The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
We are a clinical-stage biopharmaceutical company and operate in one reportable segment which is focused on discovering and developing innovative small-molecule drugs for the treatment of cancer and immune-mediated diseases. Our mission and goal is to build a viable biopharmaceutical company that commercializes novel therapies intended to improve quality of life, increase duration of life and resolve serious unmet medical healthcare needs. We identify promising product candidates using our scientific development expertise, develop our products in a rapid, cost-efficient manner and pursue commercialization and/or development partners when and where appropriate.
Presently, we have three product candidates in clinical development and several molecules in preclinical lead optimization. To date, nearly all of our resources have been dedicated to the research and development of our products, and we have not generated any commercial revenues from the sale of our products. We do not anticipate the generation of any product commercial revenues until we receive the necessary regulatory and marketing approvals to launch one of our products.
We have incurred significant operating losses since our inception in 1991, and as of September 30, 2011, had an accumulated deficit of $427,663,000. Based upon the current status of our product development and plans, we believe that our existing cash, cash equivalents and marketable securities will be adequate to satisfy our capital needs through at least the next twelve months. However, the process of developing and commercializing our products requires significant research and development, preclinical testing and clinical trials, manufacturing arrangements as well as regulatory and marketing approvals. These activities, together with our general and administrative expenses, are expected to result in significant operating losses until the commercialization of our products, or partner collaborations, generate sufficient revenues to cover our expenses. We expect that losses will fluctuate from quarter to quarter and that such fluctuations may be substantial. Our achieving profitability depends upon our ability to successfully complete the development of our products, obtain required regulatory approvals and successfully manufacture and market our products.
The accompanying condensed consolidated financial statements include the accounts of Pharmacyclics, Inc. and our wholly-owned subsidiary, Pharmacyclics (Europe) Limited. There has been no significant financial activity to date related to the subsidiary. All intercompany accounts and transactions have been eliminated. The U.S. dollar is our functional currency for all of our consolidated operations.
The interim condensed consolidated financial statements have been prepared by us, without audit, in accordance with the instructions to Form 10-Q and, therefore, do not necessarily include all information and footnotes necessary for a fair statement of our financial position, results of operations and cash flows in accordance with accounting principles generally accepted in the United States. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States.
In the opinion of management, the unaudited financial information for the interim periods presented reflects all normal and recurring adjustments necessary for a fair statement of results of operations, financial position and cash flows. These condensed consolidated financial statements should be read in conjunction with the financial statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2011. Operating results for interim periods are not necessarily indicative of operating results for an entire fiscal year.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts and the disclosure of contingent amounts in our financial statements and the accompanying notes. Actual results could differ from those estimates.
Basic net loss per share is computed using the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed using the weighted average number of common and potential common shares outstanding during the period. Potential common shares consist of shares issuable upon the exercise of stock options (using the treasury stock method). Options to purchase 6,833,037 and 8,009,130 shares of common stock were outstanding at September 30, 2011 and 2010, respectively, but have been excluded from the computation of diluted net loss per share because their effect was anti-dilutive.
The components of share-based compensation recognized in our statements of operations for the three months ended September 30, 2011 and 2010 and since inception are as follows (in thousands):
The following table summarizes our stock option activity for the three months ended September 30, 2011 (in thousands):
The accounting grant date for employee stock options with performance obligations is the date on which the performance goals have been defined and a mutual understanding of the terms has been reached. Generally options with performance obligations vest over a four year period, with the goals set and agreed upon each year. Therefore, the table above does not include 621,084 performance options granted in current and prior fiscal years for which the performance criteria had not been established as of September 30, 2011.
Comprehensive loss includes net loss and unrealized gains (losses) on marketable securities that are excluded from the results of operations. Our comprehensive losses were as follows (in thousands):
Our marketable securities are classified as “available-for-sale”. We include these investments in current assets and carry them at fair value. Unrealized gains and losses on available-for-sale securities are included in accumulated other income (loss). The amortized cost of debt securities is adjusted for the amortization of premiums and accretion of discounts to maturity. Such amortization is included in interest income. Gains and losses on securities sold are recorded based on the specific identification method and are included in interest expense and other income (expense), net in the statement of operations.
Management assesses whether declines in the fair value of marketable securities are other than temporary. If the decline is judged to be other than temporary, the cost basis of the individual security is written down to fair value and the amount of the write down is included in the statement of operations. In determining whether a decline is other than temporary, management considers various factors including the length of time and the extent to which the market value has been less than cost, the financial condition and near-term prospects of the issuer and our intent and ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in market value. To date we have not recorded any impairment charges on marketable securities related to other-than-temporary declines in market value.
The fair value of our financial assets and liabilities is determined by using three levels of input which are defined as follows:
We utilize the market approach to measure fair value for our financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
| As of September 30, 2011 | | Cost Basis | | | Unrealized Gain | | | Unrealized Loss | | | Estimated Fair Value | |
| Money market funds | | $ | 33,226 | | | $ | - | | | $ | - | | | $ | 33,226 | |
| Government agency securities | | | 10,251 | | | | 4 | | | | - | | | | 10,255 | |
| US agency securities – FDIC insured | | | 8,089 | | | | - | | | | (20 | ) | | | 8,069 | |
| | | | 51,566 | | | | 4 | | | | (20 | ) | | | 51,550 | |
| Less cash equivalents | | | (33,226 | ) | | | - | | | | - | | | | (33,226 | ) |
| Total marketable securities | | $ | 18,340 | | | $ | 4 | | | $ | (20 | ) | | $ | 18,324 | |
| As of June 30, 2011 | | Cost Basis | | | Unrealized Gain | | | Unrealized Loss | | | Estimated Fair Value | |
| Money market funds | | $ | 26,979 | | | $ | - | | | $ | - | | | $ | 26,979 | |
| Government agency securities | | | 16,014 | | | | 11 | | | | - | | | | 16,025 | |
| US agency securities – FDIC insured | | | 8,579 | | | | - | | | | (32 | ) | | | 8,547 | |
| | | | 51,572 | | | | 11 | | | | (32 | ) | | | 51,551 | |
| Less cash equivalents | | | (26,979 | ) | | | - | | | | - | | | | (26,979 | ) |
| Total marketable securities | | $ | 24,593 | | | $ | 11 | | | $ | (32 | ) | | $ | 24,572 | |
At September 30, 2011, our marketable securities had the following remaining contractual maturities (in thousands):
| | | Amortized Cost | | | Estimated Fair Value | |
| Less than one year | | $ | 18,340 | | | $ | 18,324 | |
The following table sets forth the basis of fair value measurements for our available-for-sale securities as of September 30, 2011 and June 30, 2011 (in thousands):
| | | Estimated Fair Value as of | | | Basis of Fair Value Measurements | |
| | | September 30, 2011 | | | Level 1 | | | Level 2 | | | Level 3 | |
| Money market funds | | $ | 33,226 | | | $ | 33,226 | | | $ | - | | | $ | - | |
| Government agency securities | | | 10,255 | | | | - | | | | 10,255 | | | | - | |
| US agency securities – FDIC Insured | | | 8,069 | | | | - | | | | 8,069 | | | | - | |
| Total cash equivalents and marketable securities | | $ | 51,550 | | | $ | 33,226 | | | $ | 18,324 | | | $ | - | |
| | | Estimated Fair Value as of | | | Basis of Fair Value Measurements | |
| | | June 30, 2011 | | | Level 1 | | | Level 2 | | | Level 3 | |
| Money market funds | | $ | 26,979 | | | $ | 26,979 | | | $ | - | | | $ | - | |
| Government agency securities | | | 16,025 | | | | - | | | | 16,025 | | | | - | |
| US agency securities – FDIC Insured | | | 8,547 | | | | - | | | | 8,547 | | | | - | |
| Total cash equivalents and marketable securities | | $ | 51,551 | | | $ | 26,979 | | | $ | 24,572 | | | $ | - | |
Note 6 – Agreements
Collaboration and License Agreement with Les Laboratoires Servier. In April 2009, we entered into a collaboration and license agreement with Les Laboratoires Servier ("Servier") to research, develop and commercialize PCI-24781, an orally active, novel, small molecule inhibitor of pan-HDAC enzymes. Under the terms of the agreement, Servier acquired the exclusive right to develop and commercialize the pan-HDAC inhibitor product worldwide except for the United States and will pay a royalty to us on sales outside of the United States. Servier is solely responsible for conducting and paying for all development activities outside the United States. We will continue to own all rights within the United States.
In May 2009, we received an upfront payment from Servier of $11,000,000 ($10,450,000 net of withholding taxes) and we received an additional $4,000,000 for research collaboration paid over a twenty-four month period through April 2011. The revenue related to these payments was recognized over the two-year research period, which ended in April 2011. Total revenue recognized in the three months ended September 30, 2010 was $1,964,000.
We also received a $7,000,000 advance development milestone payment in April 2011 and we could receive additional payments up to approximately $17,500,000 upon the achievement of certain future development and regulatory milestones, as well as royalty payments. The $7,000,000 advance development milestone payment was recorded as deferred revenue at September 30, 2011. In October 2011 the related milestone was reached and the Company expects to record the $7,000,000 as revenue in its quarter ending December 31, 2011.
Celera Corporation. In April 2006, we acquired multiple small molecule drug candidates for the treatment of cancer and other diseases from Celera Genomics, an Applera Corporation (now Celera Corporation – a subsidiary of Quest Diagnostics Incorporated). Future milestone payments under the agreement, as amended, could total as much as $97 million, although we currently cannot predict if or when any of the milestones will be achieved. Approximately two-thirds of the milestone payments relate to our HDAC Inhibitor program and approximately one-third relates to our Factor VIIa program. Approximately 90% of the potential future milestone payments would be paid to Celera after obtaining regulatory approval in various countries. There are no milestone payments related to our Btk program. In addition to the milestone payments, Celera will be entitled to royalty payments based on annual sales of drugs commercialized from our HDAC Inhibitor, Factor VIIa and certain Btk Inhibitor programs.
Note 7 – Income Taxes
We may from time to time be assessed interest or penalties by major tax jurisdictions, although there have been no such assessments historically. In the event we receive an assessment for interest and/or penalties, it would be classified in the financial statements as income tax expense. Currently, all tax years in major jurisdictions remain open due to the taxing authorities’ ability to adjust operating loss carry forwards. Our ability to utilize these carry forwards may be limited under certain circumstances, such as a cumulative stock ownership change of greater than 50%, as defined, over a three year period. We continuously evaluate our estimates of the amount of net operating loss and tax credit carry forwards that we expect to be able to utilize in the future.
Note 8 – Related Party Transaction
During the three months ended September 30, 2011 we paid Dr. Gwen Fyfe, a member of our Board of Directors, approximately $89,000 for consulting services under a Consulting Agreement entered into prior to Dr. Fyfe joining our Board in December 2010. In November 2011, we entered into an amendment (the “Amendment”) to our Consulting Agreement with Dr. Fyfe. The Amendment provides that Dr. Fyfe will receive a lump sum of $50,000 and that she will continue to provide limited consulting services to us for a period of two years. In addition, the options to purchase 330,000 shares of our common stock previously granted to Dr. Fyfe in connection with her consulting services will continue to vest through November 30, 2011 and all such vested options shall remain exercisable for a period of two years following the date of the Amendment. Options granted to Dr. Fyfe upon her initial election to the Board shall continue to vest up to our upcoming Annual Meeting of Stockholders and all such vested options and all additional options received by Dr. Fyfe in connection with her Board service shall be exercisable for a period of three years following our upcoming Annual Meeting of Stockholders.
Note 9 – Recent Accounting Pronouncements
In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income, which eliminates the presentation options currently in Accounting Standards Codification (“ASC”) Topic 220 and requires the presentation of other comprehensive income in either a continuous statement of comprehensive income or in two separate but consecutive statements. ASU No. 2011-05 is effective for fiscal years and interim periods within those fiscal years, beginning on or after December 15, 2011 and requires retrospective application. As this accounting standard only requires enhanced disclosure, the adoption of this standard will not impact our financial position or results of operations.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with our interim financial statements and the related notes appearing at the beginning of this report. The interim financial statements and this Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial statements and notes thereto for the year ended June 30, 2011 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on September 13, 2011.
The following discussion contains forward-looking statements that involve risks and uncertainties. These statements relate to future events, such as our future clinical and product development, financial performance and regulatory review of our product candidates. Our actual results could differ materially from any future performance suggested in this report as a result of various factors, including those discussed elsewhere in this report, in our Annual Report on Form 10-K for the fiscal year ended June 30, 2011 and in our other Securities and Exchange Commission reports and filings. All forward-looking statements are based on information currently available to Pharmacyclics; and we assume no obligation to update such forward-looking statements. Stockholders are cautioned not to place undue reliance on such statements.
Company Overview
We are a clinical-stage biopharmaceutical company focused on discovering and developing innovative small-molecule drugs for the treatment of cancer and immune-mediated diseases. Our mission and goal is to build a viable biopharmaceutical company that commercializes novel therapies intended to improve quality of life, increase duration of life and resolve serious unmet medical healthcare needs. We identify promising product candidates using our scientific development expertise, develop our products in a rapid, cost-efficient manner and pursue commercialization and/or development partners when and where appropriate.
Presently, we have three product candidates in clinical development and several molecules in preclinical lead optimization. To date, nearly all of our resources have been dedicated to the research and development of our products, and we have not generated any commercial revenues from the sale of our products. We do not anticipate the generation of any product commercial revenues until we receive the necessary regulatory and marketing approvals to launch one of our products.
We have incurred significant operating losses since our inception in 1991, and as of September 30, 2011, had an accumulated deficit of $427,663,000. The process of developing and commercializing our products requires significant research and development, preclinical testing, clinical trials and manufacturing arrangements as well as regulatory and marketing approvals. These activities, together with our general and administrative expenses, are expected to result in significant operating losses until the commercialization of our products, or partner collaborations, generate sufficient revenues to cover our expenses. We expect that losses will fluctuate from quarter to quarter and that such fluctuations may be substantial. Achieving profitability depends upon our ability to successfully complete the development of our products, obtain required regulatory approvals and successfully commercialize our products.
Bruton’s Tyrosine Kinase (Btk) Inhibitor for Oncology
PCI-32765 is an orally active small molecule inhibitor of Bruton’s tyrosine kinase (Btk) that we are developing for the treatment of patients with B-cell lymphoma or leukemia. B-cell maturation is mediated by B-cell receptor (BCR) signal transduction and Btk is an essential part of the BCR signaling pathway. Recently, Btk has been demonstrated to affect a number of vital growth and survival processes in cancerous B-cells.
As reported at the ASCO annual meeting in June 2011, in a Phase IB/II trial in patients with chronic lymphocytic leukemia (CLL) or small lymphocytic lymphoma (SLL), single agent PCI-32765 has been well-tolerated and had considerable activity in patients with either relapsed/ refractory or treatment-naïve disease. Discontinuation of treatment for adverse events was uncommon; diarrhea, nausea/ vomiting, and dyspepsia were the most frequently reported events and were typically of modest severity. As previously reported, a typical pattern of response occurred in the CLL patients, characterized by rapid reduction of lymph node size and a transient rise in circulating CLL cells (lymphocytosis), followed by resolution of lymphocytosis, a process that occurred more rapidly in treatment-naïve versus relapsed/ refractory patients. At a median follow-up of 6.3 months, 67% of patients with treatment-naïve disease had achieved an overall response by standard criteria, with an additional 19% of patients achieving a nodal response. At a median follow-up of 7.8 months in the cohort of relapsed/ refractory patients treated with 420mg qD, the rate of overall objective response was 48% with an additional 41% of patients having achieved a nodal response. The initial response assessment at 2 months in patients with relapsed/ refractory disease appeared similar between the 420mg qD and 840mg qD doses. Additionally, achieving response appeared to be independent of poor-risk features, such as del (17p), del (11q), and lack of mutation in the immunoglobulin heavy chain variable region gene. Through June 30, 2011, only three patients had experienced disease progression on study.
In August 2011, we entered into a five-year Cooperative Research and Development Agreement with the National Cancer Institute (NCI) to collaborate on the development of PCI-32765. Under the Agreement, the NCI's Division of Cancer Treatment and Diagnosis plans to sponsor Phase I and Phase II trials of PCI-32765 in various hematologic malignancies.
We have initiated a Phase II program that will enable potential registrational paths in CLL, MCL, and diffuse large B-cell lymphoma (DLBCL). We anticipate that this Phase II program should allow for Phase III enabling decisions in these indications based upon ongoing analysis of the data. The ongoing Phase II program currently includes the following studies:
| | · | PCYC-1104: A multicenter, phase II study of PCI-32765 in relapsed or refractory mantle cell lymphoma, including cohorts of subjects either previously treated with bortezomib or naïve to bortezomib treatment. This trial is activated in several US and EU sites and is currently enrolling patients. |
| | · | PCYC-1106: A multicenter, open-label, Phase II study of PCI 32765 in subjects with relapsed or refractory DLBCL. This study is designed to assess the activity of PCI-32765 in two genetically distinct subtypes of DLBCL, the activated B-cell (ABC) subtype and the germinal center (GC) subtype. This trial is activated in several US sites and is currently enrolling patients. |
| | · | PCYC-1108: A Phase IB, multicenter, open-label, study of PCI-32765, in combination with intensive immune chemotherapy (FCR or BR)* in subjects with CLL or SLL lymphoma. This trial is activated in several US sites and is currently enrolling patients. *(FCR = fludarabine, cyclophosphamide and rituximab; BR = bendamustine and rituximab) |
| | · | PCYC-1109: A phase IB/II study of PCI-32765 and ofatumumab in subjects with relapsed or refractory CLL or SLL. This is a single site trial and is currently enrolling patients. |
Factor VIIa Inhibitor
PCI-27483 is a potent and selective first-in-human small molecule inhibitor of coagulation (clotting) Factor VIIa. PCI-27483 suppresses the active form of Factor VII (FVIIa) that arises from interaction with the cell surface membrane protein known as tissue factor (TF). The FVIIa: TF complex is found at elevated levels in cancers of the pancreas, stomach, colon and lung. The activity of this complex triggers a host of patho-physiologic processes that facilitate tumor blood vessel formation (angiogenesis), growth and metastases. In pancreatic cancer patients, elevated levels of the FVIIa: TF complex correlates with an increased propensity to develop thromboses, also known as blood clots. Studies in laboratory animals indicate that PCI-27483 inhibits the growth of tumors that express TF.
We have completed Phase I testing of Factor VIIa Inhibitor PCI-27483 in healthy volunteers. In this study, PCI-27483 caused no adverse events, and we were able to establish the International Normalized Ratio (INR) as a pharmacodynamic marker for evaluation in clinical trials.
A multicenter Phase I/II of PCI-27483 in patients with locally advanced or metastatic pancreatic cancer that are either receiving or are planned to receive gemcitabine therapy is currently ongoing. The Phase I portion of the study, which evaluated safety and established the Phase II dose of PCI-27483, has completed enrollment and interim results were reported at the 2011 GI Cancers Symposium on January 21, 2011. The Phase II portion of the study is enrolling and patients are being randomized to receive either gemcitabine alone or gemcitabine plus PCI-27483 (1.2 mg/kg twice daily). The objectives of this phase of the study are to: a) assess the safety of Pharmacyclics FVIIa Inhibitor PCI-27483 at pharmacologically active dose levels; b) to assess potential inhibition of tumor progression and c) obtain initial information of the effects on the incidence of thromboembolic events.
Histone Deacetylase (HDAC) Inhibitor
PCI-24781 is an orally-bioavailable histone deacetylase inhibitor that is currently in multiple clinical trials. Histone deacetylases are cellular enzymes whose functions include turning gene expression off and on. PCI-24781 targets histone deacetylase (HDAC) enzymes and inhibits their function. We have shown that PCI-24781 impacts the tumor cells by multiple mechanisms including a re-expression of tumor suppressor genes, disruption of DNA repair mechanisms, cell cycle inhibition and the generation of reactive oxygen species. Previous clinical trials have demonstrated that our HDAC Inhibitor PCI-24781 has favorable systemic elimination properties when dosed orally, and inhibits the target enzymes.
We are currently conducting a Phase I trial in patients with advanced solid tumors, a Phase I/II trial in sarcoma patients (in combination with doxorubicin, an anti tumor agent) and a Phase I/II trial testing PCI-24781 in patients with relapsed or refractory Non-Hodgkin's lymphoma. Currently we are enrolling patients in the Phase II portion of this trial in patients with follicular lymphoma.
The HDAC Inhibitor PCI-24781 has been studied in over 100 patients treated in clinical trials thus far. The main dose-limiting toxicity observed has been a rapidly reversible thrombocytopenia (a decrease in platelets, which are blood cells necessary for clotting). This effect is common among HDAC inhibitors and is considered a class effect (i.e. related to the pharmacologic mechanism of action). The duration and severity of the thrombocytopenia has been managed using novel dose scheduling strategies that we have developed and tested in the clinic.
We are subject to risks common to pharmaceutical companies developing products, including risks inherent in our research, development and commercialization efforts, preclinical testing, clinical trials, uncertainty of regulatory and marketing approvals, uncertainty of market acceptance of our products, history of and expectation of future operating losses, reliance on collaborative partners, enforcement of patent and proprietary rights, and the need for future capital. In order for a product to be commercialized, we must conduct preclinical tests and clinical trials, demonstrate efficacy and safety of our product candidates to the satisfaction of regulatory authorities, obtain marketing approval, enter into manufacturing, distribution and marketing arrangements, build a U.S. commercial capability, obtain market acceptance and, in many cases, obtain adequate coverage of and reimbursement for our products from government and private insurers. We cannot provide assurance that we will generate revenues or achieve and sustain profitability in the future.
Results of Operations
Revenue
| | | Three Months Ended September 30, (in thousands) | |
| | | 2011 | | | 2010 | |
| | | | | | | |
| License and milestone revenue | | $ | 37 | | | $ | 1,964 | |
In May 2009, we received an upfront payment of $11,000,000 ($10,450,000 net of withholding taxes) from Servier and we received an additional $4,000,000 for research collaboration paid over a twenty-four month period through April 2011. The revenue related to these payments was recognized over the two-year research period, which ended in April 2011. Total revenue related to the Servier agreement recognized in the three months ended September 30, 2010 was $1,964,000. We also received a $7,000,000 advance development milestone payment in April 2011 which was recorded as deferred revenue at September 30, 2011. In October 2011 the related milestone was reached and the Company expects to record the $7,000,000 as revenue in its quarter ending December 31, 2011.
Research and Development
| | | Three Months Ended September 30, (in thousands) | | | Percent | |
| | | 2011 | | | 2010 | | | Change | |
| | | | | | | | | | |
| Research and development | | $ | 11,248 | | | $ | 7,702 | | | | 46.0 | % |
The increase in research and development costs of $3,546,000 in the three months ended September 30, 2011 compared with the three months ended September 30, 2010 is primarily due to a $1,811,000 increase in third party clinical trial costs, a $734,000 increase in payroll and related expenses and a $581,000 increase in consulting and other outside services. Average research and development headcount increased from 49 in the 2010 quarter to 73 in the 2011 quarter. We expect the growth in research and development spending to continue through the end of fiscal 2012.
Research and development costs are identified as either directly attributed to one of our research and development programs or as an indirect cost, with only direct costs being tracked by specific program. Direct costs consist of personnel costs directly associated with a program, preclinical study costs, clinical trial costs, and related clinical drug and device development and manufacturing costs, drug formulation costs, contract services and other research expenditures. Indirect costs consist of personnel costs not directly associated with a program, overhead and facility costs and other support service expenses. The following table summarizes our principal product development initiatives, including the related stages of development for each product, the direct costs attributable to each product and total indirect costs for each respective period. For a discussion of the risks and uncertainties associated with the timing and cost of completing a product development phase, see the Risk Factors discussed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2011.
Direct costs by program and indirect costs are as follows (in thousands):
| | | | | Phase of | | Related R&D Expenses
Three Months Ended
September 30, | |
| Program | | Description | | Development | | 2011 | | | 2010 | |
| | | | | | | | | | | |
| Btk Inhibitors | | Cancer/autoimmune | | Phase II | | $ | 7,212 | | | $ | 3,980 | |
| | | | | | | | | | | | | |
| HDAC Inhibitors | | Cancer/autoimmune | | Phase I/II | | | 305 | | | | 661 | |
| | | | | | | | | | | | | |
| Factor VIIa Inhibitor | | Cancer | | Phase II | | | 611 | | | | 740 | |
| | | | | | | | | | | | | |
| MGd | | Cancer | | Phase II | | | 8 | | | | 9 | |
| | | | | | | | | | | | | |
| Total direct costs | | | | | | | 8,136 | | | | 5,390 | |
| Indirect costs | | | | | | | 3,112 | | | | 2,312 | |
| Total research and development expenses | | | | $ | 11,248 | | | $ | 7,702 | |
General and Administrative
| | | Three Months Ended September 30, (in thousands) | | | Percent | |
| | | 2011 | | | 2010 | | | Change | |
| General and administrative expenses | | $ | 3,350 | | | $ | 1,834 | | | | 82.7 | % |
The increase in general and administrative costs of $1,516,000 in the three months ended September 30, 2011 compared with the three months ended September 30, 2010 is primarily due to a $714,000 increase in patent and legal costs, a $267,000 increase in payroll and related expenses, a $187,000 increase in consulting and other outside services, a $148,000 increase in share-based compensation and other increases associated with supporting the growth of our programs. Average general and administrative headcount increased from 10 in the 2010 quarter to 13 in the 2011 quarter.
Interest Income and Other Expense
| | | Three Months Ended September 30, (in thousands) | | | Percent | |
| | | 2011 | | | 2010 | | | Change | |
| Interest income | | $ | 35 | | | $ | 49 | | | | |
| Other expense | | | (12 | ) | | | - | | | | |
| Interest income and other expense, net | | $ | 23 | | | $ | 49 | | | | (53.1 | %) |
The decrease in interest income and other expense, net in the three months ended September 30, 2011 compared with the three months ended September 30, 2010 is due to lower interest income on lower average invested balances and costs related to the disposal of equipment.
Liquidity and Capital Resources
Our principal sources of working capital have been private and public equity financings as well as proceeds from collaborative research and development agreements and interest income.
As of September 30, 2011, we had $105,249,000 in cash, cash equivalents and marketable securities. Net cash used in operating activities was $11,169,000 during the three months ended September 30, 2011; an increase of $4,468,000 from the $6,701,000 used during the three months ended September 30, 2010. The increase resulted primarily from a higher net loss which was partially offset by higher growth in accounts payable and a lack of change in deferred revenue in the 2011 period.
Net cash provided by investing activities of $5,794,000 and used in investing activities of $31,138,000 in the three months ended September 30, 2011 and 2010, respectively, consisted primarily of the net effect of purchases and maturities of marketable securities.
Net cash provided by financing activities of $4,543,000 and $662,000 for the three months ended September 30, 2011 and 2010, respectively resulted primarily from the exercise of stock options. Additionally, the 2011 cash flows include the payment of $571,000 of offering costs incurred in connection with our sale of shares in a registered direct offering in June 2011.
In April 2006, we acquired multiple small molecule drug candidates for the treatment of cancer and other diseases from Celera Genomics, an Applera Corporation business (now Celera Corporation – a subsidiary of Quest Diagnostics Incorporated). Future milestone payments under the agreement, as amended, could total as much as $97 million, although we currently cannot predict if or when any of the milestones will be achieved. Approximately two-thirds of the milestone payments relate to our HDAC Inhibitor program and approximately one-third relates to our Factor VIIa program. Approximately 90% of the potential future milestone payments would be paid to Celera after obtaining regulatory approval in various countries. There are no milestone payments related to our Btk program. In addition to the milestone payments, Celera will be entitled to royalty payments based on annual sales of drugs commercialized from our HDAC Inhibitor, Factor VIIa and certain Btk Inhibitor programs.
Based upon the current status of our product development plans, we believe that our existing cash, cash equivalents and marketable securities will be adequate to satisfy our capital needs through at least the next twelve months. We expect research and development expenses, as a result of on-going and future clinical trials, to consume a large portion of our existing cash resources. Changes in our research and development plans or other changes affecting our operating expenses may affect actual future consumption of existing cash resources as well. In any event, due to our extensive drug programs we will need to raise substantial additional capital to fund our operations in the future. We may seek partnership collaborations to help fund the development of our product candidates. We also expect to raise additional funds through the public or private sale of securities, bank debt, partnership collaboration or otherwise. If we are unable to secure additional funds, whether through partnership collaborations or sale of our securities, we will have to delay, reduce the scope of or discontinue one or more of our product development programs. Our actual capital requirements will depend on many factors, including the following:
• progress with preclinical studies and clinical trials;
• the time and costs involved in obtaining regulatory approval;
• continued progress of our research and development programs;
• our ability to establish and maintain collaborative arrangements with third parties;
• the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims;
• the amount and timing of capital equipment purchases; and
• competing technological and market developments.
Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially. The factors described above will impact our future capital requirements and the adequacy of our available funds. If we are required to raise additional funds, we cannot be certain that such additional funding will be available on terms attractive to us, or at all. Furthermore, any additional equity financing may be highly dilutive, or otherwise disadvantageous, to existing stockholders and debt financing, if available, may involve restrictive covenants. Collaborative arrangements, if necessary to raise additional funds, may require us to relinquish rights to certain of our technologies, products or marketing territories. Our failure to raise capital when needed and on acceptable terms, would require us to reduce our operating expenses and would limit our ability to respond to competitive pressures or unanticipated requirements to develop our product candidates and to continue operations, any of which would have a material adverse effect on our business, financial condition and results of operations.
Off-Balance Sheet Arrangements
None
Critical Accounting Policies, Estimates and Judgments
There have been no material changes in our critical accounting policies, estimates and judgments during the three months ended September 30, 2011, compared with the disclosures in Part II, Item 7 of our Annual Report on Form 10-K for the year ended June 30, 2011.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There was no significant change in our exposure to market risk since June 30, 2011.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures: As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of the end of the first fiscal quarter of 2012, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and our Vice President, Finance and Administration. Based upon that evaluation, our Chief Executive Officer and our Vice President, Finance and Administration have concluded that our disclosure controls and procedures are adequate and effective to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Vice President, Finance and Administration, as appropriate to allow timely decisions regarding required disclosure.
(b) Changes in internal controls over financial reporting: There has been no change 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 controls over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable.
| | There have been no material changes in the risk factors previously disclosed in “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2011. |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not Applicable.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. (Removed and Reserved)
Item 5. Other Information
On November 7, 2011, we entered into an amendment (the “Amendment”) to our Consulting Agreement with Dr. Gwen Fyfe, a member of our Board. The Amendment provides that Dr. Fyfe will receive a lump sum of $50,000 and that she will continue to provide limited consulting services to us for a period of two years. In addition, all options previously granted to Dr. Fyfe in connection with her consulting services will continue to vest through November 30, 2011 and all such vested options shall remain exercisable for a period of two years following the date of the Amendment. In addition all options granted to Dr. Fyfe upon her initial election to the Board shall continue to vest up to our upcoming Annual Meeting of Stockholders and all such vested options and all additional options received by Dr. Fyfe in connection with her Board service shall be exercisable for a period of three years following our upcoming Annual Meeting of Stockholders.
The foregoing is only a brief description of the material terms of the Agreements, does not purport to be a complete description of the rights and obligations of the parties thereunder and is qualified in its entirety by reference to the form of Amendment that is filed as Exhibit 10.2 to this Quarterly Report on Form 10-Q and incorporated by reference herein.
| Item 6. | Exhibits | |
| | | | |
| | | 10.1 | Consulting Services Agreement, by and between Gwendolyn Fyfe, M.D. and Pharmacyclics, Inc., effective May 10, 2010. |
| | | | |
| | | 10.2 | Amendment to Consulting Services Agreement by and between Gwendolyn Fyfe, M.D. and Pharmacyclics, Inc., dated November 8, 2011. |
| | | | |
| | | 31.1 | Rule 13a-14(a)/15d-14(a) Certification of CEO. |
| | | | |
| | | 31.2 | Rule 13a-14(a)/15d-14(a) Certification of VP Finance & Administration. |
| | | | |
| | | 32.1 | Section 1350 Certifications of CEO and VP Finance & Administration. |
| | | | |
| | | 101.INS | XBRL Instance Document |
| | | | |
| | | 101.SCH | XBRL Taxonomy Extension Schema |
| | | | |
| | | 101.CAL | XBRL Taxonomy Extension Calculation Linkbase |
| | | | |
| | | 101.DEF | XBRL Taxonomy Extension Definition Linkbase |
| | | | |
| | | 101.LAB | XBRL Taxonomy Extension Label Linkbase |
| | | | |
| | | 101.PRE | XBRL Taxonomy Extension Presentation Linkbase |
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | Pharmacyclics, Inc. | |
| | | | |
| | (Registrant) | |
| | | | |
| | | | |
| By: | /s/ ROBERT W. DUGGAN | |
| | | Robert W. Duggan | |
| | | Chairman of the Board and Chief Executive Officer |
| | | | |
| | | | |
| Dated: November 8, 2011 | By: | /s/ RAINER M. ERDTMANN | |
| | | Rainer M. Erdtmann | |
| | | Vice President, Finance & Administration and Secretary |
| | | (Principal Financial and Accounting Officer) |
Exhibit Number | Description |
| | |
| 10.1 | Consulting Services Agreement, by and between Gwendolyn Fyfe, M.D. and Pharmacyclics, Inc., effective May 10, 2010. |
| | |
| 10.2 | Amendment to Consulting Services Agreement by and between Gwendolyn Fyfe, M.D. and Pharmacyclics, Inc., dated November 8, 2011. |
| | |
| 31.1 | Rule 13a-14(a)/15d-14(a) Certification of CEO. |
| | |
| 31.2 | Rule 13a-14(a)/15d-14(a) Certification of CFO. |
| | |
| 32.1 | Section 1350 Certifications of CEO and CFO. |
| | |
101.INS | XBRL Instance Document |
| | |
101.SCH | XBRL Taxonomy Extension Schema |
| | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase |
| | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase |
| | |
101.LAB | XBRL Taxonomy Extension Label Linkbase |
| | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase |
