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EX-32.2 - EX-32.2 - ACHIEVE LIFE SCIENCES, INC.ogxi-ex322_8.htm
EX-32.1 - EX-32.1 - ACHIEVE LIFE SCIENCES, INC.ogxi-ex321_7.htm
EX-31.2 - EX-31.2 - ACHIEVE LIFE SCIENCES, INC.ogxi-ex312_10.htm
EX-31.1 - EX-31.1 - ACHIEVE LIFE SCIENCES, INC.ogxi-ex311_6.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED June 30, 2017

or

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

FOR THE TRANSITION PERIOD FROM ______________ TO ____________.

Commission file number 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     No  

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

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

 

Large accelerated filer

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company  

 

 

 

 

Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

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

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 July 31, 2017

Common Stock, $0.001 par value

 

30,104,495

 

 


OncoGenex Pharmaceuticals, Inc.

Index to Form 10-Q

 

 

Page
Number

 

 

Part I.   Financial Information

3

 

 

 

Item 1

Consolidated Financial Statements (unaudited)

3

 

 

 

 

Consolidated Balance Sheets as of June 30, 2017 (unaudited) and December 31, 2016

3

 

 

 

 

Consolidated Statements of Loss and Comprehensive Loss (unaudited) for the three and six months ended June 30, 2017 and June 30, 2016

4

 

 

 

 

Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2017 and June 30, 2016

5

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

6

 

 

 

Item 2.

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

18

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

28

 

 

 

Item 4.

Controls and Procedures

28

 

 

Part II.   Other Information

30

 

 

 

Item 1A.

Risk Factors

30

 

 

 

Item 6.

Exhibits

45

 

 

Items 2, 3 and 4 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) 

 

 

 

June 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents [note 4]

 

$

13,916

 

 

$

15,233

 

Short-term investments [note 4]

 

 

 

 

 

10,230

 

Interest receivable

 

 

 

 

 

32

 

Amounts receivable

 

 

241

 

 

 

478

 

Prepaid expenses

 

 

307

 

 

 

954

 

Total current assets

 

 

14,464

 

 

 

26,927

 

Restricted cash [note 4 and note 7]

 

 

272

 

 

 

272

 

Property and equipment, net

 

 

129

 

 

 

258

 

Other assets

 

 

13

 

 

 

13

 

Total assets

 

$

14,878

 

 

$

27,470

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

233

 

 

$

2,121

 

Accrued liabilities other

 

 

1,056

 

 

 

2,442

 

Accrued clinical liabilities

 

 

50

 

 

 

3,415

 

Accrued compensation

 

 

254

 

 

 

188

 

Current portion of long-term obligations [note 7]

 

 

46

 

 

 

57

 

Warrant liability [note 4 and note 5 [f]]

 

 

114

 

 

 

232

 

Total current liabilities

 

 

1,753

 

 

 

8,455

 

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

 

 

22

 

 

 

49

 

Total liabilities

 

 

1,775

 

 

 

8,504

 

Commitments and contingencies [note 7]

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Common stock, $0.001 par value, 75,000,000 shares authorized, 30,138,488 and

   30,059,514 issued at June 30, 2017 and December 31, 2016, respectively, and

   30,104,495 and 30,025,521 outstanding at June 30, 2017 and December 31, 2016, respectively

 

 

30

 

 

 

29

 

Additional paid-in capital

 

 

213,662

 

 

 

213,239

 

Accumulated deficit

 

 

(203,230

)

 

 

(196,942

)

Accumulated other comprehensive income

 

 

2,641

 

 

 

2,640

 

Total stockholders' equity

 

 

13,103

 

 

 

18,966

 

Total liabilities and stockholders' equity

 

 

14,878

 

 

 

27,470

 

 

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

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

COLLABORATION REVENUE [note 3]

 

$

 

 

$

2,122

 

 

$

 

 

$

5,062

 

EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

777

 

 

 

4,662

 

 

 

1,689

 

 

 

9,304

 

General and administrative

 

 

2,321

 

 

 

2,475

 

 

 

4,853

 

 

 

4,774

 

Restructuring costs (recovery) [note 8]

 

 

(9

)

 

 

(8

)

 

 

(107

)

 

 

423

 

Litigation settlement [note 7]

 

 

 

 

 

1,375

 

 

 

 

 

 

1,375

 

Total operating expenses

 

 

3,089

 

 

 

8,504

 

 

 

6,435

 

 

 

15,876

 

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

23

 

 

 

61

 

 

 

50

 

 

 

109

 

Other

 

 

3

 

 

 

(35

)

 

 

1

 

 

 

(25

)

Gain (loss) on warrants

 

 

66

 

 

 

(533

)

 

 

118

 

 

 

134

 

Total other income

 

 

92

 

 

 

(507

)

 

 

169

 

 

 

218

 

Net loss

 

$

(2,997

)

 

$

(6,889

)

 

$

(6,266

)

 

$

(10,596

)

OTHER COMPREHENSIVE INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gain on securities

 

 

 

 

 

4

 

 

 

1

 

 

 

18

 

Total other comprehensive income

 

 

 

 

 

4

 

 

 

1

 

 

 

18

 

Comprehensive loss

 

$

(2,997

)

 

$

(6,885

)

 

$

(6,265

)

 

$

(10,578

)

Basic and diluted net loss per common share

 

$

(0.10

)

 

$

(0.23

)

 

$

(0.21

)

 

$

(0.35

)

Shares used in computation of basic and diluted net loss per

   common share

 

 

30,026,743

 

 

 

29,932,930

 

 

 

30,083,776

 

 

 

29,880,277

 

 

See accompanying notes

 

 

4


OncoGenex Pharmaceuticals, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2017

 

 

2016

 

Operating Activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(6,266

)

 

$

(10,596

)

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

 

 

 

 

 

 

 

 

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

 

 

(118

)

 

 

(134

)

Depreciation

 

 

130

 

 

 

103

 

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

 

 

423

 

 

 

1,387

 

Restructuring gain [note 8]

 

 

(107

)

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Interest receivable

 

 

32

 

 

 

64

 

Amounts receivable

 

 

237

 

 

 

(293

)

Prepaid expenses and other assets

 

 

647

 

 

 

714

 

Accounts payable

 

 

(1,888

)

 

 

(784

)

Accrued liabilities other

 

 

(1,279

)

 

 

(19

)

Accrued clinical liabilities

 

 

(3,365

)

 

 

(2,263

)

Accrued compensation

 

 

66

 

 

 

61

 

Accrued litigation settlement [note 7]

 

 

 

 

 

1,375

 

Lease obligation

 

 

(38

)

 

 

(16

)

Deferred collaboration revenue [note 3]

 

 

 

 

 

(5,040

)

Net cash used in operating activities

 

 

(11,526

)

 

 

(15,441

)

Financing Activities:

 

 

 

 

 

 

 

 

Taxes paid related to net share settlement of equity awards

 

 

(22

)

 

 

 

Net cash used in financing activities

 

 

(22

)

 

 

 

Investing Activities:

 

 

 

 

 

 

 

 

Purchase of investments

 

 

(4

)

 

 

(29,111

)

Proceeds from sale of investments

 

 

 

 

 

 

Proceeds from maturities of investments

 

 

10,234

 

 

 

20,858

 

Purchase of property and equipment

 

 

(1

)

 

 

(35

)

Net cash provided by (used in)  investing activities

 

 

10,229

 

 

 

(8,288

)

Effect of exchange rate changes on cash

 

 

2

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

(1,317

)

 

 

(23,729

)

Cash and cash equivalents at beginning of period

 

 

15,233

 

 

 

34,310

 

Cash and cash equivalents at end of period

 

$

13,916

 

 

$

10,581

 

 

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, 2016 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, 2016 and filed with the United States Securities and Exchange Commission, or the SEC, on February 23, 2017.

The consolidated financial statements include the accounts of OncoGenex and our wholly owned subsidiaries, OncoGenex Technologies Inc., or OncoGenex Technologies, Ash Acquisition Sub, Inc and Ash Acquisition Sub 2, Inc. All intercompany balances and transactions have been eliminated.

 

On January 5, 2017, we and Achieve entered into the Merger Agreement, pursuant to which Ash Acquisition Sub, Inc., a Delaware corporation and a wholly owned subsidiary of ours will merge with and into Achieve, or the First Merger, with Achieve becoming a wholly owned subsidiary of ours and the surviving company of the First Merger, or the Initial Surviving Corporation. Promptly following the First Merger, the Initial Surviving Corporation will merge with and into Ash Acquisition Sub 2, Inc., or Merger Sub 2, a Delaware corporation and a wholly owned subsidiary of ours, with Merger Sub 2 continuing as the surviving entity as a direct wholly owned subsidiary of ours. The two mergers taken together, are intended to qualify as a “reorganization” within the meaning of Section 368(a)(2)(D) of the Internal Revenue Code of 1986, as amended. The surviving company is expected to be renamed Achieve Life Sciences, Inc. and is referred to herein as the “combined company.” The Special Meeting date to vote on the merger has been set for August 1, 2017.

Subject to the terms and conditions of the Merger Agreement, at the closing of the First Merger, each outstanding share of Achieve common stock will be converted into the right to receive approximately 4,242.8904 shares of our common stock, subject to adjustment as provided in the Merger Agreement based on increases or decreases in Achieve’s fully-diluted capitalization, as well as the payment of cash in lieu of fractional shares. Immediately following the effective time of the merger, our equityholders are expected to own approximately 25% of the outstanding capital stock of the combined company on a fully diluted basis, and the Achieve stockholders are expected to own approximately 75% of the outstanding capital stock of the combined company on a fully diluted basis.

Consummation of the merger is subject to certain closing conditions, including, among other things, approval by the stockholders of us and Achieve. The Merger Agreement contains certain termination rights for both us and Achieve, and further provides that, upon termination of the Merger Agreement under specified circumstances, either party may be required to pay the other party a termination fee of $0.5 million. In addition, the Merger Agreement provides that if either party breaches certain covenants regarding alternative transactions to those contemplated by the Merger Agreement, the breaching party may be required to pay the other party a termination fee of $1.0 million. In connection with certain terminations of the Merger Agreement, either party may be required to pay the other party’s third party expenses up to $0.5 million.

At the effective time of the First Merger, our Board of Directors is expected to consist of seven members, three of whom will be designated by us and four of whom will be designated by Achieve. We are expected to designate Scott Cormack, Stewart Parker and Martin Mattingly. Achieve is expected to designate Richard Stewart, Anthony Clarke, Donald Joseph and Jay Moyes. Additionally, at the effective time of the First Merger, Rick Stewart, the current Chairman of Achieve, is expected to be the Chairman and Chief Executive Officer of the combined company; Anthony Clarke, the current Chief Scientific Officer of Achieve, is expected to be the Chief Scientific Officer of the combined company; and John Bencich, our Chief Financial Officer and Cindy Jacobs, our Chief Medical Officer, are expected to continue to serve the combined company in their respective roles.

 

6


In accordance with the terms of the Merger Agreement, (i) certain of our officers and directors, who collectively hold approximately 1.2 percent of the outstanding shares of our capital stock as of the close of business on January 4, 2017, have each entered into a support agreement with Achieve, or the OncoGenex Support Agreements, and (ii) certain officers, directors and stockholders of Achieve, who collectively hold approximately 78 percent of the outstanding shares of Achieve capital stock as of the close of business on January 4, 2017, have each entered into a support agreement with us, or the Achieve Support Agreements, and together with the OncoGenex Support Agreements, the Support Agreements. The Support Agreements include covenants as to the voting of such shares in favor of approving the transactions contemplated by the Merger Agreement and against actions that could adversely affect the consummation of the Merger.

The Support Agreements will terminate upon the earlier of the consummation of the First Merger or the termination of the Merger Agreement by its terms.

Concurrently and in connection with the execution of the Merger Agreement, (i) certain of our officers and directors, who collectively hold approximately 1.2 percent of the outstanding shares of our capital stock as of the close of business on January 4, 2017 and (ii) certain officers, directors and stockholders of Achieve, who collectively hold approximately 78 percent of the outstanding shares of Achieve capital stock as of the close of business on January 4, 2017, have each entered into lock-up agreements with us, pursuant to which, subject to certain exceptions, each stockholder will be subject to a 180-day, or the Lock-Up Period, lock-up on the sale of shares of our capital stock, which Lock-Up Period shall begin upon the consummation of the First Merger.

 

We expect to issue contingent value rights, or each, a CVR and collectively, the CVRs, on July 31, 2017 to our existing stockholders as of July 27, 2017. One CVR will be issued for each share of our common stock outstanding as of the record date for such issuance. Each CVR will be a non-transferable right to potentially receive certain cash, equity or other consideration received by the combined company in the event the combined company receives any such consideration during the five-year period after consummation of the First Merger as a result of the achievement of certain clinical milestones, regulatory milestones, sales-based milestones and/or up-front payment milestones relating to our product candidate apatorsen, or the Milestones, upon the terms and subject to the conditions set forth in a contingent value rights agreement to be entered into between us, Achieve and an as of yet unidentified third party, as rights agent, or the CVR Agreement. The aggregate consideration to be distributed to the holders of the CVRs, if any, will be equal to 80% of the consideration received by the combined company as a result of the achievement of the Milestones less certain agreed to offsets, as determined pursuant to the CVR Agreement. Under the CVR Agreement, for a period of six months beginning in February 2017, we will use certain defined efforts to enter into an agreement with a third party regarding the development and/or commercialization of apatorsen. At the expiration of this six-month period, if a third party has not entered into a term sheet for the development or commercialization of apatorsen, the combined company will no longer be contractually required to pursue an agreement regarding apatorsen and no consideration will be payable to the holders of CVRs.

 

We also entered into a letter agreement with Achieve, whereby we would pay, on behalf of Achieve, for transaction and other costs associated with the merger. In the event that the Merger Agreement is terminated and as a result of such termination we are required to pay to Achieve one or more termination fees, the total amount of termination fees we would owe is reduced by the amount of the transaction and other costs we would have paid on behalf of Achieve. As of June 30, 2017, we have paid, on behalf of Achieve, a total of $0.4 million in transaction and other costs associated with the merger.

 

 

2. ACCOUNTING POLICIES

Pending Adoption of Recent Accounting Pronouncements

On February 2016, the Financial Accounting Standards Board, or FASB, issued its new leases standard, ASU No. 2016-02, Leases (Topic 842), or 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 our disclosures.  We are currently evaluating the impact of adoption on our financial position and results from operations.

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

7


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 and cannot reasonably estimate how the adoption of the standard will impact our consolidated financial statements and related disclosures.

 

Recently Adopted Accounting Policies

In March 2016, the 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 for simplification apply only to nonpublic entities. For public business entities, the amendments in this Update are effective for annual periods beginning after 15 December 2016, and interim periods within those annual periods. For all other entities, the amendments are effective for annual periods beginning after 15 December 2017, and interim periods within annual periods beginning after 15 December 2018. The adoption of this standard did not have a significant impact on our financial position or results of 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. The adoption of this standard did not have a significant impact on our financial position or results of operations.

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 15 December 2016, and interim periods beginning after 15 December 2017. 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, we 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 is responsible for expenses related to custirsen incurred pursuant to the Collaboration Agreement through December 31, 2014. We are responsible for certain custirsen-related expenses from and after January 1, 2015. Pursuant to the Termination Agreement, we received a nominal amount from the remaining hold-back after deductions by Teva for certain costs incurred after the Closing Date. We do not expect to receive any additional amounts from Teva.

The advanced reimbursement payment made by Teva, as part of the Termination Agreement, was deferred and recognized as collaboration revenue on a dollar for dollar basis as costs were incurred as part of the continuing research and development activities related to custirsen. We have fully utilized the $23.2 million in advance reimbursement for custirsen-related development costs and recognized the full amount into collaboration revenue between January 1, 2015 and June 30, 2016.

In accordance with the Termination Agreement, Teva transferred certain third-party agreements for the phase 3 clinical trial in second-line chemotherapy in patients with non-small cell lung cancer, or ENSPIRIT, and custirsen development activities to us on the Closing Date.

8


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.

Ionis and UBC License Agreements

In January 2017, we discontinued further development of OGX-225.  We provided a notice of discontinuance to Ionis and a letter of termination to UBC, notifying them that we have discontinued development of OGX-225 resulting in termination of the license agreement related to this product candidate. We believe that all financial obligations, other than continuing mutual indemnification obligations and our requirement to pay for out-of-pocket patent expenses incurred up to the date of termination and for abandoning the OGX-225 patents and patent applications, under all OGX-225-related agreements with Ionis and UBC, are no longer owed and no further payments are due.

 

In November 2016, we discontinued further development of custirsen. We provided a notice of discontinuance to Ionis and a letter of termination to UBC, notifying the parties that we have discontinued development of custirsen, resulting in termination of all licensing agreements related to custirsen. We believe that all financial obligations, other than continuing mutual indemnification obligations and our requirement to pay for out-of-pocket patent expenses incurred up to the date of termination and for abandoning the custirsen patents and patent applications, under all custirsen-related agreements with Ionis and UBC, including the Ionis settlement agreement, are no longer owed and no further payments are due.

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 claimed that we were 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 sought damages and a declaratory judgment that, based on our alleged breach, Ionis has the right to terminate the license agreement.

In August 2016, we and Ionis settled this lawsuit. Pursuant to the settlement, we paid to Ionis a $1.4 million upfront payment. In addition, under the settlement agreement, we were required to pay to Ionis additional success-based payments of up to an amount that does not exceed $5.0 million based on, (i) an additional 5% royalty on net sales of custirsen and (ii) 50% of any money we receive related to the sale, license or any other commercial transaction involving custirsen, subject to certain limitations. As a result of the notice of discontinuance provided for custirsen, we believe that all financial obligations under the settlement agreement are no longer owed and no further payments are due.

 

 

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.

9


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.

Money Market Securities

Money market securities are classified within Level I of the fair value hierarchy and are valued based on quoted prices in active markets for identical securities.

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.

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 June 30, 2017, we recorded a $0.1 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 therefore 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):

 

June 30, 2017

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

822

 

 

$

 

 

$

 

 

$

822

 

Money market securities (cash equivalents)

 

 

13,094

 

 

 

 

 

 

 

 

 

13,094

 

Restricted cash (Note 7)

 

 

272

 

 

 

 

 

 

 

 

 

272

 

Total assets

 

$

14,188

 

 

$

 

 

$

 

 

$

14,188

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrants

 

$

 

 

$

 

 

$

114

 

 

$

114

 

 

10


The following table presents the changes in fair value of our total Level 3 financial liabilities for the six months ended June 30, 2017. During the six months ended June 30, 2017, 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

 

 

June 30,

 

 

 

2016

 

 

Warrants

 

 

warrants

 

 

2017

 

Warrant liability

 

$

232

 

 

$

 

 

$

(118

)

 

$

114

 

 

Cash, cash equivalents and short-term investments consist of the following (in thousands):

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Estimated

 

June 30, 2017

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

Cash

 

$

822

 

 

$

 

 

$

 

 

$

822

 

Money market securities

 

 

13,094

 

 

 

 

 

 

 

 

 

13,094

 

Total cash and cash equivalents

 

$

13,916

 

 

$

 

 

$

 

 

$

13,916

 

Money market securities (restricted cash)

 

 

272

 

 

 

 

 

 

 

 

 

272

 

Total restricted cash

 

$

272

 

 

$

 

 

$

 

 

$

272

 

 

Our gross realized gains and losses on sales of available-for-sale securities were not material for the three and six months ended June 30, 2017 and 2016.

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.

 

 

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 six months ended June 30, 2017, we issued no shares of common stock to satisfy stock option exercises and 118,986 shares of common stock to satisfy restricted stock unit settlements, compared with the issuance of no shares of common stock to satisfy stock option exercises and 196,732 shares of common stock to satisfy restricted stock unit settlements, respectively, during the six months ended June 30, 2016.

[c]

Stock options

2010 Performance Incentive Plan

As of June 30, 2017, we had reserved, pursuant to various plans, 3,493,244 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 1,095,890 were reserved for options currently outstanding, 115,906 were reserved for restricted stock units currently outstanding and 2,281,448 were available for future equity grants.

Under the plan, we may grant options to purchase common shares or restricted stock units to our employees, directors, officers and consultants. The exercise price of the options is determined by our board of directors but will be at least equal to the fair value of the common shares at the grant date. The options vest in accordance with terms as determined by our board of directors, typically over three to four years for options issued to employees and consultants, and over one to three years for members of our board of directors. The expiry date for each option is set by our board of directors with a maximum expiry date of ten years from the date of grant. In addition, the 2010 Plan allows for accelerated vesting of outstanding equity awards in the event of a change in control. The terms for accelerated vesting, in the event of a change in control, is determined at our discretion and defined under the employment agreements for our officers and certain of our employees.

11


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.

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, 2016

 

 

1,378,805

 

 

$

8.62

 

Expired

 

 

(265,239

)

 

 

8.80

 

Forfeited

 

 

(17,676

)

 

 

3.72

 

Balance,  June 30, 2017

 

 

1,095,890

 

 

$

8.57

 

 

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. No stock options were granted during the six months ended June 30, 2017. For the six months ended June 30, 2016, the weighted-average assumptions used in the Black-Scholes option-pricing model are noted in the following table:

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2016

 

Risk-free interest rates

 

 

1.51

%

Expected dividend yield

 

 

0

%

Expected life

 

5.3 years

 

Expected volatility

 

 

71.88

%

 

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 strategic alternatives we are exploring and the structural changes to our business that may result and the potential impact on 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

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Research and development

 

$

78

 

 

$

462

 

 

$

148

 

 

$

684

 

General and administrative

 

$

134

 

 

 

457

 

 

 

275

 

 

 

703

 

Total stock-based compensation

 

$

212

 

 

$

919

 

 

$

423

 

 

$

1,387

 

 

As of June 30, 2017 and December 31, 2016, the total unrecognized compensation expense related to stock options granted was $0.3 million and $0.6 million respectively, which is expected to be recognized as expense over a period of approximately 1.0 year from June 30, 2017.

For the three and six months ended June 30, 2017, a total of 4.9 million shares, consisting of  3.7 million warrants, 1.1 million options and 0.1 million restricted stock units, have not been included in the loss per share computation, as their effect on diluted per share

12


amounts would have been anti-dilutive. For the same period in 2016, a total of 7.1 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 and six months ended June 30, 2017, we recorded a compensation expense of $0.1 million and $0.1 million, respectively, related to these awards, compared to $0.4 million and $0.6 million of compensation expense for the three and six months ended June 30, 2016, respectively.

The following table summarizes our restricted stock unit award activity during the six months ended June 30, 2017:

 

 

 

 

 

 

 

Weighted

 

 

 

Number

 

 

Average

 

 

 

of

 

 

Grant Date

 

 

 

Shares

 

 

Fair Value

 

Balance,  December 31, 2016

 

 

253,221

 

 

$

4.56

 

Vested

 

 

(118,986

)

 

 

5.43

 

Forfeited or expired

 

 

(18,329

)

 

 

3.70

 

Balance,  June 30, 2017

 

 

115,906

 

 

$

3.74

 

 

As of June 30, 2017, we had approximately $0.6 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 1.0 year.

[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 June 30, 2017:

 

 

 

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 six months ended June 30, 2017 or 2016.  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

 

 

 

June 30,

 

Series A and Series B Warrant Valuation Assumptions

 

2017

 

 

2016

 

Risk-free interest rates

 

 

1.38

%

 

 

0.71

%

Expected dividend yield

 

 

0

%

 

 

0

%

Expected life

 

2.00 years

 

 

3.00 years

 

Expected volatility

 

 

104.85

%

 

 

91.64

%

13


 

 

6. RELATED PARTY TRANSACTION

In January 2016, Scott Cormack, our Chief Executive Officer, married Michelle Griffin, a consultant to us.  For the three and six months ended June 30, 2017, we paid Ms. Griffin approximately $0.1 million and $0.1 million, respectively, for consulting services pursuant to a consulting agreement entered into in 2013 and amended thereafter. In addition, pursuant to the consulting agreement with Ms. Griffin, as at June 30, 2017, we had an accrued termination liability of approximately $0.4 million.

 

 

7. COMMITMENTS AND CONTINGENCIES

The following table summarizes our contractual obligations as of June 30, 2017 (in thousands):

 

 

 

Total

 

 

Less than 1 year

 

 

1-3 years

 

 

3-5 years

 

 

More than 5 years

 

Bothell office operating lease

 

$

238

 

 

$

238

 

 

$

 

 

$

 

 

$

 

Vancouver office operating lease

 

$

119

 

 

$

95

 

 

$

24

 

 

$

 

 

$

 

UBC license maintenance fees

 

$

28

 

 

$

5

 

 

$

9

 

 

$

9

 

 

$

5

 

Leased equipment

 

$

13

 

 

$

13

 

 

$

 

 

$

 

 

$

 

Total

 

$

398

 

 

$

351

 

 

$

33

 

 

$

9

 

 

$

5

 

 

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, we 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, we received a nominal amount from the remaining hold-back after deductions by Teva for certain costs incurred after the Closing Date. We do not expect to receive any additional amounts from Teva.

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.

Ionis Pharmaceuticals Inc. and University of British Columbia

Custirsen

In November 2016, we discontinued further development of custirsen. We provided a notice of discontinuance to Ionis and a letter of termination to UBC, notifying the parties that we have discontinued development of custirsen, resulting in termination of all licensing agreements related to custirsen. We believe that all financial obligations, other than continuing mutual indemnification obligations and our requirement to pay for out-of-pocket patent expenses incurred up to the date of termination and for abandoning the custirsen patents and patent applications, under all custirsen-related agreements with Ionis and UBC, including the Ionis settlement agreement, are no longer owed and no further payments are due.

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 claimed that we were 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 sought damages and a declaratory judgment that, based on our alleged breach, Ionis has the right to terminate the license agreement.

14


In August 2016, we and Ionis settled this lawsuit. Pursuant to the settlement, we paid to Ionis a $1.4 million upfront payment. In addition, under the settlement agreement, we were required to pay to Ionis additional success-based payments of up to an amount that does not exceed $5.0 million based on, (i) an additional 5% royalty on net sales of custirsen and (ii) 50% of any money we receive related to the sale, license or any other commercial transaction involving custirsen, subject to certain limitations. As a result of the notice of discontinuance provided for custirsen, we believe that all financial obligations under the settlement agreement are no longer owed and no further payments are due.

OGX-225

In January 2017, we discontinued further development of OGX-225.  We provided a notice of discontinuance to Ionis and a letter of termination to UBC, notifying them that we have discontinued development of OGX-225 resulting in termination of the license agreement related to this product candidate. We believe that all financial obligations, other than continuing mutual indemnification obligations and our requirement to pay for out-of-pocket patent expenses incurred up to the date of termination and for abandoning the OGX-225 patents and patent applications, under all OGX-225-related agreements with Ionis and UBC, are no longer owed and no further payments are due.

Apatorsen

Under the terms of the agreement, we may be obligated to make aggregate milestone payments of up to $4.3 million to Ionis contingent upon the occurrence of certain clinical development and regulatory events related to apatorsen. We are also obligated to pay to Ionis low to mid-single digit royalties on net sales for apatorsen, with the amount of royalties depending on whether third-party royalty payments are owed. We did not make any royalty payments to Ionis under the terms of the agreement in 2017.

 

We may be obligated to make aggregate milestone payments of up to CAD$0.8 million to UBC contingent upon the occurrence of certain clinical development and regulatory events related to apatorsen. We are also obligated to pay to UBC low single digit royalties on the revenue from sales of apatorsen, which royalty rate may be reduced in the event that it must pay additional royalties under patent licenses entered into with third parties in order to manufacture, use or sell apatorsen. We did not make any royalty payments to UBC under the terms of the agreement in 2017.

Unless otherwise terminated, the Ionis agreements for apatorsen will continue 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 we discontinue apatorsen and Ionis does not elect to unilaterally continue development.

Lease Arrangements

We have an operating lease agreement for office space being used in Vancouver, Canada, which expires in September 2018. Pursuant to the operating lease agreement, we have the option to terminate the lease early without penalty at any time after January 1, 2018 so long as we provide three months prior written notice to the landlord.

Future minimum lease payments under the Vancouver lease are as follows (in thousands):

 

2017

 

 

 

95

 

2018

 

 

 

24

 

Total

 

 

$

119

 

 

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 will start at approximately $18,000 commencing on May 1, 2015 and will increase on an annual basis up to approximately $20,000. We received a construction allowance, for leasehold improvements that we made, 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.

15


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

 

2017

 

 

143

 

2018

 

 

95

 

Total

 

$

238

 

 

Consolidated rent and operating expense relating to both the Vancouver, Canada and Bothell, Washington offices for the three and six months ended June 30, 2017 was $0.1 million and $0.3 million, respectively. Consolidated rent and operating expense for the three and six months ended June 30, 2016 was $0.1 million and $0.3 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. 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.

Pursuant to the Lease Termination Agreement, an additional termination fee of $1.3 million would have been payable to BMR if we had (i) met the primary endpoint for our phase 3 clinical trial for the treatment of second line metastatic castrate resistant prostate cancer, or CRPC, with custirsen, or the AFFINITY Trial, and if we had (ii) closed a transaction or transactions pursuant to which we received funding in an aggregate amount of at least $20.0 million. As at December 31, 2014 and subsequent annual and interim reporting periods up to June 30, 2016, we had assessed that the likelihood of meeting both contingent events was probable and as a result, recognized the $1.3 million in lease termination liability on our balance sheet as at the end of those reporting periods. In August 2016, final survival results of our AFFINITY trial did not meet the primary endpoint of a statistically significant improvement in overall survival in men with metastatic CRPC. As at September 30, 2016, we had re-assessed that the likelihood of meeting both contingent events is no longer possible due to not achieving the primary endpoint on our AFFINITY trial. Accordingly, no further payments are owing to BMR related to the Lease Termination Agreement.

Change in Control and Severance Agreements

Our officers and certain employees have agreements which provide for payouts in the event that we consummate a change in control. In addition, our officers and certain employees are also entitled to full vesting of their outstanding equity awards. These agreements also provide for customary severance compensation. As of June 30, 2017 and 2016, we did not consummate any change in control transaction.

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 its 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 June 30, 2017.

We have certain agreements with certain organizations with which we do business that contain indemnification provisions pursuant to which we typically agrees 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.

 

 

8. RESTRUCTURE

 

In the three and six months ended June 30, 2017, we revised our estimates of the restructuring expense and recognized a recovery of $9,000 and $0.1 million, respectively. We recorded a restructuring recovery of $8,000 and an expense of $0.4 million for the three and six months ended June 30, 2016, respectively.  

16


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.

In October 2016, we committed to a restructuring of an additional portion of our workforce in order to preserve our resources as we determine future strategic plans. As part of this restructuring, we eliminated 14 positions, representing approximately 48% of our workforce. We incurred approximately $1.0 million in restructuring costs, substantially all of which related to severance costs.

In November 2016, we committed to a further reduction in our workforce. We eliminated five positions and incurred approximately $0.7 million in expenses as a result of the workforce reduction, substantially all of which were severance costs.

 

 

 

Original

 

 

Revision

 

 

Amounts

 

 

Accrued at

 

 

 

estimated

 

 

to estimated

 

 

settled

 

 

June 30,

 

 

 

costs

 

 

costs

 

 

to date

 

 

2017

 

Restructuring Costs

 

$

2,206

 

 

$

(107

)

 

$

(2,071

)

 

$

28

 

 

17


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:

 

the timing and completion of our pending merger;

 

our ability to identify a third party to develop apatorsen;

 

progress and preliminary and future results of any clinical trials;

 

anticipated regulatory filings, requirements and future clinical trials;

 

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 a biopharmaceutical company that has been focused on the development of novel next generation cancer therapeutics. Our mission is to accelerate transformative therapies to improve the lives of people living with cancer and other serious diseases. Our product candidate apatorsen has a distinct mechanism of action and represents a unique opportunity for cancer drug development that we believe has the potential to improve treatment outcomes in a variety of cancers. Apatorsen is designed to block the production of heat shock protein 27, or Hsp27, a protein that promotes treatment resistance in cancer. In some clinical trials evaluating apatorsen, high serum Hsp27 levels appear to be a strong prognostic indicator for shorter survival outcomes.  We currently do not intend to conduct additional pre-clinical or clinical studies with apatorsen and are seeking a collaboration partnership to fund and further develop this product candidate.  

As a result of custirsen not meeting the primary endpoint of improving overall survival in three completed phase 3 trials, we have discontinued further development of custirsen. In November 2016, we provided a notice of discontinuance to Ionis Pharmaceuticals, Inc. (formerly Isis Pharmaceuticals, Inc.), or Ionis, and a letter of termination to the University of British Columbia, or UBC, notifying those parties that we have discontinued development of custirsen, resulting in termination of all licensing agreements related to custirsen. All custirsen clinical studies have been completed and all global regulatory agencies notified of trial closures.  All investigational new drug applications, or INDs, with the United States Food and Drug Administration, or FDA, related to custirsen, have been withdrawn.  

In January 2017, we also discontinued further development of our pre-clinical product candidate, OGX-225. We provided a notice of discontinuance to Ionis, and a letter of termination to UBC, informing them that we have discontinued development of OGX-225

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resulting in termination of the license agreement related to this product candidate. We believe that all financial obligations, other than continuing mutual indemnification obligations and our requirement to pay for out-of-pocket patent expenses incurred up to the date of termination and for abandoning the OGX-225 patents and patent applications, under all OGX-225-related agreements with Ionis and UBC, are no longer owed and no further payments are due.  

On January 5, 2017, we and Achieve Life Science, Inc, or Achieve, a privately held specialty pharmaceutical company, entered into an Agreement and Plan of Merger and Reorganization, or the Merger Agreement, under which OncoGenex will acquire Achieve in an all-stock transaction. Upon completion of the Merger Agreement, Achieve's stockholders are expected to own 75% of the combined company's outstanding shares and our current equityholders are expected to own the remaining 25% of the combined company's outstanding shares.  Following completion of the merger, OncoGenex Pharmaceuticals, Inc. will be renamed Achieve Life Sciences, Inc.

Pending Merger Agreement with Achieve

On January 5, 2017, we and Achieve entered into the Merger Agreement, pursuant to which Ash Acquisition Sub, Inc., a Delaware corporation and a wholly owned subsidiary of ours will merge with and into Achieve, or the First Merger, with Achieve becoming a wholly owned subsidiary of ours and the surviving company of the First Merger, or the Initial Surviving Corporation. Promptly following the First Merger, the Initial Surviving Corporation will merge with and into Ash Acquisition Sub 2, Inc., or Merger Sub 2, a Delaware corporation and a wholly owned subsidiary of ours, with Merger Sub 2 continuing as the surviving entity as a direct wholly owned subsidiary of ours. The two mergers taken together, are intended to qualify as a “reorganization” within the meaning of Section 368(a)(2)(D) of the Internal Revenue Code of 1986, as amended. The surviving company is expected to be renamed Achieve Life Sciences, Inc. and is referred to herein as the “combined company.” The Special Meeting date to vote on the merger has been set for August 1, 2017.

Subject to the terms and conditions of the Merger Agreement, at the closing of the First Merger, each outstanding share of Achieve common stock will be converted into the right to receive approximately 4,242.8904 shares of our common stock, subject to adjustment as provided in the Merger Agreement based on increases or decreases in Achieve’s fully-diluted capitalization, as well as the payment of cash in lieu of fractional shares. Immediately following the effective time of the merger, our equityholders are expected to own approximately 25% of the outstanding capital stock of the combined company on a fully diluted basis, and the Achieve stockholders are expected to own approximately 75% of the outstanding capital stock of the combined company on a fully diluted basis.

Consummation of the merger is subject to certain closing conditions, including, among other things, approval by the stockholders of us and Achieve. The Merger Agreement contains certain termination rights for both us and Achieve, and further provides that, upon termination of the Merger Agreement under specified circumstances, either party may be required to pay the other party a termination fee of $0.5 million. In addition, the Merger Agreement provides that if either party breaches certain covenants regarding alternative transactions to those contemplated by the Merger Agreement, the breaching party may be required to pay the other party a termination fee of $1.0 million. In connection with certain terminations of the Merger Agreement, either party may be required to pay the other party’s third party expenses up to $0.5 million.

At the effective time of the First Merger, our Board of Directors is expected to consist of seven members, three of whom will be designated by us and four of whom will be designated by Achieve. We are expected to designate Scott Cormack, Stewart Parker and Martin Mattingly. Achieve is expected to designate Richard Stewart, Anthony Clarke, Donald Joseph and Jay Moyes. Additionally, at the effective time of the First Merger, Rick Stewart, the current Chairman of Achieve, is expected to be the Chairman and Chief Executive Officer of the combined company; Anthony Clarke, the current Chief Scientific Officer of Achieve, is expected to be the Chief Scientific Officer of the combined company; and John Bencich, our Chief Financial Officer and Cindy Jacobs, our Chief Medical Officer, are expected to continue to serve the combined company in their respective roles.

 

In accordance with the terms of the Merger Agreement, (i) certain of our officers and directors, who collectively hold approximately 1.2 percent of the outstanding shares of our capital stock as of the close of business on January 4, 2017, have each entered into a support agreement with Achieve, or the OncoGenex Support Agreements, and (ii) certain officers, directors and stockholders of Achieve, who collectively hold approximately 78 percent of the outstanding shares of Achieve capital stock as of the close of business on January 4, 2017, have each entered into a support agreement with us, or the Achieve Support Agreements, and together with the OncoGenex Support Agreements, the Support Agreements. The Support Agreements include covenants as to the voting of such shares in favor of approving the transactions contemplated by the Merger Agreement and against actions that could adversely affect the consummation of the Merger.

The Support Agreements will terminate upon the earlier of the consummation of the First Merger or the termination of the Merger Agreement by its terms.

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Concurrently and in connection with the execution of the Merger Agreement, (i) certain of our officers and directors, who collectively hold approximately 1.2 percent of the outstanding shares of our capital stock as of the close of business on January 4, 2017 and (ii) certain officers, directors and stockholders of Achieve, who collectively hold approximately 78 percent of the outstanding shares of Achieve capital stock as of the close of business on January 4, 2017, have each entered into lock-up agreements with us, pursuant to which, subject to certain exceptions, each stockholder will be subject to a 180-day, or the Lock-Up Period, lock-up on the sale of shares of our capital stock, which Lock-Up Period shall begin upon the consummation of the First Merger.

We expect to issue contingent value rights, or each, a CVR and collectively, the CVRs, on July 31, 2017 to our existing stockholders as of July 27, 2017. One CVR will be issued for each share of our common stock outstanding as of the record date for such issuance. Each CVR will be a non-transferable right to potentially receive certain cash, equity or other consideration received by the combined company in the event the combined company receives any such consideration during the five-year period after consummation of the First Merger as a result of the achievement of certain clinical milestones, regulatory milestones, sales-based milestones and/or up-front payment milestones relating to our product candidate apatorsen, or the Milestones, upon the terms and subject to the conditions set forth in a contingent value rights agreement to be entered into between us, Achieve and an as of yet unidentified third party, as rights agent, or the CVR Agreement. The aggregate consideration to be distributed to the holders of the CVRs, if any, will be equal to 80% of the consideration received by the combined company as a result of the achievement of the Milestones less certain agreed to offsets, as determined pursuant to the CVR Agreement. Under the CVR Agreement, for a period of six months beginning in February 2017, we will use certain defined efforts to enter into an agreement with a third party regarding the development and/or commercialization of apatorsen. At the expiration of this six-month period, if a third party has not entered into a term sheet for the development or commercialization of apatorsen, the combined company will no longer be contractually required to pursue an agreement regarding apatorsen and no consideration will be payable to the holders of CVRs.

 

We are currently undertaking efforts to identify a third party to develop and, if approved, commercialize apatorsen, but have not yet identified such a party or set any Milestones. We cannot give any assurance that we will be able to identify and enter into an agreement with a third party to develop and potentially commercialize apatorsen by August 17, 2017, or if we do, that any Milestones will be set or any consideration will ever be received by the post-merger combined company or distributed to the CVR holders. Therefore, our stockholders will not be able to determine the value of the CVRs, if any, at the time they are asked to approve the merger, since the value of the CVRs is contingent upon the occurrence of future events that are not yet known.

We also entered into a letter agreement with Achieve, whereby we would pay, on behalf of Achieve, for transaction and other costs associated with the merger. In the event that the Merger Agreement is terminated and as a result of such termination we are required to pay to Achieve one or more termination fees, the total amount of termination fees we would owe is reduced by the amount of the transaction and other costs we would have paid on behalf of Achieve. As of June 30, 2017, we have paid, on behalf of Achieve, a total of $0.4 million in transaction and other costs associated with the merger.

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. In some clinical trials evaluating apatorsen, high serum Hsp27 levels at baseline, or at the start of treatment, appear to be a strong prognostic indicator for shorter survival outcomes.

Apatorsen utilizes second-generation antisense drug chemistry and belongs to the drug class known as antisense therapeutics. We have collaborated with Ionis and selectively licensed technology from Ionis to combine Ionis’ second-generation antisense chemistry with our proprietary gene target sequences to create an inhibitor that is designed to down-regulate Hsp27. In contrast to first-generation antisense chemistry, second-generation antisense chemistry has improved target binding affinity, increased resistance to degradation and improved tissue distribution. These improvements result in slower clearance of the therapies from the body, which allow for less frequent dosing and thereby make treatment easier on patients at a lower associated cost.

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.

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In 2013, we initiated the ORCA (Ongoing Studies Evaluating Treatment Resistance in CAncer) program which encompasses six phase 2 clinical studies designed to evaluate whether treatment with apatorsen can lead to improved prognosis and treatment outcomes for cancer patients. All six of these trials have been completed.  We currently do not intend to conduct additional pre-clinical or clinical studies with apatorsen and are seeking a collaboration partnership to fund and further develop this product candidate.

The six phase 2 apatorsen clinical trials that have been completed under the ORCA program are described below.

Completed Trials

 

The Borealis-2™ Trial: The completed investigator-sponsored, randomized phase 2 trial evaluated 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. The primary endpoint analysis was a superiority test for overall survival, performed at a one-sided 0.10 significance level using a stratified log-rank test. Secondary endpoints included PFS, disease response and safety assessments. The trial met its primary endpoint of improving survival at the one-sided 0.10 significance level. Patients who received apatorsen treatment experienced a 20% reduction in risk of death, compared to patients receiving docetaxel alone (overall survival hazard ratio (HR)=0.80; 80% CI: 0.65-0.98; p=0.078). In February 2017, results were presented at the American Society of Clinical Oncology, or ASCO, 2017 Genitourinary Cancers Symposium. Apatorsen was well tolerated in combination with docetaxel. The reduction in risk of progression or death was 20% for patients receiving apatorsen in combination with docetaxel, compared to docetaxel alone (PFS HR= 0.80; 80% CI: 0.64-1.01; p=0.107). Partial or complete responses occurred in 16.2% patients receiving apatorsen plus docetaxel compared to 10.9% patients receiving docetaxel alone with median response durations of 6.2 months versus 4.4 months, respectively.  Overall for the study, higher baseline serum Hsp27 levels were significantly prognostic for indicating an almost 2-fold higher risk of death (HR= 1.96; p=0.0001). In an exploratory analysis on a subset of patients (20% of total) who completed at least 2 treatment cycles and had either a decrease in serum Hsp27 levels from baseline or had only a 20.5% increase in serum Hsp27 levels from baseline, the reduction in risk of death with apatorsen treatment was 71% (HR= 0.29: 80% CI: 0.18-0.48; interaction p=0.0727). The trial was conducted by the Hoosier Cancer Research Network at 28 sites across the United States.

 

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 (HR = 0.86; 95% CI: 0.54-1.36; p=0.252) when compared to chemotherapy alone. Subsequent exploratory analyses showed a trend for improved survival in patients with baseline poor prognostic features treated with 600 mg apatorsen compared to placebo (HR=0.72; 95% CI: 0.35–1.45). In general for the study, higher baseline serum Hsp27 levels were significantly prognostic for indicating a 2-fold higher risk of death (HR= 2.01; p=0.0004). Further exploratory analysis of serum Hsp27 levels showed a trend towards survival benefit for the poor-prognosis patients in apatorsen 600 mg and 1000 mg arms who achieved lower overall (area-under-the-curve) serum Hsp27 levels during study treatment, compared to similar patients in the placebo arm (HR=0.45 and 0.62, respectively). Less benefit was believed to be observed in the 1000mg apatorsen arm due to increased adverse events leading to a higher rate of discontinuation of both apatorsen and chemotherapy. Apatorsen 600mg was well tolerated in combination with gemcitabine/cisplatin chemotherapy. These data were presented at the 2015 ASCO Annual Meeting.

 

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 could extend PFS outcome. In January 2016, the primary endpoint data for PFS was reported to have not reached the statistical significance required to demonstrate a benefit (PFS HR= 0.90; 80% CI 0.71-1.14; p=0.557). In the study, higher baseline serum Hsp27 levels were found to be significantly prognostic for indicating an almost 2-fold higher risk of death (HR= 1.98; p=0.0034). A potential benefit was observed in a subgroup of patients with high baseline serum Hsp27 status (~10% of total) when treated with apatorsen (PFS HR= 0.462; 80% CI: 0.193- 1.106). Study follow up with survival results was completed at the end of 2016. The addition of apatorsen to carboplatin and pemetrexed therapy did not demonstrate an overall survival benefit in the study (HR= 1.067; 80% CI: 0.838-1.359). PFS results were presented at ASCO 2016. The study investigators concluded that apatorsen and pemetrexed/carboplatin therapy was well tolerated and showed promising PFS results in the treatment of patients with non-squamous NSCLC who have high baseline Hsp27 status and thus warranted further study in this population. We do not intend to pursue additional trials in non-squamous NSCLC at this time. The study was an investigator-sponsored trial conducted by sites under the Sarah Cannon Research Institute.

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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 non-small cell lung cancer, or NSCLC. Patients also continued weekly apatorsen infusions as maintenance treatment after chemotherapy until disease progression. The aim of the trial was to determine if adding apatorsen to gemcitabine and carboplatin therapy can extend progression free survival, or PFS, outcome. Additional analyses include tumor response rates, overall survival, safety, and health-related quality of life, as well as to determine the effect of Hsp27 levels on clinical outcomes, 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 completed enrollment in December 2016. During the conduct of the trial, two amendments were submitted: one that reduced the apatorsen dose to 400mg and the second that reduced patient enrollment to ~90 patients. The trial did not meet the primary endpoint for improved progression free survival or the secondary endpoint for improved survival in patients receiving apatorsen plus gemcitabine and carboplatin compared to gemcitabine and carboplatin alone.  Final results have not yet been presented or published. The trial was an investigator-sponsored trial conducted and funded primarily by the UK National Cancer Research Network and the UK Experimental Cancer Medicine Network.

 

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 show improved survival for patients receiving apatorsen plus ABRAXANE and gemcitabine when compared to ABRAXANE and gemcitabine alone (HR= 1.098; 95% CI 0.759-1.590). Similarly there was no improvement in PFS (PFS HR=1.020; 95% CI 0.806-1.290). The study did show that higher baseline serum Hsp27 levels were significantly prognostic for indicating a 1.8-fold higher risk of death (HR= 1.84; p=0.0041). A potential benefit was observed in a subgroup of patients with high baseline serum Hsp27 status (14% of total) when treated with apatorsen (PFS HR= 0.381; 95% CI 0.120-1.208 and survival HR= 0.587; 95% CI 0.195-1.770). The study was 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 baseline Hsp27 status warrant further study of apatorsen in this population. We do not intend to pursue additional trials in pancreatic cancer at this time. The study was an investigator-sponsored trial conducted by sites under the Sarah Cannon Research Institute.

 

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 was to evaluate if adding apatorsen to Zytiga treatment can reverse or delay treatment resistance by evaluating the PFS rate at a milestone Day 60 assessment. The primary endpoint was the proportion of patients who were progression free (clinical and radiologic) at study day 60. Other secondary endpoints were PSA and objective responses, time to disease progression, circulating tumor cells, or CTCs, and Hsp27 levels. The Pacific trial was an investigator-sponsored trial conducted by the Hoosier Cancer Research Network at sites in Canada and the United State. In February 2017, results were presented at the ASCO 2017 Genitourinary Cancers Symposium. Apatorsen was well tolerated in combination with Zytiga with the median treatment duration of 106 days for apatorsen plus Zytiga compared to 75 days for continuing Zytiga alone. The proportion of patients who were progression free at Day 60 was 33% when apatorsen was added to Zytiga, compared to 17% with Zytiga alone (p=0.17). The median time of PFS was 8.6 weeks for apatorsen treatment, compared to 7.9 weeks for Zytiga. A 50% or greater decline in PSA levels was seen in 6% of patients when apatorsen was added to Zytiga compared to 3% with continuing Zytiga alone. Stable disease or partial response was seen in 20% of patients when apatorsen was added to Zytiga vs 14% with Zytiga alone. For patients with ≥5 CTCs at baseline, 22% vs 11% of patients had a CTC reduction to less than 5 CTCs when apatorsen was added to Zytiga vs Zytiga alone, respectively.

 

Overview of Safety Results for Company-Sponsored Apatorsen Trials

Phase 2 Borealis-1 Trial

Overall, the incidence of serious adverse events, or SAEs, in the Borealis-1 trial was higher in the apatorsen arms (when combined with gemcitabine and cisplatin) than the placebo arm (placebo: 43%, 600 mg: 53%, 1000 mg: 62%). The only SAEs that were experienced by ≥5% of subjects overall were urinary tract infection (placebo: 3%, 600 mg: 2%, 1000 mg: 13%) and thrombocytopenia (placebo: 3%, 600 mg: 5%, 1000 mg: 7%).

 

Phase 1 Clinical Trial in Patients with Solid Tumors

Most adverse events, or AEs, during the Phase 1 clinical trial in patients with solid turmors were mild, with Grade 1 (50%) or Grade 2 (37%) in severity. Approximately 12% of all AEs were more severe (Grade 3 or higher). The most frequently reported adverse events in the apatorsen monotherapy arms were infusion-related reactions (62%) and chills (55%). The most frequently reported adverse events in the apatorsen plus docetaxel arms were chills (77%), infusion-related reactions (73%), fatigue (68%), diarrhea (64%), back

22


pain (50%), pruritus (itching) (45%) and nausea (45%). Approximately 52% of these AEs were considered related to apatorsen and reported for 60 of the 64 treated subjects (94%). The most commonly reported apatorsen-related AEs included fatigue (19/64 subjects [30%]), dyspnea (18/64 [28%]), anemia (16/64 [25%]), back pain (14/64 [22%]) and diarrhea (14/74 [22%]). The incidence of laboratory toxicity was determined based on laboratory data. The majority of laboratory toxicities were Grade 1 or Grade 2.

 

Twenty-nine of the 64 subjects (45%) treated in the apatorsen Phase 1 trial experienced SAEs. The most common SAE was dyspnea, reported in five of 64 subjects (8%); all SAEs of dyspnea were considered not related to apatorsen. Disease progression and febrile neutropenia, each reported in four of 64 subjects (6%), were the second most common SAEs. Febrile neutropenia was reported exclusively among subjects in the 1000 mg apatorsen + docetaxel cohort, and was considered not related to apatorsen in all but one subject. SAEs of disease progression were considered not related to apatorsen in all four subjects. Other SAEs reported in subjects (3%) were blood creatinine increased (possibly related and definitely related to apatorsen, in two subjects receiving 800 mg apatorsen as monotherapy) and hydronephrosis (both considered not related to apatorsen, in one subject each receiving 1000 mg apatorsen as monotherapy or in combination with docetaxel). Other than the increased febrile neutropenia observed in the 1000 mg apatorsen + docetaxel cohort, no other increased frequency in specific SAEs seemed to correlate with increasing apatorsen dosing or with adding docetaxel to the higher apatorsen doses.

Product Candidate Custirsen

In November 2016, we provided a notice of discontinuance to Ionis notifying them that we have discontinued development of custirsen, resulting in termination of all licensing agreements related to custirsen. We believe that all financial obligations, other than continuing mutual indemnification obligations and our requirement to pay for out-of-pocket patent expenses incurred up to the date of termination and for abandoning the custirsen patents and patent applications, under all custirsen-related agreements with Ionis, including the Ionis settlement agreement, are no longer owed and no further payments are due.

 

All custirsen clinical studies have been completed and all global regulatory agencies notified of trial closures.  All investigational new drug applications, or INDs, with the United States Food and Drug Administration, or FDA, related to custirsen, have been withdrawn.

Product Candidate OGX-225

In January 2017, we discontinued further development of OGX-225.  We provided a notice of discontinuance to Ionis and a letter of termination to UBC, notifying them that we have discontinued development of OGX-225 resulting in termination of the license agreement related to this product candidate.  We believe that all financial obligations, other than continuing mutual indemnification obligations and our requirement to pay for out-of-pocket patent expenses incurred up to the date of termination and for abandoning the OGX-225 patents and patent applications, under all OGX-225-related agreements with Ionis and UBC, are no longer owed and no further payments are due.

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, cash reimbursements from Teva for certain costs incurred by us under the clinical development plan and advanced reimbursement we received from Teva in April 2015. 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. 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.

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. Due to the number of 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

23


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.

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.

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 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 results from completed studies, 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 June 30, 2017:

 

 

 

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 six months ended June 30, 2017 or 2016.

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 and six months ended June 30, 2017 and 2016

Collaboration revenue

Revenue for the three and six months ended June 30, 2017 decreased to zero from $2.1 million and $5.1 million for the three and six months ended June 30, 2016, respectively. The advanced reimbursement payment made by Teva, as part of the Termination Agreement, was deferred and recognized as collaboration revenue on a dollar for dollar basis as costs were incurred as part of the continuing research and development activities related to custirsen. The decrease in collaboration revenue in 2017 as compared to 2016 was due to the full recognition of the remaining amounts of deferred revenue in 2016.

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Research and development expenses

Our research and development expenses for our clinical development programs for the three and six months ended June 30, 2017 and 2016 are as follows (in thousands):

 

 

 

Three months ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Clinical development programs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Custirsen

 

$

72

 

 

$

2,374

 

 

$

230

 

 

$

4,656

 

Apatorsen

 

$

144

 

 

$

496

 

 

$

264

 

 

$

904

 

Other  research and development

 

$

561

 

 

$

1,792

 

 

$

1,195

 

 

$

3,744

 

Total research and development expenses

 

$

777

 

 

$

4,662

 

 

$

1,689

 

 

$

9,304