pbyi-10q_20160930.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended September 30, 2016

OR

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

For the transition period from              to             

Commission File Number: 001-35703

 

PUMA BIOTECHNOLOGY, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

77-0683487

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

10880 Wilshire Boulevard, Suite 2150, Los Angeles, CA 90024

(Address of principal executive offices) (Zip code)

(424) 248-6500

(Registrant’s telephone number, including area code)

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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 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  .

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.      36,818,092 shares of Common Stock, par value $0.0001 per share, were outstanding as of November 4, 2016.

 

 

 

 

 


PUMA BIOTECHNOLOGY, INC.

- INDEX -

 

 

Page

PART I – FINANCIAL INFORMATION:

 

 

Item 1.

 

Financial Statements:

1

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2016 (Unaudited) and December 31, 2015

1

 

 

 

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2016 and 2015 (Unaudited)

2

 

 

 

Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2016 and 2015 (Unaudited)

3

 

 

 

Condensed Consolidated Statement of Stockholders’ Equity for the Nine Months Ended September 30, 2016 (Unaudited)

4

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015 (Unaudited)

5

 

 

 

Notes to Condensed Consolidated Financial Statements

6

 

Item 2.

 

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

15

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

21

 

Item 4.

 

Controls and Procedures

22

 

PART II – OTHER INFORMATION:

 

 

Item 1.

 

Legal Proceedings

23

 

Item 1A.

 

Risk Factors

23

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

23

 

Item 3.

 

Defaults Upon Senior Securities

24

 

Item 4.

 

Mine Safety Disclosures

24

 

Item 5.

 

Other Information

24

 

Item 6.

 

Exhibits

25

 

Signatures

26

 

 

 


CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Any statements about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and may be forward looking. These forward-looking statements include, but are not limited to, statements about:

 

the development of our drug candidates, including when we expect to undertake, initiate and complete clinical trials of our product candidates;

 

the regulatory approval of our drug candidates;

 

the anticipated timing of product revenues and the commercial availability of our drug candidates;

 

our use of clinical research organizations and other contractors;

 

our ability to find collaborative partners for research, development and commercialization of potential products;

 

our ability to market any of our products;

 

our history of operating losses;

 

our expectations regarding our costs and expenses;

 

our anticipated capital requirements and estimates regarding our needs for additional financing;

 

our ability to compete against other companies and research institutions;

 

our ability to secure adequate protection for our intellectual property;

 

our intention to vigorously defend against a purported securities class action lawsuit; derivative lawsuits and a defamation lawsuit;

 

our ability to attract and retain key personnel; and

 

our ability to obtain adequate financing.

These statements are often, but not always, made through the use of words or phrases such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend” and similar words or phrases. Accordingly, these statements involve estimates, assumptions and uncertainties that could cause actual results to differ materially from those expressed in them. Discussions containing these forward-looking statements may be found throughout this Quarterly Report on Form 10-Q, including, in Part I, the section entitled “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These forward-looking statements involve risks and uncertainties, including the risks discussed in Part I, Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2015 that could cause our actual results to differ materially from those in the forward-looking statements. Such risks should be considered in evaluating our prospects and future financial performance. We undertake no obligation to update the forward-looking statements or to reflect events or circumstances after the date of this document.

 

 

 


Part I – FINANCIAL INFORMATION

Item 1. Financial Statements

PUMA BIOTECHNOLOGY, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

 

 

September 30, 2016 (unaudited)

 

 

December 31, 2015 (Note 1)

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

52,541

 

 

$

31,569

 

Marketable securities

 

 

56,390

 

 

 

184,320

 

Prepaid expenses and other, current

 

 

7,290

 

 

 

7,660

 

Receivables

 

 

1,179

 

 

 

 

Total current assets

 

 

117,400

 

 

 

223,549

 

Property and equipment, net

 

 

5,180

 

 

 

2,383

 

Prepaid expenses and other, long-term

 

 

7,135

 

 

 

9,597

 

Restricted cash

 

 

4,316

 

 

 

4,313

 

Total assets

 

$

134,031

 

 

$

239,842

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

20,878

 

 

$

17,803

 

Accrued expenses

 

 

16,721

 

 

 

14,639

 

Total current liabilities

 

 

37,599

 

 

 

32,442

 

Deferred rent

 

 

5,284

 

 

 

1,393

 

Total liabilities

 

 

42,883

 

 

 

33,835

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Common stock - $.0001 par value;  100,000,000 shares authorized;  32,503,092 shares issued and outstanding at September 30, 2016 and 32,466,842 issued and outstanding at December 31, 2015

 

 

3

 

 

 

3

 

Additional paid-in capital

 

 

814,992

 

 

 

726,651

 

Accumulated other comprehensive income (loss)

 

 

3

 

 

 

(147

)

Accumulated deficit

 

 

(723,850

)

 

 

(520,500

)

Total stockholders' equity

 

 

91,148

 

 

 

206,007

 

Total liabilities and stockholders' equity

 

$

134,031

 

 

$

239,842

 

 

See Accompanying Notes to the Condensed Consolidated Financial Statements

 

 

1

 


 

PUMA BIOTECHNOLOGY, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

(unaudited)

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative

$

14,022

 

 

$

8,809

 

 

$

37,326

 

 

$

22,212

 

Research and development

 

51,977

 

 

 

51,924

 

 

 

166,400

 

 

 

156,033

 

Totals

 

65,999

 

 

 

60,733

 

 

 

203,726

 

 

 

178,245

 

Loss from operations

 

(65,999

)

 

 

(60,733

)

 

 

(203,726

)

 

 

(178,245

)

Other (expenses) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

214

 

 

 

318

 

 

 

756

 

 

 

654

 

Other (expenses) income

 

4

 

 

 

(2

)

 

 

(380

)

 

 

26

 

Totals

 

218

 

 

 

316

 

 

 

376

 

 

 

680

 

Net loss

$

(65,781

)

 

$

(60,417

)

 

$

(203,350

)

 

$

(177,565

)

Net loss applicable to common stock

$

(65,781

)

 

$

(60,417

)

 

$

(203,350

)

 

$

(177,565

)

Net loss per common share—basic and diluted

$

(2.02

)

 

$

(1.87

)

 

$

(6.26

)

 

$

(5.55

)

Weighted-average common shares outstanding—basic and diluted

 

32,497,168

 

 

 

32,303,203

 

 

 

32,489,584

 

 

 

32,018,869

 

 

See Accompanying Notes to the Condensed Consolidated Financial Statements

 

 

2

 


 

PUMA BIOTECHNOLOGY, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

(unaudited)

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Net loss

$

(65,781

)

 

$

(60,417

)

 

$

(203,350

)

 

$

(177,565

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on available-for-sale securities

 

(28

)

 

 

149

 

 

 

150

 

 

 

63

 

Comprehensive loss

$

(65,809

)

 

$

(60,268

)

 

$

(203,200

)

 

$

(177,502

)

 

See Accompanying Notes to the Condensed Consolidated Financial Statements

 

 

3

 


 

PUMA BIOTECHNOLOGY, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(in thousands, except share data)

(unaudited)

 

 

Common Stock

 

 

Additional

Accumulated Other

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Paid-in

Capital

 

 

Comprehensive

Income (Loss)

 

 

Accumulated

Deficit

 

 

Total

 

Balance at December 31, 2015

 

 

32,466,842

 

 

$

3

 

 

$

726,651

 

 

$

(147

)

 

$

(520,500

)

 

$

206,007

 

Stock-based compensation

 

 

 

 

 

 

 

 

87,990

 

 

 

 

 

 

 

 

 

87,990

 

Exercises of stock options

 

 

36,250

 

 

 

 

 

 

351

 

 

 

 

 

 

 

 

 

351

 

Unrealized gain on available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

150

 

 

 

 

 

 

150

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(203,350

)

 

 

(203,350

)

Balance at September 30, 2016

 

 

32,503,092

 

 

$

3

 

 

$

814,992

 

 

$

3

 

 

$

(723,850

)

 

$

91,148

 

 

See Accompanying Notes to the Condensed Consolidated Financial Statements

 

 

 

4

 


 

PUMA BIOTECHNOLOGY, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

 

For the Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

Operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(203,350

)

 

$

(177,565

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

565

 

 

 

568

 

Build-out allowance received from landlord

 

 

2,997

 

 

 

179

 

Stock-based compensation

 

 

87,990

 

 

 

73,254

 

Disposal of leasehold improvements

 

 

368

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Receivables

 

 

(1,179

)

 

 

1,760

 

Prepaid expenses and other

 

 

2,832

 

 

 

(706

)

Accounts payable

 

 

3,075

 

 

 

(5,214

)

Accrued expenses

 

 

2,082

 

 

 

(13,896

)

Accrual of deferred rent

 

 

3,891

 

 

 

183

 

Net cash used in operating activities

 

 

(100,729

)

 

 

(121,437

)

Investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(3,730

)

 

 

(943

)

Restricted cash

 

 

(3

)

 

 

(3,097

)

Expenditures for leasehold improvements

 

 

(2,997

)

 

 

(179

)

Purchase of available-for-sale securities

 

 

(81,794

)

 

 

(211,783

)

Sale/maturity of available-for-sale securities

 

 

209,874

 

 

 

90,457

 

Net cash provided by (used in) investing activities

 

 

121,350

 

 

 

(125,545

)

Financing activities:

 

 

 

 

 

 

 

 

Net proceeds from issuance of common stock

 

 

 

 

 

205,133

 

Net proceeds from exercise of options

 

 

351

 

 

 

26,908

 

Net cash provided by financing activities

 

 

351

 

 

 

232,041

 

Net increase in cash and cash equivalents

 

 

20,972

 

 

 

(14,941

)

Cash and cash equivalents, beginning of period

 

 

31,569

 

 

 

38,539

 

Cash and cash equivalents, end of period

 

$

52,541

 

 

$

23,598

 

 

See Accompanying Notes to the Condensed Consolidated Financial Statements

 

 

5

 


 

PUMA BIOTECHNOLOGY, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1—Business and Basis of Presentation:

Business:

Puma Biotechnology, Inc., or Puma, is a biopharmaceutical company based in Los Angeles, California with a focus on the development and commercialization of innovative products to enhance cancer care. The Company in-licenses the global development and commercialization rights to three drug candidates—PB272 (neratinib (oral)), PB272 (neratinib (intravenous)) and PB357. Neratinib is a potent irreversible tyrosine kinase inhibitor that blocks signal transduction through the epidermal growth factor receptors, HER1, HER2 and HER4. Currently, the Company is primarily focused on the development of the oral version of neratinib, and its most advanced drug candidates are directed at the treatment of HER2-positive breast cancer. The Company believes that neratinib has clinical application in the treatment of several other cancers as well, including non-small cell lung cancer and other tumor types that over-express or have a mutation in HER2.

In November 2012, the Company established and incorporated Puma Biotechnology Ltd., a wholly owned subsidiary, for the sole purpose of serving as Puma’s legal representative in the United Kingdom and the European Union in connection with Puma’s clinical trial activity in those countries.

Basis of Presentation:

The Company is initially focused on developing neratinib for the treatment of patients with human epidermal growth factor receptor type 2, or HER2-positive, breast cancer, HER2 mutated non-small cell lung cancer, HER2-negative breast cancer that has a HER2 mutation and other solid tumors that have an activating mutation in HER2.  The Company has reported a net loss of approximately $65.8 million and $203.4 million for the three and nine months ended September 30, 2016, respectively, and negative cash flows from operations of approximately $100.7 million for the nine months ended September 30, 2016.  Management believes that the Company will continue to incur net losses and negative net cash flows from operating activities through the drug development process.

The accompanying unaudited condensed consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, pursuant to the rules and regulations of the Securities and Exchange Commission, or the SEC, for interim financial information.  Accordingly, the unaudited condensed consolidated financial statements do not include all information and footnotes required by GAAP for complete annual financial statements.  In the opinion of management, the accompanying unaudited condensed consolidated interim financial statements reflect all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation.  Interim operating results are not necessarily indicative of results that may be expected for the year ending December 31, 2016, or for any subsequent period.  These unaudited condensed consolidated interim financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.  The condensed consolidated balance sheet at December 31, 2015, has been derived from the audited consolidated financial statements included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2015.

The Company has spent and expects to continue to spend substantial amounts in connection with implementing its business strategy, including planned product development efforts, clinical trials and preparation for commercialization.  The Company’s continued operations will depend on its ability to raise funds through various potential sources, such as equity and debt financing. Through September 30, 2016, the Company’s financing was primarily through public offerings of Company common stock and private equity placements. Given the current and desired pace of clinical development of its product candidates and efforts to prepare for commercialization, management believes that the cash and cash equivalents and marketable securities on hand at September 30, 2016, together with the approximately $161.8 million in net proceeds the Company received from the issuance and sale of its common stock in October 2016, are sufficient to fund the Company’s operations for the next 12 to 18 months. The Company may need additional financing until it can achieve profitability, if ever.  There can be no assurance that additional capital will be available on favorable terms or at all or that any additional capital that the Company is able to obtain will be sufficient to meet its needs.  If it is unable to raise additional capital, the Company could likely be forced to curtail desired development activities, which will delay the development of its product candidates.

 

 

6

 


 

Note 2—Significant Accounting Policies:

The significant accounting policies followed in the preparation of these condensed consolidated financial statements are as follows:

Use of Estimates:

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the balance sheet, and reported amounts of expenses for the period presented. Accordingly, actual results could differ from those estimates. Significant estimates include accrued expenses for the cost of services provided by consultants who manage clinical trials and conduct research and clinical trials on behalf of the Company that are billed on a delayed basis. As the actual costs become known, the Company adjusts its estimated cost in that period. The value of stock-based compensation includes estimates based on future events, which are difficult to predict. It is at least reasonably possible that a change in the estimates used to record accrued expenses and to value the stock-based compensation will occur in the near term.

Principles of Consolidation:

The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation.

Cash and Cash Equivalents:

The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Cash equivalents are carried at cost, which approximates fair value.

Investment Securities:

The Company classifies all investment securities (short term and long term) as available-for-sale, as the sale of such securities may be required prior to maturity to implement management’s strategies. These securities are carried at fair value, with the unrealized gains and losses reported as a component of accumulated other comprehensive income (loss) in stockholders’ equity until realized. Realized gains and losses from the sale of available-for-sale securities, if any, are determined on a specific identification basis. A decline in the market value of any available-for-sale security below cost that is determined to be other than temporary results in a revaluation of its carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established. Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to yield using the straight-line method. Interest income is recognized when earned.

Assets Measured at Fair Value on a Recurring Basis:

Accounting Standards Codification, or ASC, 820, Fair Value Measurement, or ASC 820, provides a single definition of fair value and a common framework for measuring fair value as well as new disclosure requirements for fair value measurements used in financial statements. Under ASC 820, fair value is determined based upon the exit price that would be received by a company to sell an asset or paid by a company to transfer a liability in an orderly transaction between market participants, exclusive of any transaction costs. Fair value measurements are determined by either the principal market or the most advantageous market. The principal market is the market with the greatest level of activity and volume for the asset or liability. Absent a principal market to measure fair value, the Company uses the most advantageous market, which is the market from which the Company would receive the highest selling price for the asset or pay the lowest price to settle the liability, after considering transaction costs. However, when using the most advantageous market, transaction costs are only considered to determine which market is the most advantageous and these costs are then excluded when applying a fair value measurement. ASC 820 creates a three-level hierarchy to prioritize the inputs used in the valuation techniques to derive fair values. The basis for fair value measurements for each level within the hierarchy is described below, with Level 1 having the highest priority and Level 3 having the lowest.

 

Level 1:

  

Quoted prices in active markets for identical assets or liabilities.

 

 

 

Level 2:

  

Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets.

 

 

 

Level 3:

  

Valuations derived from valuation techniques in which one or more significant inputs are unobservable.

 

7

 


 

Following are the major categories of assets measured at fair value on a recurring basis as of September 30, 2016 and December 31, 2015, using quoted prices in active markets for identical assets (Level 1), significant other observable inputs (Level 2), and significant unobservable inputs (Level 3) (in thousands):

 

September 30, 2016

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Cash equivalents

 

$

40,457

 

 

$

 

 

$

 

 

$

40,457

 

Commercial paper

 

 

 

 

 

15,368

 

 

 

 

 

 

15,368

 

Marketable securities - U.S. government

 

 

 

 

 

6,022

 

 

 

 

 

 

6,022

 

Marketable securities - corporate bonds

 

 

 

 

 

35,000

 

 

 

 

 

 

35,000

 

 

 

$

40,457

 

 

$

56,390

 

 

$

 

 

$

96,847

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Cash equivalents

 

$

29,166

 

 

$

 

 

$

 

 

$

29,166

 

Commercial paper

 

 

 

 

 

2,996

 

 

 

 

 

 

2,996

 

Marketable securities - U.S. government

 

 

 

 

 

11,500

 

 

 

 

 

 

11,500

 

Marketable securities - corporate bonds

 

 

 

 

 

169,824

 

 

 

 

 

 

169,824

 

 

 

$

29,166

 

 

$

184,320

 

 

$

 

 

$

213,486

 

 

The Company’s investments in commercial paper, corporate bonds and U.S. government securities are exposed to price fluctuations. The fair value measurements for commercial paper, corporate bonds and U.S. government securities are based upon the quoted prices of similar items in active markets multiplied by the number of securities owned, exclusive of any transaction costs and without any adjustments to reflect discounts that may be applied to selling a large block of securities at one time.

Concentration of Risk:

Financial instruments, which potentially subject the Company to concentrations of credit risk, principally consist of cash and cash equivalents. The Company’s cash and cash equivalents in excess of the Federal Deposit Insurance Corporation and the Securities Investor Protection Corporation insured limits at September 30, 2016, were approximately $56.8  million. The Company does not believe it is exposed to any significant credit risk due to the quality of the financial instruments in which the money is held. Pursuant to the Company’s internal investment policy, investments must be rated A-1/P-1 or better by Standard and Poor’s Corporation and Moody’s Investors Service at the time of purchase.

Property and Equipment:

Property and equipment are recorded at cost and depreciated over estimated useful lives ranging from three to five years using the straight-line method. Leasehold improvements are recorded at cost and amortized over the shorter of their useful lives or the term of the lease by use of the straight-line method. Maintenance and repair costs are charged to operations as incurred.

The Company assesses the impairment of long-lived assets, primarily property and equipment, whenever events or changes in business circumstances indicate that carrying amounts of the assets may not be fully recoverable. When such events occur, management determines whether there has been impairment by comparing the asset’s carrying value with its fair value, as measured by the anticipated undiscounted net cash flows of the asset. Should impairment exist, the asset is written down to its estimated fair value. The Company has not recognized any impairment losses through September 30, 2016.

Research and Development Expenses:

Research and development expenses are charged to operations as incurred. The major components of research and development costs include clinical manufacturing costs, clinical trial expenses, consulting and other third-party costs, salaries and employee benefits, stock-based compensation expense, supplies and materials, and allocations of various overhead costs. Clinical trial expenses include, but are not limited to, investigator fees, site costs, comparator drug costs, and clinical research organization, or CRO, costs. In the normal course of business, the Company contracts with third parties to perform various clinical trial activities in the ongoing development of potential products. The financial terms of these agreements are subject to negotiation and variations from contract to contract and may result in uneven payment flows. Payments under the contracts depend on factors such as the achievement of certain events, the successful enrollment of patients and the completion of portions of the clinical trial or similar conditions. The Company’s accruals for clinical trials are based on estimates of the services received and efforts expended pursuant to contracts with numerous clinical trial sites, cooperative groups and CROs. The objective of the Company’s accrual policy is to match the recording of expenses in the condensed consolidated financial statements to the actual services received and efforts expended. As actual costs become known, the Company adjusts its accruals in that period.

8

 


 

In instances where the Company enters into agreements with third parties for clinical trials and other consulting activities, upfront amounts are recorded to prepaid expenses and other in the accompanying condensed consolidated balance sheets and expensed as services are performed or as the underlying goods are delivered. If the Company does not expect the services to be rendered or goods to be delivered, any remaining capitalized amounts for non-refundable upfront payments are charged to expense immediately. Amounts due under such arrangements may be either fixed fee or fee for service, and may include upfront payments, monthly payments and payments upon the completion of milestones or receipt of deliverables.

Costs related to the acquisition of technology rights and patents for which development work is still in process are charged to operations as incurred and considered a component of research and development costs.

Stock-Based Compensation:

Stock option awards:

ASC 718, Compensation — Stock Compensation, or ASC 718, requires the fair value of all share-based payments to employees, including grants of stock options, to be recognized in the statement of operations over the requisite service period. Under ASC 718, employee option grants are generally valued at the grant date and those valuations do not change once they have been established. The fair value of each option award is estimated on the grant date using the Black-Scholes Option Pricing Method. As allowed by ASC 718 for companies with a short period of publicly traded stock history, the Company’s estimate of expected volatility is based on the average expected volatilities of a sampling of seven companies with similar attributes to the Company, including industry, stage of life cycle, size and financial leverage. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant valuation. Option forfeitures are calculated when the option is granted to reduce the option expense to be recognized over the life of the award and updated upon receipt of further information as to the amount of options expected to be forfeited. The option expense is “trued-up” upon the actual forfeiture of a stock option grant. Due to its limited history, the Company uses the simplified method to determine the expected life of the option grants.

Performance shares:

The performance shares are valued on the grant date and the fair value of the performance award is equal to the market price of the Company’s common stock on the grant date. The performance share expense is recognized based on the Company’s estimate of a range of probabilities that the Company’s closing common stock price on the vesting dates will be lower or higher than the Company’s common stock price on the grant date. Based on the range of probabilities, the expense is calculated and recognized over the three-year vesting period.

Restricted stock units:

The restricted stock units, or RSUs, are valued on the grant date and the fair value of the RSUs is equal to the market price of the Company’s common stock on the grant date. The RSU expense is recognized over the requisite service period.  When the requisite service period begins prior to the grant date (because the service inception date occurs prior to the grant date), the Company is required to begin recognizing compensation cost before there is a measurement date (i.e., the grant date). The service inception date is the beginning of the requisite service period. If the service inception date precedes the grant date, accrual of compensation cost for periods before the grant date shall be based on the fair value of the award at the reporting date. In the period in which the grant date occurs, cumulative compensation cost shall be adjusted to reflect the cumulative effect of measuring compensation cost based on fair value at the grant date rather than the fair value previously used at the service inception date (or any subsequent reporting date).

Net Loss per Common Share:

Basic net loss per common share is computed by dividing net loss applicable to common stockholders by the weighted average number of common shares outstanding during the periods presented as required by ASC 260, Earnings per Share. Diluted earnings per common share are the same as basic earnings per common share because the assumed exercise of the Company’s outstanding options are anti-dilutive. For the three and nine months ended September 30, 2016, potentially dilutive securities excluded from the calculations were 5,730,151 shares issuable upon exercise of options, 9,469 shares issuable as performance awards, 2,116,250 shares issuable upon exercise of a warrant, and 640,644 shares underlying restricted stock units that are subject to vesting. For the three and nine months ended September 30, 2015, potentially dilutive securities excluded from the earnings per common share calculation were 4,444,258 issuable upon exercise of options, 18,942 issuable as performance shares and 2,116,250 shares issuable upon exercise of a warrant.

Deferred Rent:

The Company has entered into operating lease agreements for its corporate offices in Los Angeles and South San Francisco that contain provisions for future rent increases, leasehold improvement allowances and rent abatements. The Company records monthly rent expense equal to the total of the payments due over the lease term, divided by the number of months of the lease term. The difference between the rent expense recorded and the amount paid is credited or charged to deferred rent, which is reflected as a

9

 


 

separate line item in the accompanying condensed consolidated balance sheets. Additionally, the Company recorded as deferred rent the cost of the leasehold improvements paid by the landlord, which is amortized on a straight-line basis over the term of the lease.

Issuance of Common Stock Upon Exercise of Stock Option Grants:

When a stock option grant is exercised, the Company notifies its transfer agent to release the required number of shares of common stock from the reserve for the Company’s 2011 Incentive Award Plan, as amended, or the 2011 Plan. The Company records the transaction for the cash received and the issuance of common shares. Should there be a delay in the cash receipts due to the settlement period, the Company records a receivable from the exercise of an option as part of stockholders’ equity on the condensed consolidated balance sheet.

Recently Issued Accounting Standards:

In January 2016, the Financial Accounting Standards Board, or FASB, issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in ASU 2016-01 address certain aspects of recognition, measurement, presentation and disclosure of financial instruments. ASU 2016-01 will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption of some of the amendments included in ASU 2016-01 for financial statements of fiscal years or interim periods that have not yet been issued is permitted as of the beginning of the fiscal year of adoption. The Company is currently evaluating the effect that the adoption of ASU 2016-01 will have on its financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases. The amendments in ASU 2016-02 will require organizations that lease assets, with lease terms of more than 12 months, to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Consistent with current U.S. GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current U.S. GAAP which requires only capital leases to be recognized on the balance sheet, ASU No. 2016-02 will require both types of leases to be recognized on the balance sheet. ASU 2016-02 will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the effect that the adoption of ASU 2016-02 will have on its financial statements.

In March 2016, the FASB issued ASU No. 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments. ASU 2016-06 amends FASB ASC 815-15 to clarify what steps are required when assessing whether the economic characteristics and risks of call (put) options are clearly and closely related to the economic characteristics and risks of their debt hosts, which is one of the criteria for bifurcating an embedded derivative. ASU 2016-06 will be effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. An entity should apply the amendments in ASU No. 2016-06 on a modified retrospective basis to existing debt instruments as of the beginning of the fiscal year for which the amendments are effective. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the effect that the adoption of ASU 2016-06 will have on its financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718). ASU 2016-09 will require organizations to recognize all income tax effects of awards in the statement of operations when the awards vest or are settled. ASU 2016-09 will also allow organizations to repurchase more shares from employees than they could previously purchase for tax withholding purposes without triggering liability accounting and to make a policy election to account for forfeitures as they occur. ASU 2016-09 will be effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted in any interim or annual period. The Company is currently evaluating the effect that the adoption of ASU 2016-09 will have on its financial statements.

In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606). ASU 2016-10 amends ASC 606, Revenue from Contracts with Customers, to clarify two aspects of ASC 606, identifying performance obligations and the licensing implementation guidance, while retaining the related principles of those areas. The amendments in ASU 2016-10 do not change the core principle of the guidance in ASC 606. The amendments in ASU No. 2016-10 affect the guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements for the amendments in ASU No. 2016-10 are the same as the effective date and transition requirements in ASC 606 and any other Topic amended by ASU 2014-09. ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective date of ASU 2014-09 by one year to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. The Company is currently evaluating the effect that the adoption of ASU 2016-10 will have on its financial statements.

In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606). ASU 2016-12 amends ASC 606 to address certain issues in the guidance on assessing collectability, presentation of sales taxes, noncash consideration, and completed contracts and contract modifications at transition. The amendments in ASU 2016-12 do not change the core principle of the

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guidance in ASC 606. The amendments in ASU No. 2016-12 affect the guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements for the amendments in ASU No. 2016-12 are the same as the effective date and transition requirements in ASC 606 and any other Topic amended by ASU 2014-09. ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective date of ASU 2014-09 by one year to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. The Company is currently evaluating the effect that the adoption of ASU 2016-12 will have on its financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force), which addresses the diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. ASU 2016-15 will be effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact of adopting ASU 2016-15 on its consolidated financial statements.

 

 

Note 3—Prepaid Expenses and Other:

Prepaid expenses and other consisted of the following (in thousands):

 

 

September 30, 2016

 

 

December 31, 2015

 

Current:

 

 

 

 

 

 

 

 

CRO services

 

$

3,902

 

 

$

2,969

 

Other clinical development

 

 

1,541

 

 

 

2,309

 

Insurance

 

 

 

 

 

1,138

 

Other

 

 

1,847

 

 

 

1,244

 

 

 

 

7,290

 

 

 

7,660

 

Long-term:

 

 

 

 

 

 

 

 

CRO services

 

 

4,975

 

 

 

5,754

 

Other clinical development

 

 

1,606

 

 

 

3,005

 

Insurance

 

 

36

 

 

 

87

 

Other

 

 

518

 

 

 

751

 

 

 

 

7,135

 

 

 

9,597

 

Totals

 

$

14,425

 

 

$

17,257

 

 

 

Note 4—Property and Equipment:

Property and equipment consisted of the following (in thousands):

 

Property and Equipment:

 

September 30, 2016

 

 

December 31, 2015

 

Leasehold improvements

 

$

3,760

 

 

$

1,502

 

Computer equipment

 

 

1,781

 

 

 

1,646

 

Telephone equipment

 

 

169

 

 

 

169

 

Furniture and fixtures

 

 

2,136

 

 

 

1,167

 

 

 

 

7,846

 

 

 

4,484

 

Less: accumulated depreciation and amortization

 

 

(2,666

)

 

 

(2,101

)

Totals

 

$

5,180

 

 

$

2,383

 

 

During the nine months ended September 30, 2016, the Company disposed of leasehold improvements that were surrendered as a result of the amended lease in its South San Francisco location (see Note 9 – Commitments and Contingencies of the Consolidated Financial Statements section of the Annual Report on Form 10-K for the year ended December 31, 2015).  The loss on the disposal of leasehold improvements was approximately $0.4 million.

 

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Note 5—Accrued Expenses:

Accrued expenses consisted of the following (in thousands):

 

 

 

September 30, 2016

 

 

December 31, 2015

 

Accrued CRO services

 

$

7,098

 

 

$

8,436

 

Accrued other clinical development

 

 

3,820

 

 

 

3,618

 

Accrued legal fees

 

 

517

 

 

 

443

 

Accrued compensation

 

 

5,256

 

 

 

1,970

 

Other

 

 

30

 

 

 

172

 

Totals

 

$

16,721

 

 

$

14,639

 

 

Accrued CRO services represent the Company’s estimate of such costs and will be adjusted in the period the actual costs become known. Accrued compensation includes estimated bonus and earned but unused vacation for full-time employees. When actual performance bonuses are paid out to employees, the bonus expense will be adjusted to reflect the actual expense for the year. Additionally, vacation is accrued at the rate the employee earns vacation and reduced as vacation is used by the employee.

 

Note 6—Stockholders’ Equity:

 

Stock-Based Compensation:

The Company’s 2011 Plan was adopted by the Board of Directors on September 15, 2011.  Pursuant to the 2011 Plan, the Company may grant incentive stock options and nonqualified stock options, as well as other forms of equity-based compensation. Incentive stock options may be granted only to employees, while consultants, employees, officers and directors are eligible for the grant of nonqualified options under the 2011 Plan. The maximum term of stock options granted under the 2011 Plan is 10 years. The exercise price of incentive stock options granted under the 2011 Plan must be at least equal to the fair value of such shares on the date of grant. Through September 30, 2016, a total of 10,529,412 shares of the Company’s common stock have been reserved for issuance under the 2011 Plan.

Employee stock-based compensation for the three and nine months ended September 30, 2016 and 2015 were as follows (in thousands, except share and per share data):

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended  September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Stock-based compensation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development, or R&D

 

$

20,258

 

 

$

19,867

 

 

$

66,376

 

 

$

60,594

 

General and administrative, or G&A

 

 

6,802

 

 

 

4,747

 

 

 

18,852

 

 

 

12,173

 

Restricted stock units -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

R&D

 

 

1,754

 

 

 

 

 

 

1,754

 

 

 

 

G&A

 

 

869

 

 

 

 

 

 

869

 

 

 

 

Performance shares - R&D

 

 

68

 

 

 

342

 

 

 

139

 

 

 

487

 

Total stock-based compensation expense

 

$

29,751

 

 

$

24,956

 

 

$

87,990

 

 

$

73,254

 

Impact on basic and diluted net loss per share

 

$

0.92

 

 

$

0.77

 

 

$

2.71

 

 

$

2.29

 

Weighted average shares (basic and diluted)

 

 

32,497,168

 

 

 

32,303,203

 

 

 

32,489,584

 

 

 

32,018,869

 

 

Performance Shares:

During January 2014, performance share awards that provide for a maximum of 28,411 shares of common stock to be issued were granted to certain employees. These shares vest over three years on the first, second and third anniversary of December 15, 2013. On each vesting date, if the Company’s closing common stock price is equal to $102.46 per share, one-third of the 28,411 shares will be awarded. If the Company’s closing common stock price on a vesting date is either lesser or greater than $102.46 per share, the number of shares of common stock to be issued will be adjusted to be less than one-third of the 28,411 shares. No shares will be awarded on a vesting date if the Company’s closing common stock price is less than $47.53 per share at such vesting dates. The

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performance shares are valued on the grant date and the fair value of the performance award is equal to the market price of the Company’s common stock on the grant date. The performance share expense is recognized based on the Company’s estimate of a range of probabilities that the Company’s closing common stock price will be lower or higher than $102.46 on the vesting dates. Based on the range of probabilities, the expense is calculated and recognized over the three-year vesting period.  On December 15, 2015, the second vesting occurred and the calculations were performed.  As a result, 6,530 shares of common stock were issued to the employees and 2,943 performance shares were cancelled.  The third and final vesting event will occur on December 15, 2016.

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

Grant-Date

 

Performance shares

 

Shares

 

 

Fair Value

 

Nonvested shares at December 31, 2015

 

 

9,469

 

 

$

102.46

 

Granted

 

 

 

 

 

 

Vested/Issued

 

 

 

 

 

 

Cancelled

 

 

 

 

 

 

Nonvested shares at September 30, 2016

 

 

9,469

 

 

$

102.46

 

 

Stock Options:

The fair value of options granted to employees was estimated using the Black-Scholes Option Pricing Method (see Note 2—Significant Accounting Policies) with the following weighted-average assumptions used during the nine months ended September 30, 2016 and 2015:

 

 

 

2016

 

 

2015

 

 

Dividend yield

 

 

0.0

%

 

 

0.0

%

 

Expected volatility

 

 

67.3

%

 

 

63.4

%

 

Risk-free interest rate

 

 

1.4

%

 

 

1.6

%

 

Expected life in years

 

 

5.72

 

 

 

5.85

 

 

 

Activity with respect to options granted under the 2011 Plan is summarized as follows:

 

 

 

Shares

 

 

Weighted

Average

Exercise

Price

 

 

Weighted Average Remaining

Contractual Term (years)

 

 

Aggregate

Intrinsic Value

(in thousands)

 

Outstanding at December 31, 2015

 

 

5,542,285

 

 

$

105.59

 

 

 

8.6

 

 

$

87,632

 

Granted

 

 

712,417

 

 

$

45.02

 

 

 

9.0

 

 

 

 

Forfeited

 

 

(416,501

)

 

$

123.67

 

 

 

 

 

 

 

 

 

Exercised

 

 

(36,250

)

 

$

9.71

 

 

 

 

 

 

$

1,268

 

Expired

 

 

(71,800

)

 

$

169.60

 

 

 

 

 

 

 

 

 

Outstanding at September 30, 2016

 

 

5,730,151

 

 

$

96.55

 

 

 

7.9

 

 

$

79,721

 

Nonvested at September 30, 2016

 

 

2,736,716

 

 

$

99.35

 

 

 

9.0

 

 

$

16,048

 

Exercisable at September 30, 2016

 

 

2,993,435

 

 

$

94.00

 

 

 

7.0

 

 

$

63,673

 

 

At September 30, 2016, total estimated unrecognized employee compensation cost related to nonvested stock options and performance shares granted prior to that date were approximately $138.8 million and $0.3 million, respectively. These unrecognized expenses are expected to be recognized over a weighted-average period of 1.7 years for stock options and 0.3 years for performance shares. The weighted-average grant date fair value of options granted during the nine months ended September 30, 2016 and 2015, were $26.79 per share and $89.17 per share, respectively.

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

Grant-Date

 

Stock options

 

Shares

 

 

Fair Value

 

Nonvested shares at December 31, 2015

 

 

3,572,202

 

 

$

73.59

 

Granted

 

 

712,417

 

 

 

26.79

 

Vested/Issued

 

 

(1,131,402

)

 

 

85.08

 

Forfeited

 

 

(416,501

)

 

 

74.02

 

Nonvested shares at September 30, 2016

 

 

2,736,716

 

 

 

59.27

 

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Restricted stock units:

On October 14, 2016, restricted stock units were awarded to certain employees.  These restricted stock units vest over three years in six equal installments on each six month anniversary of the vesting start date, July 19, 2016.  Because the service period began on the vesting start date of July 19, 2016, and the award date did not occur until October 14, 2016, the restricted stock units are valued using the fair value on September 30, 2016, and will be adjusted to the fair value on the award date, October 14, 2016.

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

Grant-Date

 

Restricted stock units

 

Shares

 

 

Fair Value 1

 

Nonvested shares at December 31, 2015

 

 

 

 

$

 

Granted

 

 

640,644

 

 

 

54.35

 

Vested/Issued

 

 

 

 

 

 

Cancelled

 

 

 

 

 

 

Nonvested shares at September 30, 2016

 

 

640,644

 

 

$

54.35

 

 

1 As the service inception date preceded the grant date, the Company’s accrual of compensation cost for the periods before the grant date was based on the fair value of the awards at the reporting date.

 

Note 7—401(k) Savings Plan:

During 2012, the Company adopted a 401(k) savings plan for the benefit of its employees. The Company is required to make matching contributions to the 401(k) plan equal to 100% of the first 3% of wages deferred by each participating employee and 50% on the next 2% of wages deferred by each participating employee. The Company incurred expenses for employer matching contributions of approximately $0.7 million and $0.5 million for the nine months ended September 30, 2016 and 2015, respectively.

Note 8—Receivables:

On April 1, 2016, the Company took possession of additional office space pursuant to the amendments to the leases entered into in July 2015 (see Note 9 – Commitments and Contingencies of the Consolidated Financial Statements section of the Annual Report on Form 10-K for the year ended December 31, 2015).  This office space increased the leased square footage in the Los Angeles and South San Francisco offices by approximately 26,000 square feet and 13,000 square feet, respectively.  Pursuant to the terms of these amended leases, the landlords provided tenant improvement allowances.  One of the tenant improvement allowances was prepaid by the Company and will be reimbursed by the landlord prior to December 31, 2016.  The total of this landlord receivable is approximately $1.2 million.

 

Note 9—Subsequent Events:

On October 19, 2016, the Company entered into an underwriting agreement in connection with the public offering, issuance and sale by the Company of 3,750,000 shares of the Company’s common stock, par value $0.0001 per share, at a public offering price of $40.00 per share, less underwriting discounts and commissions.  Under the terms of the underwriting agreement, the Company also granted the underwriters an option exercisable for 30 days to purchase up to an additional 562,500 shares of its common stock at the public offering price, less underwriting discounts and commissions. On October 20, 2016, the underwriters exercised their option to purchase additional shares in full.

The Company received net proceeds from the offering of approximately $161.8 million, after deducting underwriting discounts and commissions and estimated offering expenses. The Company intends to use the net proceeds of the offering for the overall development of its drug candidates, including, but not limited to, research and development and clinical trial expenditures, pre-commercialization activities and general corporate and working capital purposes.

 

 

 

 

 

 

 

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Item 2.

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the notes thereto included in Item 1 in this Quarterly Report on Form 10-Q. The following discussion should also be read in conjunction with our audited consolidated financial statements and the 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 year ended December 31, 2015.

Unless otherwise provided in this Quarterly Report, references to the “Company,” “we,” “us,” and “our” refer to Puma Biotechnology, Inc., a Delaware corporation, together with its wholly-owned subsidiary, Puma Biotechnology Ltd.

Overview

We are a biopharmaceutical company with a focus on the development and commercialization of innovative products to enhance cancer care. We in-license the global development and commercialization rights to three drug candidates—PB272 (neratinib (oral)), PB272 (neratinib (intravenous)) and PB357.  Neratinib is a potent irreversible tyrosine kinase inhibitor, or TKI, that blocks signal transduction through the epidermal growth factor receptors, HER1, HER2 and HER4.   Currently, we are primarily focused on the development of the oral version of neratinib, and our most advanced drug candidates are directed at the treatment of HER2-positive breast cancer.  We believe neratinib has clinical application in the treatment of several other cancers as well, including non-small cell lung cancer and other tumor types that over-express or have a mutation in HER2.  Our efforts and resources to date have been focused primarily on acquiring and developing our pharmaceutical technologies, raising capital and recruiting personnel. We have had no product sales to date and we will have no product sales until we receive approval from the United States Food and Drug Administration, or FDA, or equivalent foreign regulatory bodies to begin selling a drug product. Developing drug products, however, is a lengthy and very expensive process. Assuming we do not encounter any unforeseen safety issues during the course of developing our drug candidates, we do not expect to receive approval of a product candidate until approximately 2017.

We recently completed a Phase III clinical trial of neratinib for the extended adjuvant treatment of patients with early stage HER2-positive breast cancer, which we refer to as the ExteNET trial.  Based on the results from the ExteNET trial, we submitted a New Drug Application, or NDA, with the FDA for regulatory approval of neratinib in the extended adjuvant setting in the United States in July 2016 and a Marketing Authorization Application, or MAA, with the European Medicines Agency, or EMA, in June 2016.  We are continuing to evaluate potential commercialization options for neratinib in this indication, including developing a direct sales force, contracting with third parties to provide sales and marketing capabilities, some combination of these two options or other strategic options.   We expect that our expenses will continue to increase as we continue to evaluate our options with regard to commercialization efforts.

Critical Accounting Policies

As of the date of the filing of this quarterly report, we believe there have been no material changes to our critical accounting policies and estimates during the nine months ended September 30, 2016, from our accounting policies at December 31, 2015, as reported in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015.

Summary of Expenses

General and administrative, or G&A, expenses consist primarily of salaries and related personnel costs, including stock-based compensation expense, professional fees, business insurance, rent, general legal activities, preparation for commercialization and other corporate expenses.

Research and development, or R&D, expenses include costs associated with services provided by consultants who conduct clinical services on our behalf, contract organizations for manufacturing of clinical materials and clinical trials. During the nine months ended September 30, 2016 and 2015, our R&D expenses consisted primarily of clinical research organization, or CRO fees, fees paid to consultants, salaries and related personnel costs and stock-based compensation. We expense our R&D costs as they are incurred.

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Results of Operations

Three Months Ended September 30, 2016 Compared to Three Months Ended September 30, 2015

General and administrative expenses:

For the three months ended September 30, 2016, G&A expenses were approximately $14.0 million, compared to approximately $8.8 million for the three months ended September 30, 2015. G&A expenses for the three months ended September 30, 2016 and 2015 were as follows:

 

General and administrative expenses

 

Three Months Ended September 30,

 

 

Period to period

 

(in thousands)

 

2016

 

 

2015

 

 

percentage change

 

Payroll and related costs

 

$

1,680

 

 

$

1,101

 

 

 

52.6

%

Professional fees and expenses

 

 

2,644

 

 

 

1,807

 

 

 

46.3

%

Facility and equipment costs

 

 

1,251

 

 

 

582

 

 

 

114.9

%

Employee stock-based compensation expense

 

 

7,671

 

 

 

4,747

 

 

 

61.6

%

Other

 

 

776

 

 

 

572

 

 

 

35.7

%

 

 

$

14,022

 

 

$

8,809

 

 

 

59.2

%

 

For the three months ended September 30, 2016, G&A expenses increased approximately $5.2 million compared to the same period in 2015.  Approximately $3.0 million of this increase is related to an increase in stock-based compensation expense attributable to our increased headcount and additional incentive awards to existing employees.  The remaining approximately $2.2 million increase in G&A expense for the three months ended September 30, 2016, compared to the same period in 2015, was primarily attributable to:

 

 

an approximately $0.6 million increase in payroll and related costs as administrative headcount increased from 16 to 23 to support corporate growth and to prepare for the commercial launch of neratinib.  We expect these payroll and related costs to continue to increase as we prepare for commercialization.

 

 

an approximately $0.8 million increase in professional fees and expenses, which consist primarily of legal, auditing, consulting and investor relations fees.  We expect these fees to increase as we continue to defend against the class action, derivative and defamation lawsuits filed against us, prepare for commercialization and as we support compliance measures related to the Sarbanes Oxley Act of 2002, as amended, or Sarbanes Oxley.

 

an approximately $0.7 million increase in facility and equipment costs.  During 2015, we amended two of our office leases and in April 2016 we took possession of additional office space pursuant to the amended leases; therefore, we expect that our facility and equipment costs will continue at the higher levels similar to the three months ended September 30, 2016.

Research and development expenses:

For the three months ended September 30, 2016, R&D expenses were approximately $52.0 million, compared to approximately $51.9 million for the three months ended September 30, 2015. R&D expenses for the three months ended September 30, 2016 and 2015 were as follows:

 

Research and development expenses

 

Three Months Ended September 30,