252

 

General and administrative

 

$

246

 

 

 

264

 

Total stock-based compensation

 

$

468

 

 

$

516

 

 

As of March 31, 2016 and December 31, 2015, the total unrecognized compensation expense related to stock options granted was $2.2 million and $1.8 million respectively, which is expected to be recognized as expense over a period of approximately 1.8 years from March 31, 2016.

For the three months ended March 31, 2016, a total of 7.2 million shares, consisting of  3.7 million warrants, 3.0 million options and 0.5 million restricted stock units, have not been included in the loss per share computation, as their effect on diluted per share amounts would have been anti-dilutive. For the same periods in 2015, a total of 6.9 million shares underlying options, restricted stock units and warrants have not been included in the loss per share computation.

[d]

Restricted Stock Unit Awards

We grant restricted stock unit awards that generally vest and are expensed over a four year period. We also grant restricted stock unit awards that vest in conjunction with certain performance conditions to certain executive officers, key employees and consultants. At each reporting date, we are required to evaluate whether achievement of the performance conditions is probable. Compensation expense is recorded over the appropriate service period based upon our assessment of accomplishing each performance condition. For the three months ended March 31, 2016, $0.2 million of compensation expense was recognized related to these awards, compared to $0.2 million for the three months ended March 31, 2015.

12


The following table summarizes our restricted stock unit award activity during the three months ended March 31, 2016:

 

 

 

 

 

 

 

Weighted

 

 

 

Number

 

 

Average

 

 

 

of

 

 

Grant Date

 

 

 

Shares

 

 

Fair Value

 

Balance,  December 31, 2015

 

 

640,759

 

 

$

4.92

 

Settled

 

 

(101,228

)

 

 

7.28

 

Forfeited or expired

 

 

(38,441

)

 

 

4.23

 

Balance,  March 31, 2016

 

 

501,090

 

 

$

4.50

 

 

As of March 31, 2016, we had approximately $3.7 million in total unrecognized compensation expense related to our restricted stock unit awards that is to be recognized over a weighted-average period of approximately 2.0 years.

[e]

Non-employee options and restricted stock units

We recognize non-employee stock-based compensation expense over the period of expected service by the non-employee. As the service is performed, we are required to update our valuation assumptions, re-measure unvested options and restricted stock units and record the stock-based compensation using the valuation as of the vesting date. This differs from the accounting for employee awards where the fair value is determined at the grant date and is not subsequently adjusted. This re-measurement may result in higher or lower stock-based compensation expense in the Consolidated Statements of Loss and Comprehensive Loss. As such, changes in the market price of our stock could materially change the value of an option or restricted stock unit and the resulting stock-based compensation expense.

[f]

Common Stock Warrants

The following is a summary of outstanding warrants to purchase common stock at March 31, 2016:

 

 

 

Total

 

 

 

 

 

 

 

 

 

Outstanding

 

 

Exercise

 

 

 

 

 

and

 

 

price per

 

 

 

 

 

Exercisable

 

 

Share

 

 

Expiration Date

(1) Series A Warrants issued in July 2014 financing

 

 

2,779,933

 

 

 

4.00

 

 

July 2019

(2) Series B Warrants issued in July 2014 financing

 

 

670,269

 

 

 

4.00

 

 

July 2019

(3) Series A-1 Warrants issued in April 2015 financing

 

 

239,234

 

 

 

2.40

 

 

October 2020

 

No warrants were exercised during the three months ended March 31, 2016 or 2015.  The Series A-1 Warrants issued in the April 2015 financing are classified as equity. The Series A and Series B warrants issued in the July 2014 financing are classified as liabilities. The estimated fair value of warrants issued and classified as liabilities is reassessed at each reporting date using the Black-Scholes option pricing model.

 

 

 

As of

 

 

 

March 31,

 

Series A and Series B Warrant Valuation Assumptions

 

2016

 

 

2015

 

Risk-free interest rates

 

 

0.91

%

 

 

1.19

%

Expected dividend yield

 

 

0

%

 

 

0

%

Expected life

 

3.25 years

 

 

4.25 years

 

Expected volatility

 

 

84.07

%

 

 

63.35

%

 

 

6. RELATED PARTY TRANSACTION

In January 2016, Scott Cormack, our Chief Executive Officer, married Michelle Griffin, a consultant to us.  For the three months ended March 31, 2016, we paid Ms. Griffin approximately $0.2 million, for consulting services pursuant to a consulting agreement entered into in 2013 and amended thereafter. We also granted Ms. Griffin options to purchase 135,000 shares of common stock in 2016. In addition, pursuant to the consulting agreement with Ms. Griffin, as at March 31, 2016, we had an accrued termination liability of approximately $0.4 million.

 

 

13


7. COMMITMENTS AND CONTINGENCIES

Teva Pharmaceutical Industries Ltd.

In December 2009, we, through our wholly-owned subsidiary, OncoGenex Technologies, entered into a Collaboration Agreement with Teva for the development and global commercialization of custirsen (and related compounds). In December 2014, we and Teva agreed to terminate the Collaboration Agreement upon entry into a Termination Agreement. In April 2015, OncoGenex Technologies and Teva entered into the Termination Agreement, pursuant to which the Collaboration Agreement was terminated and we regained rights to custirsen. Pursuant to the Termination Agreement, Teva paid to us, as advanced reimbursement for certain continuing research and development activities related to custirsen, an amount equal to $27.0 million less approximately $3.8 million, which reduction represented a hold-back amount of $3.0 million and $0.8 million for certain third-party custirsen-related development expenses incurred by Teva between January 1, 2015 and the Closing Date. Pursuant to the Termination Agreement, one half of the then remaining hold-back amount will be paid to us six months after the Closing Date, one half of the then remaining hold-back amount will be paid to us nine months after the Closing Date and the entire then remaining hold-back amount will be paid to us 12 months after the Closing Date. As of March 31, 2016, the entire amount of the holdback had been almost fully deducted by Teva for certain custirsen-related costs incurred after the Closing Date. We received a nominal amount from the remaining hold-back in October 2015, representing one half of the then remaining amount six months from the Closing Date. We expect to receive only nominal amounts from the remaining hold-back.

All licenses granted by us to Teva under the Collaboration Agreement were terminated as of the Closing Date.

In accordance with the Termination Agreement, Teva transferred certain third-party agreements for the ENSPIRIT study and custirsen development activities to us on the Closing Date. If any additional historical third-party agreements are discovered after the Closing Date and are used to conduct the ENSPIRIT study, then Teva will use commercially reasonable effort to assign such agreements to us and will be responsible for any costs invoiced under such agreements in excess of an aggregate of $0.1 million. We will be responsible for the initial $0.1 million of costs under such agreements.

Prior to the termination of the Collaboration Agreement, Teva made upfront payments in the aggregate amount of $50.0 million. Teva also acquired $10.0 million of our common stock at a premium under a separate Stock Purchase Agreement. We were required to contribute $30.0 million in direct and indirect costs towards the clinical development plan. We fulfilled our obligation to contribute $30.0 million towards the development of custirsen. Teva was required to and did fund all additional expenses under the clinical development plan through December 31, 2014, after which date we took over responsibility for future costs following termination of our Collaboration Agreement. We do not owe, to Teva, any development milestone payments or royalty payments on sales of custirsen, if any.

Ionis Pharmaceuticals Inc. and University of British Columbia

We are obligated to pay milestone payments of up to CAD $1.6 million and $7.75 million pursuant to license agreements with UBC and Ionis, respectively, upon the achievement of specified product development milestones related to apatorsen and OGX-225 and low to mid-single digit royalties on future product sales.

In addition, we are required to pay to Ionis up to 20% of all non-royalty revenue (defined to mean revenue not based on net sales of products) we receive from third parties. In May and November 2015, we received communications from Ionis requesting payment of 30% of the $23.2 million paid by Teva under the Termination Agreement, as well as 30% of any amounts paid by Teva upon release of the $3.0 million holdback amount. On January 5, 2016, Ionis filed a lawsuit and claims that OncoGenex Technologies is in breach of the license agreement for failing to pay Ionis a share of the advance reimbursement payment from Teva and other non-monetary consideration received from Teva in connection with the termination of the Collaboration Agreement. Ionis seeks damages in the amount of at least $10 million and a declaratory judgment that, based on OncoGenex Technologies’ alleged breach, Ionis has the right to terminate the license agreement. We do not believe that any payments are due to Ionis. Under the Ionis license agreement, no payment is due to Ionis on any consideration that we receive for the reimbursement for research and development activities. The amounts paid or payable by Teva under the Termination Agreement constitute an advanced reimbursement for certain continuing research and development activities related to custirsen and certain other antisense inhibitors of clusterin, and therefore, no payments are owed to Ionis. We intend to vigorously defend the lawsuit and, based on our preliminary review, we believe we have valid defenses.

Unless otherwise terminated, the Ionis agreements for custirsen and apatorsen will continue for each product until the later of 10 years after the date of the first commercial product sale, or the expiration of the last to expire of any patents required to be licensed in order to use or sell the product, unless OncoGenex Technologies abandons either custirsen or apatorsen and Ionis does not elect to unilaterally continue development. The Ionis agreement for OGX-225 will continue into perpetuity unless OncoGenex Technologies abandons the product and Ionis does not elect to unilaterally continue development.

To facilitate the execution and performance of our prior Collaboration Agreement with Teva, we amended the license agreement with Ionis and UBC, as it pertains to custirsen, in December 2009.

14


The amendment to the license agreement with Ionis provides, among other things, that if we are subject to change of control with a third party, where the surviving company immediately following such change of control has the right to develop and sell the product, then (i) a milestone payment of $20.0 million will be due and payable to Ionis 21 days following the first commercial sale of the product in the United States; and (ii) unless such surviving entity had previously sublicensed the product and a royalty rate payable to Ionis by us has been established, the applicable royalty rate payable to Ionis will thereafter be the maximum amount payable under the license agreement. Any non-royalty milestone amounts previously paid will be credited toward the $20.0 million milestone if not already paid. As a result of the $10.0 million milestone payment payable to Ionis in relation to the Collaboration Agreement, the remaining amount owing in the event of change of control discussed above is a maximum of $10.0 million.

Lease Arrangements

We have an operating lease agreement for office space being used in Vancouver, Canada, which expires in September 2016. As of March 31, 2016, the remaining future minimum lease payments under the Vancouver lease are $43,000.

In February 2015, we entered into an office lease with Grosvenor International (Atlantic Freeholds) Limited, or Landlord, pursuant to which we leased approximately 11,526 square feet located at 19820 North Creek Parkway, Bothell, Washington, 98011, commencing on February 15, 2015. The initial term of this lease will expire on April 30, 2018, with an option to extend the term for one approximately three-year period. Our monthly base rent for the premises started at approximately $18,000 commencing on May 1, 2015 and will increase on an annual basis up to approximately $20,000. The Landlord has agreed to provide us with a construction allowance of approximately $0.1 million. We will be responsible for 17% of taxes levied upon the building during each calendar year of the term. We delivered to the Landlord a letter of credit in the amount of $0.2 million, in accordance with the terms if the lease, which the Landlord may draw upon for base rent or other damages in the event of our default under this lease. In August 2015 we exercised our expansion option for an additional 2,245 square feet of office space, which commenced on August 1, 2015.

The remaining future minimum annual lease payments under the Bothell lease are as follows (in thousands):

 

2016

 

 

203

 

2017

 

 

281

 

2018

 

 

95

 

Total

 

$

579

 

 

Consolidated rent and operating expense relating to both the Vancouver, Canada and Bothell, Washington offices for the three months ended March 31, 2016 and 2015 was $0.1 million and $0.5 million, respectively.

In February 2015, we entered into a Lease Termination Agreement with BMR pursuant to which we and BMR agreed to terminate our lease, dated November 21, 2006, as amended, for the premises located at 1522 217th Place S.E. in Bothell, Washington, or Terminated Lease, effective March 1, 2015. Under the Lease Termination Agreement, we paid BMR a $2.0 million termination fee. We may also pay BMR an additional termination fee of $1.3 million if we (i) meet the primary endpoint for our phase 3 clinical trial for the treatment of second line metastatic CRPC with custirsen and if we (ii) close a transaction or transactions pursuant to which we receive funding in an aggregate amount of at least $20.0 million. BMR drew approximately $0.1 million on our letter of credit with respect to its payment of deferred state sales tax and terminated the remaining balance of $0.2 million. BMR returned to us the security deposit under the Terminated Lease, less amounts deducted in accordance with the terms of the Terminated Lease, of $0.5 million.

With respect to the contingent payment of $1.3 million, we have assessed that the likelihood of meeting both contingent events is more likely than not. As a result, we have recognized the $1.3 million in lease termination liability on our balance sheet as at March 31, 2016.

Guarantees and Indemnifications

We indemnify our officers, directors and certain consultants for certain events or occurrences, subject to certain limits, while the officer or director is or was serving at our request in such capacity. The term of the indemnification period is equal to the officer’s or director’s lifetime.

The maximum amount of potential future indemnification is unlimited; however, we have obtained director and officer insurance that limits our exposure and may enable us to recover a portion of any future amounts paid. We believe that the fair value of these indemnification obligations is minimal. Accordingly, we have not recognized any liabilities relating to these obligations as of March 31, 2016.

15


We have agreements with certain organizations with which we do business that contain indemnification provisions pursuant to which we typically agree to indemnify the party against certain types of third-party claims. We accrue for known indemnification issues when a loss is probable and can be reasonably estimated. There were no accruals for or expenses related to indemnification issues for any period presented.

Restructure

In February 2016, we committed to a plan to reduce operating expenses, which included a workforce reduction of 11 employees, representing approximately 27% of our employees prior to the reduction. We incurred approximately $0.4 million in expenses as a result of the workforce reduction, substantially all of which were severance costs.

 

 

16


Item 2.

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

INFORMATION REGARDING FORWARD LOOKING STATEMENTS

This document contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve a number of risks and uncertainties. We caution readers that any forward-looking statement is not a guarantee of future performance and that actual results could differ materially from those contained in the forward-looking statement. These statements are based on current expectations of future events. Such statements include, but are not limited to, statements about future financial and operating results, plans, objectives, expectations and intentions, costs and expenses, interest rates, outcome of contingencies, financial condition, results of operations, liquidity, business strategies, cost savings, objectives of management and other statements that are not historical facts. You can find many of these statements by looking for words like “believes,” “expects,” “anticipates,” “estimates,” “may,” “should,” “will,” “could,” “plan,” “intend” or similar expressions in this document  or in documents incorporated by reference into this document. We intend that such forward-looking statements be subject to the safe harbors created thereby. Examples of these forward-looking statements include, but are not limited to:

 

·

progress and preliminary and future results of clinical trials conducted by us or our collaborators;

 

·

anticipated regulatory filings and requirements and future clinical trials conducted by us or our collaborators;

 

·

timing and amount of future contractual payments, product revenue and operating expenses;

 

·

market acceptance of our products and the estimated potential size of these markets; and

 

·

our anticipated future capital requirements and the terms of any capital financing agreements.

These forward-looking statements are based on the current beliefs and expectations of our management and are subject to significant risks and uncertainties. If underlying assumptions prove inaccurate or unknown risks or uncertainties materialize, actual results may differ materially from current expectations and projections. Factors that might cause such a difference include those discussed in Item 1A “Risk Factors,” as well as those discussed elsewhere in the Quarterly Report on Form 10-Q.  You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this document or, in the case of documents referred to or incorporated by reference, the date of those documents.

All subsequent written or oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We do not undertake any obligation to release publicly any revisions to these forward-looking statements to reflect events or circumstances after the date of this document or to reflect the occurrence of unanticipated events, except as may be required under applicable U.S. securities law. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements. 

Overview

We are an emerging leader in next generation cancer therapeutics. Our mission is to accelerate transformative therapies to improve the lives of people living with cancer and other serious diseases. We have developed a pipeline of late-stage product candidates that are designed to block the production of specific proteins that promote treatment resistance in cancer. We believe our therapies have the potential to redefine treatment outcomes in a variety of cancers. We have three product candidates in our pipeline: custirsen, apatorsen and OGX-225, each of which has a distinct mechanism of action and represents a unique opportunity for cancer drug development. Of the product candidates in our pipeline, custirsen and apatorsen are clinical-stage assets being evaluated in two phase 3 studies and four phase 2 studies, respectively.

Our product candidates -- custirsen, apatorsen and OGX-225 -- focus on mechanisms of treatment resistance in cancer patients and are designed to block the production of specific proteins that we believe promote treatment resistance and survival of tumor cells and are over-produced in response to a variety of cancer treatments. Our aim in targeting these particular proteins is to disable the tumor cell’s adaptive defenses, thereby rendering the tumor cells more susceptible to attack with a variety of cancer therapies. We believe this approach will increase survival time and improve the quality of life for cancer patients.

We are focused on executing clinical development plans in order to reach several near-term milestones for both the custirsen and apatorsen programs and believe that our cash, cash equivalents, and short-term investments will be sufficient to fund our currently planned operations into the third quarter of 2017.

17


Product Candidate Custirsen

Three phase 3 custirsen clinical trials have been initiated:

 

·

The SYNERGY Trial: The completed phase 3 clinical trial evaluated a survival benefit for custirsen in combination with first-line docetaxel treatment in patients with metastatic castrate resistant prostate cancer, or metastatic CRPC. Results of the SYNERGY trial were presented at the European Society for Medical Oncology, or ESMO, 2014 Congress in September 2014. Final survival results indicated that the addition of custirsen to standard first-line docetaxel/prednisone therapy did not meet the primary endpoint of a statistically significant improvement in overall survival, or OS, in men with metastatic CRPC, compared to docetaxel/prednisone alone (median survival 23.4 months vs. 22.2 months, respectively; hazard ratio 0.93 and one-sided p value 0.207). The adverse events observed were similar to custirsen's known adverse event profile. Subsequent exploratory analyses showed improved overall survival for those men who received custirsen and who were at increased risk for poor outcomes. Those preliminary results showed a 27% lower rate of death for patients who were at increased risk for poor outcomes and received custirsen. Based on these findings, we have amended the AFFINITY trial as outlined below.

 

·

The AFFINITY Trial: The phase 3 clinical trial to evaluate a survival benefit for custirsen in combination with cabazitaxel treatment as second-line chemotherapy in patients with metastatic CRPC. AFFINITY was initiated in August 2012 and completed enrollment of approximately 630 patients in September 2014. In January 2015, an interim futility analysis was completed and per recommendation of an Independent Data Monitoring Committee, or IDMC, the trial continued as planned.

Based on the exploratory findings from the SYNERGY trial, we sought advice from regulatory authorities to amend the AFFINITY trial to include these learnings and to adjust the statistical analysis plan accordingly. Both the FDA and European Medicines Agency, or EMA, were supportive of the proposed amendment to the AFFINITY protocol and statistical analysis plan. The following protocol amendment was submitted in all participating countries where the trial is being conducted:

 

o

The inclusion of a co-primary survival objective for evaluating survival benefit in a subpopulation of men who were at increased risk for poor outcomes as well as for all men enrolled into the study, known as the intent-to-treat, or ITT, population.

 

o

A revised statistical analysis plan including the hypothesized hazard ratio, or HR, for the subpopulation who are at an increased risk for poor outcomes specified to be 0.69 with the critical HR ≤ 0.778. The hypothesized HR for the ITT population, remains unchanged as 0.75 with the critical HR ≤ 0.820.

 

o

The revised statistical analysis plan included an interim analysis for the ITT population at the same time as the final analysis for the subpopulation. This interim analysis had both futility and early efficacy criteria defined for the ITT population.

The co-primary survival analysis for the poor prognostic subpopulation and the interim analysis for the ITT population in the AFFINITY trial were completed in December 2015. The co-primary survival results for the subpopulation of men who had multiple poor prognostic risk factors revealed that the combination of custirsen and cabazitaxel did not meet the rigorous criteria required to demonstrate an improvement in overall survival (hypothesized hazard ratio < 0.69, one-sided p value < 0.015). Based on the interim analysis for the ITT population, the IDMC recommended that the trial continue as planned. Both the IDMC and we remain blinded to all analyses and final results are expected in the third quarter of 2016, depending on timing of the event-driven final ITT analysis.

 

·

The ENSPIRIT Trial: The phase 3 clinical trial to evaluate a survival benefit for custirsen in combination with docetaxel treatment as second-line chemotherapy in patients with non-small cell lung cancer, or NSCLC. This trial was initiated in September 2012.

The first interim futility analysis was completed in August 2014. A protocol amendment was submitted and approved by all regulatory agencies in participating countries, to amend the statistical design and analysis plan of the ENSPIRIT trial including the following:

 

o

A revised statistical analysis plan including the hypothesized HR, to be 0.75 with the critical HR of ≤ 0.84, reducing the required sample size from 1,100 to 700 patients.  This change maintained 90% power while assessing for a more clinically relevant survival benefit when adding custirsen to second-line docetaxel.

 

o

A revision to the final interim futility analysis with more rigorous criteria in order to continue the trial due to lack of futility. This was successfully completed in July 2015, and the trial continued as planned.

 

o

The inclusion of an additional objective to analyze survival outcome based on NSCLC histology as part of the other non-primary analyses.

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We believe these amendments, specifically the revised statistical thresholds, are more appropriately aligned to the interests of both treating clinicians and their patients. Based on current ENSPIRIT enrollment projections and the changes outlined in the protocol amendment, we believe final survival results could be available in the first half of 2017, depending on completion of enrollment and timing of the event-driven final analysis.

Custirsen has received Fast Track designation from the U.S. Food and Drug Administration, or FDA, for second-line treatment of metastatic CRPC when combined with cabazitaxel and prednisone and for the second-line treatment of advanced NSCLC when combined with docetaxel in patients with disease progression following treatment with a first-line, platinum-based chemotherapy doublet regimen.

Product Candidate Apatorsen

Apatorsen is our product candidate that is designed to inhibit production of Hsp27, a cell-survival protein expressed in many types of cancers including bladder, prostate, breast, pancreatic and non-small cell lung cancer. Hsp27 expression is stress-induced, including by many anti-cancer therapies. Overexpression of Hsp27 is thought to be an important factor leading to the development of treatment resistance and is associated with metastasis and negative clinical outcomes in patients with various tumor types.

A number of preclinical studies have shown that reducing Hsp27 production induces tumor cell death in prostate, non-small cell lung, bladder and pancreatic cancer cells. The studies also suggest that reducing Hsp27 production sensitizes prostate tumor cells to hormone ablation therapy. These preclinical studies have also shown that inhibiting the production of Hsp27 in human prostate, bladder, lung, breast, ovarian and pancreatic tumor cells sensitizes the cells to chemotherapy.

Hsp27 has been reported by others to function as an immunomodulatory protein by a number of mechanisms that include altering important membrane expressed proteins on monocytes and immature dendritic cells; this alteration results in tumor-associated immune cells that are not functional in identifying and killing cancer cells. The induction of anti-inflammatory cytokines by Hsp27 may also play a role in down-regulating lymphocyte activation leading to additional unresponsive immune cells.

In 2013, we initiated the ORCA (Ongoing Studies Evaluating Treatment Resistance in CAncer) program which encompasses clinical studies designed to evaluate whether inhibition of Hsp27 can lead to improved prognosis and treatment outcomes for cancer patients. Our goal is to advance cancer treatment by conducting clinical trials for apatorsen across multiple cancer indications including bladder, lung, pancreatic and prostate cancers. We are conducting parallel clinical trials to evaluate apatorsen in several cancer indications and treatment combinations to accelerate the development of apatorsen. As part of this strategy, we are supporting specific investigator-sponsored trials to allow assessment of a broader range of clinical indications for future OncoGenex-sponsored trials and possible market approval. The ORCA trials, with exception of the Pacific™ trial, are designed to provide information that will be useful for designing future phase 3 trials and may be used as supportive studies for registration, if applicable.  Due to small sample sizes, data from these trials are not likely to result in statistically significant differences in either progression free survival, or PFS, or overall survival, or OS.

Six phase 2 apatorsen clinical trials have been initiated or completed under the ORCA program.

 

 

Completed Trials

 

·

The Borealis-1™ Trial: Our completed company-sponsored Borealis-1™ phase 2 trial was a three-arm, randomized, placebo-controlled trial evaluating 600mg or 1000mg apatorsen in combination with a first-line standard of care chemotherapy regimen (gemcitabine and cisplatin) in the metastatic setting. Overall, trial results indicated that the addition of 600mg apatorsen to standard of care chemotherapy showed a 14% reduction in risk of death (OS HR = 0.86) and a 17% reduction in progressive disease and death (PFS HR = 0.83) when compared to chemotherapy alone. Less benefit was observed in the 1000mg apatorsen arm due to increased adverse events leading to a higher rate of discontinuation of both apatorsen and chemotherapy.Results from an exploratory analysis showed that metastatic bladder cancer patients with poor prognostic features (lower performance status, liver involvement, low hemoglobin and high alkaline phosphatase) achieved a 28% reduction in risk of death from the addition of 600mg apatorsen to first-line chemotherapy (OS HR = 0.72) compared to chemotherapy alone. Overall, higher baseline serum Hsp27 levels predicted worse survival outcome and patients characterized as poor prognosis had significantly higher baseline sHsp27 levels than patients characterized as good prognosis. These results were presented in an oral session on June 1, 2015 at the American

19


 

Society of Clinical Oncology, or ASCO, and additional analyses were presented on September 28, 2015 at the European Cancer Congress, or ECC.

 

·

The Rainier™ Trial: Our completed investigator-sponsored Rainier™ phase 2 trial was a randomized, placebo-controlled trial evaluating apatorsen in combination with ABRAXANE® (paclitaxel protein-bound particles for injectable suspension) (albumin-bound) and gemcitabine compared to ABRAXANE and gemcitabine alone in patients with untreated metastatic pancreatic cancer. The addition of apatorsen to ABRAXANE and gemcitabine did not demonstrate an overall survival benefit in the study when compared to ABRAXANE and gemcitabine alone (OS HR = 1.253; PFS HR = 1.038).   A potential benefit was observed in a subgroup of patients (14%) with high baseline serum Hsp27 status when treated with apatorsen (OS HR = 0.568; PFS HR = 0.402). Overall, higher baseline Hsp27 status correlated with worse survival outcome. The study was sponsored and conducted by Sarah Cannon Research Institute, or SCRI, and further results were presented at the Gastrointestinal, or GI, Cancers Symposium meeting in January 2016. The study investigators concluded that these promising results in pancreatic cancer patients with high Hsp27 status warrant further study of apatorsen in this population.

Ongoing Trials

 

·

The Borealis-2™ Trial: The investigator-sponsored, randomized phase 2 trial evaluating apatorsen in combination with docetaxel treatment compared to docetaxel treatment alone in patients with advanced or metastatic bladder cancer who have disease progression following first-line platinum-based chemotherapy. Patients may also continue weekly apatorsen infusions as maintenance treatment until disease progression or unacceptable toxicity if they complete a minimum of two cycles of docetaxel, or are discontinued from docetaxel due to docetaxel toxicity. This trial was initiated in April 2013 and patient enrollment was completed in September 2015. A futility analysis was completed in December 2015 and the trial is continuing as planned. The trial randomized approximately 200 patients and results are expected in the second half of 2016. The study is being sponsored and conducted by the Hoosier Cancer Research Network.

 

·

The Spruce™ Trial: The investigator-sponsored, randomized, placebo-controlled phase 2 trial evaluating apatorsen plus carboplatin and pemetrexed therapy compared to carboplatin and pemetrexed therapy in patients with previously untreated advanced non-squamous NSCLC. Patients continued pemetrexed with weekly apatorsen or placebo infusions as maintenance treatment until disease progression if they completed a minimum of 3 cycles of chemotherapy treatment. The aim of the trial is to determine if adding apatorsen to carboplatin and pemetrexed therapy can extend PFS outcome. Additional analyses are expected to include tumor response rates, overall survival, safety, tolerability and the effect of therapy on Hsp27 levels. Patients who are at increased risk for poor outcomes will also be prospectively evaluated. This trial was initiated in August 2013 and patient enrollment was completed in February 2015. The trial randomized approximately 155 patients. In January 2016, the primary endpoint data for PFS was reported to have not reached the statistical significance required to demonstrate a benefit. A potential PFS benefit was observed in patients with high baseline serum Hsp27 status when treated with apatorsen. The study is ongoing and overall survival results are expected in the second half of 2016. PFS results will be presented at t ASCO 2016. The study is being sponsored and conducted by Sarah Cannon Research Institute.

 

·

The Spruce-2™ Trial (formerly referred to as the Cedar Trial): The investigator-sponsored, randomized phase 2 trial evaluating apatorsen plus gemcitabine and carboplatin therapy or gemcitabine and carboplatin therapy alone in patients with previously untreated advanced squamous NSCLC. Patients also continue weekly apatorsen infusions as maintenance treatment after chemotherapy until disease progression. The aim of the trial is to determine if adding apatorsen to gemcitabine and carboplatin therapy can extend PFS outcome. Additional analyses will include tumor response rates, overall survival, safety, and health-related quality of life. Additional analyses are expected to determine the effect of therapy on Hsp27 levels, explore potential biomarkers that may help predict response to treatment and survival outcomes in patients who were at increased risk for poor outcomes. The trial was initiated in July 2014 and is enrolling patients. Following review of our randomized phase 2 apatorsen clinical trials, an amendment was submitted that reduces the apatorsen dose from 600mg to 400mg to allow comparison of safety and efficacy between the two apatorsen doses. The trial is expected to randomize approximately 140 patients. The trial is being conducted and funded primarily by the UK National Cancer Research Network and the UK Experimental Cancer Medicine Network.

 

·

The Pacific™ Trial: The investigator-sponsored, randomized phase 2 trial evaluating apatorsen in men with CRPC who are experiencing a rising PSA while receiving Zytiga® (abiraterone acetate). The aim of the trial is to determine if adding apatorsen to Zytiga treatment can reverse or delay treatment resistance by evaluating the PFS rate at a milestone Day 60 assessment. Other secondary endpoints such as PSA and objective responses, time to disease progression, CTCs and Hsp27 levels are expected to be evaluated. The trial completed enrollment of 72 patients in March 2016. The study is being sponsored and conducted by the Hoosier Cancer Research Network.

 

In addition to the Borealis-1 and Borealis-2 clinical trials in metastatic bladder cancer in the ORCA program, we are evaluating apatorsen for a potential pivotal study in the treatment of non-muscle invasive bladder cancer, or NMIBC. We have completed a pre-

20


IND meeting with FDA in preparation for a separate IND application to evaluate apatorsen for intravesical administration in combination with Bacillus Calmette-Guerin, or BCG, treatment in patients with NMIBC. FDA had no objection to the study population or classification of subpopulations in a preliminary study design and deemed the proposed definitions of primary and secondary endpoints acceptable.

Product Candidate OGX-225

OGX-225 is our product candidate designed to inhibit the production of Insulin Growth Factor Binding Proteins -2 and -5 (IGFBP-2, IGFBP-5), two proteins that when overexpressed affect the growth of cancer cells. Increased IGFBP-2 and IGFBP-5 production are observed in many human cancers, including prostate, breast, colorectal, non-small cell lung, glioblastoma, acute myeloid leukemia, acute lymphoblastic leukemia, neuroblastoma, and melanoma. The increased production of these proteins is linked to faster rates of cancer progression, treatment resistance, and shorter survival duration in humans.

Preclinical studies with human prostate and breast cancer cells have shown that reducing IGFBP-2 and IGFBP-5 production with OGX-225 sensitized these tumor types to hormone ablation therapy or chemotherapy and induced tumor cell death. We have completed IND enabling toxicology studies for OGX-225.

Collaboration Revenue

Revenue recognized to date was attributable to the upfront payment we received in the fourth quarter of 2009 pursuant to a Collaboration Agreement with Teva, as well as cash reimbursements from Teva for certain costs incurred by us under the clinical development plan. Our policy is to account for these reimbursements as collaboration revenue.

In April 2015, we and Teva entered into an agreement to terminate the Collaboration Agreement, or the Termination Agreement. Pursuant to the Termination Agreement, Teva paid to us, as advanced reimbursement for certain continuing research and development activities related to custirsen and certain other antisense inhibitors of clusterin, an amount equal to $27.0 million less approximately $3.8 million, which reduction represents a hold-back amount of $3.0 million and $0.8 million for certain third-party expenses incurred by Teva between January 1, 2015 and April 24, 2015, or Closing Date. Teva was permitted to deduct from the $3.0 million hold-back certain costs incurred after January 1, 2015 that arose after the Closing Date. Pursuant to the Termination Agreement, one half of the then remaining hold-back amount is to be paid to us six months after the Closing Date, one half of the then remaining hold-back amount is to be paid to us nine months after the Closing Date and the entire then remaining hold-back amount will be paid to us 12 months after the Closing Date. As of March 31, 2016, the entire amount of the hold-back had been almost fully deducted by Teva for certain custirsen-related costs incurred after the Closing Date. We received a nominal amount of the remaining hold-back in October 2015, representing one half of the then remaining amount six months after the Closing Date. We expect to receive only nominal amounts from the remaining hold-back. Teva is responsible for expenses related to custirsen incurred pursuant to the Collaboration Agreement through December 31, 2014.  We will be responsible for certain custirsen-related expenses from and after January 1, 2015.

As a result of the termination of the Collaboration Agreement with Teva, we do not expect to earn any additional collaboration revenue beyond the amounts provided as advanced reimbursement for custirsen -related development expenses as set forth in the Termination Agreement. The advanced reimbursement payment made by Teva, as part of the Termination Agreement, was deferred and is being recognized as collaboration revenue on a dollar for dollar basis as costs are incurred as part the of continuing research and development activities related to custirsen and certain other antisense inhibitors of clusterin. Of the advance reimbursement received, we have incurred approximately $21.1 million for certain custirsen-related development costs since January 1, 2015 and recognized these amounts as collaboration revenue.

Research and Development Expenses

Research and development, or R&D, expenses consist primarily of costs for clinical trials, contract manufacturing, personnel costs, milestone payments to third parties, facilities, regulatory activities, preclinical studies and allocations of other R&D-related costs. External expenses for clinical trials include fees paid to clinical research organizations, clinical trial site costs and patient treatment costs.

Currently, we manage our clinical trials through contract research organizations and independent medical investigators at their sites and at hospitals and expect this practice to continue. Through our clinical development programs, we are developing each of our product candidates in parallel for multiple disease indications. Due to the number of ongoing projects and our ability to utilize resources across several projects, we do not record or maintain information regarding the indirect operating costs incurred for our research and development programs on a program-specific basis. In addition, we believe that allocating costs on the basis of time incurred by our employees does not accurately reflect the actual costs of a project.

21


Several of our clinical trials have been supported by grant funding that was received directly by the hospitals and/or clinical investigators conducting the clinical trials as investigator-sponsored trials, thereby allowing us to complete these clinical trials at a lower cost to us.

Under the prior Collaboration Agreement with Teva, we were required to spend $30.0 million in direct and indirect development costs for the benefit of the custirsen development plan, such contribution to be funded by the upfront payment provided by Teva as an advanced reimbursement for our development expenses. In December 2012, we had spent the required $30.0 million in development costs related to custirsen. In accordance with the Termination Agreement, Teva was required to and did fund all additional expenses under the clinical development plan through December 31, 2014, after which date we took over responsibility for future custirsen-related costs following termination of our Collaboration Agreement. We do not owe Teva any development milestone payments or royalty payments on sales of custirsen, if any.

Final analyses of clinical trials involving our product candidates are dependent on and driven by timing of disease progression and/or survival events occurring and as a result we cannot estimate completion dates for development activities or when we might receive material net cash inflows from our R&D projects, if ever.

Our projects or intended R&D activities may be subject to change from time to time as we evaluate our R&D priorities and available resources.

General and Administrative Expenses

General and administrative, or G&A, expenses consist primarily of salaries and related costs for our personnel in executive, finance and accounting, corporate communications, human resources and other administrative functions, as well as consulting costs, including market research, business consulting and intellectual property. Other costs include professional fees for legal and auditing services, insurance and facility costs.

Warrant liability

The following is a summary of outstanding warrants to purchase common stock that are classified as liabilities at March 31, 2016:

 

 

 

Total

 

 

 

 

 

 

 

 

 

Outstanding

 

 

Exercise

 

 

 

 

 

and

 

 

price per

 

 

 

 

 

Exercisable

 

 

Share

 

 

Expiration Date

(1) Series A Warrants issued in July 2014 financing

 

 

2,779,933

 

 

 

4.00

 

 

July 2019

(2) Series B Warrants issued in July 2014 financing

 

 

670,269

 

 

 

4.00

 

 

July 2019

 

No warrants were exercised during the three months ended March 31, 2016 or 2015.

We reassess the fair value of the common stock warrants classified as liabilities at each reporting date utilizing a Black-Scholes pricing model. Inputs used in the pricing model include estimates of stock price volatility, expected warrant life and risk-free interest rate. The computation of expected volatility was based on the historical volatility of shares of our common stock for a period that coincides with the expected life of the warrants.

Results of Operations

For the three months ended March 31, 2016 and 2015

Collaboration Revenue

Revenue for the three months ended March 31, 2016 and 2015 were $2.9 million and $1.4 million, respectively. The advanced reimbursement payment made by Teva, as part of the Termination Agreement, was deferred and is being recognized as collaboration revenue on a dollar for dollar basis as costs are incurred as part of the continuing research and development activities related to custirsen. The increase in 2016 as compared to 2015 was due to higher collaboration revenue recognized on the deferred revenue as a result of higher ENSPIRIT costs. This was partially offset by a decrease in collaboration revenue recognized for the AFFINITY trial as a result of a decrease in associated clinical activities.

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Research and Development Expenses

Our research and development expenses for our clinical development programs for the three months ended March 31, 2016 and 2015 are as follows (in thousands):

 

 

 

Three months ended

 

 

 

 

March 31,

 

 

 

 

2016

 

 

2015

 

 

Clinical development programs:

 

 

 

 

 

 

 

 

 

Custirsen

 

$

2,282

 

 

$

1,192

 

 

Apatorsen

 

$

408

 

 

$

528

 

 

Other  research and development

 

$

1,952

 

 

$

1,953

 

 

Total research and development expenses

 

$

4,642

 

 

$

3,673

 

 

 

Research and development expenses for the three months ended March 31, 2016 and 2015 were $4.6 million and $3.7 million, respectively. The increase in 2016 as compared to 2015 was due primarily to higher ENSPIRIT trial costs. This was partially offset by lower clinical trial costs for the AFFINITY trial and our investigator sponsored trials evaluating apatorsen as a result of a decrease in associated clinical activities.

General and Administrative Expenses

G&A expenses for the three months ended March 31, 2016 and 2015 were $2.3 million and $2.7 million, respectively. The decrease in 2016 as compared to 2015 was due primarily to lower administrative and professional expenses. This was partially offset by higher consulting fees.

Gain on Warrants

We recorded a gain of $0.7 million and $0.5 million on the revaluation of our outstanding liability-classified warrants for the three months ended March 31, 2016 and 2015, respectively. We revalue warrants that are classified as liabilities at each balance sheet date to fair value.

Liquidity and Capital Resources

We have incurred an accumulated deficit of $180.5 million through March 31, 2016, and we expect to incur substantial additional losses in the future as we continue or expand our R&D activities and other operations, as more fully described below. We have not generated any revenue from product sales to date, and we may not generate product sales revenue in the near future, if ever.

Our operations to date have been primarily funded through the sale of our equity securities and payments received from Teva. As of March 31, 2016, our cash, cash equivalents, and short-term investments decreased to $46.1 million from $55.2 million as of December 31, 2015.

In April 2015, we and Teva terminated our Collaboration Agreement. Pursuant to the Termination Agreement, Teva paid to us, as advanced reimbursement for certain continuing research and development activities related to custirsen, an amount equal to $27.0 million less approximately $3.8 million, which reduction represented a hold-back amount of $3.0 million and $0.8 million for certain third-party expenses incurred by Teva between January 1, 2015 and the Closing Date. Teva was permitted to deduct from the $3.0 million hold-back certain custirsen-related costs incurred after January 1, 2015 that arose after the Closing Date. Pursuant to the Termination Agreement, one half of the then remaining hold-back amount is to be paid to us six months after the Closing Date, one half of the then remaining hold-back amount is to be paid to us nine months after the Closing Date and the entire then remaining hold-back amount will be paid to us 12 months after the Closing Date. As of March 31, 2016, the entire amount of the holdback had been almost fully deducted by Teva for certain custirsen-related costs incurred after the Closing Date. We received a nominal amount from the remaining hold-back in October 2015, representing one half of the then remaining amount six months from the Closing Date. We expect to receive only nominal amounts from the remaining hold-back.

Pursuant to the Termination Agreement, Teva remains responsible for expenses related to custirsen incurred pursuant to the Collaboration Agreement through December 31, 2014. We will be responsible for all custirsen-related expenses incurred from and after January 1, 2015. We do not owe Teva any development milestone payments or royalty payments on sales of custirsen, if any. As a result of the termination of the Collaboration Agreement, other than the advanced reimbursement for certain continuing research and development activities related to custirsen already received by us, and any amounts paid to us from the hold-back by Teva, if any, we will not receive any future cash reimbursements from Teva for certain costs incurred by us in connection with the clinical

23


development of custirsen. Of the advance reimbursement received, we have incurred approximately $21.1 million for certain custirsen-related development costs between January 1, 2015 and March 31, 2016.

In April 2015, we and Lincoln Park Capital Fund, LLC, or LPC, entered into a Purchase Agreement, pursuant to which we had the right to sell to LPC up to $18.0 million in shares of our common stock, par value $0.001 per share, subject to certain limitations and conditions set forth in the Purchase Agreement. LPC initially purchased 956,938 Series A-1 Units at a purchase price of $2.09 per unit, for aggregate gross proceeds of $2.0 million. Each Series A-1 Unit consisted of (i) one share of common stock and (ii) one warrant to purchase one-quarter of a share of common stock at an exercise price of $2.40 per share. After the initial purchase, we had the right, from time to time, in our sole discretion and subject to certain conditions, to direct LPC to purchase additional shares of common stock having an aggregate value of $16.0 million. We directed LPC to purchase such additional shares as often as every business day over the 24-month term of the Purchase Agreement in increments of up to 125,000 shares of common stock, with such number of shares increasing as the closing sale price of our common stock increased. The purchase price of shares of common stock pursuant to the Purchase Agreement was based on prevailing market prices of common stock at the time of sale without any fixed discount, and we controlled the timing and amount of common stock sold to LPC. In addition, we had the right to direct LPC to purchase additional amounts as accelerated purchases if on the date of a regular purchase the closing sale price of the common stock is not below $1.50 per share. As consideration for entering into the Purchase Agreement, we issued to LPC 126,582 shares of common stock; no cash proceeds were received from the issuance of these shares.

From April 30, 2015 through August 13, 2015, we offered and sold 6,814,980 shares of our common stock pursuant to our Purchase Agreement with LPC. These sales resulted in gross proceeds to us of approximately $18.0 million and offering expenses of $0.4 million. As of August 13, 2015, no further amounts remained available for sale under this offering program.

In February 2016, we committed to a plan to reduce operating expenses, which included a workforce reduction of 11 employees, representing approximately 27% of our employees prior to the reduction. We incurred approximately $0.4 million in expenses as a result of the workforce reduction, substantially all of which were severance costs. We expect cost savings associated with the reduction of employees and consultants, together with the elimination of certain planned expenditures not required for the completion of ongoing trials, will extend our cash runway into the third quarter of 2017. Our currently planned operations are set forth below under the heading Operating Capital and Capital Expenditure Requirements.

Cash Flows

Cash Used by Operations

For the three months ended March 31, 2016, net cash used in operating activities increased to $9.1 million from $6.4 million for the three months ended March 31, 2015. The increase in cash used in operations in 2016 as compared to 2015 was primarily attributable to the final Teva cash reimbursement, for costs incurred as part of the custiresen development program in the fourth quarter of 2014, which was received in the first quarter of 2015.

Cash Used by Financing Activities

For the three months ended March 31, 2016, net cash used in financing activities was zero compared to net cash used of $0.1 million for the three months ended March 31, 2015. There were no financing activities in the three months ended March 31, 2016. Net cash used by financing activities in the three months ended March 31, 2015 was the result of taxes paid upon the net settlement of equity awards.

Cash Used by Investing Activities

For the three months ended March 31, 2016, net cash used in investing activities was $6.3 million compared to $3.9 million provided by investing activities for the three months ended March 31, 2015. Net cash used in investing activities for the three months ended March 31, 2016 and net cash provided by investing activities for the three months ended March 31, 2015 was due to transactions involving marketable securities in the normal course of business.

24


Operating Capital and Capital Expenditure Requirements

Based on our current expectations, we believe that our cash, cash equivalents, and short-term investments will be sufficient to fund our currently planned operations into the third quarter of 2017. Depending on timing of enrollment or event-driven final analyses, the expected key milestones and activities are as follows:

 

·

Custirsen

 

·

Announcing AFFINITY trial results, the phase 3 trial evaluating a survival benefit for custirsen in combination with cabazitaxel as second-line chemotherapy in approximately 630 patients with castrate-resistant prostate cancer. The final analysis for the intent-to-treat population is expected in the third quarter of 2016.

 

·

Announcing ENSPIRIT trial results, the phase 3 trial evaluating a survival benefit for custirsen in combination with docetaxel as second-line chemotherapy in approximately 700 patients with non-small cell lung cancer. The final survival analysis is expected in the first half of 2017.

 

·

Apatorsen

 

·

Announcing Borealis-2 trial results, an investigator-sponsored, randomized phase 2 trial evaluating apatorsen in combination with docetaxel treatment compared to docetaxel treatment alone in patients with advanced or metastatic bladder cancer. Final results are expected in the second half of 2016.

 

·

Announcing Spruce trial results for the overall survival endpoint, the investigator-sponsored, randomized, placebo-controlled phase 2 trial evaluating apatorsen treatment with carboplatin and pemetrexed chemotherapy in patients with previously untreated advanced non-squamous NSCLC. Results are expected in the second half of 2016.

 

·

Completing a submission-ready investigational new drug application regarding apatorsen via intravesical administration in combination with Bacillus Calmette-Guerin (BCG) treatment in patients with non-muscle invasive bladder cancer.

Results from the custirsen and apatorsen trials may be released at a date that is beyond the period for which we currently project we have available cash resources. We have based this estimate on assumptions that may prove to be wrong, or we could utilize our available capital resources sooner than we currently expect. We would require additional funding to support our operations if we were to continue the AFFINITY or ENSPIRIT trials beyond their anticipated data result dates, spend capital on activities related to product launch, acquire or invest in other assets, conduct development activities with respect to our other product candidates beyond those development activities described above, including activities with respect to OGX-225 or unsuccessfully defend pending litigation, or if the clinical trials cost more than we anticipate or custirsen is successful in a phase 3 trial with no partnership. If we need to extend our cash availability or to conduct any such currently unplanned development activities, we would seek such necessary funding through the licensing or sale of certain of our product candidates, by executing a partnership or collaboration agreement, or through private or public offerings of our equity or debt. However, we can provide no assurance that such funding would be available to us on favorable terms, or at all.

Our future capital requirements will depend on many factors, including:

 

·

timing, costs and results of clinical development, preclinical development and regulatory approvals;

 

·

our ability to obtain additional funding through a partnership or collaboration agreement with a third party or licenses of certain of our product candidates, or through private or public offerings of our equity or debt, or through sale of certain of our royalty rights;

 

·

our ongoing level of focus and efforts to develop and commercialize custirsen and apatorsen;

 

·

success of custirsen and apatorsen;

 

·

costs to defend, and results of, pending litigation; and

 

·

costs related to obtaining, defending and enforcing patents.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet financing arrangements at March 31, 2016.

Commitments and Contingencies

We previously disclosed certain contractual obligations and contingencies and commitments relevant to us within the financial statements and Management Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form

25


10-K for the year ended December 31, 2015, as filed with the SEC on March 9, 2016. There have been no material changes to our “Contractual Obligations” table in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2015 Form 10-K. For more information regarding our current contingencies and commitments, see note 7 to the financial statements included above.

Material Changes in Financial Condition

 

 

 

March 31,

 

 

December 31,

 

(in thousands)

 

2016

 

 

2015

 

Total Assets

 

$

48,841

 

 

$

58,209

 

Total Liabilities

 

 

14,625

 

 

 

20,769

 

Total Equity

 

 

34,216

 

 

 

37,440

 

 

The decrease in assets at March 31, 2016 compared to December 31, 2015 was primarily due to a decrease in cash and cash equivalents as these assets have been used to fund operations. The decrease in liabilities at March 31, 2016 compared to December 31, 2015 were due to a decrease in deferred revenue as these amounts were recognized into collaboration revenue on a dollar for dollar basis as costs were incurred as part of the continuing research and development activities related to custirsen and lower clinical trial accruals associated with patient enrollment and treatment in the AFFINITY trial and our investigator sponsored trials evaluating apatorsen.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts and related disclosures. We have discussed those estimates that we believe are critical and require the use of complex judgment in their application in our Annual Report on Form 10-K for the year ended December 31, 2015, filed with the SEC on March 9, 2016. Since December 31, 2015, there have been no material changes to our critical accounting policies or the methodologies or assumptions we apply under them.

New Accounting Standards

See Note 2, “Accounting Policies,” of the consolidated financial statements for information related to the adoption of new accounting standards in 2016, none of which had a material impact on our financial statements, and the future adoption of recently issued accounting standards, which we do not expect to have a material impact on our financial statements. 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

Interest rate risk is the risk that the fair values and future cash flows of financial instruments will fluctuate because of the changes in market interest rates. We invest our cash in a variety of financial instruments, primarily in short-term bank deposits, money market funds, and domestic and foreign commercial paper and government securities. These investments are denominated in U.S. dollars, and we monitor our exposure to interest rate changes. We have very limited interest rate risk due to having only a few assets or liabilities subject to fluctuations in interest rates. Our investment portfolio includes only marketable securities with active secondary or resale markets to help ensure portfolio liquidity. Due to the nature of our highly liquid marketable securities, a change in interest rates would not materially change the fair market value. We have estimated the effect on our portfolio of a hypothetical increase in interest rates by 1% to be a reduction of approximately $0.4 million in the fair value of our investments as of March 31, 2016.

Foreign Currency Exchange Risk

We are exposed to risks associated with foreign currency transactions on certain contracts and payroll expenses related to our Canadian subsidiary, OncoGenex Technologies, denominated in Canadian dollars, and we have not hedged these amounts. As our unhedged foreign currency transactions fluctuate, our earnings might be negatively affected. Accordingly, changes in the value of the U.S. dollar relative to the Canadian dollar might have an adverse effect on our reported results of operations and financial condition, and fluctuations in exchange rates might harm our reported results and accounts from period to period. We have estimated the effect on our reported results of operations of a hypothetical increase of 10% in the exchange rate of the Canadian dollar against the U.S. dollar to be approximately $0.1 million for the three months ended March 31, 2016.

26


Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that material information required to be disclosed in our periodic reports filed or submitted under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Our disclosure controls and procedures are also designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act are accumulated and communicated to our management, including our principal executive officer and principal financial officer as appropriate, to allow timely decisions regarding required disclosure.

During the quarter ended March 31, 2016, we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective, as of the end of the period covered by this report.

Changes in Internal Control Over Financial Reporting

We have not made any changes to our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended March 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 

Limitations on Effectiveness of Controls

Our management does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected.

 

 

27


PART II. OTHER INFORMATION

Item 1.

Legal Proceedings.

On January 5, 2016, Ionis Pharmaceuticals, Inc. (formerly known as Isis Pharmaceuticals, Inc.) filed a lawsuit against our subsidiary OncoGenex Technologies, Inc. in the United States District Court for the Southern District of California. Ionis claims that OncoGenex Technologies is in breach of an Amended and Restated License Agreement between Ionis and OncoGenex Technologies dated July 2, 2008, as amended, or License Agreement. Under the License Agreement, Ionis is entitled to a share of certain forms of non-royalty revenue received by OncoGenex Technologies, but is not entitled to a share of revenue received by OncoGenex Technologies for the reimbursement of research and development activities. In April 2015, we terminated a collaboration agreement with Teva Pharmaceuticals Industries Ltd. In connection with that termination, Teva paid us $23.2 million as an advance reimbursement for certain continuing research and development activities related to custirsen and certain other antisense inhibitors of clusterin. In the lawsuit, Ionis claims that OncoGenex Technologies is in breach of the License Agreement for failing to pay Ionis a share of the advance reimbursement payment from Teva and other non-monetary consideration received from Teva. Ionis seeks damages in the amount of at least $10 million and a declaratory judgment that, based on OncoGenex Technologies’ alleged breach, Ionis has the right to terminate the License Agreement. On March 4, 2016, OncoGenex Technologies filed a motion to dismiss the lawsuit in the United States District Court for the Southern District of California.

We intend to vigorously defend this matter and, based on our preliminary review, we believe we have valid defenses. However, litigation is inherently uncertain, and any judgment or injunctive relief entered against us or any adverse settlement could materially and adversely impact our business, financial condition, operating results and prospects. Because we are in the early stages of this matter, we are unable to estimate a reasonably possible range of loss, if any, that may result from this matter. In addition, litigation can involve significant management time and attention, and the cost of litigation can be expensive, regardless of outcome.

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Item 1A.

Risk Factors

Risks Related to Our Business

Investing in our common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all of the other information contained in this Quarterly Report on Form 10-Q and in the other periodic and current reports and other documents we file with the Securities and Exchange Commission, before deciding to invest in our common stock. If any of the following risks materialize, our business, financial condition, results of operation and future prospects will likely be materially and adversely affected. In that event, the market price of our common stock could decline and you could lose all or part of your investment.

Risks Related to Our Business

We have incurred losses since inception and anticipate that we will continue to incur losses for the foreseeable future. We have never had any products available for commercial sale and we may never achieve or sustain profitability.

We are a clinical-stage biopharmaceutical company, are not profitable, have incurred losses in each year since our inception and do not expect to become profitable in the foreseeable future. We have never had any products available for commercial sale, and we have not generated any revenue from product sales nor do we anticipate that we will generate revenue from product sales in the near future. Our revenue to date has been collaboration revenue under the Collaboration Agreement with Teva, which was terminated in April 2015. As a result of the termination of the Collaboration Agreement, Teva will no longer be responsible for custirsen-related expenses, and we will not receive additional revenue from Teva other than the advanced reimbursement payment for custirsen-related expenses we received in connection with the termination of the Collaboration Agreement. We have not yet submitted any products for approval by regulatory authorities, and we continue to incur research and development and general and administrative expenses related to our operations. We expect to continue to incur losses for the foreseeable future, and we expect these losses to increase as we continue our research activities and conduct development of, and seek regulatory approvals for, our product candidates, and prepare for and begin to commercialize any approved products. If our product candidates fail in clinical trials or do not gain regulatory approval, or if our product candidates do not achieve market acceptance, we may never become profitable. Even if we achieve profitability in the future, we may not be able to sustain profitability in subsequent periods.

Clinical trials may not demonstrate a clinical benefit of our product candidates.

Positive results from preclinical studies and clinical trials, including any exploratory results from the custirsen or apatorsen clinical trials conducted to date should not be relied on as evidence that on-going, amended, or later-stage or large-scale clinical trials will succeed. We will be required to demonstrate with substantial evidence through well-controlled clinical trials that our product candidates are safe and effective for use in a diverse population before we can seek regulatory approvals for their commercial sale. Success in early clinical trials does not mean that future clinical trials will be successful because product candidates in later-stage clinical trials may fail to demonstrate sufficient safety and efficacy to the satisfaction of regulatory agencies, despite having progressed through initial clinical trials. Further, preliminary results from our clinical trials may not be confirmed in final data, or may change materially.

Even after the completion of our planned Phase 3 clinical trials, regulatory agencies may disagree with our clinical trial design and our interpretation of data, and may require us to conduct additional clinical trials to demonstrate the efficacy of our product candidates.

We have amended some of our ongoing clinical trials to incorporate preliminary observations from our other completed clinical trials.  These observations may not be applicable to other stages of disease, or in combination with other therapies or indications.  In planning or completing amendments to our trials, the statistical requirements to demonstrate success have been increased. This is due to including fewer patients for the primary evaluation and/or due to allowing for the chance of success to be determined in either of two primary evaluations, rather than only having one primary evaluation specified.  Accordingly, if the observations from other completed trials are applied as amendments to our ongoing trials but prove not to be applicable to our ongoing trials, the results might indicate that our original trial design would have been successful if the changes had not been made to the original statistical requirements. We may choose to make additional amendments to ongoing studies for any reason including to analyze final top line data earlier than planned. Any future amendments may compromise the integrity of the clinical trial results and may not be acceptable to regulators.

We are highly dependent on the success of our lead product candidates, custirsen and apatorsen, and we cannot give any assurance that they, or any of our other product candidates, will receive regulatory approval or will be successfully commercialized.

In order to market custirsen, we must, among other things, complete ongoing clinical trials, including phase 3 or registration clinical trials, to demonstrate safety and efficacy. In April 2014, we announced that top-line survival results from our phase 3 SYNERGY trial

29


indicated that the addition of custirsen to standard first-line docetaxel/prednisone therapy did not meet the primary endpoint of a statistically significant improvement in overall survival in men with metastatic CRPC, compared to docetaxel/prednisone alone. Our protocol amendments, including but not limited to revisions to statistical analysis plans, may be approved by regulatory authorities on a country-by-country basis slower than we anticipate, or not at all. We may decide not to continue to advance the development and commercialization of custirsen, which would harm or prevent the commercialization of this product candidate. The failure to further develop and eventually commercialize custirsen could have a material adverse effect on our business and financial condition. The failure of custirsen to be shown safe or effective in one or more indications could negatively impact the development of custirsen in other indications and could result in the suspension or termination of our custirsen development plans.

Completing additional clinical trials will be required for apatorsen to establish the safety and efficacy of this product candidate. In September 2015, we announced that the addition of apatorsen to ABRAXANE and gemcitabine did not demonstrate a survival benefit compared to ABRAXANE and gemcitabine alone. Additionally, in January 2016, we announced that data from the phase 2 Spruce trial evaluating the combination of apatorsen with carboplatin and pemetrexed in patients with untreated metastatic NSCLC did not reach the statistical significance required to demonstrate a PFS benefit. We are conducting parallel clinical trials to evaluate apatorsen in several cancer indications and treatment combinations. The failure of apatorsen to be shown safe or effective in one or more indications could negatively impact the development of apatorsen in other indications and could result in the suspension or termination of our apatorsen development plans.

OGX-225 has not been tested in humans. Our preclinical testing of this product candidate may not be favorable and we may not be able to clinically evaluate OGX-225.

Our clinical development programs for our product candidates may not receive regulatory approval either if such product candidates fail to demonstrate that they are safe and effective in clinical trials and consequently fail to obtain necessary approvals from the regulatory agencies, or if we have inadequate financial or other resources to advance these product candidates through the clinical trial process. If competitive products developed by third parties show significant benefit in the cancer indications in which we are developing our product candidates, any planned supportive or primary registration trials may be delayed, altered or not initiated and custirsen, apatorsen and our other product candidates may never receive regulatory approval. Any failure to obtain regulatory approval of custirsen, apatorsen or our other product candidates could have a material and adverse effect on our business.

We rely on third parties to manufacture and supply our product candidates and other agents used in our clinical trials and potential future commercial use. A decrease in the availability or quality of any of these products or agents could increase clinical trial costs, delay or halt clinical development or regulatory approval of our product candidates or commercialization of our future product candidates, resulting in additional losses and depriving us of potential product revenue.

We do not own or operate manufacturing facilities, and we depend on third-party contract manufacturers for production of all of our product candidates and rely on other companies and their manufacturers for other agents used in all of our clinical trials. We lack the resources and the capability to manufacture any of our product candidates ourselves. To date, our product candidates have been manufactured in limited quantities for preclinical studies and clinical trials. All active pharmaceutical ingredients, or API, and drug product for custirsen and apatorsen have been manufactured for us by third parties pursuant to a purchase order or short-term contract that has been fulfilled.

Prior to the termination of our collaboration agreement with Teva, Teva manufactured custirsen drug product and, pursuant to the Termination Agreement, it has discontinued such activities.  In addition to the selection of a new drug product supplier, we will require technology and methods transfer, validation processes and stability data in order to manufacture drug product. These activities, results and associated regulatory requirements may delay our ability to submit our application for market approval, if applicable. We cannot provide assurance that we will find a new manufacturer of drug product whose terms or timing would be acceptable to us and we may not have sufficient resources to commence certain activities as soon as required. As a result, we could experience a significant delay in custirsen’s development and potential future commercialization.

If, in the future, one of our product candidates is approved for commercial sale, we, or a pharmaceutical partner that has licensed such product candidate, may need to manufacture that product candidate in commercial quantities. We cannot provide assurance that the third-party manufacturers with which we have contracted in the past will have sufficient capacity to satisfy our future manufacturing needs, that we will be able to negotiate additional purchases of API or drug product from these or alternative manufacturers on terms favorable to us, if at all, or that a pharmaceutical partner that has licensed such product candidate will have sufficient capacity or expertise to satisfy future needs.

Third-party manufacturers may fail to perform under their contractual obligations, or may fail to deliver the required commercial quantities of bulk API or finished drug product on a timely basis and at commercially reasonable prices. We have experienced manufacturing quality issues resulting in an unusable lot of product candidate in the past. Any performance failure on the part of our contract manufacturers could delay clinical development or regulatory approval of our product candidates or commercialization of our

30


future product candidates, depriving us of potential product revenue and resulting in additional losses. If we are required to identify and qualify an alternate manufacturer, we may be forced to delay or suspend our clinical trials, regulatory submissions, required approvals or commercialization of our product candidates, which may cause us to incur higher costs and could prevent us from commercializing our product candidates successfully. If we are unable to find one or more replacement manufacturers capable of production at a reasonably favorable cost, in adequate volumes, of adequate quality and on a timely basis, we would likely be unable to meet demand for our product candidates and our clinical trials could be delayed or we could lose potential revenue. Our ability to replace an existing API manufacturer may be difficult because the number of potential manufacturers is limited to approximately five manufacturers, and regulatory agencies must inspect any replacement manufacturer and review information related to product produced at the manufacturer before they can begin manufacturing our product candidates. It may be difficult or impossible for us to identify and engage a replacement manufacturer on acceptable terms in a timely manner, if at all. We expect to continue to depend on third-party contract manufacturers for the foreseeable future.

Our product candidates require precise, high-quality manufacturing. Any of our contract manufacturers will be subject to ongoing periodic unannounced inspection by regulatory agencies to ensure strict compliance with current Good Manufacturing Practices, or cGMP, and other applicable government regulations and corresponding standards. If our contract manufacturers fail to achieve and maintain high manufacturing standards in compliance with cGMP regulations, we may experience manufacturing errors resulting in patient injury or death, product recalls or withdrawals, delays or interruptions of production or failures in product testing or delivery, delay or prevention of filing or approval of marketing applications for our product candidates, cost overruns or other problems that could seriously affect our business.

Significant manufacturing scale-up may require additional validation studies, which the regulatory agencies must review and approve. Additionally, any third-party manufacturers we retain to manufacture our product candidates on a commercial scale must pass regulatory agencies’ pre-approval inspection for conformance to cGMP regulations before we can obtain approval of our product candidates. If we are unable to successfully increase the manufacturing capacity for a product candidate in conformance with cGMP regulations, the regulatory approval or commercial launch of any related products may be delayed or there may be a shortage in supply.

We also rely on third-parties for the provision of other agents used in our clinical trials, and in some circumstances these agents are provided to us at no cost. We have no assurance that these third-parties will continue to provide their products to us at no cost.

The termination of our Collaboration Agreement with Teva has resulted in us being required to take over responsibility for conducting the ongoing custirsen trials, and further development and commercialization of custirsen will require significant resources from us or another collaborator.

In April 2015, we and Teva entered into a Termination Agreement, pursuant to which we terminated our Collaboration Agreement and Teva transitioned the responsibilities associated with conducting the ongoing custirsen clinical trials to us. Under the terms of the Termination Agreement, we received approximately $23.2 million as advanced reimbursement for custirsen-related development activities and regained all rights to custirsen and responsibility for all custirsen-related expenses as of January 1, 2015, including those related to the ENSPIRIT trial, as well as manufacturing and regulatory activities for the custirsen programs, which were previously managed and funded by Teva. Of the advance reimbursement received, we have incurred approximately $21.1 million for certain custirsen-related development costs between January 1, 2015 and March 31, 2016.

Additionally, further development of custirsen will require significant resources from us or another collaborator. We will not receive any future cash reimbursements from Teva for costs incurred by us in connection with the clinical development of custirsen, and we are required to fund all future development and commercialization ourselves if we are unable to find another collaborator. We expect that the $23.2 million payment from Teva as advanced reimbursement for custirsen-related development activities, along with our existing capital resources, will allow for the completion and final results from the AFFINITY and ENSPIRIT trials, but we will need to acquire additional capital or enter into a new partnership or collaboration agreement to fund additional development or commercialization. There are no assurances that we will have access to additional capital or find a new collaborator, or that the terms and timing of any such arrangements would be acceptable to us. As a result, we could experience a significant delay in the custirsen development process. If we determine to discontinue the development of custirsen, or any ongoing clinical trials, we would not receive any future return on our investment from that product candidate, or a specific indication.

Because we depend on financing from third parties for our operations, our business may fail if such financing becomes unavailable or is not available on commercially reasonable terms.

To date, we have financed our operations primarily through the sale of our equity securities and from payments we received pursuant to the Collaboration Agreement with Teva. In April 2015, our Collaboration Agreement with Teva was terminated, and we will not receive any future payments from Teva. We believe that our existing capital resources and interest on such resources will be sufficient to meet our current operating requirements into the third quarter of 2017. However, if patients live longer as a result of new or

31


investigational therapies, the trials proceed slower or take longer than expected to complete, or are initiated later than expected, we change our development plans, acquire rights to new product candidates, cannot find third-party collaborators for our other product candidates, do not successfully defend pending litigation or engage in commercialization and product launch activities, we will need additional capital sooner than we expect. Our future capital requirements will depend on many factors, including, without limitation:

 

·

the scope and results of our clinical trials and preclinical studies;

 

·

whether we experience delays in our clinical and preclinical development programs, or experience slower-than-anticipated product development or rate of events;

 

·

whether we are able to enter into additional third-party collaborative partnerships to develop and/or commercialize any of our other product candidates on terms that are acceptable to us;

 

·

our ability to forecast the cost of our ongoing development activities, including the ENSPIRIT trial;

 

·

the timing and requirements of, and the costs involved in, making protocol amendments to any of our ongoing studies prior to their completion and conducting studies required to obtain regulatory approvals for our product candidates from regulatory agencies;

 

·

the availability of third parties to perform the key development tasks for our product candidates, including conducting preclinical studies and clinical trials and manufacturing our product candidates to be tested in those studies and trials and the associated costs of those services;

 

·

the costs involved in preparing, filing, prosecuting, maintaining, defending the validity of and enforcing patent claims and other costs related to patent rights and other intellectual property rights, including litigation costs and the results of such litigation;

 

·

whether we modify our development program, including terminating and starting new trials;

 

·

whether opportunities to acquire additional product candidates arise and the costs of acquiring and developing those product candidates;

 

·

whether we engage in commercialization and product launch activities; and

 

·

the costs to defend, and the results of, pending litigation.

If we are unable to raise funds on acceptable terms when it becomes necessary to do so, we may not be able to continue developing our product candidates, acquire or develop additional product candidates or respond to competitive pressures or unanticipated requirements. For these reasons, any inability to raise additional funds when we require it could have a material adverse effect on our business.

We may fail to achieve the expected financial and operating benefits of our plan to reduce operating expenses and the plan may harm our business and financial results.

In February 2016, we announced a plan to reduce operating expenses, which included a workforce reduction of 11 employees, representing approximately 27% of our employees prior to the reduction. We face significant risks associated with this plan that may impair our ability to achieve anticipated savings and operational efficiencies or that may otherwise harm our business. These risks include loss of workforce capabilities, decreases in employee focus and morale, attrition of necessary or key employees, higher than anticipated separation expenses, litigation and the failure to meet financial and operational targets. In addition, the calculation of the anticipated cost savings and other benefits resulting from our plan to reduce operating expenses are subject to many estimates and assumptions. These estimates and assumptions are subject to significant business, economic, competitive and other uncertainties and contingencies, many of which are beyond our control. If these estimates and assumptions are incorrect or if we experience delays or unforeseen events, our business and financial results could be adversely affected.

We rely, in part, on third parties to conduct clinical trials for our product candidates and plan to rely on third parties to conduct future clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may be unable to obtain regulatory approval for or commercialize our current and future product candidates.

To implement our product development strategies, we rely on third parties, such as collaborators, contract research organizations, medical institutions, clinical investigators and contract laboratories, to conduct clinical trials of our product candidates. Although we rely on third parties to conduct our clinical trials, we are responsible for ensuring that each of our clinical trials is conducted in accordance with our development plan and protocol. Moreover, regulatory agencies require us to comply with regulations and standards, commonly referred to as Good Clinical Practices, or GCPs, for conducting, monitoring, recording and reporting the results of clinical trials to ensure that the data and results are scientifically credible and accurate and that the clinical trial subjects are

32


adequately informed of the potential risks of participating in clinical trials. Our reliance on third parties does not relieve us of these responsibilities and requirements. If the third parties conducting our clinical trials do not perform their contractual duties or obligations, do not meet expected deadlines or need to be replaced or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to GCPs or for any other reason, we may need to enter into new arrangements with alternative third parties and our clinical trials may be extended, delayed or terminated. In addition, a failure by such third parties to perform their obligations in compliance with GCPs may cause our clinical trials to fail to meet regulatory requirements, which may require us to repeat our clinical trials.

Our clinical trials may be suspended or terminated at any time, including by regulatory agencies, a Data Safety Monitoring Board overseeing the clinical trial at issue, by a clinical trial site or investigator, or by us. Any failure or significant delay in completing clinical trials for our product candidates could materially harm our financial results and the commercial prospects for our product candidates.

We do not know whether any of our currently planned or on-going clinical trials for custirsen or apatorsen will proceed or be completed on schedule, if at all, or, with respect to our other product candidates, whether we will be able to initiate any future preclinical studies or clinical trials, as applicable, beyond those currently planned. The completion of our clinical trials currently in progress could also be substantially delayed or prevented by several factors, including:

 

·

delay or failure to obtain required future additional funding, when needed, through private or public offerings of our equity securities, debt financings, or the execution of a licensing, partnership or collaboration agreement with a third party for any of our product candidates;

 

·

lack of efficacy evidenced during clinical trials;

 

·

inadequate evidence of clinical benefit or futility;

 

·

slower than expected rates of patient recruitment, enrollment and final analysis;

 

·

failure of patients to complete the clinical trial;

 

·

unforeseen safety issues;

 

·

termination of our clinical trials by us, by one or more clinical trial sites, investigators, data safety monitoring boards, or regulatory agencies;

 

·

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

 

·

inability to monitor patients adequately during or after treatment;

 

·

introduction of competitive products that may impede our ability to retain patients in clinical trials;

 

·

delay or failure to obtain sufficient manufacturing supply of custirsen or apatorsen; and

 

·

delay in submission or acceptance of protocol amendments.

The completion or commencement of future preclinical studies or clinical trials could be substantially delayed or prevented by several factors, including:

 

·

delay or failure to obtain required future additional funding, when needed, through private or public offerings of our equity securities, debt financings, or the execution of a licensing, partnership or collaboration agreement with a third party for any of our product candidates;

 

·

insufficient remaining patent term to justify continued development and commercialization;

 

·

delay or failure to obtain sufficient manufacturing supply of custirsen, apatorsen or other products necessary to conduct our clinical trials;

 

·

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

 

·

limited number of, and competition for, suitable sites to conduct clinical trials;

 

·

introduction of new product candidates to the market in therapeutic areas similar to those that we are developing for our product candidates;

 

·

concurrent evaluation of new investigational product candidates in therapeutic areas similar to those that we are developing for our product candidates;

33


 

·

delay or failure to obtain regulatory agencies’ approval or agreement to commence a clinical trial, including our phase 3 or registration clinical trials or amendment of those trials;

 

·

delay or failure to obtain sufficient supplies, including comparator drug, for our clinical trials; delay or failure to reach agreement on acceptable clinical trial agreement terms or clinical trial protocols with prospective sites or investigators;

 

·

delay or failure to obtain the approval of the Institutional Review Board to conduct a clinical trial at a prospective site; and

 

·

our decision to alter the development strategy for one or more clinical or preclinical products.

We may seek to partner with third-party collaborators with respect to the development and commercialization of our product candidates, and we cannot control whether we will be able to do so on favorable terms, if at all.

Our business strategy relies in part on potentially partnering successful product candidates with larger companies to complement our internal development and commercialization efforts. We will be competing with many other companies as we seek partners for our product candidates and may not be able to compete successfully against those companies. If we are not able to enter into collaboration arrangements for our product candidates, we would be required to undertake and fund further development, clinical trials, manufacturing and commercialization activities solely at our own expense and risk. If we are unable to finance and/or successfully execute those expensive activities, or we delay such activities due to capital availability, our business could be materially and adversely affected, and potential future product launch could be materially delayed, be less successful, or we may be forced to discontinue clinical development of these product candidates.

Our product candidates may cause undesirable and potentially serious side effects during clinical trials that could delay or prevent their regulatory approval or commercialization.

Since patients in our clinical trials have advanced stages of cancer, we expect that additional adverse events, including serious adverse events, will occur.

Undesirable side effects caused by any of our product candidates could cause us or regulatory authorities to amend, interrupt, delay or halt clinical trials and could result in the denial of regulatory approval by regulatory agencies for any or all targeted indications or decrease the competitive opportunity of the product candidate which may decrease sales potential. This, in turn, could prevent us from commercializing our product candidates and generating revenue from their sale. In addition, if our product candidates receive marketing approval and we or others later identify undesirable side effects caused by the product:

 

·

we may elect to terminate the ongoing clinical trials and cease development of the product;

 

·

regulatory authorities may withdraw their approval of the product;

 

·

we may be required to recall the product, change the way the product is administered, conduct additional clinical trials or change the labeling of the product;

 

·

a product may become less competitive and product sales may decrease; and