Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

(Mark One)

 

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

 

For the quarterly period ended March 31, 2015

 

OR

 

TRANSITION REPORT UNDER SECTION 13 OF 15(d) OF THE EXCHANGE ACT OF 1934

 

From the transition period from               to               .

 

Commission File Number 001-35798

 


 

KALOBIOS PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

 


 

 

 

 

Delaware

 

77-0557236

(State or other jurisdiction of

 

(IRS Employer

incorporation)

 

Identification No.)

 

442 Littlefield Avenue, South San Francisco, CA, 94080

(Address of principal executive offices)

(Zip Code)

 

Registrant’s telephone number, including area code: (650) 243-3100

 


 

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

 

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

 

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

 

 

 

 

Large accelerated filer  

 

Accelerated filer

 

 

 

Non-accelerated filer  
(Do not check if a smaller reporting company)

 

Smaller reporting company  

 

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

 

As of May 1, 2015, there were 32,992,178 shares of common stock of the issuer outstanding.

 

 

 


 

Table of Contents

TABLE OF CONTENTS

KALOBIOS PHARMACEUTICALS, INC.

FORM 10-Q

 

 

 

 

 

 

 

 

Page

 

 

 

 

PART I. FINANCIAL INFORMATION 

 

 

 

 

 

Item 1.

Financial Statements (unaudited)

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2015 and December 31, 2014

 

 

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended March 31, 2015 and 2014

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2015 and 2014

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

 

 

 

 

Item 2.

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

15 

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

22 

 

 

 

 

 

Item 4.

Controls and Procedures

22 

 

 

 

 

PART II. OTHER INFORMATION 

23 

 

 

 

 

 

Item 1.

Legal Proceedings

23 

 

 

 

 

 

Item 1A.

Risk Factors

23 

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

51 

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

51 

 

 

 

 

 

Item 4.

Mine Safety Disclosures

51 

 

 

 

 

 

Item 5.

Other Information

51 

 

 

 

 

 

Item 6.

Exhibits

51 

 

 

 

 

SIGNATURES 

 

52 

 

 

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PART I. FINANCIAL INFORMATION

 

Item 1.Financial Statements

 

KaloBios Pharmaceuticals, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

 

 

    

March 31,

    

December 31,

 

 

2015

 

2014

 

 

(Unaudited)

 

(Note 2)

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

12,624 

 

$

10,923 

Marketable securities

 

 

17,597 

 

 

29,790 

Prepaid expenses and other current assets

 

 

950 

 

 

1,532 

Total current assets

 

 

31,171 

 

 

42,245 

 

 

 

 

 

 

 

Property and equipment, net

 

 

473 

 

 

414 

Restricted cash

 

 

193 

 

 

193 

Other assets

 

 

113 

 

 

125 

Total assets

 

$

31,950 

 

$

42,977 

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

857 

 

$

1,822 

Accrued compensation

 

 

1,267 

 

 

1,400 

Deferred rent, short term

 

 

21 

 

 

16 

Accrued research and clinical liabilities

 

 

3,311 

 

 

3,470 

Notes payable

 

 

9,677 

 

 

10,928 

Financing derivative

 

 

92 

 

 

89 

Other accrued liabilities

 

 

315 

 

 

328 

Total current liabilities

 

 

15,540 

 

 

18,053 

 

 

 

 

 

 

 

Deferred rent, long-term

 

 

305 

 

 

311 

Total liabilities

 

 

15,845 

 

 

18,364 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

Common stock, $0.001 par value: 85,000,000 shares and 85,000,000 shares authorized at March 31, 2015 and December 31, 2014 respectively; 32,992,178 and 32,992,178 shares issued and outstanding at March 31, 2015 and December 31, 2014, respectively

 

 

33 

 

 

33 

Additional paid-in capital

 

 

203,909 

 

 

202,801 

Accumulated other comprehensive income

 

 

(2)

 

 

(8)

Accumulated deficit

 

 

(187,835)

 

 

(178,213)

Total stockholders’ equity

 

 

16,105 

 

 

24,613 

Total liabilities and stockholders’ equity

 

$

31,950 

 

$

42,977 

 

See accompanying notes

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KaloBios Pharmaceuticals, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(in thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

    

2015

    

2014

    

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

Research and development

 

 

5,905 

 

 

7,690 

 

General and administrative

 

 

3,437 

 

 

2,470 

 

Total operating expenses

 

 

9,342 

 

 

10,160 

 

 

 

 

 

 

 

 

 

Loss from operations

 

 

(9,342)

 

 

(10,160)

 

 

 

 

 

 

 

 

 

Other (expense) income:

 

 

 

 

 

 

 

Interest expense

 

 

(280)

 

 

(260)

 

Interest income

 

 

16 

 

 

14 

 

Other (expense) income, net

 

 

(16)

 

 

(2)

 

Net loss

 

 

(9,622)

 

 

(10,408)

 

Other comprehensive income:

 

 

 

 

 

 

 

Net unrealized gains (losses) on marketable securities

 

 

 

 

(4)

 

Comprehensive loss

 

$

(9,616)

 

$

(10,412)

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per common share

 

$

(0.29)

 

$

(0.32)

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding used to calculate basic and diluted net loss per common share

 

 

32,992,178 

 

 

32,966,471 

 

 

See accompanying notes

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KaloBios Pharmaceuticals, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

    

2015

    

2014

 

 

 

(unaudited)

 

Operating activities:

 

 

 

 

 

 

 

Net loss

 

$

(9,622)

 

$

(10,408)

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

48 

 

 

101 

 

Noncash interest expense

 

 

56 

 

 

45 

 

Financing derivative

 

 

 

 

 

Amortization of premium on marketable securities

 

 

80 

 

 

59 

 

Stock based compensation expense

 

 

305 

 

 

491 

 

Modification of stock options related to executive retirement

 

 

389 

 

 

 

Modification of stock options related to restructuring activities

 

 

414 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Contract receivables

 

 

 

 

40 

 

Prepaid expenses and other assets

 

 

583 

 

 

(138)

 

Accounts payable

 

 

(965)

 

 

(1,563)

 

Accrued compensation

 

 

(133)

 

 

(454)

 

Accrued research and clinical liabilities

 

 

(159)

 

 

382 

 

Other liabilities

 

 

(13)

 

 

155 

 

Deferred rent

 

 

(1)

 

 

(8)

 

Net cash (used in) operating activities

 

 

(9,015)

 

 

(11,298)

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

Purchase of marketable securities

 

 

(3,703)

 

 

(31,005)

 

Proceeds from maturities of marketable securities

 

 

15,822 

 

 

22,460 

 

Purchases of property and equipment

 

 

(108)

 

 

(35)

 

Changes in restricted cash

 

 

 

 

(193)

 

Net cash provided by (used in) investing activities

 

 

12,011 

 

 

(8,773)

 

 

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

 

Proceeds from issuance of common stock

 

 

 

 

59 

 

Principal payments under notes payable

 

 

(1,295)

 

 

(811)

 

Net cash (used in) financing activities

 

 

(1,295)

 

 

(752)

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

1,701 

 

 

(20,823)

 

Cash and cash equivalents, beginning of period

 

 

10,923 

 

 

54,220 

 

Cash and cash equivalents, end of period

 

$

12,624 

 

$

33,397 

 

 

 

 

 

 

 

 

 

Supplemental cash flow disclosure:

 

 

 

 

 

 

 

Cash paid for interest

 

$

233 

 

$

219 

 

 

See accompanying notes.

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KaloBios Pharmaceuticals, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

1. Nature of Operations

 

KaloBios Pharmaceuticals, Inc. (the Company) is a biopharmaceutical company whose primary business is to develop monoclonal antibody therapeutics for diseases that represent a significant burden to society and to patients and their families. Our clinical development efforts are focused solely in oncology, including both hematologic malignancies and potentially solid tumors. The Company was incorporated on March 15, 2000 in California and reincorporated as a Delaware corporation in September 2001. All of the Company’s assets are located in California.

 

The Company has incurred significant losses and had an accumulated deficit of $187.8 million as of March 31, 2015. The Company has financed its operations primarily through the sale of equity securities, grants and the payments received under its agreements with Novartis Pharma AG (Novartis) and Sanofi Pasteur S.A. (Sanofi). To date, none of the Company’s product candidates have been approved for sale and therefore the Company has not generated any revenue from product sales. Management expects operating losses to continue for the foreseeable future. As a result, the Company will continue to require additional capital through equity offerings, debt financing and/or payments under new or existing licensing or collaboration agreements. If sufficient funds on acceptable terms are not available when needed, the Company could be required to significantly reduce its operating expenses and delay, reduce the scope of, or eliminate one or more of its development programs. The Company’s ability to access capital when needed is not assured and, if not achieved on a timely basis, could materially harm its business, financial condition and results of operations. Further, any failure to raise capital could be deemed a material adverse change under our loan and security agreement with MidCap Financial and that may, in turn, result in the lender declaring the loan in default and demanding repayment of the principal, accrued interest, the exit fee and a prepayment fee. These conditions could raise substantial doubt about the Company’s ability to continue as a going concern. Therefore, the Company has classified the notes payable as current. The report of  our Independent Registered Public Accounting Firm included an explanatory paragraph about the Company’s ability to continue as a going concern in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

 

2. Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and on a basis consistent with the annual consolidated financial statements, and in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for a fair statement of the periods presented. These financial statements have been prepared on a basis which assumes that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The December 31, 2014 Condensed Consolidated Balance Sheet was derived from the audited financial statements but does not include all disclosures required by GAAP. These interim financial results are not necessarily indicative of the results to be expected for the year ending December 31, 2015, or for any other future annual or interim period. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes thereto included in the Company’s Form 10-K for the year ended December 31, 2014.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts and disclosures reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates. The Company believes judgment is involved in determining the stock-based compensation and accruals. The Company evaluates estimates and assumptions as facts and circumstances

6


 

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dictate. As future events and their effects cannot be determined with precision, actual results could differ from these estimates and assumptions, and those differences could be material to the consolidated financial statements.

 

Concentration of Credit Risk

 

Cash, cash equivalents, and marketable securities consist of financial instruments that potentially subject the Company to a concentration of credit risk in the event of a default by the related financial institution holding the securities, to the extent of the value recorded in the balance sheet. The Company invests cash that is not required for immediate operating needs primarily in highly liquid instruments with lower credit risk. The Company has established guidelines relating to the quality, diversification, and maturities of securities to enable the Company to manage its credit risk.

 

Cash, Cash Equivalents, and Marketable Securities

 

The Company considers all highly liquid investments with an original maturity of 90 days or less at the time of purchase to be cash equivalents. Investments in securities with remaining maturities of less than one year, or where our intent is to use the investments to fund current operations or to make them available for current operations, are classified as short-term and available for sale. Investments in securities with remaining maturities greater than one year are classified as noncurrent and available for sale (see Note 3). Securities available for sale are carried at estimated fair value, with unrealized gains and losses reported as part of accumulated other comprehensive income (loss), a separate component of stockholders’ equity. The Company has estimated the fair value amounts by using available market information. The cost of available-for-sale securities sold is based on the specific-identification method.

 

Research and Development Expenses

 

Development costs incurred in the research and development of new products are expensed as incurred, including expenses that may or may not be reimbursed under research and development collaboration agreements. Research and development costs include, but are not limited to, salaries, benefits, stock-based compensation, laboratory supplies, allocated overhead, fees for professional service providers and costs associated with product development efforts, including preclinical studies and clinical trials. Research and development expenses under collaborative agreements approximate or exceed the revenue recognized under such agreements.

 

The Company estimates preclinical study and clinical trial expenses based on the services performed, pursuant to contracts with research institutions and clinical research organizations that conduct and manage preclinical studies and clinical trials on its behalf. In accruing service fees, the Company estimates the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from the estimate, the Company will adjust the accrual accordingly. Payments made to third parties under these arrangements in advance of the receipt of the related services are recorded as prepaid expenses until the services are rendered.

 

Stock-Based Compensation Expense

 

The Company measures employee and director stock-based compensation expense for stock awards at the grant date and employee stock purchase plan, or ESPP, based on the fair value-based measurement of the award, and the expense is recorded over the related service period, generally the vesting period, net of estimated forfeitures. The Company calculates the fair value-based measurement of stock options and ESPP using the Black-Scholes valuation model and the single-option method and recognizes expense using the straight-line attribution approach.

 

The Company accounts for equity instruments issued to nonemployees based on their fair values on the measurement dates using the Black-Scholes option-pricing model. The fair values of the options granted to nonemployees are remeasured as they vest. As a result, the noncash charge to operations for nonemployee options with vesting is affected each reporting period by changes in the fair value of the Company’s common stock.

 

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Comprehensive Loss

 

Comprehensive loss represents net loss adjusted for the change during the periods presented in unrealized gains and losses on available-for-sale securities less reclassification adjustments for realized gains or losses included in net loss. The unrealized gains or losses are reported on the Consolidated Statements of Comprehensive Loss.

 

Net Loss Per Common Share

 

Basic net loss per common share is calculated by dividing the net loss by the weighted-average number of common shares outstanding during the period, without consideration of common stock equivalents. Diluted net loss per common share is computed by dividing the net loss by the weighted-average number of common shares and common share equivalents outstanding for the period. Common stock equivalents are only included in the calculation of diluted net loss per common share when their effect is dilutive.

 

The Company’s potential dilutive securities which include unvested stock options and warrants have been excluded from the computation of diluted net loss per share as the effect would be to reduce the net loss per share and be antidilutive. Therefore, the denominator used to calculate both basic and diluted net loss per common share is the same in all periods presented.

 

The following shares of outstanding potentially dilutive securities have been excluded from the computations of diluted net loss per common share as the effect of including such securities would be antidilutive:

 

 

 

 

 

 

 

 

 

As of March 31,

 

    

2015

    

2014

Warrants to purchase common stock

 

88,545 

 

88,545 

Options to purchase common stock

 

4,020,821 

 

2,548,314 

 

 

4,109,366 

 

2,636,859 

 

 

3. Investments

 

At March 31, 2015, the amortized cost and fair value of investments, with gross unrealized gains and losses, were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Gross

    

Gross

    

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

(in thousands)

 

Cost

 

Gains

 

Losses

 

Fair Value

Money market funds

 

$

10,476 

 

$

 

$

 

$

10,476 

Federal agency securities

 

 

11,506 

 

 

 

 

 

 

11,506 

Corporate debt securities

 

 

6,093 

 

 

 

 

(2)

 

 

6,091 

Total investments

 

$

28,075 

 

$

 

 

$

(2)

 

$

28,073 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reported as:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

$

10,283 

Marketable securities, current

 

 

 

 

 

 

 

 

 

 

 

17,597 

Restricted cash

 

 

 

 

 

 

 

 

 

 

 

193 

Total investments

 

 

 

 

 

 

 

 

 

 

$

28,073 

 

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At December 31, 2014, the amortized cost and fair value of investments, with gross unrealized gains, were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Gross

    

Gross

    

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

(in thousands)

 

Cost

 

Gains

 

Losses

 

Fair Value

Money market funds

 

$

9,663 

 

$

 

$

 

$

9,663 

Federal agency securities

 

 

13,774 

 

 

 

 

(4)

 

 

13,770 

Commercial paper

 

 

1,499 

 

 

 

 

 

 

1,500 

Corporate debt securities

 

 

14,525 

 

 

 

 

(5)

 

 

14,520 

Total investments

 

$

39,461 

 

$

 

$

(9)

 

$

39,453 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reported as:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

$

9,470 

Marketable securities

 

 

 

 

 

 

 

 

 

 

 

29,790 

Restricted cash

 

 

 

 

 

 

 

 

 

 

 

193 

Total investments

 

 

 

 

 

 

 

 

 

 

$

39,453 

 

There were no realized gains or losses from the sale of marketable securities for the three months ended March 31, 2015 and 2014.

 

4. Fair Value of Financial Instruments

 

Cash, accounts payable and accrued liabilities are carried at cost, which approximates fair value given their short-term nature. Marketable securities and cash equivalents are carried at fair value.

 

The fair value of financial instruments reflects the amounts that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The fair value hierarchy is based on three levels of inputs that may be used to measure fair value, of which the first two are considered observable, and the third is considered unobservable, as follows:

 

Level 1 — Quoted prices in active markets for identical assets or liabilities.

 

Level 2 — Inputs other than those included in Level 1 that are directly or indirectly observable, such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

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The Company measures the fair value of financial assets and liabilities using the highest level of inputs that are reasonably available as of the measurement date. The following tables summarize the fair value of financial assets and liabilities (investments) that are measured at fair value and the classification by level of input within the fair value hierarchy:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements as of

 

 

March 31, 2015

(in thousands)

    

Level 1

    

Level 2

    

Level 3

    

Total

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

10,476 

 

$

 

$

 

$

10,476 

Federal agency securities

 

 

 

 

11,506 

 

 

 

 

11,506 

Commercial paper

 

 

 

 

 

 

 

 

Corporate debt securities

 

 

 

 

6,091 

 

 

 

 

6,091 

Total assets measured at fair value

 

$

10,476 

 

$

17,597 

 

$

 

$

28,073 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financing derivative

 

 

 

 

 

 

92 

 

 

92 

Total liabilities measured at fair value

 

$

 

$

 

$

92 

 

$

92 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements as of

 

 

December 31, 2014

(in thousands)

    

Level 1

    

Level 2

    

Level 3

    

Total

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

9,663 

 

$

 

$

 

$

9,663 

Federal agency securities

 

 

 

 

13,770 

 

 

 

 

13,770 

Commercial paper

 

 

 

 

1,500 

 

 

 

 

1,500 

Corporate debt securities

 

 

 

 

14,520 

 

 

 

 

14,520 

Total assets measured at fair value

 

$

9,663 

 

$

29,790 

 

$

 

$

39,453 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financing derivative

 

 

 

 

 

 

89 

 

 

89 

Total liabilities measured at fair value

 

$

 —

 

$

 —

 

$

89 

 

$

89 

 

The Company’s Level 2 investments include U.S. government-backed securities, commercial paper and corporate debt securities that are valued based upon observable inputs that may include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data including market research publications. The average remaining maturity of the Company’s Level 2 investments as of March 31, 2015 is less than three months and all of these investments are rated A3/A-/A- or P1/A1/F1, or higher by Moody’s, S&P and Fitch.

 

In December 2014, the Company recorded a financing derivative liability resulting from an embedded derivative related to the prepayment feature of the loan and security agreement with MidCap Financial. At March 31, 2015, the Company remeasured the financing derivative liability as $92,000 and recorded the loss of $3,000 as other expense. The fair value of this derivative was determined using Level 3 inputs, or significant unobservable inputs. The value of the financing derivative was determined by comparing the difference between the fair value of the notes payable with and without the financing derivative by calculating the respective present values from future cash flows using a 14% discount rate, adjusted for the probability of the occurrence of an event of default under the loan and security agreement with MidCap Financial. The 14% discount rate assumption was based on an effective borrowing rate under the current circumstances considering the quoted borrowing rate for the Company and the imputed fair value of any additional financial instruments that may be required to be extended to the lender in order to obtain such debt financing. The probability of the occurrence of an event of default under the loan and security agreement with MidCap Financial was based on management’s judgment. Refer to Note 5 for additional details regarding the loan and security agreement with MidCap Financial.

 

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The following table presents changes in financial instruments measured at fair value using Level 3 inputs:

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements of

 

 

 

Level 3 Liabilities

 

 

 

(in thousands)

 

Balance at December 31, 2014

 

$

89 

 

(Gain) loss on remeasurement of the financing derivative liability

 

 

 

Balance at March 31, 2015

 

$

92 

 

 

The estimated fair value of the notes payable as of March 31, 2015, based on current market rates for similar borrowings, as measured using Level 3 inputs, approximates the carrying amount as presented on the condensed consolidated balance sheet.

 

5. Notes Payable

 

Loan and Security Agreement

 

In September 2012, the Company entered into the Agreement with MidCap Financial, providing for the borrowing of up to $15 million, of which $10 million was required to be drawn. The remaining $5 million was available to be drawn at the option of the Company. The Agreement provides for the loan to be issued in three tranches: the first tranche of $5 million was issued in September 2012; the second tranche of $5 million was issued in December 2012; and, prior to the amendment described below, the final tranche could have been drawn at the option of the Company no later than June 2013. The loan has a monthly variable interest rate, reset each month, if applicable, as determined by adding to 600 basis points the greater of: (a) one month LIBOR or (b) 3% (the LIBOR floor). Interest on amounts outstanding are payable monthly in arrears. There was an interest only period to December 31, 2013 followed by straight-line principal payments over thirty-six months until December 31, 2016. At the time of final payment, the Company must pay an exit fee of 3% of the drawn amount. Pursuant to the Agreement, the Company provided a first priority security interest in all existing and after-acquired assets, excluding intellectual property. In addition, the terms of the Agreement provided MidCap Financial a warrant to purchase shares of the Company’s Series E convertible preferred stock (Series E Preferred) equal to 4% of the amount drawn down under the facility divided by the Series E Preferred exercise price of $12.11 per share. The warrant expired upon the completion of the Company’s IPO.

 

The Company has the right to prepay all or a portion of the borrowed amounts under the Agreement; however, if the Company exercises this option, the Company must pay a prepayment fee determined by multiplying the outstanding loan amount by 2% if the prepayment occurs in 2015 and 1% if the prepayment occurs in the final year. In the event of default, upon which all amounts borrowed become immediately due and payable, the Company will be subject to the prepayment fee ranging from 1% to 2% of the amount due on the loan and a step up in interest rate of 5%. An event of default includes, but is not limited to, an occurrence such as a payment default, a material adverse change, insolvency, or a change of control. The Company’s ability to access capital when needed is not assured and, if not achieved on a timely basis, could materially harm its business, financial condition and results of operations. Further, any failure to raise capital could be deemed a material adverse change under our loan and security agreement with MidCap Financial and that may, in turn, result in the lender declaring the loan in default and demanding repayment of the principal, accrued interest, the exit fee and a prepayment fee. Therefore, the Company has classified notes payable as current.

 

In connection with the Agreement and the first tranche draw down of $5 million in September 2012 and second tranche draw down of $5 million in December 2012, the Company issued a warrant to MidCap Financial to purchase shares of the Company’s Series E Preferred. Contemporaneously with the issuance of the warrant, the Company recorded a debt discount of $79,000.

 

Debt issuance costs paid directly to MidCap Financial of $114,000 (financing fees) and the fair value of the warrant issued to MidCap Financial were treated as a discount on the debt and are being accreted using the interest method. Other debt issuance costs for legal fees are included in other assets in the accompanying consolidated balance sheet and are being amortized using the interest method. The accretion of the debt discount and amortization of other debt issuance costs are recorded as non‑cash interest expense in the consolidated statements of comprehensive loss.

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In June 2013, the Company entered into the Amendment to extend the draw down date for the final tranche of $5.0 million from June 2013 to May 2014. In addition, the final tranche was changed from an optional draw down to a required draw down. In connection with the Amendment, the Company issued a warrant to purchase up to 49,548 shares of the Company’s common stock with an exercise price of $12.11 per share. The warrant expires in June 2023, on the tenth anniversary of its issuance date. The warrants issued to Midcap Financial had an initial fair value of $130,000, which represent financing fees, and are included in other assets in the accompanying consolidated balance sheet and are being amortized as non-cash interest expense over the remaining term of the Agreement using the effective interest method. The Company estimated the fair values of these warrants using the Black-Scholes option-pricing model, based on the inputs for the estimated fair value of the underlying common stock at the valuation measurement date, the contractual term of the warrant, risk-free interest rates, expected dividend rates and expected volatility of the price of the underlying common stock. Pursuant to this Amendment, the Company drew down the final tranche of $5.0 million in May 2014.

 

Future payments as of March 31, 2015 under the Agreement, assuming no adjustments to the variable rate of interest of 9% as of March 31, 2015, are as follows:

 

 

 

 

 

 

 

(in thousands)

    

    

Remainder of  2015

 

$

4,418 

2016

 

 

5,910 

Total minimum payments

 

 

10,328 

Less amount representing interest

 

 

(834)

Notes payable, gross

 

 

9,494 

Discount on notes payable

 

 

(41)

Accretion of the final exit fee payment

 

 

224 

Carrying value of notes payable

 

$

9,677 

 

 

 

 

 

 

 

 

6. Past Collaborations

 

Sanofi

 

In January 2010, the Company and Sanofi entered into an agreement for the development and commercialization of KB001, the precursor to KB001-A, an investigational new biologic for the treatment and prevention of Pseudomonas aeruginosa (Pa) infections (the Sanofi agreement). Under the terms of the Sanofi agreement, the Company received an initial upfront non-refundable payment of $35 million and received an additional non-refundable payment of $5 million that represented a second installment of the upfront fees due to the Company under the agreement upon completion of a sublicense negotiation with a third party in August 2011. Sanofi was solely responsible for conducting, at its cost, the research, development, manufacture, and commercialization of the licensed products for the diagnosis, treatment and/or prevention of all human diseases and conditions caused by Pa, except that the Company retained responsibility, at the Company’s cost, for developing and promoting the products for the diagnosis, treatment and/or prevention of Pa in patients with cystic fibrosis (CF) or bronchiectasis. Under the terms of the Sanofi agreement, the Company received specified research and development funding for services performed in connection with KB001-A research and development efforts and could have also received contingent payments based on the occurrence of development, regulatory or commercial events, and royalties on any product sales.

 

In July 2014, the Company and Sanofi executed an agreement (the Termination Agreement) under which the Sanofi agreement was terminated.  As a result of the Termination Agreement, KaloBios regained full global rights to license, develop, manufacture and commercialize KB001-A in all indications, as well as a non-exclusive license to the KB001-A manufacturing process developed by Sanofi.  In consideration for entering into the Termination Agreement, Sanofi will be entitled to royalties on net sales of KB001-A if approved, subject to a $40 million cap on the aggregate royalties to be paid.  In addition, Sanofi will be entitled to receive up to 10% of certain sub-license payments or other milestone payments received in the event KaloBios successfully re-partners KB001-A, subject to a separate $40 million cap on the aggregate amount of sub-license payments to be shared with Sanofi.   

 

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7. Commitments and Contingencies

 

Contractual Obligations and Commitments

 

On May 21, 2013, the Company entered into an agreement with a third party for the manufacturing of KB003 clinical supply for future clinical trials. Despite the termination of the KB003 development program in severe asthma during the first quarter of 2014, the Company is continuing to evaluate other potential indications for KB003. Under that agreement the third party will perform a range of related services, including process development, optimization, validation, formulation development, regulatory assistance, stability testing and related activities. In addition, we had entered into an agreement with a separate third party to produce supply of KB001-A. As of December 31, 2014, there were no remaining commitments for services. In February 2015, this agreement was cancelled.

 

As of March 31, 2015, there were no significant and material changes to our contractual obligations from those set forth in our Form 10-K filed with the Securities and Exchange Commission (SEC) on March 16, 2015.

 

Guarantees and Indemnifications

 

The Company, as permitted under Delaware law and in accordance with its bylaws, has agreed to indemnify its officers and directors for certain events or occurrences, subject to certain limits, while the officer or director is or was serving at the Company’s 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, the Company currently holds director and officer liability insurance. This insurance limits the Company’s exposure and may enable it to recover a portion of any future amounts paid.

 

The Company has certain agreements with service providers with which it does business that contain indemnification provisions pursuant to which the Company typically agrees to indemnify the party against certain types of third-party claims. The Company accrues for known indemnification issues when a loss is probable and can be reasonably estimated. The Company would also accrue for estimated incurred but unidentified indemnification issues based on historical activity. As the Company has not incurred any indemnification losses to date, there were no accruals for or expenses related to indemnification issues for any period presented.

 

8. Warrants to Purchase Common Stock

 

On June 19, 2013, in connection with the Amendment to its debt agreement with MidCap Financial, the Company issued a warrant to purchase up to 49,548 shares of the Company’s common stock with an exercise price of $12.11 per share. The warrant expires in June 2023. The Company recorded the initial value of the warrants in equity and other assets in the accompanying consolidated balance sheet, with the deferred other asset to be amortized over the remaining term of the debt using the effective interest method.

 

In addition, the Company has outstanding warrants to purchase an aggregate of 38,997 shares of common stock at $5.13 per share which will expire on October 31, 2015.

 

9. Stockholders’ Equity

 

2012 Equity Incentive Plan

 

As of March 31, 2015, under the 2012 Equity Incentive Plan, the Company may grant shares, stock units, stock appreciation rights, performance cash awards and/or options to employees, directors, consultants, and other service providers. For options, the per share exercise price may not be less than the fair market value of a Company common share on the date of grant. Awards generally vest over four years and expire 10 years from the date of grant. Options generally become exercisable as they vest following the date of grant.

 

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A summary of stock option activity for the three months ended March 31, 2015 under all of the Company’s options plans is as follows:

 

 

 

 

 

 

 

 

 

    

 

    

Weighted

 

 

 

 

Average

 

 

 

 

Exercise

 

 

Options

 

Price

Outstanding at December 31, 2014

 

2,677,774 

 

$

4.24 

Granted

 

1,797,000 

 

 

0.45 

Exercised

 

 

 

Cancelled (forfeited)

 

(453,953)

 

 

3.91 

Cancelled (expired)

 

 

 

Outstanding at March 31, 2015

 

4,020,821 

 

$

2.59 

 

 

 

 

 

 

 

 

 

 

 

 

The weighted average fair value of options granted during the three months ended March 31, 2015  was  $0.29 per share.

 

2012 Employee Stock Purchase Plan

 

The Employee Stock Purchase Plan, or ESPP, provides eligible employees with the opportunity to acquire an ownership interest in the Company through periodic payroll deductions, based on a six-month look-back period, at a price equal to the lesser of 85% of the fair market value of the ordinary shares at either the beginning or ending of the relevant offering period. The ESPP is structured as a qualified employee stock purchase plan under Section 423 of the Internal Revenue Code of 1986. However, the ESPP is not intended to be a qualified pension, profit sharing or stock bonus plan under Section 401(a) of the Internal Revenue Code of 1986 and is not subject to the provisions of the Employee Retirement Income Security Act of 1974. The ESPP will terminate on January 15, 2033 unless sooner terminated. There were 168,469 shares initially authorized for issuance under the plan, and the first offering period commenced June 1, 2014 and ended on October 31, 2014. Subsequent offering periods will each be six months in duration and will commence on November 1st and May 1st each year.

 

Stock-Based Compensation

 

The Company recorded stock-based compensation expense in the condensed consolidated statements of comprehensive loss as follows:

 

 

 

 

 

 

 

 

 

 

 

 

Three Months

 

 

 

Ended March 31,

 

(in thousands)

    

2015

 

2014

 

General and administrative

 

$

142 

 

$

226 

 

Research and development

 

 

163 

 

 

265 

 

 

 

$

305 

 

$

491 

 

 

In addition, during the three months ended March 31, 2015, the Company recorded charges of $0.4 million and $0.4 million relating to the fair value of stock options which were modified due to executive retirement and restructuring activities, and classified them as general and administrative expenses and research and development expenses, respectively.

 

At March 31, 2015, the Company had $2.0 million of total unrecognized stock-based compensation expense, net of estimated forfeitures, related to outstanding stock options that will be recognized over a weighted-average period of 1.8 years.

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10.  Restructuring Charges

 

Restructuring charges incurred during the three months ended March 31, 2015 primarily consist of severance and other post-termination benefit costs resulting from the cost reduction program implemented by the Company in January 2015. These activities primarily consisted of 20% reduction of the workforce. Per ASC 420-10-05-1, Exit or Disposal Cost Obligations, include, but are not limited to involuntary termination benefits provided to employees under the terms of a one-time benefit arrangement that, in substance, is not an ongoing benefit arrangement or a deferred compensation contract, and certain contract termination costs. Restructuring costs are expensed during the period in which the Company determines it will incur those costs and all requirements of accrual are met. The Company recorded approximately $0.6 million in restructuring charges relating to such obligations during the first quarter, and expects to incur $0.2 million in restructuring charges relating to such obligations during the second quarter, all of which represents costs expected to be incurred during 2015. In addition, certain contract termination costs of $1.2 million were accrued as of December 31, 2014 relating to manufacturing activity that no longer had identifiable future benefit to the Company. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

    

 

Contract
termination
costs - R&D

    

 

Salaries and
benefits - R&D

    

 

Salaries and
benefits - G&A

    

 

Total

 

Balance as of December 31, 2014

 

$

1,185 

 

$

 -

 

$

 -

 

$

1,185 

 

Accrued

 

 

 -

 

 

522 

 

 

82 

 

 

604 

 

Paid

 

 

(479)

 

 

(257)

 

 

 -

 

 

(736)

 

Balance as of March 31, 2015

 

$

706 

 

$

265 

 

$

82 

 

$

1,053 

 

 

As disclosed in Note 9, the Company recorded stock based compensation expense of $0.4 million, classified as research and development expense, related to the fair value of stock options of a  former executive which were modified such that they did not expire upon termination.

 

 

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Forward-Looking Statements

 

The following discussion and analysis should be read in conjunction with our financial statements and accompanying notes included in this Quarterly Report on Form 10-Q and the financial statements and accompanying notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, filed with the Securities and Exchange Commission, or SEC, on March 16, 2015. This discussion contains “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Such forward looking statements involve risks and uncertainties. We use words such as “may,” “will,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “predict,” “potential,” “believe,” “should” and similar expressions to identify forward-looking statements. Although we believe the expectations reflected in these forward- looking statements are reasonable, such statements are inherently subject to risk and we can give no assurances that our expectations will prove to be correct. These statements appearing throughout this Quarterly Report on Form 10-Q are statements regarding our intent, belief, or current expectations, primarily regarding our operations. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q. As a result of many factors, such as those set forth under “Risk Factors” under Item 1A of Part II below, and elsewhere in this Quarterly Report on Form 10-Q, our actual results may differ materially from those anticipated in these forward-looking statements. We undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date of this report or to reflect actual outcomes.

 

Overview

 

We are a biopharmaceutical company focused on monoclonal antibody therapeutics for diseases that are a significant burden to society and patients and their families. Our clinical development efforts going forward will be focused solely in oncology, including both hematologic malignancies and potentially solid tumors. Our principal pharmaceutical product candidates that we have advanced to the clinical development stage are:

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·

KB004, a Humaneered ® anti ‑EphA3 monoclonal antibody that has the potential to offer a novel approach to treating both hematologic malignancies and solid tumors. In a Phase 1 dose escalation study KB004 was found to be generally safe and well tolerated and is currently enrolling patients in a Phase 2 cohort expansion study as a potential therapeutic for myelodysplastic syndrome (MDS) and myelofibrosis (MF).

·

KB003 is a Humaneered®, recombinant monoclonal antibody (mAb) that neutralizes soluble granulocyte-macrophage colony-stimulating factor (GM-CSF), a critical cytokine for the growth of certain hematologic malignancies and solid tumors. KB003 is a GM-CSF antagonist with a favorable safety profile that has been studied in more than 90 subjects in clinical studies in either healthy adults or adults with autoimmune diseases.  Given our strategic focus on oncology, and following discussions with clinical experts and regulatory agencies, the Company intends to initiate a Phase 1 clinical trial in CMML patients to assess the safety, pharmacokinetics, and activity of KB003 in 2015.  

·

KB001‑A, a Humaneered ®, PEGylated, anti‑PcrV modified antibody fragment (Fab’) antibody that was being developed for the prevention and treatment of Pseudomonas aeruginosa (Pa) infections in mechanically ventilated patients and cystic fibrosis (CF) patients with chronic Pa lung infections. However, based on results of the phase 2 data released in early 2015, we have discontinued development of this product in all indications.

In order to maintain adequate capital to fund the continued development of our product candidates, management continues to evaluate a number of alternatives, including but not limited to: (i) seeking additional partner(s) for our programs to provide capital for future development and to share in development costs, (ii) undertaking reductions in operating spending, and (iii) evaluating various means to raise additional capital, such as debt or equity offerings. Regardless of any actions we take to address our cash position in the near term, we will also need to raise additional capital in order to further advance our product candidates towards regulatory approval. If management is unsuccessful in these efforts, based on our current levels of operating spending our current capital may not be sufficient in some scenarios to fund our operations for the next twelve months.

 

From the date we commenced our operations through 2006, our efforts focused primarily on research, development, and the advancement of our Humaneered® antibody technology. In 2006, we commenced our first clinical trial. We have incurred significant losses to date and, as of March 31, 2015, we had an accumulated deficit of $187.8 million. We have funded our operations primarily through private and public placements of our equity securities, contract revenue in connection with our collaborations, and grants and borrowings under equipment financing arrangements and our loan and security agreement. On February 5, 2013, we closed our initial public offering (IPO) of 8,750,000 shares of common stock at an offering price of $8.00 per share, resulting in net proceeds of approximately $61.5 million, after deducting underwriting discounts, commissions and offering expenses. On October 1, 2013 we closed a public offering of 8,625,000 shares of common stock at an offering price of $4.00 per share, resulting in net proceeds of approximately $32.0 million, after deducting underwriting discounts, commissions and offering expenses. As of March 31, 2015, we had cash, cash equivalents, and investments of $30.2 million.

 

We expect to continue to incur net losses as we develop our drug candidates, expand clinical trials for our drug candidates currently in clinical development, expand our research and development activities, expand our systems and facilities, seek regulatory approvals, and engage in commercialization preparation activities in anticipation of Food and Drug Administration (FDA) approval of our drug candidates. Specifically, we have incurred substantial expenses in connection with our historical respiratory programs, most notably our Phase 2 clinical trial for KB003 in severe asthma patients inadequately controlled by corticosteroids, and our Phase 2 clinical trial of KB001-A in CF patients with chronic Pa infections.  We have also incurred significant expenses on our ongoing Phase 1 and Phase 2 clinical trials for our KB004 oncology program, and expect to continue to incur significant costs on our oncology development programs going forward as we continue our current KB004 studies and as we evaluate additional potential oncology indications for both KB004 and KB003.  Significant capital is required to continue to develop and to launch a product and many expenses are incurred before revenue is received, if any. We are unable to predict the extent of any future losses or when we will receive revenue or become profitable, if at all.

 

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Past Collaborations

 

Sanofi

 

In January 2010, the Company and Sanofi entered into an agreement for the development and commercialization of KB001, the precursor to KB001-A, an investigational new biologic for the treatment and prevention of Pseudomonas aeruginosa (Pa) infections (the Sanofi agreement). Under the terms of the Sanofi agreement, the Company received an initial upfront non-refundable payment of $35 million and received an additional non-refundable payment of $5 million that represented a second installment of the upfront fees due to the Company under the agreement upon completion of a sublicense negotiation with a third party in August 2011. Sanofi was solely responsible for conducting, at its cost, the research, development, manufacture, and commercialization of the licensed products for the diagnosis, treatment and/or prevention of all human diseases and conditions caused by Pa, except that the Company retained responsibility, at the Company’s cost, for developing and promoting the products for the diagnosis, treatment and/or prevention of Pa in patients with cystic fibrosis (CF) or bronchiectasis. Under the terms of the Sanofi agreement, the Company received specified research and development funding for services performed in connection with KB001-A research and development efforts and could have also received contingent payments based on the occurrence of development, regulatory or commercial events, and royalties on any product sales.

 

In July 2014, the Company and Sanofi executed an agreement (the Termination Agreement) under which the Sanofi agreement was terminated.  As a result of the Termination Agreement, KaloBios regained full global rights to license, develop, manufacture and commercialize KB001-A in all indications, as well as a non-exclusive license to the KB001-A manufacturing process developed by Sanofi.  In consideration for entering into the Termination Agreement, Sanofi will be entitled to royalties on net sales of KB001-A if approved, subject to a $40 million cap on the aggregate royalties to be paid.  In addition, Sanofi will be entitled to receive up to 10% of certain sub-license payments or other milestone payments received in the event KaloBios successfully re-partners KB001-A, subject to a separate $40 million cap on the aggregate amount of sub-license payments to be shared with Sanofi.   

 

Critical Accounting Policies and Use of Estimates

 

Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (GAAP). The preparation of our financial statements in conformity with GAAP requires our management to make estimates and assumptions that affect the amounts and disclosures reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates. Our management believes judgment is involved in determining revenue recognition, the fair value-based measurement of stock-based compensation, accruals and warrant valuations. Our management evaluates estimates and assumptions as facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ from these estimates and assumptions, and those differences could be material to the consolidated financial statements. If our assumptions change, we may need to revise our estimates, or take other corrective actions, either of which may also have a material adverse effect on our statements of operations, liquidity and financial condition.

 

We are an emerging growth company under the JOBS Act. Emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to avail ourselves of this exemption from new or revised accounting standards and, therefore, we may not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

 

There have been no significant and material changes in our critical accounting policies and use of estimates during the three months ended March 31, 2015, as compared to those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Use of Estimates” in our 2014 Annual Report on Form 10-K (File No. 001-35798), filed with the Securities and Exchange Commission (SEC) on March 16, 2015.

 

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Results of Operations

 

General

 

We have not generated net income from operations, except for the year ended December 31, 2007 during which we recognized a one-time license payment from Novartis. At March 31, 2015, we had an accumulated deficit of $187.8 million primarily as a result of research and development and general and administrative expenses. While we may in the future generate revenue from a variety of sources, including license fees, milestone payments, and research and development payments in connection with strategic partnerships, our product candidates are at an early stage of development and may never be successfully developed or commercialized. Accordingly, we expect to continue to incur substantial losses from operations for the foreseeable future, and there can be no assurance that we will ever generate significant revenue or profits.

 

Research and Development Expenses

 

Conducting research and development is central to our business model. We expense both internal and external research and development costs as incurred. We currently track external research and development costs incurred by project for each of our clinical programs (KB004, KB003, and KB001-A). We began tracking our external costs by project beginning January 1, 2008, and we have continued to refine our systems and our methodology in tracking external research and development costs. Our external research and development costs consist primarily of:

 

·

expenses incurred under agreements with contract research organizations, investigative sites, and consultants that conduct our clinical trials and a substantial portion of our preclinical activities;

 

·

the cost of acquiring and manufacturing clinical trial and other materials; and

 

·

other costs associated with development activities, including additional studies.

 

Other research and development costs consist primarily of internal research and development costs such as salaries and related fringe benefit costs for our employees (such as workers compensation and health insurance premiums), stock‑based compensation charges, travel costs, lab supplies, overhead expenses such as rent and utilities, and external costs not allocated to one of our clinical programs. Internal research and development costs generally benefit multiple projects and are not separately tracked per project. The following table shows our total research and development expenses for the three months ended March 31, 2015 and 2014, and for the period from January 1, 2008 to March 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three

 

For the Period from

 

 

 

Months Ended

 

January 1, 2008 to

 

 

 

March 31,

 

March 31, 2015

 

(in thousands)

 

2015

 

2014

 

 

 

 

External costs:

    

 

    

    

 

    

    

 

    

 

KB004

 

$

2,011 

 

$

2,039 

 

$

33,651 

 

KB003

 

 

313 

 

 

1,606 

 

 

40,476 

 

KB001-A

 

 

1,014 

 

 

1,578 

 

 

33,594 

 

Internal costs

 

 

2,567 

 

 

2,467 

 

 

66,643 

 

Total research and development

 

$

5,905 

 

$

7,690 

 

$

174,364 

 

 

We expect to continue to incur substantial expenses related to our development activities for the foreseeable future as we continue product development including continuing the Phase 2 expansion portion of our KB004 trial in hematologic malignancies, evaluating KB004 in potential solid tumor indications and evaluating KB003 in certain orphan oncology indications such as CMML.  We also expect to continue to incur some costs in the first half of 2015 associated with concluding our Phase 2 clinical trial for our KB001-A CF program completed in January 2015. Historically, we have incurred significant costs related to our respiratory programs for KB001-A and KB003 and oncology for KB004. However, due to the termination of our respiratory programs, we expect our clinical development

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efforts going forward will be focused on the KB004 program, while we will continue to evaluate KB003 in certain orphan oncology indications such as CMML. As a result, we expect our research and development expenses will decrease in 2015 as compared to 2014. In addition, if our product development efforts are successful, we expect to incur substantial costs to prepare for potential clinical trials and activities beyond the ongoing Phase 2 trial for KB004 and any trials we commence to evaluate KB003 in oncology indications such as CMML.

 

General and Administrative Expenses

 

General and administrative expenses consist principally of personnel-related costs, professional fees for legal, consulting, audit and tax services, rent and other general operating expenses not otherwise included in research and development.

 

Comparison of Three Months Ended March 31, 2015 and 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

Increase/ (Decrease)

 

(in thousands)

    

2015

    

2014

    

in thousands

    

%  

 

Contract revenue

 

$

 

$

 

$

 

(100)

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

5,905 

 

$

7,690 

 

$

(1,785)

 

-23%

 

General and administrative

 

 

3,437 

 

 

2,470 

 

 

967 

 

39% 

 

Loss from operations

 

 

(9,342)

 

 

(10,160)

 

 

818 

 

-8%

 

Interest expense

 

 

(280)

 

 

(260)

 

 

(20)

 

8% 

 

Interest income

 

 

16 

 

 

14 

 

 

 

14% 

 

Other (expense) income, net

 

 

(16)

 

 

(2)

 

 

(14)

 

700% 

 

Net loss

 

$

(9,622)

 

$

(10,408)

 

$

786 

 

-8%

 

 

Research and development expenses decreased $1.8 million, from $7.7 million for the three months ended March 31, 2014 to $5.9 million for the three months ended March 31, 2015. The decrease was primarily attributed to a $1.3 million decrease in clinical trial expenses related to the completion of KB003 in severe asthma, $0.6 million decrease resulting from the completion of our Phase 2 study of KB001-A in CF patients with chronic Pa infections in the first quarter of 2015, $0.5 million decrease in milestone payments from the initiation of the Phase 2 KB004 program in Q1 2014, and $0.2 million decrease in personnel related expenses, offset by $0.9 million in restructuring charges which consisted of a 20% reduction in force.  We expect external expenses on KB001-A will decrease significantly in 2015 as a result of the trial being completed in the first quarter of 2015 and our discontinuing development of KB001-A for CF patients with chronic Pa infections.  In addition, we began enrollment of patients in a Phase 2 clinical trial in hematologic malignancies of KB004 in the first half of 2014, and as a result, we expect external costs for our KB004 program to increase in 2015.  Overall, we expect a decrease in total research and development expense in 2015 as we focus our efforts on our oncology programs with KB004 and KB003.

 

General and administrative expenses increased $1.0 million, from $2.5 million for the three months ended March 31, 2014 to $3.4 million for the three months ended March 31, 2015 due primarily to one-time charges of $1.1 million for costs incurred due to the retirement of the CEO, and $0.1 million in restructuring expenses, offset by a decrease of $0.2 million in personnel related costs. With the exception of the one-time executive retirement and restructuring costs, we do not expect an increase in general and administrative expenses in 2015.

 

Interest expenses  relate to our loan and security agreement with MidCap Financial entered into in September 2012 and amended in 2013. Interest income and other (expense) income, net, primarily consists of interest earned on our cash and cash equivalents, foreign currency gains and losses and realized gains and losses on the sale of investments.

 

Liquidity and Capital Resources

 

Since our inception, we have financed our operations primarily through proceeds from the public offerings of our common stock, private placements of our preferred stock, debt financings, interest income earned on cash, and cash

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equivalents, and marketable securities, borrowings against lines of credit, and receipts from agreements with Sanofi and Novartis. At March 31, 2015, we had cash and cash equivalents and investments of $30.2 million.

 

The following table sets forth the primary sources and uses of cash and cash equivalents for each of the periods presented below:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

(in thousands)

    

2015

    

2014

 

Net cash (used in) operating activities

 

$

(9,015)

 

$

(11,298)

 

Net cash provided by (used in) investing activities

 

 

12,011 

 

 

(8,773)

 

Net cash (used in) financing activities

 

 

(1,295)

 

 

(752)

 

Net increase (decrease) in cash and cash equivalents

 

$

1,701 

 

$

(20,823)

 

 

Net cash used in operating activities was $9.0 million and $11.3 million for the three months ended March 31, 2015 and 2014, respectively. The primary use of cash in each of the periods was to fund our operations related to the development of our product candidates. Cash used in operating activities of $9.0 million for the three months ended March 31, 2015 primarily related to our net loss of $9.6 million, adjusted for non-cash items such as $0.3 million of stock-based compensation expense,  $0.8 million relating to the fair value of stock options which were modified due to executive retirement and restructuring activities and net cash outflows of $0.7 million related to changes in operating assets and liabilities. Cash used in operating activities of $11.3 million for the three months ended March 31, 2014 primarily related to our net loss of $10.4 million, adjusted for non-cash items such as $0.5 million of stock-based compensation expense and net cash outflows of $1.6 million related to changes in operating assets and liabilities..

 

Net cash provided by investing activities was $12.0 million for the three months ended March 31, 2015, primarily related to proceeds from maturities of marketable securities of $15.8 million partially offset by purchases of investments of $3.7 million. Net cash used in investing activities was $8.8 million for the three months ended March 31, 2014, primarily related to purchases of marketable securities of $31.0 million offset by proceeds from maturities of marketable securities of $22.5 million.

 

Net cash used in financing activities was $1.3 million for the three months ended March 31, 2015, and $0.8 million for the three months ended March 31, 2014,  and consisted primarily of payments on our borrowings.

 

We expect to incur substantial expenditures in the foreseeable future for the development and potential commercialization of our product candidates. Specifically, we have incurred substantial expenses in connection with our Phase 2 clinical trial for KB001‑A in CF patients with chronic Pa infections and expect to continue to incur additional costs as we wind that program down.  In addition, we have incurred and expect to continue to incur significant costs as a result of our ongoing Phase 2 clinical trials for our KB004 development program in hematologic malignancies, as well as for any clinical trials we initiate to evaluate KB004 in other indications including potentially solid tumors and any trials we may initiate to evaluate KB003 as an oncology therapeutic.

 

In order to maintain adequate capital to fund the continued development of our product candidates, management continues to evaluate a number of alternatives, including but not limited to: (i) seeking additional partner(s) for our programs to provide capital for future development and to share in development costs, (ii) undertaking reductions in operating spending, and (iii) evaluating various means to raise additional capital, such as debt or equity offerings. Regardless of any actions we take to address our cash position in the near term, we will also need to raise additional capital in order to further advance our product candidates towards regulatory approval. If management is unsuccessful in these efforts, based on our current levels of operating spending our current capital may not be sufficient in some scenarios to fund our operations for the next twelve months. Our ability to access capital when needed is not assured and, if not achieved on a timely basis, could materially harm our business, financial condition and results of operations. Further, any failure to raise capital could be deemed a material adverse change under our loan and security agreement with MidCap Financial and that may, in turn, result in the lender declaring the loan in default and demanding repayment of the principal, accrued interest, the exit fee and a prepayment fee. These conditions could raise substantial doubt about our ability to continue as a going concern. The report of our Independent Registered Public Accounting Firm included an explanatory paragraph about the Company’s ability to continue as a going concern as included in our Annual Report on Form 10-K for the year ended December 31, 2014.

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We will continue to require additional financing to develop our products and fund operations. We will seek funds through equity or debt financings, collaborative or other arrangements with corporate sources, or through other sources of financing. Adequate additional funding may not be available to us on acceptable terms or at all. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategies. We anticipate that we will need to raise substantial additional capital, the requirements of which will depend on many factors, including:

 

·

the type, number, costs, and results of the product candidate development programs which we are pursuing or may choose to pursue in the future;

·

the scope, progress, expansion, costs, and results of our clinical trials;

·

the timing of and costs involved in obtaining regulatory approvals;

·

our ability to establish and maintain development partnering arrangements;

·

the timing, receipt and amount of contingent, royalty, and other payments from Sanofi or any of our future development partners;

·

the emergence of competing technologies and other adverse market developments;

·

the costs of maintaining, expanding, and protecting our intellectual property portfolio, including potential litigation costs and liabilities;

·

the resources we devote to marketing, and, if approved, commercializing our product candidates;

·

the scope, progress, expansion, and costs of manufacturing our product candidates;

·

our ability to draw funds from our current or any future loan and security agreement; and

·

the costs associated with being a public company.

If we are unable to raise additional funds when needed, we may be required to delay, reduce, or terminate some or all of our development programs and clinical trials. We may also be required to sell or license to others technologies or clinical product candidates or programs that we would prefer to develop and commercialize ourselves.

 

Contractual Obligations and Commitments

 

On May 21, 2013, we entered into an agreement with a third party for the manufacturing of KB003 clinical supply for future clinical trials. Despite the termination of the KB003 development program in severe asthma during the first quarter of 2014, we are continuing to evaluate other potential indications for KB003. Under that agreement the third party will perform a range of related services, including process development, optimization, validation, formulation development, regulatory assistance, stability testing and related activities. In addition, we had entered into an agreement with a separate third party to produce supply of KB001-A. As of December 31, 2014, there were no remaining commitments for services and in February 2015, this agreement was cancelled.

 

As of March 31, 2015, there were no significant and material changes to our contractual obligations from those set forth in our Form 10-K filed with the Securities and Exchange Commission (SEC) on March 16, 2015.

 

Indemnification

 

In the normal course of business, we enter into contracts and agreements that contain a variety of representations and warranties and provide for general indemnifications. Our exposure under these agreements is unknown because it involves claims that may be made against us in the future, but have not yet been made. To date, we have not paid any claims or been required to defend any action related to our indemnification obligations. However, we may record charges in the future as a result of these indemnification obligations.

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In accordance with our amended and restated certificate of incorporation and our amended and restated bylaws, we have indemnification obligations to our officers and directors for specified events or occurrences, subject to some limits, while they are serving at our request in such capacities. We have also entered into indemnification agreements with our directors, executive officers, and key employees. There have been no claims to date, and we have director and officer insurance that may enable us to recover a portion of any amounts paid for future potential claims.

 

Off-Balance Sheet Arrangements

 

We currently have no off-balance sheet arrangements, such as structured finance, special purpose entities or variable interest entities.

 

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

 

We are exposed to market risk related to fluctuations in interest rates and market prices. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates. However, since a majority of our investments are in short-term FDIC-insured government securities, and money market funds, we do not believe we are subject to any material market risk exposure. The fair value of our investments included in cash equivalents and marketable securities was $27.9 million and $39.3 million as of March 31, 2015 and December 31, 2014, respectively.

 

Our investment policy is to limit credit exposure through diversification and investment in highly rated securities. We, along with our investment advisors, actively review current investment ratings, company specific events, and general economic conditions in managing our investments and in determining whether there is a significant decline in fair value that is other‑than‑temporary. We monitor and evaluate our investment portfolio on a quarterly basis for other‑than‑temporary impairment charges.

 

We are also exposed to market risk related to fluctuations in interest rates indexed to LIBOR, which determines the variable interest payments made on our notes payable. However, we do not believe we are subject to any material market risk exposure related to this obligation.

 

We are also exposed to foreign currency exchange rate risk inherent in our contracts with research institutions and contract research organizations as certain services are performed by them outside the United States. While billed in US dollars by our vendors, our estimate of the amount owed may change until the vendor invoices us for the services rendered. We make our estimates for those services using our best estimate of costs incurred including the impact of foreign currency.

 

Item 4.Controls and Procedures.

 

Managements Evaluation of our Disclosure Controls and Procedures

 

Management, including our Interim Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), as of the end of the period covered by this report. Based upon the evaluation, our Interim Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file and submit under the Securities Exchange Act of 1934, as amended, is (i) recorded, processed, summarized and reported as and when required and (ii) accumulated and communicated to our management, including our Interim Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely discussion regarding required disclosure.

 

Changes in Internal Control Over Financial Reporting

 

There have been no changes in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

 

Item 1.Legal Proceedings

 

We are not currently a party to any material legal proceedings.

 

Item 1A.Risk Factors

 

Risk Related to Our Business and the Development, Regulatory Approval, and Commercialization of Our Product Candidates

 

We will need substantial additional capital to develop and commercialize our product candidates, and we may be unable to raise additional capital when needed, or at all, which would force us to reduce or discontinue operations.

 

As of March 31, 2015, we had $30.2 million in cash, cash equivalents, and investments. We utilized $9.0 million of cash in operating activities during the three months ended March 31, 2015.

 

Our spending levels vary based on new and ongoing development and corporate activities. As a result, our cash used in operating activities will also fluctuate from period to period. We have not sold and do not expect to sell any product candidates or derive royalty revenue from product candidate sales for the foreseeable future, if ever. In order to develop and bring product candidates through approval for marketing, we must commit substantial resources to costly and time-consuming clinical trials. As such, we anticipate that we will need to raise substantial additional capital, primarily to advance our lead program, KB004, in clinical trials. The amount of capital we will require and the timing of our need for additional capital will depend on many other factors, including:

 

·

the type, number, costs, and results of the product candidate development programs which we are pursuing or may choose to pursue in the future;

 

·

the scope, progress, expansion, costs, and results of, or delays in, our clinical trials;

 

·

the timing of and costs involved in obtaining regulatory approvals;

 

·

our ability to establish and maintain development partnering arrangements and any associated funding;

 

·

the timing, receipt and amount of contingent, royalty, and other payments from any future development partners;

 

·

the emergence of competing products or technologies and other adverse market developments;

 

·

the costs of maintaining, expanding, and protecting our intellectual property portfolio, including potential litigation costs and liabilities;

 

·

the resources we devote to marketing, and, if approved, commercializing our product candidates;

 

·

the sourcing, timing, scope, progress, expansion, and costs of manufacturing our product candidates;

 

·

the timing of repayment of current loans, and our ability to draw funds from any future loan and security agreement; and

 

·

the costs associated with being a public company.

 

Since our inception, we have been financing our operations primarily through private placements and our initial and secondary public offerings of our equity securities, interest income earned on cash, cash equivalents, and marketable securities, borrowings from lines of credit, and payments under agreements with Sanofi and Novartis International

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Pharmaceutical Ltd. (together with its affiliates, Novartis), a licensee of our Humaneered® technology. Our future capital requirements are substantial and in order to fund our future needs, we may seek additional funding through equity or debt financings, development partnering arrangements, borrowings from lines of credit, or other sources. In order to maintain adequate capital to fund the continued development of our product candidates, management continues to evaluate a number of alternatives, including but not limited to: (i) seeking additional partner(s) for our programs to provide capital for future development and to share in development costs, (ii) undertaking reductions in operating spending, and (iii) evaluating various means to raise additional capital, such as debt or equity offerings. Regardless of any actions we take to address our cash position in the near term, we will also need to raise additional capital in order to further advance our product candidates towards regulatory approval. If management is unsuccessful in these efforts, based on our current levels of operating spending our current capital may not be sufficient in some scenarios to fund our operations for the next twelve months. Our ability to access capital when needed is not assured and, if not achieved on a timely basis, could materially harm our business, financial condition and results of operations. Further, any failure to raise capital could be deemed a material adverse change under our loan and security agreement with MidCap Financial and that may, in turn, result in the lender declaring the loan in default and demanding repayment of the principal, accrued interest, the exit fee and a prepayment fee. These conditions could raise substantial doubt about our ability to continue as a going concern. The Report of Independent Registered Public Accounting Firm at the beginning of the Consolidated Financial Statements section of the Annual Report for the year ended December 31, 2014 on Form 10-K filed on March 16, 2015 included an explanatory paragraph about the Company’s ability to continue as a going concern.

 

Our expectations are based on management’s current assumptions and clinical development plans, which may prove to be wrong, and we could spend our available financial resources much faster than we currently expect. We will require substantial additional capital to support clinical trials, regulatory approvals, and, if approved, the commercialization of our product candidates. Additional funding may not be available to us on a timely basis or at acceptable terms, if at all.

 

If we are unable to raise additional funds when needed, we may be required to delay, reduce, or terminate some or all of our development programs and clinical trials. We may also be required to sell or license to others our technologies, product candidates, or development programs that we would have preferred to develop and commercialize ourselves on less than favorable terms, if at all.

 

We have a history of operating losses, we expect to continue to incur losses, and we may never become profitable.

 

As of March 31, 2015, we had an accumulated deficit of $187.8 million, and for the three months ended March 31, 2015, we incurred a net loss of $9.6 million. We have incurred net losses each year since our inception except for the year ended December 31, 2007. To date, we have only recognized revenue from payments for funded research and development and for license or collaboration fees. We expect to make substantial expenditures and incur additional operating losses in the future to further develop and commercialize our product candidates. Our accumulated deficit is expected to increase significantly as we continue our development and clinical trial efforts. Our ability to achieve and sustain profitability depends on obtaining regulatory approvals for and successfully commercializing our product candidates, either alone or with third parties. We do not currently have the required approvals to market any of our product candidates and we may never receive them. We may not be profitable even if we or any of our future development partners succeed in commercializing any of our product candidates. Because of the numerous risks and uncertainties associated with developing and commercializing our product candidates, we are unable to predict the extent of any future losses or when we will become profitable, if at all.

 

Our product candidates are at an early stage of development and may not be successfully developed or commercialized. We have had to discontinue the development of prior product candidates.

 

Our product candidates are in the early stage of development and will require substantial clinical development, testing, and regulatory approval prior to commercialization. We currently only have one product candidate in Phase 2 clinical trials, KB004, and we have recently discontinued development of KB001-A in CF patients with Pa lung infections and KB003 in severe asthma. None of our product candidates have advanced into a pivotal study and it may be years before such a study is initiated, if at all. Of the large number of drugs in development, only a small percentage successfully complete the FDA regulatory approval process and are commercialized. Accordingly, even if we are able to obtain the requisite financing to continue to fund our development programs, we cannot assure you that our product

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candidates will be successfully developed or commercialized. If we or any of our future development partners are unable to develop, or obtain regulatory approval for or, if approved, successfully commercialize, one or more of our product candidates, we may not be able to generate sufficient revenue to continue our business.

 

We may not be successful in establishing and maintaining additional development partnerships, which could adversely affect our ability to develop and commercialize product candidates.

 

We have recently announced our mutual agreement with Sanofi to terminate our prior development partnership for KB001-A. In addition to our prior partnership with Sanofi, a part of our strategy is to enter into development partnerships in the future, including collaborations with major biotechnology or pharmaceutical companies. We face significant competition in seeking appropriate development partners and the negotiation process is time consuming and complex. Although our decision with Sanofi was mutual, we cannot predict the impact of that decision on the likelihood of our ability to enter into future partnerships for KB001-A or for our other programs. Moreover, we may not be successful in our efforts to establish a development partnership or other alternative arrangements for any of our other existing or future product candidates and programs because, among other reasons, our research and development pipeline may be insufficient, our product candidates and programs may be deemed to be at too early a stage of development for collaborative effort and/or third parties may not view our product candidates and programs as having the requisite potential to demonstrate safety and efficacy. Even if we are successful in our efforts to establish new development partnerships, the terms that we agree upon may not be favorable to us and we may not be able to maintain such development partnerships if, for example, development or approval of a product candidate is delayed or sales of an approved product candidate are disappointing. Any delay in entering into new development partnership agreements related to our product candidates could delay the development and commercialization of our product candidates and reduce their competitiveness if they reach the market.

 

Moreover, if we fail to establish and maintain additional development partnerships related to our product candidates:

 

·

the development of our current or future product candidates may be terminated or delayed;

 

·

our cash expenditures related to development of certain of our current or future product candidates would increase significantly and we may need to seek additional financing;

 

·

we may be required to hire additional employees or otherwise develop expertise, such as sales and marketing expertise, for which we have not budgeted; and

 

·

we will bear all of the risk related to the development of any such product candidates.

 

Our loan and security agreement contains restrictions that limit our flexibility in operating our business.

 

In September 2012, we entered into a loan and security agreement with MidCap Financial and drew down $5.0 million under the facility. In December 2012, we drew down an additional $5.0 million under the facility, and in May 2014, we drew down the final $5.0 million available under the facility. The agreement contains various covenants that limit our ability to engage in specified types of transactions. These covenants limit our ability to, among other things:

 

·

incur or assume certain debt;

 

·

merge or consolidate;

 

·

change the nature of our business;

 

·

change our organizational structure or type;

 

·

dispose of certain assets;

 

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·

grant liens on our assets;

 

·

make certain investments;

 

·

pay dividends; and

 

·

enter into material transactions with affiliates.

 

A breach of any of these covenants or a material adverse change to our business, operations, or condition (financial or otherwise) could result in a default under the loan. A material adverse change means a material impairment in the perfection or priority of the lender’s lien in the collateral or in the value of the collateral; a material adverse change in the business, operations, or condition (financial or otherwise) of the Company, taken as a whole; or a material impairment of the prospect of repayment of any portion of the obligations. In the case of a continuing event of default under the loan, MidCap Financial could elect to declare all amounts outstanding to be immediately due and payable and terminate all commitments to extend further credit, commence and prosecute bankruptcy and/or other insolvency proceedings, or proceed against the collateral granted to MidCap Financial under the loan. Amounts outstanding under the term loan are secured by all of our existing and future assets (excluding intellectual property, which is subject to a negative pledge arrangement). A default and any accompanying repayment could have a material adverse effect on our business, operating results and financial condition.

 

Because we have a short operating history developing clinical-stage antibodies, there is a limited amount of information about us upon which you can evaluate our product candidates and business prospects.

 

We commenced our first clinical trial in 2006, and we have a limited operating history developing clinical-stage antibodies upon which you can evaluate our business and prospects. In addition, as an early-stage clinical development company, we have limited experience in conducting clinical trials, and we have never conducted clinical trials of a size required for regulatory approvals. Further, we have not yet demonstrated an ability to successfully overcome many of the risks and uncertainties frequently encountered by companies in new and rapidly evolving fields, particularly in the biopharmaceutical area. For example, to execute our business plan we will need to successfully:

 

·

execute our product candidate development activities, including successfully completing our clinical trial programs;

 

·

obtain required regulatory approvals for the development and commercialization of our product candidates;

 

·

manage our spending as costs and expenses increase due to clinical trials, regulatory approvals, manufacturing and commercialization;

 

·

secure substantial additional funding;

 

·

develop and maintain successful strategic relationships;

 

·

build and maintain a strong intellectual property portfolio;

 

·

build and maintain appropriate clinical, sales, distribution, and marketing capabilities on our own or through third parties; and

 

·

gain market acceptance and favorable reimbursement status for our product candidates.

 

If we are unsuccessful in accomplishing these objectives, we may not be able to develop product candidates, raise capital, expand our business, or continue our operations.

 

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We have and may continue to experience delays in commencing or conducting our clinical trials, in receiving data from third parties or in the continuation or completion of clinical testing, which could result in increased costs to us and delay our ability to generate product candidate revenue.

 

Before we can initiate clinical trials in the United States for any new product candidates, we are required to submit the results of preclinical testing to the FDA as part of an Investigational New Drug (IND) application, along with other information including information about product candidate chemistry, manufacturing, and controls and our proposed clinical trial protocol. In doing so, we rely in part on preclinical, clinical, and quality data previously generated by other third parties for regulatory submissions. In addition, for our programs already underway, we are required to report or provide information to appropriate regulatory authorities in order to continue with our testing programs. If we are unable to make timely regulatory submissions for any of our programs, it will delay our plans for our clinical trials.  If those third parties do not make the required data available to us, we will likely have to identify and contract with another CMO, and/or develop all necessary preclinical and clinical data on our own, which will lead to significant delays and increase development costs of the product candidate. In addition, the FDA may require us to conduct additional preclinical testing for any product candidate before it allows us to initiate clinical testing under any IND, which may lead to additional delays and increase the costs of our preclinical development. Moreover, despite the presence of an active IND for a product candidate, clinical trials can be delayed for a variety of reasons, including delays in:

 

·

identifying, recruiting, and enrolling qualified subjects to participate in a clinical trial;

 

·

identifying, recruiting, and training suitable clinical investigators;

 

·

reaching agreement on acceptable terms with prospective contract research organizations (CROs) and trial sites, the terms of which can be subject to extensive negotiation, may be subject to modification from time to time, and may vary significantly among different CROs and trial sites;

 

·

obtaining and maintaining sufficient quantities of a product candidate for use in clinical trials, either as a result of transferring the manufacturing of a product candidate to another site or manufacturer, deferring ordering or production of product in order to conserve resources or mitigate risk, having product in inventory become no longer suitable for use in humans, or other reasons that reduce or delay availability of drug supply;

 

·

obtaining and maintaining institutional review board (IRB) or ethics committee approval to conduct a clinical trial at an existing or prospective site;

 

·

retaining or replacing participants who have initiated a clinical trial but may withdraw due to adverse events from the therapy, insufficient efficacy, fatigue with the clinical trial process, or personal issues; readiness of any companion diagnostic necessary to ensure that the study enrolls the target population; or

 

·

undergoing a clinical trial put on clinical hold at any time by the FDA during product candidate development.

 

Once a clinical trial has begun, recruitment and enrollment of subjects may be slower than we anticipate. Numerous companies and institutions are conducting clinical studies in similar patient populations which can result in competition for qualified patients. In addition, clinical trials will take longer than we anticipate if we are required, or believe it is necessary, to enroll additional subjects. Clinical trials may also be delayed as a result of ambiguous or negative interim results. Further, a clinical trial may be suspended or terminated by us, an Institutional Review Board (IRB), an ethics committee, or a data safety monitoring committee overseeing the clinical trial, any of our clinical trial sites with respect to that site or the FDA or other regulatory authorities due to a number of factors, including:

 

·

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

 

·

inspection of the clinical trial operations or clinical trial site by the FDA or other regulatory authorities;

 

·

inability to provide timely supply of drug product;

 

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·

unforeseen safety issues, known safety issues that occur at a greater frequency or severity than we anticipate, or any determination that the clinical trial presents unacceptable health risks; or

 

·

lack of adequate funding to continue the clinical trial.

 

Additionally, if any of our future development partners do not develop the licensed product candidates in the time and manner that we expect, or at all, the clinical development efforts related to these licensed product candidates could be delayed or terminated. In addition, our ability to enforce our partners’ obligations under any future collaboration efforts may be limited due to time and resource constraints, competing corporate priorities of our future partners, and other factors.

 

Any delays in the commencement of our clinical trials may delay or preclude our ability to further develop or pursue regulatory approval for our product candidates. Changes in U.S. and foreign regulatory requirements and guidance also may occur and we may need to amend clinical trial protocols to reflect these changes. Amendments may require us to resubmit our clinical trial protocols to IRBs for re-examination, which may affect the costs, timing, and likelihood of a successful completion of a clinical trial. If we or any of our future development partners experience delays in the completion of, or if we or any of our future development partners must terminate, any clinical trial of any product candidate our ability to obtain regulatory approval for that product candidate will be delayed and the commercial prospects, if any, for the product candidate may suffer as a result. In addition, many of these factors may also ultimately lead to the denial of regulatory approval of a product candidate.

 

Our product candidates are subject to extensive regulation, compliance with which is costly and time consuming, may cause unanticipated delays, or prevent the receipt of the required approvals to commercialize our product candidates.

 

The clinical development, approval, manufacturing, labeling, storage, record-keeping, advertising, promotion, import, export, marketing, and distribution of our product candidates are subject to extensive regulation by the FDA in the United States and by comparable authorities in foreign markets. In the United States, we are not permitted to market our product candidates until we receive regulatory approval from the FDA. The process of obtaining regulatory approval is expensive, often takes many years, and can vary substantially based upon the type, complexity, and novelty of the products involved, as well as the target indications. Approval policies or regulations may change and the FDA has substantial discretion in the drug approval process, including the ability to delay, limit, or deny approval of a product candidate for many reasons. Despite the time and expense invested in clinical development of product candidates, regulatory approval is never guaranteed.

 

The FDA or other comparable foreign regulatory authorities can delay, limit, or deny approval of a product candidate for many reasons, including:

 

·

such authorities may disagree with the design or implementation of our or any of our future development partners’ clinical trials;

 

·

we or any of our future development partners may be unable to demonstrate to the satisfaction of the FDA or other regulatory authorities that a product candidate is safe and effective for any indication;

 

·

such authorities may not accept clinical data from trials which are conducted at clinical facilities or in countries where the standard of care is potentially different from the United States;

 

·

the results of clinical trials may not demonstrate the safety or efficacy required by such authorities for approval;

 

·

we or any of our future development partners may be unable to demonstrate that a product candidate’s clinical and other benefits outweigh its safety risks;

 

·

such authorities may disagree with our interpretation of data from preclinical studies or clinical trials or the use of results from antibody studies that served as precursors to our current drug candidates;

 

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·

such authorities may find deficiencies in the manufacturing processes or facilities of third-party manufacturers with which we or any of our future development partners contract for clinical and commercial supplies;

 

·

we may not be successful in developing any companion diagnostic necessary to demonstrate efficacy in our desired target populations for KB004;

 

·

such authorities may delay approval or clearance of any companion diagnostic for KB004; or

 

·

the approval policies or regulations of such authorities may significantly change in a manner rendering our or any of our future development partners’ clinical data insufficient for approval.

 

With respect to foreign markets, approval procedures vary widely among countries and, in addition to the aforementioned risks, can involve additional product testing, administrative review periods, and agreements with pricing authorities. In addition, events raising questions about the safety of certain marketed pharmaceuticals may result in increased caution by the FDA and comparable foreign regulatory authorities in reviewing new drugs based on safety, efficacy or other regulatory considerations and may result in significant delays in obtaining regulatory approvals. Any delay in obtaining, or inability to obtain, applicable regulatory approvals would prevent us, or any of our future development partners from commercializing our product candidates.

 

The results of preclinical studies and early clinical trials are not always predictive of future results. Any product candidate we or any of our future development partners advance into clinical trials may not have favorable results in later clinical trials, if any, or receive regulatory approval.

 

Drug development has substantial inherent risk. We or any of our future development partners will be required to demonstrate through adequate and well-controlled clinical trials that our product candidates are effective, with a favorable benefit-risk profile, for use in their target indications before we can seek regulatory approvals for their commercial sale. Drug development is a long, expensive and uncertain process, and delay or failure can occur at any stage of development, including after commencement of any of our clinical trials. In addition, success in early clinical trials does not mean that later clinical trials will be successful because product candidates in later-stage clinical trials may fail to demonstrate sufficient safety or efficacy despite having progressed through initial clinical testing. Furthermore, our future trials will need to demonstrate sufficient safety and efficacy for approval by regulatory authorities in larger patient populations. Companies frequently suffer significant setbacks in advanced clinical trials, even after earlier clinical trials have shown promising results. In addition, only a small percentage of drugs under development result in the submission of a New Drug Application (NDA) or BLA to the FDA and even fewer are approved for commercialization.

 

For example, we recently announced the termination of development in Pa lung infections in CF patients of KB001-A, our most advanced product candidate, because the Phase 2 study we were conducting did not meet its primary or secondary endpoints, despite promising results in prior studies of a precursor molecule, KB001. In early 2014, we announced termination of development in severe asthma of KB003, also based on negative Phase 2 results despite earlier positive data from studies of KB002, a precursor molecule.

 

Furthermore, our Phase 2 expansion trial for KB004, currently enrolling and underway, may not be successful.

 

If we fail to attract and retain key management and clinical development personnel, we may be unable to successfully develop or commercialize our product candidates.

 

We will need to effectively manage our managerial, operational, financial, and other resources in order to successfully pursue our clinical development and commercialization efforts. As a company with a limited number of personnel, we are highly dependent on the expertise of the members of our senior management. We recently announced the retirement of David W. Pritchard, our president and chief executive officer, and in a subsequent reduction in force we announced the elimination of our chief medical officer position. We cannot predict the impact of the loss of such individuals or the loss of services of any of our other senior management, should they occur. Such losses could delay or

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prevent the further development and potential commercialization of our product candidates and, if we are not successful in finding suitable replacements, could harm our business.

 

Our success also depends on our continued ability to attract, retain, and motivate highly qualified management and scientific personnel and we may not be able to do so in the future due to recent events, intense competition among biotechnology and pharmaceutical companies, universities, and research organizations for qualified personnel. We have initiated a search for permanent chief executive officer and at this time do not plan to replace the chief medical officer position, although we are actively recruiting for additional senior staff with oncology expertise in light of our dedication to oncology. If we are unable to attract and retain the necessary personnel, we may experience significant impediments to our ability to implement our business strategy.

 

If we fail to effectively integrate any new executive officers into our organization, the future development and commercialization of our product candidates may suffer, harming future regulatory approvals, sales of our product candidates or our results of operations.

 

We are currently conducting a search for a permanent chief executive officer. There can be no assurance that we can identify and hire such a candidate on a timely basis, or at all. Even if we are successful in locating a permanent chief executive officer, that person will not have worked with our senior executive team. Our future performance will depend, in part, on our ability to successfully integrate any newly hired chief executive officer into our management team and our ability to develop an effective working relationship among senior management. Our failure to integrate this individual and create effective working relationships among the members of management could result in inefficiencies in the development and commercialization of our product candidates, harming future regulatory approvals, sales of our product candidates and our results of operations.

 

Any product candidate we or any of our future development partners advance into clinical trials may cause unacceptable adverse events or have other properties that may delay or prevent its regulatory approval or commercialization or limit its commercial potential.

 

Unacceptable adverse events caused by any of our product candidates that we advance into clinical trials could cause us or regulatory authorities to interrupt, delay, or halt clinical trials and could result in the denial of regulatory approval by the FDA or other regulatory authorities for any or all targeted indications and markets. This in turn could prevent us from completing development or commercializing the affected product candidate and generating revenue from its sale. For example, we observed fatal intracranial hemorrhages in two subjects deemed possibly related to the study drug by the study investigator in our KB004 Phase 1 clinical trial and, as a result, we amended our clinical protocol, which caused a delay in our program.

 

We have not yet successfully completed testing of any of our product candidates for the treatment of the indications for which we intend to seek approval in humans, and we currently do not know the extent of adverse events, if any, that will be observed in individuals who receive any of our product candidates. If any of our product candidates cause unacceptable adverse events in clinical trials, we may not be able to obtain regulatory approval or commercialize such product candidate.

 

If we pursue development of a companion diagnostic intended to identify patients who are likely to benefit from treatment with KB004, failure to obtain approval for the diagnostic may prevent or delay approval of KB004.

 

We are in the initial phases of developing an in vitro EphA3 diagnostic, currently in the CLIA validated laboratory format, which is intended to identify patients who are likely to benefit from KB004. We have amended our study protocol prior to initiation of the Phase 2 expansion phase to include EphA3 positive tumor status as an inclusion criterion.

 

The FDA regulates companion diagnostics such as the one we are developing as medical devices. FDA regulations pertaining to medical devices govern, among other things, the research, design, development, pre-clinical and clinical testing, manufacture, safety, efficacy, storage, record-keeping, packaging, labeling, adverse event reporting, advertising, promotion, marketing, distribution, and import and export of medical devices. Pursuant to the Federal Food, Drug, and

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Cosmetic Act (FDC Act), medical devices are subject to varying degrees of regulatory control and are classified in one of three classes depending on the controls the FDA determines necessary to reasonably ensure their safety and efficacy. In July 2011, the FDA issued a draft guidance that stated that if safe and effective use of a therapeutic depends on an in vitro diagnostic, then the FDA generally will not approve the therapeutic product until it is ready to approve or clear the in vitro companion diagnostic device. It is possible that KB004 may not be approved until the FDA has sufficient information to also approve or clear our companion device. Moreover, the FDA’s expectations for in vitro companion diagnostics are evolving and some aspects of the FDA’s regulatory approach remain unclear. The FDA’s developing expectations will affect, among other things, the development, testing and review of any in vitro companion diagnostics.

 

Because our companion diagnostic candidate is at an early stage of development, and because we have not yet decided whether to pursue a reference lab-based test or a kit, we have yet to seek a meeting with the FDA to discuss our companion diagnostic test in development. We therefore do not yet know what the FDA will require for this test. We may not be able to develop or obtain approval or clearance for the companion diagnostic, and any delay or failure to obtain regulatory approval or clearance could delay development or prevent approval of KB004.

 

If our competitors develop treatments for the target indications of our product candidates that are approved more quickly, marketed more successfully or demonstrated to be safer or more effective than our product candidates, our commercial opportunity will be reduced or eliminated.

 

We operate in highly competitive segments of the biotechnology and biopharmaceutical markets. We face competition from many different sources, including commercial pharmaceutical and biotechnology enterprises, academic institutions, government agencies, and private and public research institutions. Our product candidates, if successfully developed and approved, will compete with established therapies as well as with new treatments that may be introduced by our competitors. Many of our competitors have significantly greater financial, product candidate development, manufacturing, and marketing resources than we do. Large pharmaceutical and biotechnology companies have extensive experience in clinical testing and obtaining regulatory approval for drugs. In addition, many universities and private and public research institutes are active in cancer research, some in direct competition with us. We also may compete with these organizations to recruit management, scientists, and clinical development personnel. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. New developments, including the development of other pharmaceutical technologies and methods of treating disease, occur in the pharmaceutical and life sciences industries at a rapid pace. Developments by competitors may render our product candidates obsolete or noncompetitive. We will also face competition from these third parties in recruiting and retaining qualified personnel, establishing clinical trial sites, and registering subjects for clinical trials, and in identifying and in-licensing new product candidates.

 

Competition in cancer drug development including hematology/oncology is intense, with more than 250 compounds in clinical trials by large pharmaceutical and biotechnology companies. Many of these companies are focused on targeted therapies. We anticipate that we will face intense and increasing competition as new treatments enter the market and advanced technologies become available. In addition, the development program that we undertake may change from time to time due to clinical or non-clinical results, competitive developments, regulatory changes, recruitment, resource or other constraints in running clinical studies and other factors.

 

We are subject to a multitude of manufacturing risks, any of which could substantially increase our costs and limit supply of our products.

 

We are, and will for the foreseeable future continue to be, wholly dependent on third party contract manufacturers for the timely supply of adequate quantities of our products which meet or exceed requisite quality and production standards for use in clinical and nonclinical studies. Given the extensive risks, scope, complexity, cost, regulatory requirements and commitment of resources associated with developing the capabilities to manufacture one or more of our products, we have no present plan or intention of developing in-house manufacturing capabilities for nonclinical, clinical or commercial scale production, beyond our current supervision and management of our third party contract manufacturers. In addition, in order to balance risk and conserve financial and human resources, we have and may continue from time to time to defer commitment to production of product, which could result in delays to the continued progress of our clinical and nonclinical testing.

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In addition to the foregoing, the process of manufacturing our products is complex, highly regulated and subject to several risks, including but not limited to the following:

 

·

The process of manufacturing biologics is extremely susceptible to product loss due to contamination, equipment failure or improper installation or operation of equipment, or vendor or operator error. Even minor deviations from normal manufacturing processes could result in reduced production yields, product defects and other supply disruptions. If microbial, viral or other contaminations are discovered in our products or in the manufacturing facilities in which our products are made, such manufacturing facilities may need to be closed for an extended period of time to investigate and remedy the contamination.

 

·

The manufacturing facilities in which our products are made could be adversely affected by equipment failures,  plant closures, capacity constraints, competing customer priorities or changes in corporate strategy or priorities, process changes or failures, changes in business models or operations, materials or labor shortages,  natural disasters,  power failures and numerous other factors.

 

·

We are wholly dependent upon third party CMOs for the timely supply of adequate quantities of requisite quality product for our nonclinical, clinical and, if approved by regulatory authorities, commercial scale production.

 

·

We, and our contract manufacturers, must comply with the FDA’s current Good Manufacturing Practice (cGMP) regulations and guidelines. We, and our contract manufacturers, may encounter difficulties in achieving quality control and quality assurance and may experience shortages in qualified personnel. We, and our contract manufacturers, are subject to inspections by the FDA and comparable agencies in other jurisdictions to confirm compliance with applicable regulatory requirements. Any failure to follow cGMP or other regulatory requirements or delay, interruption or other issues that arise in the manufacture, fill-finish, packaging, or storage of our products as a result of a failure of our facilities or the facilities or operations of third parties to comply with regulatory requirements or pass any regulatory authority inspection could significantly impair our ability to develop and commercialize our products, including leading to significant delays in the availability of products for our clinical studies or the termination or hold on a clinical study, or the delay or prevention of a filing or approval of marketing applications for our product candidates. Significant noncompliance could also result in the imposition of sanctions, including fines, injunctions, civil penalties, failure of regulatory authorities to grant marketing approvals for our product candidates, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of products, operating restrictions and criminal prosecutions, any of which could damage our reputation. If we are not able to maintain regulatory compliance, we may not be permitted to market our products and/or may be subject to product recalls, seizures, injunctions, or criminal prosecution.

 

·

Any adverse developments affecting manufacturing operations for our products may result in shipment delays, inventory shortages, lot failures, product withdrawals or recalls, or other interruptions in the supply of our products. We may also have to take inventory write-offs and incur other charges and expenses for products that fail to meet specifications, undertake costly remediation efforts or seek more costly manufacturing alternatives.

 

If we are not successful in discovering, developing, acquiring and commercializing additional product candidates, our ability to expand our business will be limited.

 

A substantial amount of our effort is focused on the continued clinical testing and potential approval of our current product candidates and expanding our product candidates to serve other indications of unmet medical needs. Research programs to identify other indications require substantial technical, financial and human resources, whether or not any product candidates for other indications are ultimately identified. Our research programs may initially show promise in identifying potential product candidates, yet fail to yield product candidates for clinical development for many reasons, including the following:

 

·

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

 

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·

competitors may develop alternatives that render our product candidates obsolete or less attractive;

 

·

product candidates we develop may nevertheless be covered by third parties’ patents or other exclusive rights;

 

·

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

 

·

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

 

·

A product candidate may not be accepted as safe and effective by patients, the medical community or third-party payers, if applicable.

 

If we do not successfully develop and commercialize product candidates for other indications, our business and future prospects may be limited and our business will be more vulnerable to problems that we encounter in developing and commercializing our current product candidates.

 

If any product candidate that we successfully develop does not achieve broad market acceptance among physicians, patients, healthcare payors and the medical community, the revenue that it generates may be limited.

 

Even if our product candidates receive regulatory approval, they may not gain market acceptance among physicians, patients, healthcare payors, and the medical community. Coverage and reimbursement of our product candidates by third-party payors, including government payors, generally is also necessary for commercial success. The degree of market acceptance of any approved product candidates will depend on a number of factors, including:

 

·

the efficacy and safety as demonstrated in clinical trials;

 

·

the clinical indications for which the product candidate is approved;

 

·

acceptance by physicians, major operators of hospitals and clinics, and patients of the product candidate as a safe and effective treatment;

 

·

the potential and perceived advantages of product candidates over alternative treatments;

 

·

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

 

·

the cost of treatment in relation to alternative treatments;

 

·

the availability of adequate reimbursement and pricing by third parties and government authorities;

 

·

relative convenience and ease of administration;

 

·

the prevalence and severity of adverse events;

 

·

the effectiveness of our sales and marketing efforts; and

 

·

unfavorable publicity relating to the product candidate.

 

If any product candidate is approved but does not achieve an adequate level of acceptance by physicians, hospitals, healthcare payors, and patients, we may not generate sufficient revenue from that product candidate and may not become or remain profitable.

 

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Reimbursement may be limited or unavailable in certain market segments for our product candidates, which could make it difficult for us to sell our product candidates profitably.

 

Market acceptance and sales of our product candidates will depend significantly on the availability of adequate insurance coverage and reimbursement from third-party payors for any of our product candidates and may be affected by existing and future health care reform measures. Government authorities and third-party payors, such as private health insurers and health maintenance organizations, decide which drugs they will pay for and establish reimbursement levels. Reimbursement by a third-party payor may depend upon a number of factors including the third-party payor’s determination that use of a product candidate is:

 

·

a covered benefit under its health plan;

 

·

safe, effective, and medically necessary;

 

·

appropriate for the specific patient;

 

·

cost effective; and

 

·

neither experimental nor investigational.

 

Obtaining coverage and reimbursement approval for a product candidate from a government or other third-party payor is a time-consuming and costly process that could require us to provide supporting scientific, clinical, and cost effectiveness data for the use of our product candidates to the payor. We may not be able to provide data sufficient to gain acceptance with respect to coverage and reimbursement. We cannot be sure that coverage or adequate reimbursement will be available for any of our product candidates. Also, we cannot be sure that reimbursement amounts will not reduce the demand for, or the price of, our product candidates. If reimbursement is not available or is available only to limited levels or with restrictions, we may not be able to commercialize certain of our product candidates profitably, or at all, even if approved.

 

In the United States and in certain foreign jurisdictions, there have been a number of legislative and regulatory changes to the health care system that could affect our ability to sell our product candidates profitably. In particular, the Medicare Modernization Act of 2003 revised the payment methods for many product candidates under Medicare. This has resulted in lower rates of reimbursement. There have been numerous other federal and state initiatives designed to reduce payment for pharmaceuticals.

 

As a result of legislative proposals and the trend toward managed health care in the United States, third-party payors are increasingly attempting to contain health care costs by limiting both coverage and the level of reimbursement of new drugs. They may also refuse to provide coverage of approved product candidates for medical indications other than those for which the FDA has granted market approvals. As a result, significant uncertainty exists as to whether and how much third-party payors will reimburse patients for their use of newly approved drugs, which in turn will put pressure on the pricing of drugs. We expect to experience pricing pressures in connection with the sale of our product candidates due to the trend toward managed health care, the increasing influence of health maintenance organizations, and additional legislative proposals as well as country, regional, or local healthcare budget limitations.

 

If we are unable to establish sales and marketing capabilities or fail to enter into agreements with third parties to market and sell any product candidates we may successfully develop, we may not be able to effectively market and sell any such product candidates.

 

We do not currently have any infrastructure for the sale, marketing, and distribution of any of our product candidates once approved, if at all, and we must build this infrastructure or make arrangements with third parties to perform these functions in order to commercialize any product candidates for which we may obtain approval. The establishment and development of a sales force, either by us or jointly with a development partner, or the establishment of a contract sales force to market any product candidates we may develop will be expensive and time consuming and could delay any product candidate launch. If we or any of our future development partners are unable to establish sales and marketing

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capabilities or any other nontechnical capabilities necessary to commercialize any product candidates we may successfully develop, we will need to contract with third parties to market and sell such product candidates. We may not be able to establish arrangements with third parties on acceptable terms, if at all.

 

We face potential product liability exposure and, if successful claims are brought against us, we may incur substantial liability for a product candidate and may have to limit its commercialization.

 

The use of our product candidates in clinical trials and the sale of any product candidates for which we may obtain marketing approval expose us to the risk of product liability claims. Product liability claims may be brought against us or any of our future development partners by participants enrolled in our clinical trials, patients, health care providers, or others using, administering, or selling our product candidates. If we cannot successfully defend ourselves against any such claims, we would incur substantial liabilities. Regardless of merit or eventual outcome, product liability claims may result in:

 

·

withdrawal of clinical trial participants;

 

·

termination of clinical trial sites or entire trial programs;

 

·

costs of related litigation;

 

·

substantial monetary awards to trial participants or other claimants;