Expertly Targeting
Drivers of Cancer
in Select Patient
Populations
A N N U A L R E P O R T
2015
Dear Shareholders,
We have completed another successful year as we continue to build and advance an exciting
pipeline of therapeutics that we believe will improve and lengthen the lives of many patients with
serious forms of cancer. We made significant progress in each of our programs in 2015 and
continue to build an exceptional team to move them forward.
We expect 2016 to be a transformational year for Mirati. We have the potential to reach proof-of-
concept for both glesatinib (MGCD265) and sitravatinib (MGCD516), and we will initiate the Phase 2
study of mocetinostat in combination with a checkpoint inhibitor in patients with advanced lung cancer.
We are in the unique position of having three clinical stage programs, each with potential to
treat cancer patients with great unmet need.
We take a unique approach to drug development, incorporating the expertise gained by our
team through many years of successfully developing novel drugs in oncology. An integral part of
our strategy is to design studies that target genetic and epigenetic drivers of cancer, and select
for patients most likely to respond to our therapies. The experience of our team allows us to
design trials that can be modified based on the emerging clinical data from our studies, as well
as promising novel discoveries in translational medicine, that improve our likelihood of
regulatory success in the most efficient manner. This means our decisions are supported by
strong scientific rationale and the most up-to-date clinical data, all while streamlining the path to
registration. We believe the specific, yet flexible nature of our clinical approach is a key
competitive advantage, and it holds immense potential for bringing oncology therapies to
patients that result in significantly better treatment outcomes.
Across our pipeline, we are researching and developing therapies for patients who have limited
treatment options and are fighting some of the most aggressive and widespread forms of
cancer. The initial focus of all three of our clinical programs is on non-small cell lung cancer
(NSCLC), which in 2015 had an annual worldwide incidence rate of 1.55 million cases. Recent
advances in targeted therapy and immunotherapy are promising but treatment outcomes for
these patients are still relatively poor. It is clear that new targeted agents and immunotherapy
combinations which enhance efficacy are needed and provide an excellent opportunity to
benefit patients while creating significant commercial opportunities.
Clinical Program Highlights
We are advancing a rich clinical pipeline of oncology programs comprised of single-agent and
combination therapies.
2015 was marked by several accomplishments to this end:
We reported encouraging clinical data from an ongoing Phase1b study trial and initiated
a Phase 2 NSCLC trial with our lead tyrosine kinase inhibitor (TKI), glesatinib
We formed important strategic diagnostic collaborations to identify the NSCLC patients
most likely to respond to our agents
We selected a dose and initiated dose expansion cohorts in selected patient populations
for sitravatinib
We forged a combination-therapy clinical trial collaboration with MedImmune for our
HDAC-inhibitor, mocetinostat
We ended the year in a strong financial position that will enable us to meaningfully
progress our entire pipeline in 2016
Glesatinib & sitravatinib – selective tyrosine kinase inhibitors initially targeting NSCLC
2015 was a productive and exciting year as we moved forward in our development of glesatinib,
our tyrosine kinase inhibitor targeting the MET and Axl pathways. Certain genetic alterations in
MET and Axl have been shown to be drivers of tumor growth and occur in up to 9% of NSCLC
patients. After presenting encouraging interim data in September at the World Conference on
Lung Cancer, we initiated a Phase 2 study in December 2015 in NSCLC patients with driver
mutations in MET. We believe that this study will demonstrate the competitive advantage
glesatinib has as a differentiated MET inhibitor in this targeted group of patients, and are looking
forward to sharing an update on our Phase 2 progress in late 2016.
As part of our effort to target this specific patient population, in 2015 we established important
collaboration agreements with two advanced molecular diagnostic companies, Foundation
Medicine and Guardant Health, to help us identify NSCLC patients with the relevant genetic
alterations who are most likely to respond to treatment with glesatinib.
We are also planning to explore the efficacy of glesatinib in EGFR-resistant NSCLC patients
where MET and Axl have been associated with resistance to first, second and third generation
EGFR inhibitors.
During the last year we made notable progress with our second TKI program, sitravatinib, which
has demonstrated potent inhibition of a closely related spectrum of tyrosine kinases
including RET, CHR4q12, CBL, DDR and Trk. Genetic alterations in these targets have been
implicated drivers in a number of cancers, including up to 9% of NSCLC patients. In September
2015, we presented interim clinical data from the ongoing Phase 1 dose escalation study in
patients with advanced solid tumors, demonstrating that sitravatinib was well tolerated with a
favorable pharmacokinetic profile. We established our recommended Phase 2 dose and initiated
the Phase 1b dose expansion cohorts in genetically-selected patients and expect to present
initial data from this trial in 2016. We also plan to leverage our relationships with Foundation
Medicine and Guardant Health in the sitravatinib program going forward.
We believe that both the glesatinib and sitravatinib programs have benefitted from our
innovative approach allowing us to test multiple hypotheses in a single trial and making
adaptations early in the clinical process based upon real-time clinical observations as well as
ongoing translational research. That flexibility allows us to inform subsequent clinical trial
designs and expedite the pathway to registration.
Mocetinostat – spectrum selective Class I & IV histone deacetylase inhibitor (HDAC) with a
combination approach
Major breakthroughs in the treatment of many types of cancer, including NSCLC, have been
achieved by targeting and inhibiting immune checkpoint pathways, specifically with drugs that
target the programmed death receptor-1 (PD-1) and ligand (PD-L1) pathways. Despite the
promise of these single-agent checkpoint inhibitors, the majority of cancer patients do not
respond to immunotherapy. Therefore, the immuno-oncology field is focusing on the
combination of checkpoint inhibitors with other agents which can increase their efficacy. There
is growing evidence that the combined anti-tumor and immunomodulatory effects of Class I
HDAC inhibitors may enhance the efficacy of immune checkpoint inhibitors by increasing tumor
cell immunogenicity and decreasing T regulatory and myeloid derived suppressor cells that
inhibit anti-tumor immune responses.
In August 2015, we entered into a clinical trial collaboration to evaluate the safety and efficacy
of mocetinostat, our HDAC inhibitor in combination with durvalumab, MedImmune’s anti-PD-L1
immune checkpoint inhibitor. This Phase 2 proof-of-concept study is expected to initiate in the
second quarter of 2016 and will evaluate this combination therapy in patients with NSCLC,
including those who are PD-L1 low and who have failed prior checkpoint inhibitor treatment, two
significant areas of unmet medical need.
Looking to the Future
We are encouraged by our progress and the great promise that our pipeline holds to provide
cancer patients with much needed treatment options. Our solid financial position allows us to
drive our current clinical programs toward proof-of-concept and data that will help inform
registration pathways, while still continuing to advance our early stage research programs,
which we look forward to introducing later in the year. Our focus is on delivering new and more
effective treatments for cancer patients and our goal is to improve and prolong the lives of
patients suffering from cancer.
While the upcoming data readouts and trial initiations for our three lead programs provide us
with near-term milestones in 2016, this is only the beginning of our story. Our unique
understanding of cancer biology and our differentiated approach to developing therapies allows
us to garner critical insights into pathways that drive tumor growth for which there are no
effective therapies. We look forward to sharing the progress we are making in our three clinical
stage programs as well as the exciting results from our pre-clinical pipeline as we approach the
Investigational New Drug Application stage and enter the clinic. We believe that our initial success is
merely a precursor of what is to come, and a model for advancing the exciting science that may lead to
breakthrough therapies for cancer patients in need of new therapies.
As always, thank you for your continued support and we look forward to sharing updates with
you in the year ahead.
Sincerely,
Charles M. Baum
President and Chief Executive Officer
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________________________________
(Mark One)
FORM 10-K
(cid:58)(cid:3) ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the fiscal year ended December 31, 2015; or
(cid:133)(cid:3) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to
Commission file number: 1-15803
_____________________________________________________
MIRATI THERAPEUTICS, INC.
(Exact Name of Registrant as Specified in Its Charter)
_____________________________________________________
Delaware
(State or other jurisdiction of
incorporation or organization)
9393 Towne Centre Drive Suite 200, San Diego, California
(Address of principal executive offices)
46-2693615
(IRS Employer
Identification No.)
92121
(Zip Code)
Registrant’s telephone number: (858) 332-3410
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value per share
(Title of Class)
________________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:133) No (cid:58)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:133) No (cid:58)
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 (cid:58) No (cid:133)(cid:3)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes (cid:58) No (cid:133)(cid:3)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. (cid:133)(cid:3)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer
(cid:133)(cid:3)
Accelerated filer
Non-accelerated filer
(cid:133)(Do not check if a smaller reporting company)(cid:3)
Smaller reporting company
(cid:58)(cid:3)
(cid:133)(cid:3)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes (cid:133) No (cid:58)(cid:3)
The aggregate market value of common stock held by non-affiliates (based on the closing price on the last business day of the registrant’s
most recently completed second fiscal quarter as reported on the NASDAQ Capital Market) was $333 million. All executive officers and directors
of the registrant and all persons filing a Schedule 13D or Schedule 13G with the Securities and Exchange Commission in respect to registrant’s
common stock have been deemed, solely for the purpose of the foregoing calculation, to be “affiliates” of the registrant.
As of March 4, 2016, the registrant had 19,302,313 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required to be disclosed in Part III of this report is incorporated by reference from the registrant’s definitive
Proxy Statement for the 2016 Annual Meeting of Stockholders, which will be held on May 18, 2016 and which proxy statement
will be filed not later than 120 days after the end of the fiscal year covered by this report.
Table of Contents
PART I
Item 1.
Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
Properties
Legal Proceedings
Mine Safety Disclosures
PART II
Item 5.
Item 6.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Consolidated Financial Data
Item 7.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 8.
Item 9.
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Item 10. Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
PART III
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accountant Fees and Services
Item 15.
Exhibits and Financial Statement Schedules
SIGNATURES
PART IV
Page
3
17
38
38
38
38
39
42
43
50
51
51
51
51
52
52
52
52
52
53
75
1
Forward-Looking Statements
PART I
This Annual Report on Form 10-K (the "Annual Report"), may contain “forward-looking statements” within the meaning
of the federal securities laws made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors,
including those set forth under Part I, Item 1A, “Risk Factors” in this Annual Report. Except as required by law, we assume no
obligation to update these forward-looking statements, whether as a result of new information, future events or otherwise. These
statements, which represent our current expectations or beliefs concerning various future events, may contain words such as “may,”
“will,” “expect,” “anticipate,” “intend,” “plan,” “believe,” “estimate” or other words indicating future results, though not all
forward-looking statements necessarily contain these identifying words. Such statements may include, but are not limited to,
statements concerning the following:
· the initiation, cost, timing, progress and results of our research and development activities, preclinical studies and
future clinical trials;
· our ability to obtain and maintain regulatory approval for our product candidates, and any related restrictions,
limitations, and/or warnings in the label of any approved product candidate;
· our ability to obtain funding for our operations;
· our plans to research, develop and commercialize our future product candidates;
· our strategic partners’ decisions relating to development and commercialization of product candidates;
· our ability to attract collaborators with development, regulatory and commercialization expertise;
· our ability to obtain and maintain intellectual property protection for our future product candidates;
· the size and growth potential of the markets for our future product candidates, and our ability to serve those
markets;
· our ability to successfully commercialize our future product candidates;
· the rate and degree of market acceptance of our future product candidates;
· our ability to develop sales and marketing capabilities, whether alone or with potential future collaborators;
· regulatory developments in the United States and foreign countries;
· the performance of our third-party suppliers and manufacturers;
· the success of competing therapies that are or become available;
· our expectations regarding the time during which we will be an emerging growth company under the Jumpstart
Our Business Startups Act of 2012 ("the JOBS Act");
· the loss of key scientific or management personnel; and
· our other future financial results, capital requirements and need for additional financing.
2
Item 1. Business
Overview
BUSINESS
Mirati Therapeutics, Inc. is a clinical-stage biopharmaceutical company focused on developing a pipeline of targeted
oncology products. We focus our development programs on drugs intended to treat specific genetically defined subsets of cancer
patients with unmet needs. Our clinical pipeline consists of three product candidates: MGCD265, MGCD516 and mocetinostat.
MGCD265 and MGCD516 are orally-bioavailable, spectrum-selective kinase inhibitors with distinct target profiles that are in
development to treat patients with non-small cell lung cancer ("NSCLC") and other solid tumors. MGCD265 is in Phase 2 clinical
development and MGCD516 is in Phase 1b clinical development. Mocetinostat is an orally-bioavailable, Class 1 selective histone
deacetylase ("HDAC") inhibitor in Phase 2 clinical development in collaboration with MedImmune, the global biologics research
and development arm of AstraZeneca PLC. References in this Annual Report on Form 10-K to "we", "our", "us", "Mirati" or "the
Company" refer to Mirati Therapeutics, Inc. and its subsidiaries.
We believe that an increased understanding of the genomic factors that drive tumor cell growth can lead to the development
of cancer drugs that target these genomic factors, resulting in increased efficacy while reducing side effects. We are leveraging
this knowledge to develop targeted cancer therapies to address unmet needs in selected cancer patient populations. Our novel
kinase inhibitors are intended to target specific mutations that drive the growth of cancer or are implicated in cancer drug resistance
or pathogenic processes such as tumor angiogenesis. Our HDAC inhibitor, mocetinostat, acts through important epigenetic
mechanisms that could have potential when used in combination with immune checkpoint inhibitors. We plan to identify additional
opportunities by leveraging our deep scientific understanding of molecular drug targets and mechanisms of resistance and
potentially in-licensing or internally discovering promising, early-stage novel drug candidates.
Our three clinical stage product candidates are as follows:
• MGCD265 is an orally-bioavailable, potent, small molecule kinase inhibitor of MET and Axl receptor tyrosine kinases,
("RTKs"). MGCD265 is in development for the treatment of solid tumors, with an initial focus on NSCLC but including
other solid tumors like those found in gastroesophageal cancers and squamous cell carcinoma of the head and neck
("HNSCC"). In September 2015, we reported interim data from the ongoing MGCD265 Phase 1b dose expansion clinical
trials disclosing that two of the four NSCLC patients who were then evaluable (having had at least two on-treatment
scans) had confirmed partial responses ("PRs"), based upon Response Evaluation Criteria in Solid Tumors ("RECIST")
criteria and two patients had tumor regressions that did not meet the RECIST threshold for a PR. Based upon these early
signs of clinical efficacy we initiated a single-arm Phase 2 clinical trial for the treatment of NSCLC patients with genetic
alternations in MET in December of 2015. Based on a meeting with the U.S. Food and Drug Administration ("FDA"),
in the Phase 2 trial of MGCD265, if we observe a response rate that is significantly better than the response rate for
currently approved second line therapy, we believe the trial could potentially serve as a registration enabling trial and
qualify for submission for accelerated approval under U.S. Code of Federal Regulations 21 CFR Part 314, Subpart H
(Accelerated Approval of New Drugs for Serious or Life-Threatening Illnesses).
We have applied for and received a proposed generic name for MGCD265. The proposed generic name is “glesatinib.”
The proposed generic name will become final once it is published and a comment period expires, which we expect will
occur in the first half of 2016.
• MGCD516 is an orally-bioavailable, potent, small molecule spectrum-selective kinase inhibitor in development for the
treatment of solid tumors with an emphasis on genetic alterations involving RET, DDR and Trk RTK families as well as
CHR4q12 amplicons and CBL inactivating mutations. We plan to focus on solid tumors exhibiting genetic alterations
which result in dysregulation of these key drivers of tumor growth, initially in NSCLC. In addition, we plan to evaluate
other tumor types where the profile of MGCD516 would suggest clinical benefit. MGCD516 is currently in a Phase 1b
dose expansion clinical trial which includes cohorts for the treatment of patients with genetic alterations involving the
RET, DDR and Trk RTK families as well as CHR4q12 amplicons and CBL inactivating mutations.
We have applied for and received a proposed generic name for MGCD516. The proposed generic name is “sitravatinib.”
The proposed generic name will become final once it is published and a comment period expires, which we expect will
occur in the first half of 2016.
• Mocetinostat is an orally-bioavailable, spectrum-selective HDAC inhibitor that we plan to evaluate in combination with
durvalumab, MedImmune’s immune checkpoint inhibitor, in patients with NSCLC. We plan to initiate this trial in the
second quarter of 2016. By virtue of its specificity for Class 1 HDACs, mocetinostat showed a favorable effect on the
3
immune system in preclinical studies. By increasing PD-L1, certain costimulatory molecules, and HLA antigens on the
tumor cells, mocetinostat may enhance the immune response to tumors. Mocetinostat may also have a favorable effect
on the immune system by decreasing T regulatory cells ("T-regs") and myeloid derived suppressor cells ("MDSCs"). We
believe that, overall, these effects on the immune system have the potential to enhance the efficacy of checkpoint inhibitors.
We are in the process of completing Phase 2 clinical trials of mocetinostat in patients with bladder cancer, myelodysplastic
syndrome ("MDS") and Non-Hodgkin's Lymphoma ("NHL"), specifically Diffuse Large B-Cell Lymphoma ("DLBCL")
and Follicular Lymphoma ("FL"). We have not observed activity or a level of patient responses in these trials that justify
moving forward as a single agent and at the present time we do not expect to undertake further single agent trials with
mocetinostat.
We were incorporated under the laws of the State of Delaware on April 29, 2013 as Mirati Therapeutics, Inc. On May 8,
2013, we entered into a plan of arrangement with MethylGene, Inc. ("MethylGene Canada") pursuant to which MethylGene Canada
became our wholly owned subsidiary and all of its shareholders became proportionate shareholders of ours. Our website address
is www.mirati.com. Our website and the information contained on, or that can be accessed through, the website will not be deemed
Our Annual Reports on Form
to be incorporated by reference in, and are not considered part of, this Annual Report on Form
and amendments to reports filed or furnished pursuant to
Section 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on the Investors portion
of our web site at www.mirati.com as soon as reasonably practical after we electronically file such material with, or furnish it to,
the Securities and Exchange Commission ("SEC").
Quarterly Reports on Form
Current Reports on Form
Our Strategy
Our goal is to be a leading developer of targeted cancer therapies for genetically selected patient populations. The key
components of our strategy include:
• Develop a pipeline of targeted cancer therapies. We believe that an increased understanding of the genomic factors that
drive tumor cell growth will lead to the development of cancer drugs with increased efficacy while reducing side effects.
We are leveraging the prior successful experience of certain members of our management team in the development and
approval of multiple oncology and targeted oncology drugs (e.g. Temodar, Sutent, Inlyta, Xalkori, and Ibrance) to develop
targeted cancer therapies to address unmet needs in specific cancer populations. Our clinical pipeline is comprised of
two novel kinase inhibitors that target specific mutations that drive cancer cell growth and an HDAC inhibitor which is
one of the most advanced epigenetic therapies in development. We plan to identify additional targets by leveraging our
deep scientific understanding of molecular drug targets and mechanisms of resistance through internal drug discovery
activities or potentially in-licensing promising, early-stage novel drug candidates.
• Employ efficient and flexible approaches to accelerate clinical development. Based on the prior extensive experience
of certain members of our management team in oncology drug development, which includes the successful registration
of several products, we take an adaptive approach to our clinical trials so that we use the information from the ongoing
trials to increase our likelihood of success. We will pursue indications and select specific patient populations in which
activity of our product candidates can be assessed in small proof of concept ("POC") clinical trials potentially leading to
accelerated clinical development. When designing clinical trials, we structure our clinical development approach to test
multiple clinical hypotheses in a single trial and design trials with the flexibility to adapt quickly and accelerate once a
signal of clinical benefit is observed. We believe our approach may increase the likelihood of seeing results early in
clinical trials with fewer patients, reducing our clinical development risk and development costs and allowing us to
potentially accelerate the development of our product pipeline.
• Advance our two lead kinase inhibitors. Kinase inhibitors have significantly improved the care of many cancer patients
and represent a commercially successful category of targeted cancer therapies with global sales of over $29.1 billion in
2011, according to BCC Research. We have two internally discovered novel kinase inhibitors in development: MGCD265
and MGCD516. These product candidates target pathways of high scientific interest, including MET, Axl, RET, DDR,
and Trk RTK families and including exploration of novel genetic alterations including CHR4q12 amplicons and CBL
inactivating mutations. These pathways are believed to be drivers of tumor growth and to be responsible for the
development of tumor resistance to several anti-cancer treatments. MGCD265 is in Phase 2 development and MGCD516
is currently in a Phase 1b dose expansion clinical trial.
• Advance mocetinostat, our HDAC inhibitor. HDAC inhibitors modulate epigenetic events by their potent inhibition of
histone deacetylation. This class of agents has been shown to be effective, as single agents, in treating hematologic
malignancies, as evidenced by the approvals of Istodax and Zolinza. A growing body of evidence indicates that Class I
HDAC inhibitors like mocetinostat have effects directly on tumor cells as well as on immune cells (T-regs and MDSC)
4
that may enhance the efficacy of immune checkpoint inhibitors such as nivolumab, pemrolizumab, durvalumab and
others. We have completed several clinical trials with mocetinostat in more than 400 patients which have provided valuable
information on the pharmacokinetic, pharmacodynamic and safety profile of the drug. We are focused on the development
of mocetinostat in combination with immune checkpoint inhibitors in NSCLC since we believe that is the most promising
indication and will create the greatest benefit for the largest number of patients. We plan to initiate a clinical trial evaluating
the combination of mocetinostat and durvalumab in patients with NSCLC in the second quarter of 2016.
• Leverage partnerships to develop our product candidates. We plan to collaborate with third parties and partner certain
rights to our product candidates as a means to accelerate their broader clinical development and maximize their therapeutic
and market potential. We plan to retain certain key development and commercialization rights in our partnerships. We
believe that retaining this strategic flexibility will enable us to maximize shareholder value. Specifically, we recently
entered into collaboration agreements with Foundation Medicine, Inc. and Guardant Health, Inc. to explore development
of their platforms as companion diagnostics for MGCD265.
Product Candidates
The following chart depicts the current state of our oncology development programs:
PRODUCT
CANDIDATE
MGCD265
INDICATION
Solid Tumors
TARGETS
MET, Axl
MGCD516
Solid Tumors
Mocetinostat
Solid Tumors
RET,
CHR4q12,
CBL, DDR and
Trk
HDACs
Class I and IV
COMMERCIAL
RIGHTS
Mirati: Global
Mirati: Global
STAGE OF DEVELOPMENT AND
ANTICIPATED MILESTONES
Single-arm, single-agent Phase 2 clinical trial in
NSCLC ongoing.
Single-agent Phase 1b dose expansion clinical
trial ongoing.
Taiho: Certain Asian
Territories
Mirati: All Other
Territories
Initiate a trial evaluating the combination of
mocetinostat with durvalumab in NSCLC in the
second quarter of 2016.
Our Targeted Kinase Programs
Specific genes or pathways that are inappropriately activated in certain types of cancer cells and not in normal tissue are
called driver mutations. Targeted therapies selectively inhibit these mutations. RTKs are a family of kinases involved in the
transmission of signals that regulate intercellular processes, including those that control cell growth and cell division. RTKs may
be inappropriately activated in cancerous tissues resulting in uncontrolled tumor cell growth. Aberrant kinase function, caused by
genetic mutations, gene amplification, or over-expression, underlies many cancer cell processes, making the kinome an important
source for therapeutic targets in oncology. Discoveries of specific drivers of disease have led to the development of targeted
therapies, or the tailoring of therapies to a particular tumor or disease profile. In some cases, these therapies have proven to be
more efficacious while having fewer side effects than traditional non-targeted therapies, such as chemotherapy, which kill healthy
cells along with cancer cells. Examples of successful development of oral targeted kinase inhibitors include Novartis AG’s Gleevec,
a BCR-ABL kinase inhibitor for the treatment of Philadelphia chromosome positive chronic myelogenous leukemia; and
GlaxoSmithKline’s Tykerb, a HER2 kinase inhibitor for the treatment of a subset of breast cancer patients over-expressing the
HER2 kinase. Further examples of oral targeted kinase inhibitors include Pfizer’s Xalkori and Bosulif and Bristol-Myers Squibb’s
Sprycel. We believe that therapies targeting specific genetic abnormalities in subsets of cancer patients identified through companion
diagnostic tests will result in streamlined clinical trials and improved patient outcomes and will be increasingly important in the
continued evolution of the treatment of cancer.
We believe that by selecting patients whose tumors have genetic mutations and alterations in the pathways that are critical
for tumor growth and that may be potently inhibited by our drugs, we will increase the potential for clinical benefit. A greater
clinical benefit in selected patients would increase the likelihood of demonstrating clinical benefit earlier in development, potentially
in Phase 1, which may allow us to move rapidly into registration trials. As a part of our ongoing development activities, we are
using commercial diagnostic assays as well as assays developed internally for early clinical trials. We are working with external
diagnostic providers to develop validated companion diagnostics for later stage clinical use and for potential registration to ensure
that the diagnostic is widely available for commercial use upon approval. In December of 2015 we announced collaborations with
Foundation Medicine, Inc., and Guardant Health, Inc. to explore development of their platforms as companion diagnostics for
MGCD265.
5
The clinical and commercial success of leading small molecule kinase inhibitors demonstrates the potential of new targeted
treatments for cancer. The following table lists retail sales figures for selected small molecule kinase inhibitors.
2014 Worldwide Retail Sales Figures of Selected Small Molecule Kinase Inhibitors
Brand Name
Gleevec
Tarceva
Sutent
Nexavar
Sprycel
Tykerb
Zelboraf
Xalkori
_____________________
(1) Source: Evaluate Pharma.
2014 Worldwide
Sales(1) (in millions)
4,746
$
1,413
$
1,174
$
1,027
$
1,493
$
282
$
329
$
438
$
Our kinase inhibitor programs in clinical development, MGCD265 and MGCD516, are kinase inhibitors with distinct
target profiles. These new molecular entities are in development for the treatment of patients with NSCLC and other solid tumors
that exhibit the mutations and alterations of interest. MGCD265 and MGCD516 were developed internally and we own all global
rights.
MGCD265 - A Multi-targeted Kinase Inhibitor for Solid Tumors
MGCD265 Overview
MGCD265 is an orally-bioavailable, potent, small molecule kinase inhibitor of MET and Axl. MGCD265 is currently in
development for the treatment of patients with solid tumors with an initial focus on patients with NSCLC. We are also investigating
patients with other solid tumors including gastroesophageal cancers and HNSCC. In late 2014 we established the maximum
tolerated dose ("MTD") and initiated dose expansion cohorts in patients selected for specific driver mutations which activate the
MET or Axl pathways. This patient selection strategy is designed to potentially result in a high response rate that could enable an
accelerated development pathway. In September 2015 we reported interim data from the ongoing MGCD265 Phase 1b dose
expansion clinical trial, disclosing that two of the four NSCLC patients who were then evaluable (having had at least two on-
treatment scans) had confirmed PRs, based upon RECIST criteria and the other two patients had tumor regressions that did not
meet the threshold to be considered RECIST PRs. Based upon these early signs of clinical efficacy we initiated a single-arm Phase
2 clinical trial for the treatment of NSCLC patients with genetic alternations in MET in December of 2015. Based on a meeting
with the FDA, if we observe a response rate in the Phase 2 trial of MGCD265 that is significantly better than the response rate for
currently approved second line therapy, we believe the trial could potentially serve as a registration enabling trial and qualify for
submission for accelerated approval under U.S. Code of Federal Regulations 21 CFR Part 314, Subpart H (Accelerated Approval
of New Drugs for Serious or Life-Threatening Illnesses).
Our development strategy for MGCD265 is based on our understanding of the compound’s target inhibition profile and,
accordingly, our initial focus for this program will be NSCLC although we intend to also explore other solid tumors where genetic
alterations in MET or Axl are also known to be present. We intend to undertake patient selection using a targeted next generation
sequencing assay to identify patients with certain genetic mutations or alterations of MET or Axl that result in oncogenic activation
and are implicated as drivers of tumor progression.
6
MGCD265 Market Overview
The National Cancer Institute ("NCI") estimates that in 2015, approximately 221,200 patients in the United States were
diagnosed with lung cancer and 158,040 died due to the disease. Approximately 85% of lung cancers are NSCLCs. The potential
oncogenic mutations of MET and Axl that we are targeting may exist in up to 8% of NSCLC cases. At present, the prevalence of
the genetic alterations of MET and Axl is less well characterized in other solid tumors, however, they are known to occur in other
solid tumors and we are exploring those additional indications. Although other tumor types may respond to treatment with
MGCD265, NSCLC, HNSCC and gastroesophageal cancers are of particular relevance to demonstrate the clinical activity of
MGCD265. Key features of these markets are shown in the table below.
Estimated Market Size of Certain Cancer Therapies
Indication
Lung Cancer
Supporting Rationale
Genetic alterations of MET and Axl in up to 8% of NSCLC
U.S. Annual Patient Incidence
221,200
Gastric Cancer
Genetic alterations of MET in up to 6% of patients
24,590
__________________________
Source: National Cancer Institute
Approximately 15% of NSCLC cases have activating EGFR mutations, equating to 28,203 patients each year in the
United States. Although tyrosine kinase inhibitors that target EGFR have demonstrated efficacy in treating patients with EGFR
mutations, tumors eventually become resistant to therapy. Resistance to EGFR therapy is mediated through mutation and/or
overexpression of alternative targets and pathways, including MET and Axl in approximately 70% of resistant tumors, or 19,742
patients annually in the United States.
MGCD265 Background
MGCD265 is a small molecule, spectrum-selective kinase inhibitor that potently inhibits MET and Axl. These targets
have been shown to play key roles in tumor development, tumor cell survival, therapeutic resistance and blood vessel formation,
or angiogenesis. MGCD265 is selective for these two targets at clinically achievable dose levels and shows minimal activity against
a panel of over 300 other kinases. We believe this profile provides the following potential advantages for MGCD265:
•
•
•
•
therapeutic action against specific mutations and genetic alterations of MET;
therapeutic action against a novel target ("Axl");
high specificity reduces the risk of side effects from off-target activity; and
the selection of specific patients whose tumors exhibit genetic alterations of MET or Axl that may be drivers of tumor
growth provides an opportunity to demonstrate single agent clinical responses of MGCD265.
The MET receptor is a member of the RTK protein family that is found on the cell’s surface that plays a key role in the
growth, survival and metastasis of various types of cancers, when not properly regulated. The MET target has generated significant
scientific and pharmaceutical interest because of its direct involvement in tumor cell survival and angiogenesis. MET expression
is elevated in several major tumor types including NSCLC, gastric cancer, RCC and HCC and is associated with poor prognosis.
MET activation may also be associated with resistance to EGFR inhibitors such as Tarceva, Iressa and Erbitux. In tumors with
EGFR mutation or activation, the activation or genetic alteration of MET is implicated as an escape mechanism leading to EGFR-
inhibitor resistance. Inhibition of MET may result in clinical benefit by blocking the MET-driven escape mechanism used by some
tumor cells when treated with other targeted inhibitors of the EGFR, such as Tarceva or Iressa.
Axl is also an RTK, and its expression has been shown to correlate with clinical-stage and lymph node status in NSCLC.
Axl can be dysregulated in certain cancers through increased protein expression or gene rearrangement, resulting in abnormal
tumor growth and tumor cell survival. Axl has also been linked to resistance to EGFR inhibitors such as Tarceva and Erbitux. Axl
is also expressed in other tumor types and may be a clinically significant driver in RCC, ovarian, pancreatic and other tumors.
MGCD265 is distinguished from many other small molecule inhibitors of MET due in part to its potent activity against
Axl, which provides an opportunity against tumors driven by Axl such as NSCLC tumors that exhibit a translocation of Axl that
drives tumor growth, thereby increasing the likelihood that these tumors will respond to MGCD265. Further, MET and Axl are
7
both overexpressed and/or genetically altered in tumors that are resistant to EGFR inhibitors such as Tarceva, Iressa and Erbitux.
It is estimated that MET is overexpressed in approximately half of EGFR-resistant tumors, and amplified in 5-20% of EGFR-
resistant tumors. It is estimated that Axl is overexpressed in approximately 20-30% of EGFR-resistant tumors. The simultaneous
inhibition of both MET and Axl pathways may be required for clinical efficacy in patients developing resistance to EGFR inhibitors
or for the prevention of resistance by combining MGCD265 with an EGFR inhibitor as first line treatment. Finally, in preclinical
studies MGCD265 has demonstrated inhibition of tumor cells which express mutant forms of MET that appear to be greater than
other known small molecule inhibitors of MET.
The profile of MGCD265 and our clinical development strategy is clearly distinguished from MET antibody antagonists
(such as MetMab) that inhibit the MET pathway signaling primarily by preventing the binding of HGF to MET. The inhibition
of the catalytic activity of MET via small molecule strategies like MGCD265, as opposed to inhibition of ligand binding by MET
antibody antagonists, is an important differentiated strategy in disease settings in which MET is activated by ligand-independent
mechanisms including activating mutations, gene amplification, and/or extreme overexpression. Our primary focus in clinical
development is on patients with NSCLC or other solid tumors exhibiting driver mutations in the MET and Axl pathways. These
driver mutations result in constitutive activation of the MET or Axl receptors so they become independent of normally tightly
regulated growth factor signaling. In the case of MET, genetic alterations can result in the activation of MET-dependent signaling
independent of binding to HGF. Therefore, patients with these driver mutations would not be responsive to MET antibody
antagonists that inhibit HGF binding, but are more likely to respond to MGCD265, which inhibits signaling irrespective of growth
factor binding. If we are able to demonstrate single agent POC in select patients, we also plan to explore the combination of
MGCD265 with EGFR inhibitors to treat and/or prevent EGFR resistance.
MGCD265 Preclinical Development
Our preclinical studies, in a variety of in vivo tumor models, suggest that MGCD265 is well tolerated at dose levels that
inhibit MET and Axl and demonstrates tumor regression in experimental cancer models that exhibit genetic mutations and alterations
of interest.
MGCD265 Clinical Trials
Multiple Phase 1 clinical trials conducted with MGCD265 show evidence of clinical activity as monotherapy and in
combination trials. MGCD265 doses have resulted in exposures consistent with greater than 90% inhibition of MET mutations,
MET amplifications and Axl fusions. Dosing is ongoing in the expansion cohorts which are enrolling patients selected for specific
genetic mutations and alterations of MET and Axl.
The original IND for MGCD265 was filed in December 2007 and became effective in January 2008. To date,
approximately 300 patients have been exposed to MGCD265 in multiple clinical trials in a variety of solid tumor types. MGCD265
has been generally well tolerated at all doses and schedules tested to date, both as monotherapy and in combination with either
Taxotere or Tarceva.
The most frequent treatment-related adverse events observed were diarrhea, fatigue and nausea. Other than as noted
below, all of these trials were conducted with prior formulations of MGCD265 that are no longer actively being developed. In
addition, none of those prior trials were conducted in patient populations that were selected for genetic alterations or mutations
in MET and Axl that we expect are the most likely to respond to treatment with MGCD265, which is our current development
focus.
8
The historical MGCD265 clinical trials are set forth in the following table.
CLINICAL TRIALS EVALUATING MGCD265
Phase 1 Clinical Trial
Single Agent Dose Escalation, 21 day cycle
Phase 1b Clinical Trial
Single Agent Expansion Cohort in patients with
genetic alterations of MET and Axl in NSCLC,
HNSCC and other solid tumors, 21 day cycle
Completed (trial amended and continuing as
described under Phase 1b dose expansion
clinical trial below)
Ongoing
Phase 1/2 Clinical Trial Combination with Erlotinib or Docetaxel
Subjects with advanced NSCLC, 21 day cycle
Single Agent Phase 2 clinical trial in patients with
genetic alterations of MET in NSCLC, 21 day cycle
Phase 2 Clinical Trial
in
Completed
Ongoing
The MTD of MGCD265 was established as 1050mg administered orally on a BID continuous schedule. The observed
dose limiting toxicities ("DLTs"), included one patient who experienced grade 3 fatigue and one patient that experienced grade 3
diarrhea. Clinical pharmacokinetic and pharmacodynamic data and nonclinical projections indicate MGCD265 plasma levels
consistent with MET and Axl inhibition that we would expect to result in clinical activity. In the fourth quarter of 2014 we initiated
the dose expansion portion of the trial and began enrolling patients selected for target alterations of interest in MET or Axl. In
September 2015 we reported an interim update on the ongoing MGCD265 Phase 1b dose expansion clinical trial, disclosing that
two of the four NSCLC patients who were then evaluable (having had at least two on-treatment scans) had confirmed PRs based
upon RECIST criteria and the other two patients had tumor regressions that did not meet the threshold to be considered RECIST
PRs. Based upon these early signs of clinical efficacy, we initiated a single-arm Phase 2 clinical trial for the treatment of NSCLC
patients with genetic alternations in MET in December of 2015.
MGCD265 Developmental Initiatives and Objectives
In the fourth quarter of 2015, we initiated a single agent Phase 2 clinical trial in patients with genetic alterations of MET
in NSCLC. Our initial focus for this program is NSCLC. We are also exploring other solid tumors that also have the genetic
mutations and alterations of interest.
We believe that by selecting patients whose tumors have genetic mutations and alterations that are implicated as oncogenic
drivers and that are potently inhibited by MGCD265 we may increase the likelihood of seeing clinical activity earlier in clinical
development. We are using commercially available diagnostic assays as well as assays developed internally for early clinical use.
We are developing companion diagnostics in collaboration with diagnostic platform providers including Foundation Medicine,
Inc. and Guardant Health, that we plan to use in the current Phase 2 trial, later stage trials and commercialization, if approved.
MGCD516 - A Novel Multi-targeted Kinase Inhibitor for Solid Tumors
MGCD516 is an orally-bioavailable, potent, small molecule multi-targeted kinase inhibitor. MGCD516 is a potent
inhibitor of closely related RTKs including the RET, DDR and Trk kinase families. We plan to focus our initial development efforts
on solid tumors in which genetic mutations and alterations of RET, DDR and Trk families are implicated as oncogenic drivers
with an initial focus on NSCLC. We are also exploring novel patient selection strategies including patients with CHR4q12 amplicons
and CBL inactivating mutations that may be treatable with MGCD516. Genetic alterations in RET, DDR and Trk account for up
to 4% of NSCLC cases patients annually in the U.S. and alterations in CHR4q12 and CBL occur in up to 6% of NSCLC cases.
We also plan to evaluate other tumor types for which the RTK targets of MGCD516 may suggest activity. We recently established
the maximum tolerated dose of MGCD516 as 150mg administered once a day, orally on a continuous schedule. We opened the
Phase 1b dose expansion clinical trial in December of 2015 and are currently treating selected patients.
MGCD516 has demonstrated oral bioavailability in preclinical studies, inhibited target-dependent tumor cell growth and
survival, and demonstrated broad spectrum antitumor activity in preclinical cancer models including tumor regression in tumor
models exhibiting genetic alteration of MGCD516 RTK targets.
9
Mocetinostat - A Spectrum-Selective Oral HDAC Inhibitor
Mocetinostat Overview
Mocetinostat is an orally-bioavailable, spectrum-selective HDAC inhibitor that we plan to evaluate in combination with
checkpoint inhibitors including PD-1 and PD-L1 inhibitors. By virtue of its specificity for Class 1 HDACs, mocetinostat showed
a favorable effect on the immune system in preclinical studies. By increasing PD-L1, costimulatory molecules, and HLA antigens
on tumor cells, we believe that mocetinostat may enhance the immune response to tumors. Mocetinostat may also have a favorable
effect on the immune system by decreasing T-regs and MDSC. We believe that, overall, these effects on the immune system have
the potential to enhance the efficacy of checkpoint inhibitors. We have established an agreement with MedImmune to evaluate
their PD-L1 inhibitor, durvalumab, in combination with mocetinostat in patients with NSCLC as one of our initial trials to
demonstrate the ability of mocetinostat to enhance the efficacy of checkpoint inhibition.
The epigenetic mechanisms of HDAC inhibitors have demonstrated efficacy in hematologic malignancies and have
been approved as single agents. In addition, HDAC inhibition by agents like mocetinostat may be complementary with other
epigenetic mechanisms. Epigenetics is the regulation of gene expression and resulting cellular phenotypes through mechanisms
other than primary DNA sequence alterations. The epigenetic regulation of gene expression involves the regulation of DNA
methylation and modification of certain histones via modulation of acetylation or methylation of specific amino acid residues.
Epigenetic pathways can become dysregulated during cancer progression through a variety of mechanisms, including the genetic
alteration of molecules that participate in DNA methylation and histone modification.
Mocetinostat Market Overview
The potential of HDAC inhibitors for the treatment of certain cancers has been validated by the approval of Zolinza and
Istodax for the treatment of T-cell lymphoma.
Our current focus for mocetinostat is on the treatment of patients with NSCLC in combination with durvalumab,
MedImmune’s immune checkpoint inhibitor. We believe that the combination has the potential to address all patients with NSCLC.
In the United States alone, the estimated annual incidence of NSCLC is approximately 220,000.
Mocetinostat Background
Histones are protein components of the structural architecture of DNA known as chromatin (chromatin is the material
that chromosomes are made of, and is comprised of DNA and histone proteins). Local gene expression activity can be controlled
through epigenetic mechanisms by inducing changes in chromatin conformation through chemical modifications of histones.
Acetylated histones are associated with a more open configuration of chromatin that is receptive to gene expression signals. In
contrast, decreases in histone acetylation result in a more compact structure where gene expression is restricted or suppressed.
Tumor suppressor genes serve to regulate cell growth and cell death, but during oncogenesis these tumor suppressor genes may
become silenced due to HDAC-dependent decreases in histone acetylation leading to unrestricted growth of tumor cells. HDACs
are a family of 11 enzymes (the individual HDAC enzymes are referred to as isoforms) that appear to act as a master regulator of
the expression of genes. HDAC inhibitors modulate inappropriate deacetylation of histones to restore normal acetylation patterns
as well as tumor suppressor gene expression. Inhibition of HDACs may result in multiple anti-cancer effects such as (1) the
inhibition of cancer cell proliferation, (2) the induction of apoptosis (cell death) of cancer cells, (3) improved cell cycle regulation,
(4) the induction of tumor suppressor genes, and (5) re-establishing normal histone acetylation activity in cells where mutations
or alterations may cause a loss of normal function.
We believe that a key differentiating feature of mocetinostat is its spectrum of activity, targeting HDAC isoforms 1, 2, 3
and 11 which area categorized as Class I (1,2,3) and Class IV (11) HDACs. We believe that these isoforms, and particularly
isoforms 1 and 2, are the most relevant HDAC isoforms in cancer therapy and are also the isoforms most potently inhibited by
mocetinostat. Compared to other HDAC inhibitors that have a broader spectrum of activity, the profile of mocetinostat may allow
us to inhibit the targets relevant to cancer more potently and thereby potentially demonstrate improved clinical efficacy and reduced
side effects. Furthermore, the selectivity of mocetinostat for Class I HDACs and the lack of activity against Class II HDACs may
have complimentary effects on tumor cells and the immune system that would enhance the activity of checkpoint inhibitors and
potentially expand the utility of checkpoint inhibition to the majority of patients with solid tumors who fail to respond to single
agent checkpoint inhibitor therapy.
10
Mocetinostat Clinical Development
The first IND for mocetinostat was submitted in December 2003 and became effective in January 2004. Our current focus
for mocetinostat is on the treatment of patients with NSCLC in combination with durvalumab. We plan to initiate a clinical trial
evaluating this combination approach in patients with NSCLC in the second quarter of 2016.
To date, we have evaluated mocetinostat as a monotherapy and in combination with other anticancer agents in more than
400 patients in Phase 1 and Phase 2 clinical trials with various malignancies, including MDS, HL, NHL (including DLBCL or
FL), acute myeloid leukemia ("AML"), chronic lymphocytic leukemia and chronic myelogenous leukemia, as well as advanced
solid tumors. Through these trials, the safety and tolerability of mocetinostat as a single agent and in combination has been well
characterized. The clinical trials showed activity as a single agent in HL and NHL and in combination with Vidaza in MDS and
AML.
We have completed several clinical trials with mocetinostat which enrolled more than 400 patients with a variety of
advanced malignancies. We are in the process of completing Phase 2 trials in bladder cancer and NHL. In both the bladder cancer
and NHL Phase 2 clinical trials patients were selected for inactivating mutations in two histone acetyl transferase genes (CREBBP
and EP300) ("HATs"), using a next generation sequencing assay. Preclinical studies have shown that tumor cells carrying these
HAT inactivating mutations are more sensitive to mocetinostat. To date we have not seen a level of activity or response to single
agent mocetinostat that justifies continuing development in those indications. As a result, at the present time we do not expect to
undertake further clinical trials with mocetinostat as a single agent in bladder cancer, NHL or MDS.
Intellectual Property
Patents and Proprietary Technology
Our goal is to obtain, maintain and enforce patent protection wherever appropriate for our product candidates, formulations,
processes, methods and any other proprietary technologies and operate without infringing on the proprietary rights of other parties,
both in the United States and in other countries. Our practice is to actively seek to obtain, where appropriate, intellectual property
protection for our current product candidates and any future product candidates, proprietary information and proprietary technology
through a combination of patents, protection of proprietary know-how and trade secrets, and contractual arrangements, both in
the United States and abroad. However, patent protection may not afford us with complete protection against competitors who
seek to circumvent our patents. We also depend upon the skills, knowledge, experience and know-how of our management and
research and development personnel as well as that of our advisors, consultants and other contractors. To help protect our proprietary
know-how that is not patentable, we seek to put in place appropriate internal policies for the management of confidential information,
and require all of our employees, consultants, advisors and other contractors to enter into confidentiality agreements that prohibit
the disclosure of confidential information and which require disclosure and assignment to us of the ideas, developments, discoveries
and inventions important to our business.
We typically file for patents in the United States with counterparts in certain countries in Europe and certain key market
countries in the rest of the world, thereby covering the major pharmaceutical markets. As of December 31, 2015, we own or co-
own U.S. patents and patent applications and their foreign counterparts, including 28 issued U.S. patents as reflected in the following
table:
Granted and Pending U.S. Patents
Program
Small Molecule Kinase Inhibitors
HDAC
TOTAL
Granted
(United
States)
Pending
(United
States)
15
13
28
1
3
4
Small Molecule Kinase Inhibitors - (15 granted U.S. patents; 1 pending U.S. patent applications)
As of December 31, 2015, we have fifteen issued patents and one pending patent application in the United States covering
kinase inhibitor compounds, including MGCD265 and MGCD516, and methods of use of these compounds. Of these issued
patents, one covers multiple series of kinase inhibitors and protects MGCD265 generically. Another issued patent, which expires
no earlier than 2026, protects a selection of compounds including MGCD265, as well as methods of inhibiting VEGF and HGF
11
receptor signaling, and methods of treating angiogenesis-mediated cell proliferative disease or inhibiting solid tumor growth. Two
issued patents cover processes of manufacturing kinase inhibitors such as MGCD265 and MGCD516, and synthetic intermediates
required for the production of these inhibitors. Exclusivity arising from our issued patents for MGCD265 extends to at least 2026,
including our patents covering the specific composition of matter of MGCD265 (expires 2026, prior to any legal or regulatory
extensions, including any patent term extension, that may be available under the Hatch Waxman Act) and the generic class of
compounds to which MGCD265 belongs (expires 2025, prior to legal or regulatory extensions, including any patent term extension,
that may be available under the Hatch Waxman Act). Another four issued patents cover several distinct classes of kinase inhibitor
compounds. Such coverage includes specific claims to MGCD516, generic coverage of the class of compounds to which MGCD516
belongs, as well as patents covering methods of use of such compounds. Exclusivity arising from our patent protection for
MGCD516 extends to at least 2029, prior to legal or regulatory extensions, including any patent term extension that may be
available under the Hatch Waxman Act.
Our pending patent applications relating to our kinase inhibitors seek coverage of a broader scope of kinase inhibitors
primarily for oncology. Methods of use of these inhibitors, such as methods of inhibiting VEGF and HGF receptor signaling,
methods of treating angiogenesis-mediated cell proliferative disease or inhibiting solid tumor growth are also being pursued.
HDAC Program - (13 granted U.S. patents; 3 pending U.S. patent applications)
Our patent estate for our HDAC program covers multiple series of HDAC inhibitors, including mocetinostat. As of
December 31, 2015, this group of patents includes 11 issued patents and 1 pending patent applications in the United States protecting
composition of matter and method of use. Two issued patents cover mocetinostat generically and specifically. Exclusivity for
mocetinostat extends to 2022 prior to legal or regulatory extensions, including any patent term extension that may be available
under the Hatch Waxman Act.
In aggregate, these U.S. patents and patent applications cover the following inventions: novel HDAC inhibitors, including
mocetinostat (eleven issued patents and one patent application), methods of inhibiting HDACs, methods for treating cell
proliferative disease or cancer, specific methods for treating colon, lung and pancreatic cancers, and methods for treating
polyglutamine expansion diseases such as Huntington’s disease. One issued and one pending application claim pharmaceutical
compositions comprising a specific HDAC inhibitor and methods of use inhibiting HDACs for treating neurodegenerative disorders.
Licensing Agreements
We may enter into license or sub-license agreements when we believe such license is required to pursue a specific program.
Competition
Competitors in Oncology - Small Molecule Kinase Inhibitors
A large number of kinase inhibitors are currently in clinical trials, with many more in the early research stage.
Biotechnology and pharmaceutical companies are also developing monoclonal antibodies to kinase targets and their ligands.
Our MGCD265 program is characterized by potential advantages including: a unique kinase spectrum including the
emerging RTK target Axl; potent inhibition of MET driver mutations which are not inhibited by other small molecule inhibitors
due to a different mode of binding to the MET molecule; a lack of activity against over 300 off-target kinases, supporting a favorable
safety profile; and excellent tolerability to date in combination with other anti-cancer agents (including chemotherapy), thus
optimizing the potential for combination therapy approaches.
Companies with MET inhibitors believed to be in late preclinical or clinical development include, but are not limited to:
AbbVie, Inc., AstraZeneca PLC, Exelixis Inc., GlaxoSmithKline PLC, Ignyta, Inc., Incyte Corporation, Merck KGaA,
NantPharma LLC, Novartis AG, Pfizer Inc., and Sanofi S. A.
Companies with Axl inhibitors in clinical development include, but are not limited to, Astellas Pharma Inc., BergenBio
AS, Exelixis, Inc., Ignyta, Inc., GlaxoSmithKline PLC and Tolero, Inc.
Competitors in Oncology - HDAC
We believe that a key differentiating feature of mocetinostat is its spectrum of activity covering only isoforms 1, 2, 3 and
11, which are the most relevant HDAC isoforms in human cancers. Other companies that are developing spectrum-selective HDAC
12
inhibitors include, but are not limited to, Acetylon Pharmaceuticals, Inc., Chroma Therapeutics Ltd., Huya Bioscience International,
Shenzen Chipscreen Biosciences Ltd. and Syndax Pharmaceuticals Inc.
Companies with Pan-HDAC inhibitors, which are HDAC inhibitors that have an effect across a broader range of HDAC
isoforms and are therefore not as selective as molecules like mocetinostat, include but are not limited to: Celgene Corporation,
Curis Inc., MEI Pharma Inc., Merck & Co Inc., Novartis, Pharmacyclics Inc. and others. We expect that these and other companies
may continue to pursue research and development in relation to HDAC inhibitors. We continue to monitor these and other companies
in order to be aware of any third party products and/or intellectual property rights relevant to our products.
Competitors in Oncology - General
In addition to companies that have HDAC inhibitors or kinase inhibitors addressing oncology indications, our competition
also includes hundreds of private and publicly traded companies that operate in the area of oncology but have therapeutics with
different mechanisms of action. The oncology market in general is highly competitive, with over 1,000 molecules currently in
clinical development. Other important competitors, in addition to those mentioned above, are small and large biotechnology
companies, including, but not limited to, Gilead Sciences Inc. and specialty and regional pharmaceutical companies and
multinational pharmaceutical companies, including but not limited to Astellas Pharma Inc., Bayer-Schering Pharmaceutical,
Boehringer Ingelheim AG, Bristol-Myers Squibb, Eisai Co. Ltd., Eli Lilly and Company, F. Hoffmann-LaRoche Ltd.,
GlaxoSmithKline, Johnson & Johnson, Taiho and Takeda Pharmaceutical Co.
Many companies have filed, and continue to file, patent applications which may or could affect our program if and when
they issue, either because they protect a product that may compete with our product candidates, or because they protect intellectual
property rights that are necessary for us to develop and commercialize our product candidates. These companies include, but are
not limited to: Bristol-Myers Squibb, Compugen Limited, Exelixis, GlaxoSmithKline, Novartis and Pfizer. Since this area is
competitive and of strong interest to pharmaceutical and biotechnology companies, we expect that these and other companies will
continue to publish and file patent applications in this space in the future, as well as pursuing research and development programs
in this area. We continue to monitor these and other companies in order to be aware of any third party products and/or intellectual
property rights relevant to our product candidates.
Employees
As of December 31, 2015, we had 47 employees located in our offices in San Diego. We also utilize the services of
consultants on a regular basis. 30 employees are engaged in product development activities and 17 are in support administration,
including business development.
Executive Officers and Directors
The following table sets forth information about our executive officers, directors and key employee as of December 31, 2015.
Name
Charles M. Baum, M.D., Ph.D.
Mark J. Gergen
Isan Chen, M.D.
James Christensen, Ph.D.
Jamie A. Donadio
Rodney W. Lappe, Ph.D.(3)
Michael Grey(1)(3)
Henry J. Fuchs, M.D.(2)(3)
Craig Johnson(1)(2)
William R. Ringo(1)(2)
Age
57
53
53
47
40
61
63
56
54
70
Position
President and Chief Executive Officer, Director
Executive Vice President and Chief Operating Officer
Executive Vice President and Chief Medical and Development Officer
Senior Vice President and Chief Scientific Officer
Vice President, Finance
Chairman of the Board
Director
Director
Director
Director
______________________________________________
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Member of the Nominating and Corporate Governance Committee.
13
Executive Officers
Charles M. Baum, M.D., Ph.D. has served as our President and Chief Executive Officer and member of our Board of
Directors since November 2012. From June 2003 to September 2012, he was at Pfizer as Senior Vice President for Biotherapeutic
Clinical Research within Pfizer's Worldwide Research & Development division and as Vice President and Head of Oncology
Development and Chief Medical Officer for Pfizer's Biotherapeutics and Bioinnovation Center. From 2000 to 2003, he was
responsible for the development of several oncology compounds at Schering-Plough Corporation (acquired by Merck). His career
has included academic and hospital positions at Stanford University and Emory University, as well as positions of increasing
responsibility within the pharmaceutical industry at SyStemix, Inc. (acquired by Novartis AG), G.D. Searle & Company (acquired
by Pfizer), Schering-Plough Corporation (acquired by Merck) and Pfizer. Dr. Baum currently serves on the board of directors of
Array BioPharma. Dr. Baum received his M.D. and Ph.D. (Immunology) degrees from Washington University School of Medicine
in St. Louis, Missouri and completed his post-doctoral training at Stanford University.
Dr. Baum's experience in the pharmaceutical industry provides our Board of Directors with subject matter expertise. In
addition, through his position as Chief Medical Officer for Pfizer's Biotherapeutics and Bioinnovation Center, Dr. Baum has
acquired the operational expertise, which we believe qualifies him to serve on our Board of Directors.
Mark J. Gergen has served as our Executive Vice President and Chief Operations Officer since February 2013. From
September 2006 to November 2012, he was Senior Vice President, Corporate Development for Amylin Pharmaceuticals, Inc.
("Amylin"). Starting in January 2005, he was Executive Vice President of CardioNet, Inc. From June 1999 to May 2003, he served
as Chief Financial and Development Officer and later Chief Restructuring Officer of Advanced Tissue Sciences, Inc. From August
1994 to June 1999, he was Division Counsel at Medtronic, Inc. Mr. Gergen received a B.A. in Business Administration from Minot
State University and a J.D. from the University of Minnesota Law School.
Isan Chen, M.D. has served as our Executive Vice President and Chief Medical and Development Officer since September
2013. Dr. Chen is board certified in Internal medicine, hematology and medical oncology with more than 15 years of experience
in oncology and clinical trials from first-in-humans through global registrational studies. He has experience in oncology clinical
development and interactions with regulatory agencies in the United States and Europe. He was most recently the Chief Medical
Officer of Aragon Pharmaceuticals, which was acquired by Johnson & Johnson in July of 2013. At Aragon Pharmaceuticals,
Dr. Chen was responsible for the clinical development strategy of all the company's programs, including prostate and breast cancer.
Prior to Aragon Pharmaceuticals, Dr. Chen served as Vice President of tumor strategy in the oncology business unit at Pfizer. In
addition he was the clinical lead for Sutent, a multiple kinase inhibitor, for the treatment of RCC, an indication in which the drug
secured FDA approval in 2006. He was also the clinical lead for the Phase 1 studies of crizotinib and CDK 4/6 inhibitor palbociclib.
Dr. Chen completed his hematology/oncology fellowship at University of California, San Diego. Before joining Pfizer, Dr. Chen
practiced medicine as a staff physician at City of Hope Medical Center and later as an assistant professor at the University of
Texas, M.D. Anderson Cancer Center.
James Christensen, Ph.D. has served as our Senior Vice President, and Chief Scientific Officer since January 2014 and
served as our Vice President, Research from June 2013 through January 2014. Prior to joining us, he held various positions at
Pfizer from 2003 to 2013, the most recent of which was Senior Director of Oncology Precision Medicine in the Oncology Research
Unit. Dr. Christensen joined Pfizer in 2003 and his responsibilities there included leading nonclinical research efforts for oncology
programs including sunitinib malate research activities and leading the nonclinical and translational biology efforts for other
research and development programs including crizotinib. Dr. Christensen participated as a member of the Cancer Research or
Oncology Research Unit leadership team from 2005 to 2013. Prior to 2003, Dr. Christensen was a Group Leader on the Preclinical
Research and Exploratory Development team at SUGEN, Inc., which was acquired by Pharmacia Corporation, now owned by
Pfizer. Dr. Christensen began his career in 1998 at Warner Lambert, now owned by Pfizer, with research focus in RTK biology
and RTK pathway biomarker development in the oncology therapeutic area. Dr. Christensen participates on the editorial boards
for Cancer Research and Molecular Cancer Therapeutics. Dr. Christensen received a Ph.D. in molecular pharmacology from North
Carolina State University with dissertation research directed toward characterization of mechanisms of apoptosis dysregulation
during the process of carcinogenesis.
Jamie A. Donadio has served as our Vice President, Finance since March 2013. Prior to joining us, Mr. Donadio was at
Amylin Pharmaceuticals from April 2001 through January 2013. From November 2011 to January 2013, Mr. Donadio served as
Senior Director of Finance at Amylin. From December 2010 to November 2011, he served as Director of Corporate Financial
Planning and Analysis at Amylin. From March 2007 to December 2010 he served as Director of SEC Reporting and from April
2001 to March 2007 he held various corporate accounting roles at Amylin. From December 2000 to April 2001, Mr. Donadio was
senior accountant at Novatel Wireless, Inc. From August 1997 to December 2000, Mr. Donadio was with Ernst & Young LLP, last
serving as an audit senior. Mr. Donadio holds a B.S. in Accounting from Babson College and is a certified public accountant
(inactive) in the State of California.
14
Non-Employee Directors
Henry J. Fuchs, M.D. has served as a member of our Board of Directors since February 2012. Since March 2009, Dr. Fuchs
has served as the Executive Vice President and Chief Medical Officer of BioMarin Pharmaceutical Inc. From September 2005 to
December 2008, Dr. Fuchs was Executive Vice President and Chief Medical Officer of Onyx Pharmaceuticals, Inc. From 1996 to
2005, Dr. Fuchs served in multiple roles of increasing responsibility at Ardea Biosciences, Inc., first as Vice President, Clinical
Affairs, then as President and Chief Operating Officer, and finally as Chief Executive Officer. From 1987 to 1996, Dr. Fuchs held
various positions at Genentech Inc. Dr. Fuchs serves on the Board of Directors of Genomics Health, Inc. and was on the Board
of Directors of Ardea Biosciences, Inc. from 1996 until its acquisition by AstraZeneca PLC in 2012. Dr. Fuchs received a B.A. in
Biochemical Sciences from Harvard University, and an M.D. from George Washington University.
We believe that Dr. Fuchs' experience as an executive and his breadth of knowledge and valuable understanding of the
pharmaceutical industry qualify him to serve on our Board of Directors.
Michael Grey has served as a member of our Board of Directors since November 2014. Mr. Grey currently serves as
President and Chief Executive Officer of Amplyx Pharmaceuticals as well as Chief Executive Officer and Chairman of Reneo
Pharmaceuticals. He recently served as President and Chief Executive Officer of Lumena Pharmaceuticals, Inc., a privately-held
biotechnology company before it was acquired by Shire. Mr. Grey also serves as a Venture Partner with Pappas Ventures, a life
sciences venture capital firm, since January 2010. Between January and September 2009, he served as President and Chief Executive
Officer of Auspex Pharmaceuticals, Inc., a private biotechnology company. From January 2005 until its acquisition in August
2008, Mr. Grey was President and Chief Executive Officer of SGX Pharmaceuticals, Inc., a public biotechnology company, where
he previously served as President from June 2003 to January 2005 and as Chief Business Officer from April 2001 until June 2003.
Prior to joining SGX Pharmaceuticals, Inc., Mr. Grey acted as President, Chief Executive Officer and Board member of Trega
Biosciences, Inc., a biotechnology company. From November 1994 to August 1998, Mr. Grey was the President of BioChem
Therapeutic, Inc., the pharmaceutical operating division of BioChem Pharma, Inc. During 1994, Mr. Grey served as President and
Chief Operating Officer for Ansan, Inc., a pharmaceutical company. From 1974 to 1993, he served in various roles with Glaxo,
Inc. and Glaxo Holdings, plc, culminating in the position of Vice President, Corporate Development. Mr. Grey is currently a
director of BioMarin Pharmaceutical, Inc. and Horizon Pharma, plc, public pharmaceutical companies and Balance Therapeutics,
Inc., Biothera Pharmaceutical, Inc., Selventa, Inc. and Ziarco Group Ltd., privately held healthcare companies. Mr. Grey previously
served on the board of directors of two public companies during the past five years: IDM Pharma, Inc. from 1999 to 2009 and
Achillion Pharmaceuticals, Inc. from 2001 to 2010. He received a B.Sc. in chemistry from the University of Nottingham, United
Kingdom.
We believe that based on Mr. Grey's experience as an executive in the biopharmaceutical industry and his breadth of
knowledge and valuable understanding of the pharmaceutical industry qualify him to serve on our Board of Directors.
Craig Johnson has served as a member of our Board of Directors since September 2013. Mr. Johnson serves on the boards
of directors for several life science companies. He is currently a director for Heron Therapeutics, Inc., a NASDAQ-listed specialty
pharmaceutical company, a position he has held since January 2014, as well as for La Jolla Pharmaceutical Company, a NASDAQ-
listed biopharmaceutical company, a position he has held since October 2013. Mr. Johnson also serves as a director of GenomeDx
Biosciences, a privately held biotechnology company, a position he has held since October 2015. Mr. Johnson also served as a
past director of Adamis Pharmaceuticals Corporation, a NASDAQ-listed biopharmaceutical company, from 2011 to 2014, as well
as Ardea Biosciences, Inc., a NASDAQ-listed biotechnology company, from 2008 until its sale to AstraZeneca PLC in June 2012.
From 2011 to 2012 he was Chief Financial Officer of PURE Bioscience, Inc., and from 2010 to 2011 he was Senior Vice President
and Chief Financial Officer of NovaDel Pharma Inc. Mr. Johnson served as Vice President and Chief Financial Officer of
TorreyPines Therapeutics, Inc. from 2004 until its sale to Raptor Pharmaceuticals Corp. in 2009, and then as Vice President of a
wholly-owned subsidiary of Raptor Pharmaceutical Corp. from 2009 to 2010. He held several positions, including Chief Financial
Officer and Senior Vice President of Operations, at MitoKor, Inc. from 1994 to 2004. Prior to 1994, Mr. Johnson held senior
financial positions with several early-stage technology companies, and also practiced as a Certified Public Accountant with Price
Waterhouse. Mr. Johnson received his B.B.A. in accounting from the University of Michigan-Dearborn.
We believe Mr. Johnson's leadership and experience and skills in accounting and finance qualify him to serve on our
Board of Directors.
Rodney Lappe, Ph.D. has served as a member of our Board of Directors since June 2012 and as Chairman of the Board
since July 2013. Since January 2012, Dr. Lappe has served as the Senior Vice President of Tavistock Life Sciences, a private
investment firm. From January 2004 to December 2011, Dr. Lappe was Group Senior Vice President, Pfizer Worldwide Research
and Development and Chief Scientific Officer for CovX in San Diego, California. Dr. Lappe joined Pfizer with the CovX acquisition
in 2008. From 2000 to 2002, Dr. Lappe served as Vice President for cardiovascular and metabolic diseases at Pharmacia. He was
15
also site leader for Pharmacia in St. Louis. Prior to joining Pharmacia, he held positions of increasing responsibility with Wyeth,
Rorer Central Research, CIBA Geigy and Searle Pharmaceuticals. Dr. Lappe received his B.A. from Blackburn College and his
Ph.D. in Pharmacology from Indiana University.
We believe Dr. Lappe's extensive experience managing pharmaceutical and biotech companies bring important strategic
insight and qualifies him to serve on our Board of Directors.
William R. Ringo has served as a member of our Board of Directors since March 2014. Mr. Ringo has over 40 years of
experience in the pharmaceutical and biotechnology sectors. Currently, he serves as a non-executive Chairman for Assembly
BioSciences and Sangamo BioSciences. In addition to Assembly BioSciences and Sangamo BioSciences, he serves on the board
of Dermira, Immune Design Corp and Five Prime Therapeutics. Previously, Mr. Ringo was senior vice president of strategy and
business development for Pfizer before his retirement in April 2010. He spent nearly 30 years with Eli Lilly and Company, serving
in numerous executive roles, including product group president for oncology and critical care, president of internal medicine
products, president of the infectious disease business unit and vice president of sales and marketing for U.S. pharmaceuticals. He
has also served as president and CEO of Abgenix, an oncology-focused antibody company that was purchased by Amgen. He also
recently served on the board of directors for Onyx Pharmaceuticals until its acquisition by Amgen in 2013. Mr. Ringo earned a
B.S. in business administration and an M.B.A. from the University of Dayton.
We believe that Mr. Ringo's experience as an executive and his breadth of knowledge and valuable understanding of the
pharmaceutical industry qualify him to serve on our Board of Directors.
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Item 1A. Risk Factors
RISK FACTORS
Except for the historical information contained herein, this annual report on Form 10-K and the information incorporated
by reference herein contains forward-looking statements that involve risks and uncertainties. These statements include projections
about our accounting and finances, plans and objectives for the future, future operating and economic performance and other
statements regarding future performance. These statements are not guarantees of future performance or events. Our actual results
may differ materially from those discussed here. Factors that could cause or contribute to such differences are described in the
following section as well as those discussed in Part II, Item 7 entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and elsewhere throughout this report and in any other documents incorporated by reference
herein. There may be additional risks that we do not presently know of or that we currently believe are immaterial which could
also impair our business and financial position. We disclaim any obligation to update any forward-looking statement.
Risks Relating to Our Financial Position and Capital Requirements
We will require additional financing and may be unable to raise sufficient capital, which could lead us to delay,
reduce or abandon development programs or commercialization.
Our operations have consumed substantial amounts of cash since inception. Our research and development expenses
were $49.0 million, $26.1 million, and $19.8 million for the years ended December 31, 2015, 2014 and 2013, respectively. In
February 2015 we completed a public offering of our common stock that generated net proceeds of $48.4 million and, subsequently,
completed an additional public offering of our common stock that generated net proceeds of $94.9 million in September 2015.
We will require substantial additional capital to pursue additional clinical development for our lead clinical programs, including
conducting late-stage clinical trials, manufacturing clinical supplies and potentially developing other assets in our pipeline, and,
if we are successful, to commercialize any of our current product candidates. If the U.S. Food and Drug Administration ("FDA")
or any foreign regulatory agency, such as the European Medicines Agency ("EMA") requires that we perform studies or trials in
addition to those that we currently anticipate with respect to the development of our product candidates, or repeat studies or trials,
our expenses would further increase beyond what we currently expect. Any delay resulting from such further or repeat studies or
trials could also result in the need for additional financing. We may not be able to adequately finance our development programs,
which could limit our ability to move our programs forward in a timely and satisfactory manner or require us to abandon the
programs, any of which would harm our business, financial condition and results of operations. Because successful development
of our product candidates is uncertain, we are unable to estimate the actual funds we will require to complete research and
development and commercialize our product candidates.
If we are unable to obtain funding from equity offerings or debt financings on a timely basis, we may be required to
(1) seek collaborators for one or more of our product candidates at an earlier stage than otherwise would be desirable or on terms
that are less favorable than might otherwise be available; (2) relinquish or license on unfavorable terms our rights to technologies
or product candidates that we otherwise would seek to develop or commercialize ourselves; or (3) significantly curtail one or more
of our research or development programs or cease operations altogether.
We are a clinical-stage company with no approved products and no historical product revenue. Consequently, we
expect that our financial and operating results will vary significantly from period to period.
We are a clinical-stage company that has incurred losses since its inception and expect to continue to incur substantial
losses in the foreseeable future. Biopharmaceutical product development is a highly speculative undertaking and involves a
substantial degree of uncertainty.
Our actual financial condition and operating results have varied significantly in the past and are expected to continue to
fluctuate significantly from quarter-to-quarter or year-to-year due to a variety of factors, many of which are beyond our control.
Factors relating to our business that may contribute to these fluctuations include:
•
•
•
•
the success of our clinical trials through all phases of clinical development;
delays in the commencement, enrollment and timing of clinical trials;
our ability to secure and maintain collaborations, licensing or other arrangements for the future development and/or
commercialization of our product candidates, as well as the terms of those arrangements;
our ability to obtain, as well as the timeliness of obtaining, additional funding to develop our product candidates;
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•
•
•
•
•
•
•
•
•
•
•
•
•
the results of clinical trials or marketing applications for product candidates that may compete with our product candidates;
competition from existing products or new products that may receive marketing approval;
potential side effects of our product candidates that could delay or prevent approval or cause an approved drug to be taken
off the market;
any delays in regulatory review and approval of our clinical development plans or product candidates;
our ability to identify and develop additional product candidates;
the ability of patients or healthcare providers to obtain coverage or sufficient reimbursement for our products;
our ability, and the ability of third parties such as Clinical Research Organizations ("CROs") to adhere to clinical study
and other regulatory requirements;
the ability of third-party manufacturers to manufacture our product candidates and key ingredients needed to conduct
clinical trials and, if approved, successfully commercialize our products;
the costs to us, and our ability as well as the ability of any third-party collaborators, to obtain, maintain and protect our
intellectual property rights;
costs related to and outcomes of potential intellectual property litigation;
our ability to adequately support future growth;
our ability to attract and retain key personnel to manage our business effectively; and
our ability to build our finance infrastructure and, to the extent required, improve our accounting systems and controls.
Accordingly, the likelihood of our success must be evaluated in light of many potential challenges and variables associated
with a clinical-stage company, many of which are outside of our control, and past operating or financial results should not be relied
on as an indication of future results. Fluctuations in our operating and financial results could cause our share price to decline. It
is possible that in some future periods, our operating results will be above or below the expectations of securities analysts or
investors, which could also cause our share price to decline.
We have incurred significant losses since our inception and anticipate that we will continue to incur significant losses
for the foreseeable future. We have never generated any revenue from product sales and may never be profitable.
We have derived limited revenue from our research and licensing agreements which has not been sufficient to cover the
substantial expenses we have incurred in our efforts to develop our product candidates. Consequently, we have accumulated net
losses since inception in 1995. Our net loss for the years ended December 31, 2015, 2014, and 2013 were $64.5 million, $43.7
million, and $52.9 million respectively. As of December 31, 2015, we had an accumulated deficit of $306.6 million. Our prior
losses, combined with expected future losses, have had and will continue to have an adverse effect on our stockholders' equity
and working capital. Such losses are expected to increase in the future as we continue the development of our product candidates
and seek regulatory approval and commercialization for our product candidates. We are unable to predict the extent of any future
losses or when we will become profitable, if ever. Even if we do achieve profitability, we may not be able to sustain or increase
profitability on an ongoing basis.
We do not anticipate generating revenue from sales of products for the foreseeable future, if ever. If any of our product
candidates fail in clinical trials or do not gain regulatory approval, or if any of our product candidates, if approved, fail to achieve
market acceptance, we may never become profitable. If one or more of our product candidates is approved for commercial sale
and we retain commercial rights, we anticipate incurring significant costs associated with commercializing any such approved
product candidate. Therefore, even if we are able to generate revenue from the sale of any approved product, we may never become
profitable. Even if we achieve profitability in the future, we may not be able to sustain profitability in subsequent periods. Our
ability to generate future revenue from product sales depends heavily on our success in:
•
completing development and clinical trial programs for our product candidates;
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•
•
•
•
•
entering into collaboration and license agreements;
seeking and obtaining marketing approvals for any product candidates that successfully complete clinical trials;
establishing and maintaining supply and manufacturing relationships with third parties;
successfully commercializing any product candidates for which marketing approval is obtained; and
successfully establishing a sales force and marketing and distribution infrastructure.
Raising additional funds through debt or equity financing will be dilutive and raising funds through licensing
agreements may be dilutive, restrict operations or relinquish proprietary rights.
To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of those
securities could result in substantial dilution for our current stockholders and the terms may include liquidation or other preferences
that adversely affect the rights of our current stockholders. Existing stockholders may not agree with our financing plans or the
terms of such financings. Moreover, the incurrence of debt financing could result in a substantial portion of our operating cash
flow being dedicated to the payment of principal and interest on such indebtedness and could impose restrictions on our operations.
In addition, if we raise additional funds through collaboration and licensing arrangements, it may be necessary to relinquish
potentially valuable rights to our products or proprietary technologies, or to grant licenses on terms that are not favorable to us.
Additional funding may not be available to us on acceptable terms, or at all.
As a public company in the United States, we incur significant legal and financial compliance costs and we are subject
to the Sarbanes-Oxley Act. We can provide no assurance that we will, at all times, in the future be able to report that our internal
controls over financial reporting are effective.
Companies that file reports with the Securities and Exchange Commission ("SEC"), including us, are subject to the
requirements of Section 404 of the Sarbanes-Oxley Act of 2002. Section 404 requires management to establish and maintain a
system of internal control over financial reporting, and annual reports on Form 10-K filed under the Securities Exchange Act of
1934, as amended ("the Exchange Act"), must contain a report from management assessing the effectiveness of a company’s
internal control over financial reporting. Ensuring that we have adequate internal financial and accounting controls and procedures
in place to produce accurate financial statements on a timely basis remains a costly and time-consuming effort that needs to be
re-evaluated frequently. Failure on our part to have effective internal financial and accounting controls would cause our financial
reporting to be unreliable, could have a material adverse effect on our business, operating results, and financial condition, and
could cause our stock price to decline as a result.
As an “emerging growth company” (as defined in the JOBS Act), we are not required to comply with Section 404(b) which
requires attestation from our external auditors on our internal control over financial reporting. We are subject to Section 404(a),
which requires management to provide a report regarding the effectiveness of internal controls. We are required to review all of
our control processes to align them to the Section 404 requirements. Failure to provide assurance that our financial controls are
effective could lead to lack of confidence by investors which could cause our stock price to decline. When we are no longer an
“emerging growth company” (as defined in the Exchange Act or the Securities Act of 1933, as amended (the "Securities Act"),
our independent registered public accounting firm will be required to attest to the effectiveness of our internal control over financial
reporting. The rules governing the standards that must be met for management to assess our internal control over financial reporting
are complex and require significant documentation, testing and possible remediation. To continue complying with the requirements
of being a reporting company under the Exchange Act, we may need to further upgrade our systems, including information
technology, implement additional financial and management controls, reporting systems and procedures, and hire additional
accounting and finance staff.
In addition, our independent registered public accounting firm has never performed an evaluation of our internal control
over financial reporting in accordance with the provisions of the Sarbanes-Oxley Act because no such evaluation has been required.
Had our independent registered public accounting firm performed an evaluation of our internal control over financial reporting
in accordance with the provisions of the Sarbanes-Oxley Act, significant deficiencies or material weaknesses may have been
identified. If we identify any significant deficiencies or material weaknesses that may exist or are unable to successfully remediate
any significant deficiency or material weakness in our internal control over financial reporting, the accuracy and timing of our
financial reporting may be adversely affected, we may be unable to maintain compliance with securities law requirements regarding
timely filing of periodic reports in addition to applicable stock exchange listing requirements, investors may lose confidence in
our financial reporting, and our stock price may decline as a result.
19
Furthermore, shareholder activism, the current political environment and the current high level of government intervention
and regulatory reform may lead to substantial new regulations and disclosure obligations, which may lead to additional compliance
costs and impact the manner in which we operate our business in ways we cannot currently anticipate. Our management and other
personnel will need to devote a substantial amount of time to these compliance initiatives. Moreover, any new regulations or
disclosure obligations may increase our legal and financial compliance costs and will make some activities more time-consuming
and costly.
We are an emerging growth company and we cannot be certain if the reduced disclosure requirements applicable to
emerging growth companies will make our common stock less attractive to investors.
We are an emerging growth company. Under the JOBS Act, emerging growth companies can delay adopting new or revised
accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail
ourselves of this exemption from new or revised accounting standards and, therefore, will be subject to the same new or revised
accounting standards as other public companies that are not emerging growth companies.
For as long as we continue to be an emerging growth company, we intend to take advantage of certain other exemptions
from various reporting requirements that are applicable to other public companies including, but not limited to, reduced disclosure
obligations regarding executive compensation in our periodic reports and proxy statements, exemptions from the requirements of
holding a nonbinding advisory stockholder vote on executive compensation and any golden parachute payments not previously
approved, exemption from the requirement of auditor attestation in the assessment of our internal control over financial reporting
and exemption from any requirement that may be adopted by the Public Company Accounting Oversight Board. If we do continue
to be an emerging growth company, the information that we provide stockholders may be different than what is available with
respect to other public companies. We cannot predict if investors will find our common stock less attractive because we rely on
these exemptions. If some investors find our common stock less attractive as a result, there may be a less-active trading market
for our common stock and our stock price may be more volatile.
We will remain an emerging growth company until the earliest of (1) the end of the fiscal year in which the market value
of our common stock that is held by non-affiliates exceeds $700 million as of the end of the second fiscal quarter, (2) the end of
the fiscal year in which we have total annual gross revenue of $1 billion or more during such fiscal year, (3) the date on which we
issue more than $1 billion in non-convertible debt in a three-year period, or (4) December 31, 2018.
Decreased disclosures in our SEC filings due to our status as an emerging growth company may make it harder for investors
to analyze our results of operations and financial prospects.
Risks Relating to Our Business and Industry
Our research and development programs and product candidates are at an early stage of development. As a result we
are unable to predict if or when we will successfully develop or commercialize our product candidates.
Our clinical-stage product candidates as well as our other pipeline assets are at an early stage of development and will
require significant further investment and regulatory approvals prior to commercialization. We currently have no product candidates
beyond Phase 2 clinical trials. MGCD265 is currently in a Phase 2 clinical trial, mocetinostat is currently in the process of completing
Phase 2 clinical trials and MGCD516 is in a Phase 1b clinical trial. Each of our product candidates will require the selection of
suitable patients for our clinical trials and additional clinical development, management of clinical, preclinical and manufacturing
activities, obtaining regulatory approval, obtaining manufacturing supply, building of a commercial organization, substantial
investment and significant marketing efforts before we generate any revenues from product sales. We are not permitted to market
or promote any of our product candidates before we receive regulatory approval from the FDA or comparable foreign regulatory
authorities, and we may never receive such regulatory approval for any of our product candidates. The treatment of cancer is a
rapidly evolving field and will continue to evolve. By such time, if ever, as we may receive necessary regulatory approvals for
our product candidates, the standard of care for the treatment of cancers may have evolved such that it would be necessary to
modify our plans for full approval and commercial acceptance of our products may be limited by a change in the standard of care.
In addition, some of our product development programs contemplate the development of companion diagnostics. Companion
diagnostics are subject to regulation as medical devices and we or our future collaborators may be required to obtain marketing
approval for accompanying companion diagnostics before we may commercialize our product candidates.
Even if we obtain the required financing or establish a collaboration to enable us to conduct late-stage clinical development
of our product candidates and pipeline assets, we cannot be certain that such clinical development would be successful, or that
we will obtain regulatory approval or be able to successfully commercialize any of our product candidates and generate revenue.
20
Success in preclinical testing and early clinical trials does not ensure that later clinical trials will be successful, and the clinical
trial process may fail to demonstrate that our product candidates are safe and effective for their proposed uses. For example, Phase
1b results with MGCD265 may not be replicated in subsequently enrolled subjects or trials. Any such failure could cause us to
abandon further development of any one or more of our product candidates and may delay development of other product candidates.
Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy traits despite having progressed
through preclinical studies and initial clinical trials. Any delay in, or termination of, our clinical trials will delay and possibly
preclude the submission of any new drug applications ("NDAs") with the FDA and, ultimately, our ability to commercialize our
product candidates and generate product revenue.
We have not previously submitted an NDA to the FDA, or similar drug approval filings to comparable foreign authorities,
for any product candidate, and we cannot be certain that any of our product candidates will receive regulatory approval. Further,
our product candidates may not receive regulatory approval even if they are successful in clinical trials. If we do not receive
regulatory approvals for our product candidates, we may not be able to continue our operations. Even if we successfully obtain
regulatory approvals to market one or more of our product candidates, our revenues will be dependent, in part, upon our or our
future collaborators’ ability to obtain regulatory approval for the companion diagnostics to be used with our product candidates,
if required, and upon the size of the markets in the territories for which we gain regulatory approval and have commercial rights.
If the markets for patient subsets that we are targeting are not as significant as we estimate, we may not generate significant
revenues from sales of such products, if approved.
All of our product candidates are subject to extensive regulation, which can be costly and time consuming, cause delays
or prevent approval of such product candidates for commercialization.
The clinical development of product candidates is subject to extensive regulation by the FDA in the United States and by
comparable regulatory authorities in foreign markets. Product development is a very lengthy and expensive process, and its outcome
is inherently uncertain. The product development timeline can vary significantly based upon the product candidate’s novelty and
complexity. Regulations are subject to change and regulatory agencies have significant discretion in the approval process.
Numerous statutes and regulations govern human testing and the manufacture and sale of human therapeutic products in
the United States, Europe and other countries and regions where we intend to market our products. Such legislation and regulation
bears upon, among other things, the approval of trial protocols and human testing, the approval of manufacturing facilities, safety
of the product candidates, testing procedures and controlled research, review and approval of manufacturing, preclinical and
clinical data prior to marketing approval including adherence to good manufacturing practices ("GMP") during production and
storage as well as regulation of marketing activities including advertising and labeling.
In order to obtain regulatory approval for the commercial sale of any of our product candidates, we must demonstrate
through preclinical studies and clinical trials that the potential product is safe and effective for use in humans for each target
indication. The failure to adequately demonstrate the safety and efficacy of a product under development could delay or prevent
regulatory approval of our product candidates.
No assurance can be given that current regulations relating to regulatory approval will not change or become more stringent
in the United States or foreign markets. Regulatory agencies may also require that additional trials be run in order to provide
additional information regarding the safety or efficacy of any drug candidates for which we seek regulatory approval. Moreover,
any regulatory approval of a drug which is eventually obtained may entail limitations on the indicated uses for which that drug
may be marketed. Furthermore, product approvals may be withdrawn or limited in some way if problems occur following initial
marketing or if compliance with regulatory standards is not maintained. Regulatory agencies could become more risk averse to
any side effects or set higher standards of safety and efficacy prior to reviewing or approving a product. This could result in a
product not being approved. Any of the foregoing scenarios could materially harm the commercial prospects for our product
candidates.
We may not be successful in establishing development and commercialization collaborations which could adversely
affect, and potentially prohibit, our ability to develop our product candidates.
Because developing pharmaceutical products, conducting clinical trials, obtaining regulatory approval, establishing
manufacturing capabilities and marketing approved products is expensive, we may seek to enter into collaborations with companies
that have more resources and experience in order to continue to develop and commercialize our product candidates. We also may
be required due to financial or scientific constraints to enter into additional collaboration agreements to research and/or to develop
and commercialize our product candidates. The establishment and realization of such collaborations may be not be possible or
may be problematic. There can be no assurance that we will be able to establish such additional collaborations on favorable terms,
if at all, or that our current or future collaborative arrangements will be successful or maintained for any specific product candidate
21
or indication. If we are unable to reach successful agreements with suitable collaboration partners for the ongoing development
and commercialization of our product candidates, we may face increased costs, we may be forced to limit the scope and number
of our product candidates we can commercially develop or the territories in which we commercialize such product candidates,
and we may be unable to commercialize products or programs for which a suitable collaboration partner cannot be found. If we
fail to achieve successful collaborations, our operating results and financial condition will be materially and adversely affected.
In addition, the terms of any collaboration agreements may place restrictions on our activities with respect to other products,
including by limiting our ability to grant licenses or develop products with other third parties, or in different indications, diseases
or geographical locations, or may place additional obligations on us with respect to development or commercialization of our
product candidates. If we fail to comply with or breach any provision of a collaboration agreement, a collaborator may have the
right to terminate, in whole or in part, such agreement or to seek damages.
Some of our collaboration agreements are complex and involve sharing or division of ownership of certain data, know-
how and intellectual property rights among the various parties. Accordingly our collaborators could interpret certain provisions
differently than we or our other collaborators which could lead to unexpected or inadvertent disputes with collaborators. In addition,
these agreements might make additional collaborations, partnering or mergers and acquisitions difficult.
There is no assurance that a collaborator who is acquired by a third party would not attempt to change certain contract
provisions that could negatively affect our collaboration. The acquiring company may also not accept the terms or assignment of
our contracts and may seek to terminate the agreements. Any one of our collaborators could breach covenants, restrictions and/or
sub-license agreement provisions leading us into disputes and potential breaches of our agreements with other partners.
If we or third parties are unable to successfully develop companion diagnostics for our product candidates, or experience
significant delays in doing so, we may not achieve marketing approval or realize the full commercial potential of such product
candidates.
A key part of our development strategy for each of MGCD265, MGCD516 and mocetinostat is to identify subsets of
patients with specific types of tumors that express specific genetic markers. Identification of these patients will require the use
and development of companion diagnostics. We expect that the FDA and comparable foreign regulatory authorities will require
the regulatory approval of a companion diagnostic as a condition to approving our product candidates. We do not have experience
or capabilities in developing or commercializing diagnostics and plan to rely in large part on third parties to perform these functions.
We are developing companion diagnostics in collaboration with diagnostic platform providers including Foundation Medicine,
Inc. and Guardant Health that we plan to use in the current Phase 2 trial of MGCD265, later stage trials and commercialization,
if approved. We do not currently have any long-term arrangements in place with any third party to develop or commercialize
companion diagnostics for MGCD516 and mocetinostat product candidates.
Companion diagnostics are subject to regulation by the FDA and comparable foreign regulatory authorities as medical
devices and will likely require separate regulatory approval prior to commercialization. If we or third parties are unable to
successfully develop companion diagnostics for our product candidates, or experience delays in doing so:
•
•
•
the development of these product candidates may be delayed because it may be difficult to identify patients for enrollment
in our clinical trials in a timely manner;
these product candidates may not receive marketing approval if their safe and effective use depends on a companion
diagnostic; and
we may not realize the full commercial potential of these product candidates that receive marketing approval if, among
other reasons, we are unable to appropriately identify patients or types of tumors with the specific genetic alterations
targeted by these product candidates.
Even if our product candidates and any associated companion diagnostics are approved for marketing, the need for
companion diagnostics may slow or limit adoption of our product candidates. Although we believe genetic testing is becoming
more prevalent in the diagnosis and treatment of cancer, our product candidates may be perceived negatively compared to alternative
treatments that do not require the use of companion diagnostics, either due to the additional cost of the companion diagnostic or
the need to complete additional procedures to identify genetic markers prior to administering our product candidates.
If any of these events were to occur, our business and growth prospects would be harmed, possibly materially.
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We rely upon third-party contractors and service providers for the execution of some aspects of our development
programs. Failure of these collaborators to provide services of a suitable quality and within acceptable timeframes may cause
the delay or failure of our development programs.
We outsource certain functions, tests and services to CROs, medical institutions and collaborators and outsource
manufacturing to collaborators and/or contract manufacturers, and we rely on third parties for quality assurance, clinical monitoring,
clinical data management and regulatory expertise. In particular, we rely on CROs to run our clinical trials on our behalf. There
is no assurance that such individuals or organizations will be able to provide the functions, tests, drug supply or services as agreed
upon or to acceptable quality standards, and we could suffer significant delays in the development of our products or processes.
In some cases there may be only one or few providers of such services, including clinical data management or manufacturing
services. In addition, the cost of such services could increase significantly over time. We rely on third parties as mentioned above
to enroll qualified patients and conduct, supervise and monitor our clinical trials. Our reliance on these third parties and collaborators
for clinical development activities reduces our control over these activities, but does not relieve us of our regulatory responsibilities,
including ensuring that our clinical trials are conducted in accordance with good clinical practices ("GCP") regulations and the
investigational plan and protocols contained in the regulatory agency applications. In addition, these third parties may not complete
activities on schedule or may not manufacture compounds under GMP conditions. Preclinical studies may not be performed or
completed in accordance with good laboratory practices, or GLP, regulatory requirements or our trial design. If we or our CROs
fail to comply with GCP regulations, the clinical data generated in our clinical trials may be deemed unreliable and the FDA, the
EMA or comparable foreign regulatory authorities may require us to perform additional clinical trials before approving any
marketing applications. If these third parties or collaborators do not successfully carry out their contractual duties or meet expected
deadlines, obtaining regulatory approval for manufacturing and commercialization of our product candidates may be delayed or
prevented. We rely substantially on third-party data managers for our clinical trial data. There is no assurance that these third
parties will not make errors in the design, management or retention of our data or data systems. There is no assurance that these
third parties will pass FDA or regulatory audits, which could delay or prohibit regulatory approval.
Our CROs may also have relationships with other commercial entities, including our competitors, for whom they may
also be conducting clinical trials or other product development activities, which could harm our competitive position. If any of
our relationships with these third-party CROs terminate, we may not be able to enter into arrangements with alternative CROs or
to do so on commercially reasonable terms. Further, switching or adding additional CROs involves additional cost and requires
management time and attention. In addition, there is a natural transition period when a new CRO commences work. As a result,
delays may occur, which could materially impact our ability to meet our desired clinical development timelines. Though we
carefully manage our relationships with our CROs, there can be no assurance that we will not encounter challenges or delays in
the future or that these delays or challenges will not have a material adverse impact on our business, financial condition and
prospects.
The timelines of our clinical trials may be impacted by numerous factors and any delays may adversely affect our ability
to execute our current business strategy.
Clinical testing is expensive, difficult to design and implement, can take many years to complete, and is uncertain as to
outcome. We may experience delays in clinical trials at any stage of development and testing of our product candidates. Our
planned clinical trials may not begin on time, have an effective design, enroll a sufficient number of subjects, or be completed on
schedule, if at all.
Events which may result in a delay or unsuccessful completion of clinical trials include:
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inability to raise funding necessary to initiate or continue a trial;
delays in obtaining regulatory approval to commence a trial;
delays in reaching agreement with the FDA on final trial design;
delays in recruiting patients with the specific genetic alterations we are targeting to participate in a trial;
imposition of a clinical hold following an inspection of our clinical trial operations or trial sites by the FDA or other
regulatory authorities;
delays in reaching agreement on acceptable terms with prospective CROs and clinical trial sites;
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delays in obtaining required institutional review board approval at each site;
delays in having subjects complete participation in a trial or return for post-treatment follow-up;
delays caused by subjects dropping out of a trial due to side effects or otherwise;
clinical sites dropping out of a trial to the detriment of enrollment;
time required to add new clinical sites; and
delays by our contract manufacturers to produce and deliver a sufficient supply of clinical trial materials.
For example, due to the targeted indications and patient populations we intend to focus on for development of our product
candidates, the number of study sites and patient populations available to us may be limited, and therefore enrollment of suitable
patients to participate in clinical trials for these product candidates may take longer than would be the case if we were pursuing
broader indications or patient populations. In addition, some of our competitors are developing targeted oncology therapeutics for
NSCLC which could limit our ability to enroll patients and complete our planned clinical trials in a timely manner.
Furthermore, enrollment may depend on the availability of suitable companion diagnostics to identify genetic markers
we are targeting and the capability and willingness of clinical sites to conduct genetic screening of potential patients.
If initiation or completion of any of our clinical trials for our product candidates are delayed for any of the above reasons
or for other reasons, our development costs may increase, our approval process could be delayed, any periods after commercial
launch and before expiration of patent protection may be reduced and our competitors may have more time to bring products to
market before we do. Any of these events could impair the commercial potential of our product candidates and could have a
material adverse effect on our business.
Our product candidates may cause undesirable side effects or have other properties that could delay or prevent their
regulatory approval, limit the commercial profile of an approved product label, or result in significant negative consequences
following marketing approval, if any.
Undesirable side effects caused by our product candidates could cause us or regulatory authorities to interrupt, delay or
halt clinical trials and could result in a more restrictive label or the delay or denial of regulatory approval by the FDA or other
comparable foreign authorities. Results of our trials could reveal a high and unacceptable severity and prevalence of side effects.
In such an event, our trials could be suspended or terminated and the FDA or comparable foreign regulatory authorities could
order us to cease further development of or deny approval of our product candidates for any or all targeted indications. Treatment-
related side effects could affect patient recruitment or the ability of enrolled patients to complete the trial, or result in potential
product liability claims. Any of these occurrences may harm our business, financial condition and prospects significantly.
Additionally, if one or more of our product candidates receives marketing approval, and we or others later identify
undesirable side effects caused by such products, a number of potentially significant negative consequences could result, including:
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regulatory authorities may withdraw approvals of such product;
regulatory authorities may require additional warnings on the product label;
we may be required to create a medication guide outlining the risks of such side effects for distribution to patients;
we could be sued and held liable for harm caused to patients; and
our reputation may suffer.
Any of these events could prevent us from achieving or maintaining market acceptance of any product candidate, if
approved, and could significantly harm our business, results of operations and prospects.
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We are and continue to be subject to stringent government regulations concerning the clinical testing of our products.
We will also continue to be subject to government regulation of any product that receives regulatory approval.
Numerous statutes and regulations govern human testing and the manufacture and sale of human therapeutic products in
the United States and other countries where we intend to market our products. Such legislation and regulation bears upon, among
other things, the approval of trial protocols and human testing, the approval of manufacturing facilities, testing procedures and
controlled research, the review and approval of manufacturing, preclinical and clinical data prior to marketing approval, including
adherence to GMP during production and storage, and marketing activities including advertising and labeling.
Clinical trials may be delayed or suspended at any time by us or by the FDA or other similar regulatory authorities if it is
determined at any time that patients may be or are being exposed to unacceptable health risks, including the risk of death, or if
compounds are not manufactured under acceptable GMP conditions or with acceptable quality. Current regulations relating to
regulatory approval may change or become more stringent. The agencies may also require additional trials be run in order to
provide additional information regarding the safety, efficacy or equivalency of any product candidate for which we seek regulatory
approval.
Moreover, any regulatory approval of a drug which is eventually obtained may entail limitations on the indicated uses for
which that drug may be marketed or on the conditions of approval, or contain requirements for potentially costly post-marketing
testing, including Phase 4 clinical trials, and surveillance to monitor the safety and efficacy of the product candidate. In addition,
if the FDA or a comparable foreign regulatory authority approves any of our product candidates, the manufacturing processes,
labeling, packaging, distribution, adverse event reporting, storage, advertising, promotion and recordkeeping for the product will
be subject to extensive and ongoing regulatory requirements. These requirements include submissions of safety and other post-
marketing information and reports, registration, as well as continued compliance with GMPs and GCPs for any clinical trials that
we conduct post-approval. Furthermore, product approvals may be withdrawn or limited in some way if problems occur following
initial marketing or if compliance with regulatory standards is not maintained. Similar restrictions are imposed in foreign markets.
Regulatory agencies could become more risk adverse to any side effects or set higher standards of safety and efficacy prior to
reviewing or approving a product. This could result in a product not being approved.
If we, or any future marketing collaborators or contract manufacturers, fail to comply with applicable regulatory
requirements, we may be subject to sanctions including fines, product recalls or seizures and related publicity requirements,
injunctions, total or partial suspension of production, civil penalties, suspension or withdrawals of previously granted regulatory
approvals, warning or untitled letters, refusal to approve pending applications for marketing approval of new products or of
supplements to approved applications, import or export bans or restrictions, and criminal prosecution and penalties. Any of these
penalties could delay or prevent the promotion, marketing or sale of our products and product candidates.
The FDA’s policies, and policies of comparable foreign regulatory authorities, may change and additional government
regulations may be enacted that could prevent, limit or delay regulatory approval of our product candidates. If we are slow or
unable to adapt to changes in existing requirements or to adopt new requirements or policies, or if we are not able to maintain
regulatory compliance, we may lose any marketing approval that we may have obtained, which would adversely affect our business,
prospects and ability to achieve or sustain profitability.
We have no experience in clinical or commercial manufacturing and depend on others for the production of our product
candidates at suitable levels of quality and quantity. Any problems or delays in the manufacture of our products would have a
negative impact on our ability to successfully execute our development and commercialization strategies.
We do not currently have nor do we plan to acquire the infrastructure or capability internally to manufacture our clinical
drug supplies for use in the conduct of our clinical trials, and we lack the resources and the capability to manufacture any of our
product candidates on a clinical or commercial scale. We rely on collaborators and/or third parties for development, scale-up,
formulation, optimization, management of clinical trial and commercial scale manufacturing and commercialization. There are
no assurances we can scale-up, formulate or manufacture any product candidate in sufficient quantities with acceptable
specifications for the conduct of our clinical trials or for the regulatory agencies to grant approval of such product candidate. We
have not yet commercialized any products and have no commercial manufacturing experience. To be successful, our products
must be properly formulated, scalable, stable and safely manufactured in clinical trial and commercial quantities in compliance
with GMP and other regulatory requirements and at acceptable costs. Should any of our suppliers or our collaborators be unable
to supply or be delayed in supplying us with sufficient supplies, no assurance can be given that we will be able to find alternative
means of supply in a short period of time. Should such parties’ operations suffer a material adverse effect, the manufacturing of
our products would also be adversely affected. Furthermore, key raw materials could become scarce or unavailable. There may
be a limited number of third parties who can manufacture our products. We may not be able to meet specifications previously
established for product candidates during scale-up and manufacturing.
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Our reliance on third parties to manufacture our product candidates will expose us and our partners to risks including the
following, any of which could delay or prevent the commercialization of our products, result in higher costs, or deprive us of
potential product revenue:
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Contract manufacturers can encounter difficulties in achieving the scale-up, optimization, formulation, or volume
production of a compound as well as maintaining quality control with appropriate quality assurance. They may also
experience shortages of qualified personnel. Contract manufacturers are required to undergo a satisfactory GMP inspection
prior to regulatory approval and are obliged to operate in accordance with FDA, International Conference on Harmonisation
of Technical Requirements for Registration of Pharmaceuticals for Human Use ("ICH"), European and other nationally
mandated GMP regulations and/or guidelines governing manufacturing processes, stability testing, record keeping and
quality standards. A failure of these contract manufacturers to follow GMP and to document their adherence to such
practices or failure of an inspection by a regulatory agency may lead to significant delays in the availability of our product
candidate materials for clinical study, leading to delays in our trials.
For each of our current product candidates we will initially rely on a limited number of contract manufacturers. Changing
these or identifying future manufacturers may be difficult. Changing manufacturers requires re-validation of the
manufacturing processes and procedures in accordance with FDA, ICH, European and other mandated GMP regulations
and/or guidelines. Such re-validation may be costly and time-consuming. It may be difficult or impossible for us to quickly
find replacement manufacturers on acceptable terms, if at all.
Our contract manufacturers may not perform as agreed or may not remain in the contract manufacturing business for the
time required to produce, store and distribute our products successfully.
The successful commercialization of our product candidates, if approved, will depend on achieving market acceptance
and we may not be able to gain sufficient acceptance to generate significant revenue.
Even if our product candidates are successfully developed and receive regulatory approval, they may not gain market
acceptance among physicians, patients, healthcare payors such as private insurers or governments and other funding parties and
the medical community. The degree of market acceptance for any of our products will depend on a number of factors, including:
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demonstration of the clinical efficacy and safety of our products;
the prevalence and severity of any adverse side effects;
limitations or warnings contained in the product’s approved labeling;
cost-effectiveness and availability of acceptable pricing;
competitive product profile versus alternative treatment methods and the superiority of alternative treatment or
therapeutics;
the effectiveness of marketing and distribution methods and support for the products; and
coverage and reimbursement policies of government and third-party payors to the extent that our products could receive
regulatory approval but not be approved for coverage by or receive adequate reimbursement from government and quasi-
government agencies or other third-party payors.
Disease indications may be small subsets of a disease that could be parsed into smaller and smaller indications as different
subsets of diseases are defined. This increasingly fine characterization of diseases could have negative consequences; including
creating an approved indication that is so small as not to have a viable market for us. If future technology allows characterization
of a disease in a way that is different from the characterization used for large pivotal studies, it may make those studies invalid or
reduce their usefulness, and may require repeating all or a portion of the studies. Future technology may supply better prognostic
ability which could reduce the portion of patients projected to need a new therapy. Even after being cleared by regulatory authorities,
a product may later be shown to be unsafe or not to have its purported effect, thereby preventing its widespread use or requiring
withdrawal from the market.
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If we fail to obtain coverage and adequate reimbursement for our products, our revenue-generating ability will be
diminished and there is no assurance that the anticipated market for our products will be sustained.
We believe that there will be many different applications for products successfully derived from our technologies and that
the anticipated market for products under development will continue to expand. However, due to competition from existing or
new products and the yet-to-be established commercial viability of our products, no assurance can be given that these beliefs will
prove to be correct. Physicians, patients, formularies, payors or the medical community in general may not accept or utilize any
products that we or our collaborative partners may develop. Other drugs may be approved during our clinical testing which could
change the accepted treatments for the disease targeted and make our product candidates obsolete.
Our and our collaborators’ ability to commercialize our products successfully will depend, in part, on the extent to which
coverage and adequate reimbursement for such products and related treatments will be available from governmental health payor
programs at the federal and state levels, including Medicare and Medicaid, private health insurers, managed care plans and other
organizations. No assurance can be given that third-party coverage and adequate reimbursement will be available that will allow
us to maintain price levels sufficient for the realization of an appropriate return on our investment in product development.
Coverage and adequate reimbursement from governmental healthcare programs, such as Medicare and Medicaid, and
private health insurers, managed care plans and other organizations is critical to new product acceptance. Coverage decisions may
depend upon clinical and economic standards that disfavor new drug products when more established or lower cost therapeutic
alternatives are already available or subsequently become available. Even if we obtain coverage for our product candidates, the
resulting reimbursement payment rates might not be adequate or may require co-payments that patients find unacceptably high.
Patients are unlikely to use our product candidates unless coverage is provided and reimbursement is adequate to cover a significant
portion of the cost of our product candidates.
In the United States and in many other countries, pricing and/or profitability of some or all prescription pharmaceuticals
and biopharmaceuticals are subject to varying degrees of government control. Outside of the United States, the successful
commercialization of our products will depend largely on obtaining and maintaining government coverage, because in many
countries patients are unlikely to use prescription drugs that are not covered by their government healthcare programs. Negotiating
coverage and reimbursement with governmental authorities can delay commercialization by 12 months or more. Coverage and
reimbursement policies may adversely affect our ability to sell our products on a profitable basis. In many international markets,
governments control the prices of prescription pharmaceuticals, including through the implementation of reference pricing, price
cuts, rebates, revenue-related taxes and profit control, and we expect prices of prescription pharmaceuticals to decline over the
life of the product or as volumes increase. Healthcare reform and controls on healthcare spending may limit the price we charge
for any products and the amounts thereof that we can sell. In particular, in the United States, the federal government and private
insurers have changed and have considered ways to change, the manner in which healthcare services are provided. In March 2010,
the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (collectively,
the "ACA"), became law in the United States. The ACA substantially changes the way healthcare is financed by both governmental
and private insurers and significantly affects the healthcare industry, and its implementation continues to impose costs on the
biopharmaceutical industry, including, among other things, by imposing an annual, nondeductible fee on any entity that
manufactures or imports specified branded prescription drugs and biologic agents, apportioned among these entities according to
their market share in certain government healthcare programs; increasing rebates paid under the Medicaid program; expanding
participation in programs such as Medicaid and the 340B Drug Discount Program, under which participating manufacturers are
required to offer statutory price concessions, and requiring reporting of certain payments under the federal Open Payments program
and its implementing regulations. Moreover, in the United States, there has recently been significantly increased government
enforcement and payor scrutiny relating to drug pricing and price increases. For example, there have been several recent U.S.
Congressional inquiries and proposed bills designed to, among other things, bring more transparency to drug pricing, review the
relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies
for drugs, and such measures, if enacted, could adversely impact the prices we or our future collaborators may charge for our
products candidates, if commercialized.
In addition, other legislative changes have been proposed and adopted since the ACA was enacted. In August 2011, the
Budget Control Act of 2011, among other things, created measures for spending reductions by Congress. A Joint Select Committee
on Deficit Reduction, tasked with recommending a targeted deficit reduction of at least $1.2 trillion for the years 2013 through
2021, was unable to reach required goals, thereby triggering the legislation’s automatic reduction to several government programs.
These changes include aggregate reductions to Medicare payments to providers of up to 2% per fiscal year, which went into effect
on April 1, 2013 and, as amended, will stay in effect through 2025 unless additional Congressional action is taken. In January 2013,
President Obama signed into law the American Taxpayer Relief Act of 2012, which, among other things, further reduced Medicare
payments to several types of providers and increased the statute of limitations period for the government to recover overpayments
to providers from three to five years. Moreover, the Drug Supply Chain Security Act, enacted in 2013, imposes new obligations
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on manufacturers of pharmaceutical products related to product tracking and tracing. Among the requirements of this legislation,
manufacturers are required to provide certain information regarding the drug products to individuals and entities to which product
ownership is transferred, label drug product with a product identifier, and keep certain records regarding the drug product. The
transfer of information to subsequent product owners by manufacturers will eventually be required to be done electronically.
Manufacturers will also be required to verify that purchasers of the manufacturers’ products are appropriately licensed. Further,
under this new legislation, manufacturers will have drug product investigation, quarantine, disposition, and notification
responsibilities related to counterfeit, diverted, stolen, and intentionally adulterated products, as well as products that are the
subject of fraudulent transactions or which are otherwise unfit for distribution such that they would be reasonably likely to result
in serious health consequences or death. These new laws may result in additional reductions in Medicare and other healthcare
funding, which could have a material adverse effect on our customers and accordingly, our financial operations.
We anticipate that the ACA, as well as other healthcare reform measures that may be adopted in the future, may result in
more rigorous coverage criteria and additional downward pressure on the reimbursement we may receive for any approved product.
Moreover, payment methodologies may be subject to changes in healthcare legislation and regulatory initiatives. For example,
the Middle Class Tax Relief and Job Creation Act of 2012 required the Centers for Medicare & Medicaid Services ("CMS"), to
reduce the Medicare clinical laboratory fee schedule by 2% in 2013, which revised schedule, served as a base for 2014 and will
be the base for future years.
Beginning January 1, 2016, major changes to the payment formula under the Medicare Clinical Laboratory Fee Schedule
("CLFS") became effective. Under the Protecting Access to Medicare Act of 2014 ("PAMA"), which was signed into law in
April 2014, certain clinical laboratories must report laboratory test payment data for each Medicare-covered clinical diagnostic
lab test that it furnishes during a time period to be defined by regulations. Under proposed regulations, reporting was proposed to
begin January 1, 2016, and will include such data collected for last two calendar quarters of 2015. The reported data must include
the payment rate (reflecting all discounts, rebates, coupons and other price concessions) and the volume of each test that was paid
by each private payor (including health insurance issuers, group health plans, Medicare Advantage plans and Medicaid managed
care organizations). Beginning in 2017, the Medicare payment rate for each clinical diagnostic lab test will be equal to the weighted
median amount for the test from the most recent data collection period. This new reimbursement methodology is expected to
generally result in relatively lower reimbursement under Medicare for clinical diagnostic lab tests than has been historically
available under the CLFS. The payment rate will apply to laboratory tests furnished by a hospital laboratory if the test is separately
paid under the hospital outpatient prospective payment system. In addition, levels of reimbursement may be impacted by other
current and future legislation, regulation or reimbursement policies of third-party payors in a manner that may harm the demand
and reimbursement available for our products, including our companion diagnostics, which in turn, could harm our future product
pricing and sales. Any reduction in reimbursement from Medicare and other government programs may result in a similar reduction
in payments from private payors. The implementation of cost containment measures or other healthcare reforms may prevent us
from being able to generate revenue, attain profitability or commercialize our products.
Competition in our targeted market area is intense and this field is characterized by rapid technological change.
Therefore developments by competitors may substantially alter the predicted market or render our product candidates
uncompetitive.
There are hundreds of drugs in clinical development today in the area of oncology therapeutics. We have competitors both
in the United States and internationally, including major multinational pharmaceutical companies, biotechnology companies and
universities and other research institutions. In the oncology market, our major competitors include, but are not limited to:
AbbVie, Inc., AstraZeneca PLC, Exelixis
Incyte Corporation, Syndax
Pharmaceuticals Inc., Merck KGaA, NantPharma LLC, Novartis AG, Pfizer Inc. ("Pfizer"), and Sanofi S. A. among others.
Inc., GlaxoSmithKline PLC, Ignyta,
Inc.,
Many companies have filed, and continue to file, patent applications in oncology which may or could affect our program.
Some of these patent applications may have already been allowed or issued, and others may issue in the future. These companies
include, but are not limited to: Bristol-Myers Squibb Company; Compugen Limited; Exelixis; GlaxoSmithKline PLC; Novartis;
and Pfizer. Since this area is competitive and of strong interest to pharmaceutical and biotechnology companies, there will likely
be additional patent applications filed, and additional patents granted, in the future, as well as additional research and development
programs expected in the future.
In addition to companies that have HDAC inhibitors or kinase inhibitors addressing oncology indications, our competition
also includes hundreds of private and publicly traded companies that operate in the area of oncology but have therapeutics with
different mechanisms of action. The oncology market in general is highly competitive with over 1,000 molecules currently in
clinical development.
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Developments by others may render our products or technologies non-competitive or obsolete or we may not be able to
keep pace with technological developments. Our competitors may have developed or may be developing technologies which may
be the basis for competitive products. Some of these products may prove to be more effective and less costly than the products
developed or being developed by us. Our competitors may obtain regulatory approval for their products more rapidly than we do
which may change the standard of care in the indications we are targeting, rendering our technology or products non-competitive
or obsolete. For example, with the recent approval of immunotherapy agents for the treatment of NSCLC and other cancers, the
standard of care for the treatment of cancer is evolving and will continue to evolve which could require us to change the design
and timelines for our registration trails and may limit the commercial acceptance of our products in the future. Others may develop
treatments or cures superior to any therapy we are developing or will develop. Moreover, alternate, less toxic forms of medical
treatment may be developed which may be competitive with our products.
Many of the organizations which could be considered to be our competitors have substantially more financial and technical
resources, more extensive discovery research, preclinical research and development capabilities and greater manufacturing,
marketing, distribution, production and human resources than we do. Many of our current or potential competitors have more
experience than us in research, preclinical testing and clinical trials, drug commercialization, manufacturing and marketing, and
in obtaining domestic and foreign regulatory approvals. In addition, failure, unacceptable toxicity, lack of sales or disappointing
sales or other issues regarding competitors’ products or processes could have a material adverse effect on our product candidates,
including our clinical candidates or our lead compounds. Established pharmaceutical companies may invest heavily to accelerate
discovery and development of novel compounds or to in-license novel compounds that could make our product candidates less
competitive. In addition, any new product that competes with an approved product must demonstrate compelling advantages in
efficacy, convenience, tolerability and safety in order to overcome price competition and brand recognition and to be commercially
successful. Accordingly, our competitors may succeed in obtaining patent protection, receiving FDA, EMA or other regulatory
approval or discovering, developing and commercializing medicines before we do, which would have a material adverse impact
on our business.
We will not be able to successfully commercialize our product candidates without establishing sales and marketing
capabilities internally or through collaborators.
We currently have no sales and marketing staff. We may not be able to find suitable sales and marketing staff and
collaborators for all of our product candidates. We have no prior experience in the marketing, sale and distribution of pharmaceutical
products and there are significant risks involved in building and managing a sales organization, including our ability to hire, retain
and incentivize qualified individuals, generate sufficient sales leads, provide adequate training to sales and marketing personnel,
and effectively manage a geographically dispersed sales and marketing team. Any collaborators may not be adequate or successful
or could terminate or materially reduce the effort they direct to our products. The development of a marketing and sales capability
will require significant expenditures, management resources and time. The cost of establishing such a sales force may exceed any
potential product revenue, or our marketing and sales efforts may be unsuccessful. If we are unable to develop an internal marketing
and sales capability in a timely fashion, or at all, or if we are unable to enter into a marketing and sales arrangement with a third
party on acceptable terms, we may be unable to successfully develop and seek regulatory approval for our product candidates and/
or effectively market and sell approved products, if any.
We are subject to competition for our skilled personnel and may experience challenges in identifying and retaining key
personnel that could impair our ability to conduct our operations effectively.
Our future success depends on our ability to retain our executive officers and to attract, retain and motivate qualified
personnel. If we are not successful in attracting and retaining highly qualified personnel, we may not be able to successfully
implement our business strategy. Although we have not experienced problems attracting and retaining highly qualified personnel
in the recent past, our industry has experienced a high rate of turnover of management personnel in recent years. Our ability to
compete in the highly competitive biotechnology and pharmaceuticals industries depends upon our ability to attract and retain
highly qualified managerial, scientific and medical personnel. We are highly dependent on our management, scientific and medical
personnel, especially Charles M. Baum, M.D., Ph.D., our President and Chief Executive Officer, Mark J. Gergen, our Executive
Vice President and Chief Operations Officer, Isan Chen, M.D., our Executive Vice President and Chief Medical and Development
Officer, James Christensen, Ph.D. our Chief Scientific Officer, and Jamie A. Donadio, our Vice President of Finance, whose
services are critical to the successful implementation of our product candidate acquisition, development and regulatory strategies,
as well as the management of our financial operations. We are not aware of any present intention of any of these individuals to
leave our Company. In order to induce valuable employees to continue their employment with us, we have provided stock options
that vest over time. The value to employees of stock options that vest over time is significantly affected by movements in our
stock price that are beyond our control, and may at any time be insufficient to counteract more lucrative offers from other companies.
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Despite our efforts to retain valuable employees, members of our management, scientific and development teams may
terminate their employment with us at any time, with or without notice. The loss of the services of any of our executive officers
or other key employees and our inability to find suitable replacements could harm our business, financial condition and prospects.
Our success also depends on our ability to continue to attract, retain and motivate highly skilled junior, mid-level and senior
managers as well as junior, mid-level and senior scientific and medical personnel.
We may also experience growth in the number of our employees and the scope of our operations, especially in clinical
development. This growth will place a significant strain on our management, operations and financial resources and we may have
difficulty managing this future potential growth. No assurance can be provided that we will be able to attract new employees to
assist in our growth. Many of the other pharmaceutical companies that we compete against for qualified personnel have greater
financial and other resources, different risk profiles and a longer history in the industry than we do. We also may employ consultants
or part-time and contract employees. There can be no assurance that these individuals are retainable. While we have been able to
attract and retain skilled and experienced personnel and consultants in the past, no assurance can be given that we will be able to
do so in the future.
Our current and future relationships with customers and third-party payors in the United States and elsewhere may be
subject, directly or indirectly, to applicable anti-kickback, fraud and abuse, false claims, transparency, health information
privacy and security and other healthcare laws and regulations, which could expose us to criminal sanctions, civil penalties,
contractual damages, reputational harm, administrative burdens and diminished profits and future earnings.
As a pharmaceutical company, even though we do not and will not control referrals of healthcare services or bill directly
to Medicare, Medicaid or other third-party payors, certain federal and state healthcare laws and regulations pertaining to fraud
and abuse and patients’ rights are and will be applicable to our business. Our current and future arrangements with third-party
payors and customers may expose us to broadly applicable fraud and abuse and other healthcare laws and regulations, including,
without limitation, the federal Anti-Kickback Statute and the federal False Claims Act, which may constrain the business or
financial arrangements and relationships through which we sell, market and distribute any drugs for which we obtain marketing
approval. In addition, we may be subject to transparency laws and patient privacy regulation by U.S. federal and state governments
and by governments in foreign jurisdictions in which we conduct our business. The laws that may affect our ability to operate
include:
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•
the federal Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting,
offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward, or in return
for, either the referral of an individual for, or the purchase, order or recommendation of, any good or service, for which
payment may be made under federal and state healthcare programs, such as Medicare and Medicaid;
federal civil and criminal false claims laws and civil monetary penalty laws, including the federal False Claims Act, which
impose criminal and civil penalties, including civil whistleblower or qui tam actions, against individuals or entities for
knowingly presenting, or causing to be presented, to the federal government, including the Medicare and Medicaid
programs, claims for payment that are false or fraudulent or making a false statement to avoid, decrease or conceal an
obligation to pay money to the federal government;
the federal Health Insurance Portability and Accountability Act of 1996 ("HIPAA"), which imposes criminal and civil
liability for executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare
matters;
HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009 ("HITECH"),
and their respective implementing regulations, which impose obligations on covered healthcare providers, health plans,
and healthcare clearinghouses, as well as their business associates that create, receive, maintain or transmit individually
identifiable health information for or on behalf of a covered entity, with respect to safeguarding the privacy, security and
transmission of individually identifiable health information;
the federal Open Payments program, which requires manufacturers of drugs, devices, biologics and medical supplies for
which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program, with specific exceptions,
to report annually to CMS information related to “payments or other transfers of value” made to physicians, which is
defined to include doctors, dentists, optometrists, podiatrists and chiropractors, and teaching hospitals and applicable
manufacturers and applicable group purchasing organizations to report annually to CMS ownership and investment interests
held by the physicians and their immediate family members, and contains requirements for manufacturers to submit reports
to CMS by the 90th day of each calendar year, and disclosure of such information to be made by CMS on a publicly
available website which began in September 2014; and
30
•
analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws, which may apply to
sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-
party payors, including private insurers; state and foreign laws that require pharmaceutical companies to comply with the
pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the
federal government or otherwise restrict payments that may be made to healthcare providers; state and foreign laws that
require drug manufacturers to report information related to payments and other transfers of value to physicians and other
healthcare providers or marketing expenditures; and state and foreign laws governing the privacy and security of health
information in certain circumstances, many of which differ from each other in significant ways and often are not preempted
by HIPAA, thus complicating compliance efforts.
Because of the breadth of these laws and the narrowness of available statutory and regulatory exceptions, it is possible
that some of our business activities could be subject to challenge under one or more of such laws. In addition, recent healthcare
reform legislation has strengthened these laws. For example, the ACA, among other things, amends the intent requirement of the
federal Anti-Kickback Statute such that a person or entity no longer needs to have actual knowledge of this statute or specific
intent to violate it in order to have committed a violation. Moreover, the ACA provides that the government may assert that a claim
including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim
for purposes of the False Claims Act. To the extent that any of our product candidates is ultimately sold in countries other than
the United States, we may be subject to similar laws and regulations in those countries. If we or our operations are found to be in
violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to penalties,
including civil and criminal penalties, damages, fines, imprisonment, exclusion from participation in government healthcare
programs, and the curtailment or restructuring of our operations, any of which could have a material adverse effect on our business.
If any of the physicians or other healthcare providers or entities with whom we expect to do business, including any of our
collaborators, is found not to be in compliance with applicable laws, it may be subject to criminal, civil or administrative sanctions,
including exclusion from participation in government healthcare programs, which could also materially affect our business.
We may become subject to the risk of product liability claims.
We face an inherent risk of product liability as a result of the clinical testing of our product candidates and will face an
even greater risk if we commercialize any products. Human therapeutic products involve the risk of product liability claims and
associated adverse publicity. Currently, the principal risks we face relate to patients in our clinical trials, who may suffer unintended
consequences. Claims might be made by patients, healthcare providers, pharmaceutical companies or others. For example, we
may be sued if any product we develop allegedly causes injury or is found to be otherwise unsuitable during product testing,
manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in manufacturing, defects
in design, a failure to warn of dangers inherent in the product, negligence, strict liability and a breach of warranties. Claims could
also be asserted under state consumer protection laws. If we cannot successfully defend ourselves against product liability claims,
we may incur substantial liabilities or be required to limit commercialization of our product candidates, if approved. Even successful
defense would require significant financial and management resources. Regardless of the merits or eventual outcome, liability
claims may result in:
•
•
decreased demand for our product candidates;
injury to our reputation;
• withdrawal of clinical trial participants;
•
•
•
•
•
•
•
initiation of investigations by regulators;
costs to defend the related litigation;
a diversion of management’s time and our resources;
substantial monetary awards to trial participants or patients;
product recalls, withdrawals or labeling, marketing or promotional restrictions;
loss of revenue from product sales; and
the inability to commercialize any of our product candidates, if approved.
31
We may not have or be able to obtain or maintain sufficient and affordable insurance coverage, and without sufficient
coverage any claim brought against us could have a materially adverse effect on our business, financial condition or results of
operations. We run clinical trials through investigators that could be negligent through no fault of our own and which could affect
patients, cause potential liability claims against us and result in delayed or stopped clinical trials. We are required in many cases
by contractual obligations to indemnify collaborators, partners, third-party contractors, clinical investigators and institutions. These
indemnifications could result in a material impact due to product liability claims against us and/or these groups. We currently
carry $10 million in product liability insurance, which we believe is appropriate for our clinical trials. Although we maintain such
insurance, any claim that may be brought against us could result in a court judgment or settlement in an amount that is not covered,
in whole or in part, by our insurance or that is in excess of the limits of our insurance coverage. Our insurance policies also have
various exclusions, and we may be subject to a product liability claim for which we have no coverage. We will have to pay any
amounts awarded by a court or negotiated in a settlement that exceed our coverage limitations or that are not covered by our
insurance, and we may not have, or be able to obtain, sufficient capital to pay such amounts.
Our business involves the controlled use of hazardous materials and as such we are subject to environmental and
occupational safety laws. Continued compliance with these laws may incur substantial costs and failure to maintain compliance
could result in liability for damages that may exceed our resources.
Our preclinical research, manufacturing and development processes involve the controlled use of hazardous and radioactive
materials. We are subject to federal, local and foreign laws and regulations governing the use, manufacture, storage, handling and
disposal of such materials and certain waste products. Our operations involve the use of hazardous and flammable materials,
including chemicals and biological materials. Our operations also produce hazardous waste products. The risk of accidental
contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, we could be held
liable for any damages that result, and any such liability could exceed our resources. We may not be adequately insured against
this type of liability. We may be required to incur significant costs to comply with environmental laws and regulations in the future,
and our operations, business or assets may be materially adversely affected by current or future environmental laws or regulations.
We may have to dedicate resources to the settlement of litigation.
Securities legislation in the United States, Canada and other countries makes it relatively easy for stockholders to sue.
This could lead to frivolous lawsuits which could take substantial time, money, resources and attention or force us to settle such
claims rather than seek adequate judicial remedy or dismissal of such claims.
If we are required to defend patent infringement actions brought by third parties, or if we sue to protect our own patent
rights or otherwise to protect our proprietary information and to prevent its disclosure, or if we are involved in other litigation,
whether as a plaintiff or defendant, we may be required to pay substantial litigation costs and managerial attention may be diverted
from business operations even if the outcome is in our favor. If we are required to defend our patents or trademarks against
infringement by third parties, we may be required to pay substantial litigation costs and managerial attention and financial resources
may be diverted from our research and development operations even if the outcome is in our favor.
We may be vulnerable to disruption, damage and financial obligation as a result of system failures.
Despite the implementation of security measures, any of the internal computer systems belonging to us, our collaborators
or our third-party service providers are vulnerable to damage from computer viruses, unauthorized access, natural disasters,
terrorism, war and telecommunication and electrical failure. Any system failure, accident or security breach that causes interruptions
in our own, in collaborators’ or in third-party service vendors’ operations could result in a material disruption of our drug discovery
and development programs. In addition, we rely upon third-party contractors and service providers for the hosting, support and/
or maintenance of some aspects of our computer hardware, computer software and telecommunications systems. Failure of those
contractors and service providers to provide systems and services of a suitable quality and within acceptable timeframes may
cause the delay or failure of our development programs, or loss of confidential or proprietary information. To the extent that any
disruption or security breach results in a loss or damage to our data or applications, or inappropriate disclosure of confidential or
proprietary information, we may incur liability, our drug discovery and development programs may be adversely affected and the
further development of our product candidates may be delayed. Furthermore, we may incur additional costs to remedy the damages
caused by these disruptions or security breaches.
32
Risks Relating to Our Intellectual Property
We may not obtain adequate protection for our product candidates through patents and other intellectual property
rights and as such our competitive advantage in the marketplace may be compromised.
Our success depends, in part, on our ability to secure and protect our patents, trade secrets, trademarks and other intellectual
property rights and to operate without infringing on the proprietary rights of others or having third parties circumvent the rights
that we own or license. We have filed and are actively pursuing patent applications in the United States, Japan, Europe and other
major markets via the Patent Cooperation Treaty or directly in countries of interest. The patent positions of healthcare companies,
universities and biopharmaceutical companies, including ours, are uncertain and involve complex questions of law and fact for
which important legal issues may remain unresolved. Therefore, there is no assurance that our pending patent applications will
result in the issuance of patents or that we will develop additional proprietary products which are patentable. Moreover, patents
issued or to be issued to us may not provide us with any competitive advantage. Further, if the patent applications we hold or in-
license with respect to our programs, product candidates and companion diagnostic fail to issue, if their breadth or strength of
protection is threatened, or if they fail to provide meaningful exclusivity for our product candidates, it could dissuade companies
from collaborating with us to develop product candidates, and threaten our ability to commercialize future products.
Our patents may be challenged by third parties at the United States Patent and Trademark Office ("USPTO"), comparable
foreign patent offices, or in patent litigation. In addition, it is possible that third parties with products that are very similar to ours
will circumvent our patents by means of alternate designs or processes or file applications or be granted patents that would block
or hurt our efforts.
There are no assurances that our patent counsel, lawyers or advisors have given us correct advice or counsel. Opinions
from such patent counsel or lawyers may not be correct or may be based on incomplete facts. We cannot be certain that we are
the first to invent or first to file for patent protection for the inventions covered by pending patent applications and, if we are not,
we may be subject to priority disputes. We may be required to disclaim part or all of the subject matter and/or term of certain
patents or all of the subject matter and/or term of certain patent applications. There may be prior art of which we are not aware
that may affect the validity or enforceability of a patent claim. There also may be prior art of which we are aware, but which we
do not believe affects the validity or enforceability of one or more claims, which may, nonetheless, ultimately be found to affect
the validity or enforceability of a claim. No assurance can be given that if challenged, our patents would be declared by the USPTO,
comparable foreign patent offices or a court to be valid or enforceable or that even if found valid and enforceable, a competitor’s
technology or product would be found by a court to infringe our patents. The possibility exists that others will develop products
which have the same effect as our products on an independent basis which do not infringe our patents or other intellectual property
rights, or will design around the claims of patents that we have had issued that cover our products. The steps we have taken to
protect our intellectual property may not prevent the misappropriation of our proprietary information and technologies, particularly
in foreign countries where laws or law enforcement practices may not protect proprietary rights to the same extent as in the United
States, Europe or Japan. Unauthorized disclosure of our proprietary information could also harm our competitive position. We
could also inadvertently use our collaborators’ data inappropriately which could lead to liability. We may file patent applications
but have claims restricted or we may not be able to supply sufficient data to satisfy a patent office to support our claims and, as a
result, may not obtain the original claims desired or we may receive restricted claims. Alternatively, it is possible that we may not
receive any patent protection from an application.
Maintaining our patents and applications requires timely payment of fees and other associated costs in the countries of
filing, and we could inadvertently abandon a patent or patent application (or trademark or trademark application) due to non-
payment of fees, or as a result of a failure to comply with filing deadlines or other requirements of the prosecution process, resulting
in the loss of protection of certain intellectual property rights in a certain country. Alternatively, we, our collaborators or our patent
counsel may take action resulting in a patent or patent application becoming abandoned which may not be able to be reinstated,
or if reinstated, may suffer patent term adjustments. Any of these outcomes could hurt our ability to gain full patent protection for
our products. Registered trademarks and/or applications for trademark registrations in the United States that belong to us are
subject to similar risks as described above for patents and patent applications.
Many of our collaboration agreements are complex and may call for licensing or cross-licensing of potentially blocking
patents, know-how or intellectual property. Due to the potential overlap of data, know-how and intellectual property rights there
can be no assurance that one of our collaborators will not dispute our right to send data or know-how or other intellectual property
rights to third parties and this may potentially lead to liability or termination of a program or litigation. There are no assurances
that the actions of our collaborators would not lead to disputes or cause us to default with other collaborators. We cannot be certain
that a collaborator will not challenge the validity of licensed patents.
33
We cannot be certain that any country’s patent and/or trademark office will not implement new rules which could affect
how we draft, file, prosecute and/or maintain patents and patent applications, or that certain patent rights and/or trademark rights
will be granted by governmental authorities in particular foreign countries. We cannot be certain that increasing costs for drafting,
filing, prosecuting and maintaining patent applications and patents will not limit our ability to file for patent protection, or to
prosecute applications through to grant. We may be forced to abandon or return the rights to specific patents due to a lack of
financial resources. There is no assurance that we could enter into licensing arrangements at a reasonable cost, or develop or obtain
alternative technology in respect of patents issued to third parties that incidentally cover our products. Any inability to secure such
licenses or alternative technology could result in delays in the introduction of some of our products or even lead to prohibition of
the development, manufacture or sale of certain products by us.
We may file applications for trademark registrations in connection with our product candidates in various jurisdictions,
including the United States. No assurance can be given that any of our trademark applications will be registered in the United
States or elsewhere, or that the use of any registered or unregistered trademarks will confer a competitive advantage in the
marketplace. Furthermore, even if we are successful in our trademark registrations, the FDA and regulatory authorities in other
countries have their own process for drug nomenclature and their own views concerning appropriate proprietary names. No
assurance can be given that the FDA or any other comparable regulatory authority will accept any of our trademarks or will not
request reconsideration of one of our trademarks, for use in connection with our drug product candidates, whether currently or at
some time in the future. The loss, abandonment, or cancellation of any of our trademarks or trademark applications could negatively
affect the success of the product candidates to which they relate.
Moreover, some of our know-how and technology which is not patented or not patentable may constitute trade secrets.
Therefore, we require our consultants, advisors and collaborators to enter into confidentiality agreements and our employees to
enter into invention and non-disclosure agreements. However, no assurance can be given that such agreements will provide for a
meaningful protection of our trade secrets, know-how or other proprietary information in the event of any unauthorized use or
disclosure of information. Furthermore, we cannot provide assurance that any of our employees, consultants, contract personnel
or collaborators, either accidentally or through willful misconduct, will not cause serious negative impact to our programs and/or
our strategy. All of our employees have signed confidentiality agreements, but there can be no assurance that they will not
inadvertently or through their misconduct give trade secrets away.
Third-party patents or intellectual property infringement claims may result in a reduction in the scope of our patent
protection and competitive exclusivity with respect to our product candidates. Patent litigation, including defense against third-
party intellectual property claims, may result in us incurring substantial costs.
Patent applications which may relate to or affect our business may have been filed by others. Such patent applications or
patents resulting therefrom may conflict with our technologies, patents or patent applications, potentially reducing the scope or
strength of our patent protection, and may ultimately be determined to limit or prohibit our freedom to operate with respect to our
product candidates. Such events could cause us to stop or change the course of our research and development or modify our
intellectual property strategies. We could also become involved in interference proceedings in connection with one or more of our
patents or patent applications to determine priority of invention, or in post-grant opposition proceedings at the USPTO or comparable
foreign patent offices. There can be no guarantees that an interference proceeding or defense of a post-grant opposition would be
successful or that such an outcome would be upheld on appeal. An unfavorable outcome could require us to cease using the related
technology or to attempt to license rights to it from the prevailing party. Our business could be harmed if the prevailing party does
not offer us a license on commercially reasonable terms. Our defense of such interference proceedings may fail and, even if
successful, may result in substantial costs and distract our management and other employees.
No assurance can be given that our patents, once issued, would be declared by a court to be valid or enforceable, or that
we would not be found to infringe a competitor’s patent.
Third parties may assert that we are using their proprietary information without authorization. Third parties may also have
or obtain patents and may claim that technologies licensed to or used by us infringe their patents. Because patent applications can
take many years to issue, third parties may have currently pending patent applications which may later result in issued patents that
our product candidates or companion diagnostic may infringe, or which such third parties claim are infringed by the use of our
technologies. If any third-party patents are held by a court of competent jurisdiction to cover any aspect of our product candidates,
including the formulation or method of use of such product candidate, the holders of any such patents may be able to block our
ability to commercialize such product candidate unless we obtain a license under the applicable patents, or until such patents
expire. In any such case, such a license may not be available on commercially reasonable terms or at all. In addition, any legal
action that seeks damages or an injunction to stop us from carrying on our commercial activities relating to the affected technologies
could subject us to monetary liability. Some of our competitors may be able to sustain the costs of complex patent litigation more
effectively than we can because they have substantially greater resources.
34
Parties making claims against us for alleged infringement of their intellectual property rights may obtain injunctive or
other equitable relief, which could effectively block our ability to further develop and commercialize one or more of our product
candidates. Defense of these claims, regardless of their merit, would involve substantial litigation expense and would be a substantial
diversion of employee resources from our business. In the event of a successful claim of infringement against us, we could be
required to redesign our infringing products or obtain a license from such third party to continue developing and commercializing
our products and technology. However, we may not be able to obtain any required license on commercially reasonable terms, or
at all. Even if we are able to obtain a license, it may be non-exclusive, thereby giving our competitors access to the same technologies
licensed to us. It may be impossible to redesign our products and technology, or it may require substantial time and expense, which
could force us to cease commercialization of one or more of our product candidates, or some of our business operations, which
could materially harm our business. In addition, in any such proceeding, we may be required to pay substantial damages, including
treble damages and attorneys’ fees in the event we are found liable for willful infringement.
Our intellectual property may be infringed upon by a third party.
Third parties may infringe one or more of our issued patents or trademarks. We cannot predict if, when or where a third
party may infringe one or more of our issued patents or trademarks. We may attempt to invalidate a competitor’s patent or trademark.
There is no assurance such action will ultimately be successful and, even if initially successful, it could be overturned upon appeal.
There is no assurance that we would be successful in a court of law to prove that a third party is infringing one or more of our
issued patents. Even if we are successful in proving in a court of law that a third party is infringing one or more of our issued
patents there can be no assurance that we would be successful in halting their infringing activities, for example, through a permanent
injunction, or that we would be fully or even partially financially compensated for any harm to our business. We may be forced
to enter into a license or other agreement with the infringing third party at terms less profitable or otherwise less commercially
acceptable to us than if the license or agreement were negotiated under conditions between those of a willing licensee and a willing
licensor. We may not become aware of a third party infringer within legal timeframes that would enable us to seek adequate
compensation, or at all, thereby possibly losing the ability to be compensated for any harm to our business. Such a third-party
may be operating in a foreign country where the infringer is difficult to locate, where we do not have issued patents and/or the
patent laws may be more difficult to enforce. Some third-party infringers may be able to sustain the costs of complex patent
infringement litigation more effectively than we can because they have substantially greater resources. Any inability to stop third-
party infringement could result in loss in market share of some of our products or even lead to a delay, reduction and/or inhibition
of the development, manufacture or sale of certain products by us. There is no assurance that a product produced and sold by a
third-party infringer would meet our or other regulatory standards or would be safe for use. Such third-party infringer products
could irreparably harm the reputation of our products thereby resulting in substantial loss in market share and profits.
Third parties may seek to obtain approval of a generic version of approved products. Defense against entry of a generic
product may result in us incurring substantial costs and ultimate failure to prevail against approval of a generic product could
result in a substantial loss of market share and profits.
Even if we are successful in obtaining regulatory approval to sell any of our product candidates in one or more countries,
we cannot be certain that our patents and other intellectual property rights will ultimately prevent approval during the patent term
of generic products developed and commercialized by third parties. A generic manufacturer may seek approval of a generic version
of any of our products in the United States by filing an Abbreviated New Drug Application ("ANDA"), with the FDA asserting
that our patents are invalid and/or unenforceable to maintain market exclusivity for any of our products, if approved. We cannot
predict if, or when, one or more generic manufacturers may attempt to seek regulatory approval for a generic version of any of
our products, if approved. There is no assurance that we will ultimately be successful in a court of law to prevent entry of a generic
version of any of our products during the applicable patent term and we may incur substantial costs defending our patents and
intellectual property rights. An inability to stop a generic manufacturer from selling a generic version of our products could result
in a substantial loss of market share and profits or even preclude the ability to continue to commercialize any of our products, if
approved.
Risks Related to Our Shares of Common Stock
Our share price is volatile and may be influenced by numerous factors that are beyond our control.
A low share price and low market valuation may make it difficult to raise sufficient additional cash due to the significant
dilution to current stockholders. Market prices for shares of biotechnology and biopharmaceutical companies such as ours are
often volatile. Factors such as clinical and regulatory developments regarding our products or processes, developments regarding
potential or future third-party collaborators, announcements of technological innovations, new commercial products, patents, the
development of proprietary rights by us or by others or any litigation relating to these rights, regulatory actions, general conditions
35
in the biotechnology and pharmaceutical industries, failure to meet analysts’ expectations, publications, financial results or public
concern over the safety of biopharmaceutical and biotechnological products, economic conditions in the United States and other
countries, terrorism and other factors could have a significant effect on the share price for our shares of common stock. Any setback
or delay in the clinical development of our programs could result in a significant decrease in our share price. In recent years the
stock of other biotechnology and biopharmaceutical companies has experienced extreme price fluctuations that have been unrelated
to the operating performance of the affected companies. There can be no assurance that the market price of our shares of common
stock will not experience significant fluctuations in the future, including fluctuations that are unrelated to our performance. These
fluctuations may result due to macroeconomic and world events, national or local events, general perception of the biotechnology
industry or to a lack of liquidity. In addition, other biotechnology companies' or our competitors’ programs could have positive
or negative results that impact their stock prices and their results or experience stock price fluctuations that could have a positive
or negative impact on our stock price, regardless whether such impact is direct or not.
Stockholders may not agree with our business, scientific, clinical and financial strategy, including additional dilutive
financings, and may decide to sell their shares or vote against such proposals. Such actions could materially impact our stock
price. In addition, portfolio managers of funds or large investors can change or change their view on us and decide to sell our
shares. These actions could have a material impact on our stock price. In order to complete a financing, or for other business
reasons, we may elect to consolidate our shares of common stock. Investors may not agree with these actions and may sell our
shares. We may have little or no ability to impact or alter such decisions.
Our principal stockholders control the majority of our shares, and their actions may significantly influence matters
submitted to our stockholders for approval and our share price.
Based on the information available to us, following our common stock offerings of 4.8 million shares which we completed
in 2015, our stockholders and their affiliates who owned more than 5% of our outstanding common stock collectively owned
approximately 53% of our outstanding common stock. Baker Bros. Advisors, L.L.C. ("Baker Brothers") and Tavistock Life
Sciences Co. ("Tavistock") and their affiliates collectively own approximately 31% of our outstanding common stock. In addition,
in conjunction with certain financing transactions, we granted to Baker Brothers and Tavistock each the right to nominate a member
of our Board of Directors and the right to appoint an observer on our Board of Directors. Collectively Baker Brothers and Tavistock
may have significant influence over matters submitted to our stockholders for approval, including the election and removal of
directors and the approval of any merger, consolidation, or sale of all or substantially all of our assets. Furthermore, as a thinly
traded stock, if Baker Brothers, Tavistock or any other of our major stockholders determine to exit from the industry or from their
holdings in us, for whatever reason, the impact on our share price could be detrimental over a prolonged period of time.
Future sales and issuances of our common stock or rights to purchase common stock, including pursuant to our equity
incentive plans, could result in additional dilution of the percentage ownership of our stockholders and could cause our stock
price to fall.
We expect that significant additional capital will be needed in the future to continue our planned operations. To the extent
we raise additional capital by issuing equity securities, our stockholders may experience substantial dilution. We may sell common
stock, convertible securities or other equity securities in one or more transactions at prices and in a manner we determine from
time to time. If we sell common stock, convertible securities or other equity securities in more than one transaction, investors may
be materially diluted by subsequent sales. These sales may also result in material dilution to our existing stockholders, and new
investors could gain rights superior to our existing stockholders.
Pursuant to our 2013 Equity Incentive Plan ("the 2013 Plan"), and our 2013 Employee Stock Purchase Plan ("the ESPP"),
our management is authorized to grant stock options and other equity-based awards to our employees, directors and consultants,
and to sell our common stock to our employees, respectively. Any increase in the number of shares outstanding as a result of the
exercise of outstanding options, the vesting or settlement of outstanding stock awards, or the purchase of shares pursuant to the
ESPP will cause our stockholders to experience additional dilution, which could cause our stock price to fall.
Our ability to use our U.S. net operating loss carryforwards and certain other tax attributes may be limited.
Under Section 382 of the Internal Revenue Code of 1986, as amended ("the Code"), if a corporation undergoes an
“ownership change,” generally defined as a greater than 50% change (by value) in its equity ownership over a three year period,
the corporation’s ability to use its pre-change U.S. net operating loss carryforwards ("NOLs"), and other pre-change U.S. tax
attributes (such as research tax credits) to offset its post-change income may be limited. We may experience ownership changes
in the future as a result of subsequent shifts in our stock ownership. As a result, if we earn net taxable income, our ability to use
our pre-change U.S. net operating loss carryforwards to offset U.S. federal taxable income may be subject to limitations, which
36
could potentially result in increased future tax liability to us. In addition, at the state level, there may be periods during which the
use of NOLs is suspended or otherwise limited, which could accelerate or permanently increase state taxes owed.
Because we do not anticipate paying any cash dividends on our common stock in the foreseeable future, capital
appreciation, if any, would be our stockholders’ only source of gain.
We have never declared or paid any cash dividends on our common shares, and we currently expect that earnings, if any,
and cash flow will primarily be retained and used in our operations, including servicing any debt obligations we may have now
or in the future. Accordingly, although we do not anticipate paying any dividends in the foreseeable future, we may not be able to
generate sufficient cash flow in order to allow us to pay future dividends on, or make any distributions with respect to our common
stock. As a result, capital appreciation, if any, of our common stock would be our stockholders’ sole source of gain on their
investment in our common stock for the foreseeable future.
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Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our corporate headquarters is located at 9393 Towne Centre Drive, San Diego, California 92121 where we occupy
approximately 18,000 square feet of office and lab space. The lease will expire on January 31, 2018. We believe that our existing
and upcoming facilities are adequate to meet our current needs.
Item 3. Legal Proceedings
None.
Item 4. Mine Safety Disclosures
Not applicable.
38
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock has been listed on The NASDAQ Capital Market since July 15, 2013 under the symbol "MRTX".
Prior to that date, there was no public market for our common stock in the United States as our common stock was listed on the
Toronto Stock Exchange.
On March 4, 2016, the last reported sale price for our common stock on The NASDAQ Capital Market was $22.46 per
share. The following table sets forth the range of high and low sales prices per share of our common stock as reported on The
NASDAQ Capital Market for the period indicated.
Year Ended December 31, 2015
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Year Ended December 31, 2014
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
High
Low
$ 43.20
$ 29.14
$ 52.00
$ 20.68
$ 37.43
$ 25.21
$ 30.76
$ 18.26
$ 19.90
$ 13.69
$ 21.58
$ 15.59
$ 23.75
$ 15.86
$ 25.97
$ 16.50
As of March 4, 2016, we had 13 stockholders of record, which excludes stockholders whose shares were held in nominee
or street name by brokers. The actual number of common stockholders is greater than the number of record holders, and includes
stockholders who are beneficial owners, but whose shares are held in street name by brokers and other nominees. This number of
holders of record also does not include stockholders whose shares may be held in trust by other entities. We have never declared
or paid any cash dividends on our capital stock. We currently intend to retain any future earnings for funding operations and,
therefore, do not anticipate paying any cash dividends in the foreseeable future.
39
Stock Performance Graph and Cumulative Total Return
The graph below shows the cumulative total stockholder return assuming the investment of $100 on July 15, 2013 (and the
reinvestment of dividends thereafter) in each of (i) Mirati Therapeutic, Inc.’s common stock, (ii) the NASDAQ Composite Index
and (iii) the NASDAQ Biotechnology Index. The comparisons in the graph below are based upon historical data and are not
indicative of, or intended to forecast, future performance of our common stock or Indexes.
Recent Sales of Unregistered Securities
During the twelve months ended December 31, 2015, we issued and sold the following unregistered securities:
Warrant exercise
In 2011 and 2012, we issued common stock warrants in connection with the issuance of common stock through private
placements. The warrant certificates provide that the warrant holder may elect to exercise their warrant and, in lieu of making the
cash payment upon such exercise, receive upon such exercise a net number of common shares determined according to a formula
prescribed in the warrant certificate. For the twelve months ended December 31, 2015, nine holders of warrants elected to net
exercise their warrants to purchase an aggregate of 1,037,330 shares of common stock, resulting in the issuance of an aggregate
of 809,498 shares of our common stock.
The issuances of the securities described above were deemed to be exempt from registration under the Securities Act of
1933, as amended, in reliance on Rule 506 of Regulation D in that each issuance of securities was to an accredited investor under
Rule 501 of Regulation D and did not involve a public offering. The recipients of securities in each of these transactions acquired
the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate
legends were affixed to the securities issued in these transactions. There were no underwriters employed in connection with any
of the transactions set forth above.
40
Use of Proceeds
We commenced our first public offering in the United States pursuant to a registration statement on Form S-1 (File No.
333-191544) that was declared effective by the SEC on October 23, 2013 and registered an aggregate of 3,250,000 shares of our
common stock for sale to the public at price of $17.50 per share for an aggregate offering price of approximately $56.9 million.
On October 29, 2013, we completed the offering. On November 27, 2013 the underwriters exercised their option to purchase an
additional 87,500 shares of our common stock at a price of $17.50 per share and an aggregate additional offering price of
approximately $1.5 million. Jefferies LLC and Leerink Swann LLC acted as joint book-running managers for the offering, and
Piper Jaffray & Co. served as co-manager for the offering.
The underwriting discounts and commissions connected with the offering totaled approximately $3.5 million. We incurred
additional costs of approximately $0.7 million in offering expenses, which when added to the underwriting discounts and
commissions paid by us, amounts to total fees and costs of approximately $4.2 million. Thus, net offering proceeds to us, after
deducting underwriting discounts and commissions and offering costs, were $54.2 million. No offering costs were paid directly
or indirectly to any of our directors or officers (or their associates) or persons owning ten percent or more of any class of our equity
securities or to any other affiliates.
As of December 31, 2015 we have used all of these funds for preclinical and clinical development of our two lead kinase
programs, MGCD265 and MGCD516, and our HDAC inhibitor, mocetinostat and related administrative support.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
41
Item 6. Selected Consolidated Financial Data
The following table presents selected historical financial data for the years ended December 31, 2015, 2014, 2013, 2012
and 2011. All the selected historical financial data has been derived from our Audited Consolidated Financial Statements and is
stated in thousands except for per share information.
Please read the following selected financial data in conjunction with Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our Audited Consolidated Financial Statements and related Notes thereto
included elsewhere in this Annual Report on Form 10-K.
Year Ended December 31,
2015
2014
2013
2012
2011
Statements of Income Data:
Total revenue
Loss from operations
Net loss
Comprehensive loss
Basic and diluted net loss per share
Weighted average common shares outstanding,
basic and diluted
$
— $
— $
— $
— $
(64,714)
(64,544)
(64,507)
(39,104)
(43,698)
(43,684)
(31,999)
(52,859)
(52,872)
(20,498)
(20,286)
(20,286)
$
(3.82) $
(3.24) $
(4.78) $
(3.00) $
3,144
(10,087)
(9,778)
(9,778)
(1.98)
16,901,826
13,483,467
11,057,040
6,762,985
4,944,184
2015
2014
2013
2012
2011
As of December 31,
Balance Sheet Data:
Cash, cash equivalents and short-term investments $
122,327
$
29,303
$
62,070
$
36,983
$
Working capital
Total assets
Accumulated deficit
Total stockholders' equity
115,604
128,017
(306,633)
118,176
27,261
33,479
(242,089)
28,062
25,563
64,537
(198,391)
25,885
33,989
39,801
(140,491)
34,416
28,445
26,711
31,082
(120,205)
27,305
42
Item 7. 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 consolidated financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K. Some of
the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including
information with respect to our plans and strategy for our business and related financing, includes forward-looking statements
that involve risks and uncertainties. As a result of many factors, including those factors set forth in the "Risk Factors" section of
this Annual Report on Form 10-K, our actual results could differ materially from the results described in or implied by the forward-
looking statements contained in the following discussion and analysis.
References in the following discussion to "we", "our", "us", "Mirati" or "the Company" refer to Mirati Therapeutics, Inc. and its
subsidiaries.
Company Overview
We are a clinical-stage biopharmaceutical company focused on developing a pipeline of targeted oncology products. We
focus our development programs on drugs intended to treat specific genetically defined subsets of cancer patients with unmet
needs. Our clinical pipeline consists of three product candidates: MGCD265, MGCD516 and mocetinostat. MGCD265 and
MGCD516 are orally-bioavailable, spectrum-selective kinase inhibitors with distinct target profiles that are in development to
treat patients with non-small cell lung cancer ("NSCLC") and other solid tumors. MGCD265 is in Phase 2 clinical development
and MGCD516 is in Phase 1b clinical development. Mocetinostat is an orally-bioavailable, Class 1 selective histone deacetylase
("HDAC") inhibitor in Phase 2 clinical development in collaboration with MedImmune, the global biologics research and
development arm of AstraZeneca PLC.
We believe that an increased understanding of the genomic factors that drive tumor cell growth can lead to the development
of cancer drugs that target these genomic factors, resulting in increased efficacy while reducing side effects. We are leveraging
this knowledge to develop targeted cancer therapies to address unmet needs in selected cancer patient populations. Our novel
kinase inhibitors are intended to target specific mutations that drive the growth of cancer or are implicated in cancer drug resistance
or pathogenic processes such as tumor angiogenesis. Our HDAC inhibitor, mocetinostat, acts through important epigenetic
mechanisms the effects of which could potentially enhance the efficacy of immune checkpoint inhibitors when used in combination.
We plan to identify additional opportunities by leveraging our deep scientific understanding of molecular drug targets and
mechanisms of resistance and potentially in-licensing or internally discovering promising, early-stage novel drug candidates.
We were incorporated under the laws of the State of Delaware on April 29, 2013 as Mirati Therapeutics, Inc. On May 8,
2013, we entered into a plan of arrangement with MethylGene, Inc. ("MethylGene Canada") pursuant to which MethylGene Canada
became our wholly owned subsidiary and all of its shareholders became proportionate shareholders of ours.
Program Updates
MGCD265
In September 2015, we reported interim data from the ongoing MGCD265 Phase 1b dose expansion clinical trial disclosing
that two of the four NSCLC patients who were then evaluable (having had at least two on-treatment scans) had confirmed partial
responses ("PRs"), based upon Response Evaluation Criteria in Solid Tumors ("RECIST") criteria and two patients had tumor
regressions that did not meet the RECIST threshold for a PR. Based upon these early signs of clinical efficacy we initiated a single-
arm Phase 2 clinical trial for the treatment of NSCLC patients with genetic alternations in MET in December of 2015. Based on
a meeting with the U.S. Food and Drug Administration, in the Phase 2 trial of MGCD265, if we observe a response rate that is
significantly better than the response rate for currently approved second line therapy, we believe the trial could potentially serve
as a registration enabling trial and qualify for submission for accelerated approval under U.S. Code of Federal Regulations 21
CFR Part 314, Subpart H (Accelerated Approval of New Drugs for Serious or Life-Threatening Illnesses).
We have applied for and received a proposed generic name for MGCD265. The proposed generic name is “glesatinib.”
The proposed generic name will become final once it is published and a comment period expires, which we expect will occur in
the first half of 2016.
43
MGCD516
MGCD516 is currently moving into the Phase 1b dose expansion clinical trial, having recently achieved the maximum
tolerated dose. As a result, we have selected a dose for the dose expansion cohorts and have begun the process of initiating dose
expansion cohorts in selected patients.
We have applied for and received a proposed generic name for MGCD516. The proposed generic name is “sitravatinib.”
The proposed generic name will become final once it is published and a comment period expires, which we expect will occur in
the first half of 2016.
Mocetinostat
We have completed several clinical trials with mocetinostat which enrolled more than 400 patients with a variety of
advanced malignancies. We are in the process of completing Phase 2 trials in bladder cancer and NHL. In both the bladder cancer
and NHL Phase 2 clinical trials patients were selected for inactivating mutations in two histone acetyl transferase genes (CREBBP
and EP300) ("HATs"), using a next generation sequencing assay. Preclinical studies have shown that tumor cells carrying these
HAT inactivating mutations are more sensitive to mocetinostat. At the present time we do not expect to undertake further clinical
trials with mocetinostat as a single agent in bladder cancer or NHL.
Liquidity Overview
At December 31, 2015, we had $122.3 million of cash, cash equivalents and short-term investments compared to 29.3
million at December 31, 2014. We have not generated any revenue from product sales. To date, we have funded our operations
primarily through the sale of our common stock and through up-front payments, research funding and milestone payments under
previous collaborative arrangements. To fund future operations we will likely need to raise additional capital as discussed more
fully below under the heading “Liquidity and Capital Resources.”
We have incurred losses in each year since our inception. Our net losses were $64.5 million, $43.7 million and $52.9
million for the years ended December 31, 2015, 2014 and 2013, respectively. As of December 31, 2015, we had an accumulated
deficit of $306.6 million. Substantially all of our operating losses resulted from expenses incurred in connection with our product
development programs, our research activities and general and administrative costs associated with our operations.
Critical Accounting Policies and Significant Judgments and Estimates
Our discussion and analysis of financial condition and results of operations are based upon our consolidated financial
statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these
financial statements requires us to make significant estimates and judgments that affect the reported amounts of assets, liabilities,
revenue and expenses and related disclosures. On an ongoing basis, our actual results may differ significantly from our estimates.
While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements
appearing elsewhere in this Annual Report on Form 10-K, we believe the following accounting policies to be critical to the
judgments and estimates used in the preparation of our consolidated financial statements.
Accrued Research and Development Expenses
We accrue and expense clinical trial activities performed by third parties based upon estimates of the proportion of work
completed over the life of the individual clinical trial and patient enrollment rates in accordance with agreements established with
Clinical Research Organizations ("CROs") and clinical trial sites. We determine the estimates by reviewing contracts, vendor
agreements and purchase orders, and through discussions with internal clinical personnel and external service providers as to the
progress or stage of completion of trials or services and the agreed-upon fee to be paid for such services. However, actual costs
and timing of clinical trials are highly uncertain, subject to risks and may change depending upon a number of factors, including
our clinical development plan.
We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and
circumstances known to us at that time. If the actual timing of the performance of services or the level of effort varies from the
estimate, we will adjust the accrual accordingly. Nonrefundable advance payments for goods and services, including fees for
process development or manufacturing and distribution of clinical supplies that will be used in future research and development
activities, are deferred and recognized as expense in the period that the related goods are consumed or services are performed.
44
Share-Based Compensation
We measure and recognize compensation expense for share-based payments based on estimated fair value. We estimate
the fair value of stock options granted using the Black-Scholes option-pricing model. The Black-Scholes option- pricing model
requires the use of certain estimates and highly judgmental assumptions that affect the amount of share-based compensation
expense recognized in our consolidated financial statements. These assumptions include the historical volatility of our stock price,
expected term of the options, the risk-free interest rate and expected dividend yields. Share-based compensation is recognized
using the graded accelerated vesting method. If any of the assumptions used in our calculation change significantly, share-based
compensation expense may differ materially from what we have recorded in the current period.
Financial Operations Overview
Research and Development Expenses
Research and development expenses consist primarily of:
•
•
•
salaries and related expenses for personnel, including expenses related to stock options or other share-based
compensation granted to personnel in development functions;
fees paid to external service providers such as CROs and contract manufacturing organizations related to clinical
trials;
contractual obligations for clinical development, clinical sites, manufacturing and scale-up, and formulation of
clinical drug supplies; and
•
costs for allocated facilities and depreciation of equipment.
We record research and development expenses as incurred. We account for nonrefundable advance payments for goods
and services that will be used in future research and development activities as expense when the services have been performed or
when the goods have been received. At this time, due to the risks inherent in the clinical development process and the early stage
of our product development programs we are unable to estimate with any certainty the costs we will incur in the continued
development of MGCD265, MGCD516 and mocetinostat. The process of conducting clinical trials necessary to obtain regulatory
approval and manufacturing scale-up to support expanded development and potential future commercialization is costly and time
consuming. Any failure by us or delay in completing clinical trials, manufacturing scale up or in obtaining regulatory approvals
could lead to increased research and development expense and, in turn, have a material adverse effect on our results of operations.
We expect that our research and development expenses may increase if we are successful in advancing MGCD265, MGCD516,
mocetinostat or any of our preclinical programs into advanced stages of clinical development.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and related benefits, including share-based
compensation, related to our executive, finance, business development, legal and support functions. Other general and
administrative expenses include professional fees for auditing and tax services, rent and utilities and insurance.
45
Results of Operations
Comparison of the Years Ended December 31, 2015 and 2014
The following table summarizes our results of operations for the year ended December 31, 2015 and 2014 (in thousands):
Research and development expenses
General and administrative expenses
Restructuring costs
Other income/(expense), net
Change in fair value of warrant liability
Research and Development Expenses
Year Ended December 31,
2015
2014
Increase
(Decrease)
$
48,959
$
26,071
$
22,888
15,755
—
170
—
12,699
334
(77)
(4,517)
3,056
(334)
247
4,517
Our research and development efforts during the years ended December 31, 2015 and 2014 were focused primarily on
our oncology programs, including our two lead kinase programs, MGCD265 and MGCD516, and our HDAC inhibitor program,
mocetinostat. The following table summarizes our research and development expenses, in thousands:
Third-party development expense:
MGCD265
MGCD516
Mocetinostat
MGCD 290*
Total third-party development expense
Internal research and development expense
Research and development expense
*Development of MGCD290 ceased in early 2013
Year Ended December 31,
2015
2014
Increase
(Decrease)
$
21,699
$
7,273
$
14,426
3,250
5,371
—
30,320
18,639
48,959
2,932
4,507
123
14,835
11,236
26,071
318
864
(123)
15,485
7,403
22,888
Research and development expenses for the year ended December 31, 2015 were $49.0 million compared to $26.1
million during the year ended December 31, 2014. The increase of $22.9 million for the year ended December 31, 2015 primarily
relates to an increase in third-party development expense of $15.5 million and an increase of internal research and development
expense of $7.4 million. The increase in third-party development expense primarily relates to an increase in expenses associated
with our ongoing clinical trials including an increase in related manufacturing expenses, primarily for MGCD265 which is currently
in Phase 2, and to a lesser extent mocetinostat. The increase in our internal research and development expense, which includes
employee salaries and related expense, facilities expense and early discovery costs, is due to an increase in salaries and related
expense, which is driven by an increase in research and development employees during the year ended December 31, 2015,
increased costs associated with our early discovery efforts and increased data management costs. Based upon our current
development plans we expect our research and development expenses to continue to increase as we advance the clinical development
of our current and future drug candidates.
General and Administrative Expenses
General and administrative expenses for the year ended December 31, 2015 were $15.8 million compared to $12.7 million
for the same period in 2014. The increase of $3.1 million for the year ended December 31, 2015 is primarily the result of increased
share-based compensation expenses and increased salaries and related expenses due to increased headcount in 2015.
46
Other Income (Expense), Net
Other income (expense), net for the year ended December 31, 2015 consisted primarily of interest income of $0.2 million.
Other income (expense), net for the year ended December 31, 2014 was expense of $0.1 million primarily due to the impact of
foreign exchange losses partially offset by interest income.
Change in Fair Value of Warrant Liability
The change in fair value of warrant liability represents expense or income associated with fair value adjustments to the
warrant liability recorded during the period. During the year ended December 31, 2014, we recorded expense of $4.5 million
associated with the change in fair value of warrant liability. During the second half of 2014, we amended all of the outstanding
warrant agreements to allow for the warrants to be denominated in U.S. Dollars. As a result of this amendment, the warrants
qualified for equity classification and were reclassified into stockholders’ equity at their fair value as of the amendment dates and
revaluations of fair value are no longer required.
Comparison of the Years Ended December 31, 2014 and 2013
The following table summarizes the results of our operations for the years ended December 31, 2014 and 2013 (in
thousands):
Research and development, net
General and administrative
Restructuring costs
Other income (expense), net
Change in fair value of warrant liability
Research and Development Expenses
Year Ended December 31,
2014
2013
Increase
(Decrease)
$
26,071
$
19,797
$
12,699
334
(77)
(4,517)
11,177
1,025
(1,084)
(19,799)
6,274
1,522
(691)
1,007
15,282
Our research and development efforts during the years ended December 31, 2014 and 2013 were focused primarily on
our oncology programs, including our two lead kinase programs, MGCD265 and MGCD516, and our HDAC inhibitor program,
mocetinostat. The following table summarizes our research and development expenses, in thousands:
Third-party development expense:
MGCD265
MGCD516
Mocetinostat
MGCD290*
Total third-party development expense
Internal research and development expense
Research and development expense, gross
Less: Investment tax credits
Research and development expense
*Development of MGCD290 ceased in early 2013
Year Ended December 31,
2014
2013
Increase
(Decrease)
$
$
7,273
2,932
4,507
123
14,835
11,236
26,071
—
$
26,071
$
6,588
2,495
2,580
1,629
13,292
7,336
20,628
(831)
19,797
$
$
685
437
1,927
(1,506)
1,543
3,900
5,443
831
6,274
Research and development expenses for the year ended December 31, 2014 were $26.1 million compared to $19.8
million during the year ended December 31, 2013. The increase of $6.3 million for the year ended December 31, 2014 primarily
related to an increase in third-party development expense of $1.5 million, an increase of internal research and development expense
of $3.9 million and the absence of investment tax credits ("ITCs"), of $0.8 million during 2014. The increase in third-party
development expense related to an increase in expenses associated with our ongoing clinical trials for our oncology candidates,
MGCD265, MGCD516 and mocetinostat and related manufacturing expenses. The increase in internal research and development
47
expense, which includes employee salaries and related expense, facilities expense and early discovery costs, was due to an increase
in salaries and related expense, which was largely due to increased share-based compensation expense. Prior to 2014, we were
eligible to claim ITCs from a Canadian provincial tax authority due to our research and development operations performed within
Canada. As a result of our relocation from Montreal, Canada to the United States, we were no longer eligible for these ITCs. The
aforementioned increased costs were offset by a decrease in costs for MGCD290, which we are no longer developing internally,
and the absence of costs incurred in 2013 associated with management changes made during 2013.
General and Administrative Expenses
General and administrative expenses for the year ended December 31, 2014 were $12.7 million compared to $11.2 million
for the same period in 2013. The increase of $1.5 million for the year ended December 31, 2014 was the result of an increase in
salaries and related expense (which is primarily the result of higher stock based compensation costs), increased legal and consulting
costs and increased costs for accounting, tax and insurance. These increased costs largely reflected our status as a U.S. public
company. Partially offsetting these increases were one-time costs incurred in 2013 associated with the corporate restructuring and
listing of our shares of common stock on The NASDAQ Capital Market.
Restructuring Costs
We incurred restructuring costs of $0.3 million and $1.0 million for the years ended December 31, 2014 and 2013,
respectively, related to the closure of our Montreal, Quebec and Princeton, New Jersey facilities. The offices were closed due to
the consolidation of our operations to our San Diego facility, with employee separation charges accounting for the majority of the
restructuring costs. The restructuring activities associated with the office closures were substantially complete as of March 31,
2014.
Change in Fair Value of Warrant Liability
The change in fair value of warrant liability represented expense or income associated with fair value adjustments to the
warrant liability recorded during the period. During the year ended December 31, 2014 and 2013, we recorded expense of $4.5
million and $19.8 million, respectively, associated with the change in fair value of warrant liability. During the third and fourth
quarters of 2014, we amended all of the outstanding warrant agreements to allow for the warrants to be denominated in U.S.
Dollars. As a result of this amendment, the warrants qualified for equity classification and were reclassified into stockholders’
equity at their fair value as of the amendment date and revaluations of fair value were no longer required.
Other Income (Expense), Net
Other income (expense), net consisted primarily of interest income and foreign exchange gains and losses. Other income
(expense), net for the year ended December 31, 2014 and 2013 was expense of $0.1 million and $1.1 million, respectively. The
decrease in expense primarily reflects the impact of foreign exchange rates as we operated in U.S. dollars throughout the year
ended December 31, 2014.
Liquidity and Capital Resources
To date, we have funded our operations primarily through the sale of our common stock and through up-front payments,
research funding and milestone payments under previous collaborative arrangements. Since inception, we have primarily devoted
our resources to funding research and development programs, including discovery research, preclinical and clinical development
activities.
At December 31, 2015, we had $122.3 million of cash, cash equivalents and short-term investments compared to $29.3
million at December 31, 2014. In February 2015, we completed a public offering of 2.6 million shares of our common stock for
net proceeds of approximately $48.4 million. Subsequently, in September 2015, we completed an additional public offering of 2.3
million shares of our common stock for net proceeds of approximately $94.9 million.
Based on our current and anticipated level of operations, we believe that our operating cash flows and cash on hand will
be sufficient to meet our anticipated obligations for at least the next twelve months. To fund future operations we will likely need
to raise additional capital. The amount and timing of future funding requirements will depend on many factors, including the
timing and results of our ongoing development efforts, the potential expansion of our current development programs, potential
new development programs and related general and administrative support. We anticipate that we will seek to fund our operations
through public or private equity or debt financings or other sources, such as potential collaboration agreements. We cannot make
assurances that anticipated additional financing will be available to us on favorable terms, or at all. Although we have previously
48
been successful in obtaining financing through our equity securities offerings, there can be no assurance that we will be able to
do so in the future.
The following table provides a summary of the net cash flow activity for each of the periods set forth below (in thousands):
Net cash used in operating activities
Net cash provided by (used in) investing activities
Net cash provided by financing activities
Increase (decrease) in cash
Net cash used in operating activities
Year Ended December 31,
2015
(50,714)
(50,753)
144,367
42,900
2014
(32,748)
24,219
887
(7,642)
2013
(29,455)
(29,470)
54,757
(4,168)
Net cash used for operating activities was $50.7 million, $32.7 million and $29.5 million for the years ended December 31,
2015, 2014 and 2013, respectively. Cash used in operating activities during 2015 primarily related to our net losses of $64.5
million, adjusted for non-cash items such as share-based compensation expense of $10.3 million, amortization of premium on
investments of $0.3 million, and net cash inflows from a change in our operating assets and liabilities of $3.0 million. Cash used
in operating activities during 2014 primarily related to our of net losses of $43.7 million, adjusted for non-cash items such as the
share-based compensation expense of $7.1 million, change in fair value of warrant liability of $4.5 million, amortization of premium
on investment of $0.5 million and net cash outflows from a change in our operating assets and liabilities of $1.4 million. Cash
used in operating activities during 2013 primarily related to our of net losses of $52.9 million, adjusted for non-cash items such
as the change in fair value of warrant liability of $19.8 million, change in fair value adjustment of share-based compensation
liability of $1.4 million, shared-based compensation expense of $1.8 million, and net cash inflows from a change in our operating
assets and liabilities of $0.3 million.
Net cash (used in) provided by investing activities
Investing activities used cash of $50.8 million and $29.5 million for the years ended December 31, 2015 and 2013,
respectively and provided cash of $24.2 million for the year ended December 31, 2014. The net cash used by investing activities
during the year ended December 31, 2015 is primarily as a result of increased purchases of short-term investments due to our
February and September 2015 public offerings of common stock partially offset by disposals and maturities of short-term
investments. The net cash provided by investing activities during 2014 was primarily due to disposal and maturities of short-term
investments offset by purchases of short-term investments. The net cash used by investing activities during 2013 was primarily
due to purchase of short-term investments, offset by disposal and maturities of short-term investments.
Net cash provided by financing activities
Net cash provided by financing activities was $144.4 million, $0.9 million and $54.8 million for the years ended
December 31, 2015, 2014 and 2013, respectively. Net cash provided by financing activities for the year ended December 31, 2015
consists of net proceeds from the issuance of common stock from our February 2015 and September 2015 public offerings of
common stock of $143.3 million, proceeds from exercise of common stock options and warrants of $0.6 million and proceeds
from stock issuances under the employee stock purchase plan of $0.5 million. Net cash provided by financing activities during
2014 consisted of proceeds from exercise of common stock options and warrants of $0.9 million. Net cash provided by financing
activities during 2013 consisted primarily of issuance of common stock, net of issuance costs, of $54.2 million and proceeds from
exercise of common stock options and warrants of $0.6 million.
49
Contractual Obligations and Commitments
The following table summarizes our contractual obligations and commitments as of December 31, 2015 that will affect
our future liquidity (in thousands):
Operating lease obligations(1)
Total Contractual Obligations
Total
Less Than
1 year
1 -3
Years
3 -5
Years
More Than
5 Years
$
$
627
627
$
$
296
296
$
$
331
331
$
$
— $
— $
—
—
(1) In June 2014 we entered into a multi-year non-cancelable building lease for office space in San Diego, California. The lease
expires in January 2018.
We enter into contracts in the normal course of business with clinical sites for the conduct of clinical trials, CROs for
clinical research studies, professional consultants for expert advice and other vendors for clinical supply manufacturing or other
services. These contracts generally provide for termination on notice, and therefore are cancelable contracts and not included in
the table of contractual obligations and commitments.
Off-Balance Sheet Arrangements
During the years ended December 31, 2015 and 2014, we did not have any off-balance sheet arrangements (as defined
by applicable SEC regulations) that are reasonably likely to have a current or future material effect on our financial condition,
results of operations, liquidity, capital expenditures or capital resources.
JOBS Act
In April 2012, the JOBS Act was enacted. Section 107 of the JOBS Act provides that an emerging growth company can
take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or
revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until
those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended
transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of
such standards is required for other companies.
We are in the process of evaluating the benefits of relying on other exemptions and reduced reporting requirements
provided by the JOBS Act. Subject to certain conditions set forth in the JOBS Act, as an “emerging growth company,” we intend
to rely on certain of these exemptions, including without limitation with respect to, (1) providing an auditor’s attestation report
on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act and (2) complying
with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm
rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements,
known as the auditor discussion and analysis. We will remain an emerging growth company until the earliest of (1) the end of the
fiscal year in which the market value of our common stock that is held by non-affiliates exceeds $700 million as of the end of the
second fiscal quarter, (2) the end of the fiscal year in which we have total annual gross revenue of $1 billion or more during such
fiscal year, (3) the date on which we issue more than $1 billion in non-convertible debt in a three-year period, or (4) December
31, 2018.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Some of our short-term investments have market risk in that a change in prevailing interest rates may cause the principal
amount of the investment to fluctuate. Financial instruments that potentially subject us to significant concentrations of credit risk
consist primarily of cash, cash equivalents and short-term investments. We invest our excess cash primarily in commercial paper
and debt instruments of financial institutions, corporations, U.S. government-sponsored agencies and the U.S. Treasury. We mitigate
credit risk by maintaining a well-diversified portfolio and limiting the amount of investment exposure as to institution, maturity
and investment type. We invest our excess cash in accordance with our investment policy.
Because of the short-term maturities of our cash equivalents and short-term investments, we do not believe that an increase
in market rates would have any significant impact on the realized value of our investments. If a 1% change in interest rates were
to have occurred on December 31, 2015, this change would not have had a material effect on the fair value of our investment
portfolio as of that date.
50
Item 8. Financial Statements and Supplementary Data
The financial statements and supplemental data required by this item are set forth at the pages indicated in Part IV, Item 15
(a)(1) of this annual report.
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15(b) and Rule 15d-15(b) of the Exchange Act, our management, including our principal
executive officer and our principal financial officer, conducted an evaluation as of the end of the period covered by this Annual
Report on Form 10-K of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that
evaluation, management has concluded that as of December 31, 2015, the Company’s disclosure controls and procedures were
effective at the reasonable assurance level and we believe the consolidated financial statements included in this Form 10-K for
the year ended December 31, 2015 present, in all material respects, our financial position, results of operations, comprehensive
loss and cash flows for the periods presented in conformity with U.S. generally accepted accounting principles.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as
such term is defined in Exchange Act Rule 13a-15(f). Internal control over financial reporting is a process designed under the
supervision and with the participation of our management, including our principal executive officer and principal financial officer,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with accounting principles generally accepted in the United States of America.
As of December 31, 2015, our management assessed the effectiveness of our internal control over financial reporting
using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-
Integrated Framework (2013 Framework). Based on this assessment, our management concluded that, as of December 31, 2015,
our internal control over financial reporting was effective based on those criteria.
This Annual Report on Form 10-K does not include an attestation report of our registered public accounting firm due
to a transition period established by the JOBS Act for emerging growth companies.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting identified in management's evaluation pursuant to
Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the quarter ended December 31, 2015 that materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
Recently Adopted Accounting Pronouncements
See “Notes to Financial Statements-Note 3-Recent Accounting Pronouncements” of our annual financial statements.
51
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The information required by this item with respect to directors is incorporated by reference from the information under
the captions "Election of Directors," "Section 16(a) Beneficial Ownership Reporting Compliance," and "Code of Ethics" contained
in the proxy statement to be filed with the SEC pursuant to Regulation 14A in connection with our 2016 annual meeting of
stockholders. The information required by this item with respect to executive officers appears under Part I of this annual report
on Form 10-K under the caption "Business-Executive Officers and Directors."
Item 11. Executive Compensation
The information required by this item is incorporated by reference to the information under the captions "Non-Employee
Director Compensation," "Executive Compensation" and "Compensation Committee Interlocks and Insider Participation"
contained in the proxy statement to be filed with the SEC pursuant to Regulation 14A in connection with our 2016 annual meeting
of stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
The information required by this item is incorporated by reference to the information under the captions "Security
Ownership of Certain Beneficial Owners and Management" and "Equity Compensation Plan Information" contained in the proxy
statement to be filed with the SEC pursuant to Regulation 14A in connection with our 2016 annual meeting of stockholders.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated by reference to the information under the captions "Election of
Directors" and "Certain Relationships and Related Transactions" contained in the proxy statement to be filed with the SEC pursuant
to Regulation 14A in connection with our 2016 annual meeting of stockholders.
Item 14. Principal Accountant Fees and Services
The information required by this item is incorporated by reference to the information under the caption contained in
"Ratification of Selection of Independent Registered Public Accounting Firm" contained in the proxy statement to be filed with
the SEC pursuant to Regulation 14A in connection with our 2016 annual meeting of stockholders.
52
Item 15. Exhibits, Financial Statement Schedules
PART IV
1. Financial Statements. We have filed the following documents as part of this Annual Report:
Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Financial Statements:
Consolidated Balance Sheets
Consolidated Statements of Operations and Comprehensive Loss
Consolidated Statements of Changes in Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Page(s)
54
56
57
58
59
60
2. Financial Statement Schedules. All schedules are omitted because they are not applicable or the required information is shown
in the Financial Statements or notes thereto.
53
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Mirati Therapeutics, Inc.
We have audited the accompanying consolidated balance sheets of Mirati Therapeutics, Inc. as of December 31, 2015 and 2014,
and the related consolidated statements of operations and comprehensive loss, changes in stockholders’ equity, and cash flows for
each of the two years in the period ended December 31, 2015. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial
reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position
of Mirati Therapeutics, Inc. at December 31, 2015 and 2014, and the consolidated results of its operations and its cash flows for
each of the two years in the period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles.
San Diego, CA
March 9, 2016
/s/ Ernst & Young LLP
54
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Mirati Therapeutics, Inc.
We have audited the consolidated balance sheet of Mirati Therapeutics, Inc. as of December 31, 2013, and the accompanying
related consolidated statements of operations and comprehensive loss, changes in stockholders’ equity, and cash flows for the year
ended December 31, 2013. These financial statements are the responsibility of the Company’s management. Our responsibility is
to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over
financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining,
on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position
of Mirati Therapeutics, Inc. at December 31, 2013, and the consolidated results of its operations and its cash flows for the year
ended December 31, 2013, in conformity with U.S. generally accepted accounting principles.
Montreal, Canada
March 17, 2014
________________________
(1)CPA auditor, CA, public accountancy permit no. A120254
/s/Ernst & Young LLP(1)
55
Mirati Therapeutics, Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
ASSETS
Current assets
Cash and cash equivalents
Short-term investments
Other current assets
Total current assets
Property and equipment, net
Other long-term assets
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities
Total current liabilities
Other liability
Total liabilities
Commitments and contingencies
Stockholders' equity
December 31,
2015
2014
$
49,493
$
72,834
3,075
125,402
614
2,001
6,593
22,710
3,354
32,657
496
326
$
$
128,017
$
33,479
9,798
$
9,798
43
9,841
5,396
5,396
21
5,417
Preferred stock, $0.001 par value, 10,000,000 shares authorized; none issued and
outstanding at both December 31, 2015 and December 31, 2014
Common stock, $0.001 par value; 100,000,000 authorized; 19,282,935 and 13,566,726
issued and outstanding at December 31, 2015 and December 31, 2014, respectively
Additional paid-in capital
Accumulated other comprehensive income
Accumulated deficit
Total stockholders' equity
—
19
415,232
9,558
(306,633)
118,176
—
14
260,616
9,521
(242,089)
28,062
Total liabilities and stockholders' equity
$
128,017
$
33,479
See accompanying notes
56
Mirati Therapeutics, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except share and per share data)
Year Ended December 31,
2015
2014
2013
Expenses
Research and development
General and administrative
Restructuring costs
Total operating expenses
Loss from operations
Other income (expense), net
Change in fair value of warrant liability
Loss before income taxes
Income tax benefit
Net loss
Unrealized gain (loss) on available-for-sale investments
Comprehensive loss
Basic and diluted net loss per share
$
48,959
$
26,071
$
15,755
—
64,714
(64,714)
170
—
(64,544)
—
(64,544) $
$
37
(64,507) $
(3.82) $
12,699
334
39,104
(39,104)
(77)
(4,517)
(43,698)
—
(43,698) $
14
$
(43,684) $
(3.24) $
$
$
$
$
Weighted average common shares outstanding, basic and diluted
16,901,826
13,483,467
19,797
11,177
1,025
31,999
(31,999)
(1,084)
(19,799)
(52,882)
23
(52,859)
(13)
(52,872)
(4.78)
11,057,040
See accompanying notes
57
Mirati Therapeutics, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands, except share data)
Common Stock
Shares
Amount
Common
Stock
Warrants
Additional
paid-in
capital
Accumulated
other
comprehensive
income
Accumulated
deficit
Total
stockholders'
equity
$ 11,153
$ 154,224
$
9,520
$
(140,491) $
34,416
Balance at January 1, 2013
9,957,725
$
Net loss for the year
Share-based compensation expense
Reclassification of warrants
Reclassification of stock option liability
—
—
—
—
Issuance of common stock, net of costs
3,337,500
Exercise of options for cash
Exercise of warrants for cash
Net exercise of warrants
Unrealized loss on investments
40,534
2,896
108,321
—
Balance at December 31, 2013
13,446,976
$
Net loss for the year
Share-based compensation expense
Reclassification of warrants from liability
Exercise of options for cash
Net exercise of warrants
Unrealized gain on investments
—
—
—
76,224
43,526
—
Balance at December 31, 2014
13,566,726
$
Net loss for the year
Share-based compensation expense
Issuance of common stock, net of costs
Issuance of common stock from ESPP
purchase
Exercise of options for cash
Net exercise of warrants
Unrealized gain on investments
—
—
4,837,500
32,645
36,566
809,498
—
Balance at December 31, 2015
19,282,935
$
10
—
—
—
3
—
—
—
—
13
—
—
—
1
—
—
14
—
—
4
—
—
1
—
19
— (11,153)
—
—
—
—
—
—
—
—
—
1,823
—
1,369
54,193
540
21
2,586
—
—
—
—
—
—
—
—
—
(13)
(52,859)
(52,859)
—
1,823
(5,041)
(16,194)
—
—
—
—
—
—
1,369
54,196
540
21
2,586
(13)
$
— $ 214,756
$
9,507
$
(198,391) $
25,885
—
—
—
—
—
—
—
7,050
36,931
886
993
—
—
—
—
—
—
14
(43,698)
(43,698)
—
—
—
—
—
7,050
36,931
887
993
14
$
— $ 260,616
$
9,521
$
(242,089) $
28,062
—
—
—
—
—
—
—
—
10,254
143,289
522
552
(1)
—
—
—
—
—
—
—
37
(64,544)
(64,544)
—
—
—
—
—
—
10,254
143,293
522
552
—
37
$
— $ 415,232
$
9,558
$
(306,633) $
118,176
See accompanying notes
58
Mirati Therapeutics, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended December 31,
2015
2014
2013
$ (64,544) $ (43,698) $
(52,859)
212
337
10,254
—
—
—
—
—
279
(1,675)
4,370
53
(50,714)
(104,954)
54,530
(329)
—
(50,753)
143,293
522
552
144,367
42,900
6,593
199
534
7,050
—
—
4,517
—
13
(1,209)
(326)
151
21
(32,748)
(10,468)
35,073
(386)
—
24,219
—
—
887
887
(7,642)
14,235
171
—
1,823
40
(70)
19,799
1,369
—
340
—
(68)
—
(29,455)
(68,408)
39,138
(204)
4
(29,470)
54,196
—
561
54,757
(4,168)
18,403
$
49,493
$
6,593
$
14,235
$
— $
—
— $
993
35
2,586
Operating activities:
Net loss
Non-cash adjustments reconciling net loss to operating cash flows
Depreciation of property and equipment
Amortization of premium on investments
Share-based compensation expense
Loss on disposal of property and equipment
Change in lease incentive liability
Change in fair value of warrant liability
Change in fair value adjustment of share-based compensation liability
Change in restructuring costs
Changes in operating assets and liabilities
Other current assets
Other long-term assets
Accounts payable and accrued liabilities
Other current and long term liabilities
Cash flows used in operating activities
Investing activities:
Purchases of short-term investments
Disposal and maturities of short-term investments
Purchases of property and equipment
Proceeds from disposal of property and equipment
Cash flows (used in) provided by investing activities
Financing activities:
Proceeds from issuance of common stock, net of issuance costs
Proceeds from issuance under employee stock purchase plan
Proceeds from exercise of common stock options and warrants
Cash flows provided by financing activities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplemental disclosures of cash flow information:
Income taxes paid
Net exercise of warrants
See accompanying notes
59
Mirati Therapeutics, Inc.
Notes to Consolidated Financial Statements
December 31, 2015
1. Description of Business
Mirati Therapeutics, Inc. ("Mirati" or the "Company") is a clinical-stage biopharmaceutical company focused on
developing a pipeline of targeted oncology products. The Company focuses its development programs on drugs intended to treat
specific genetically defined and selected subsets of cancer patients with unmet needs.
The Company's common stock has been listed on the NASDAQ Capital Market since July 15, 2013 under the ticker
symbol "MRTX." The Company has a wholly owned subsidiary in Canada, MethylGene, Inc. ("MethylGene"). MethylGene’s
common stock was listed on the Toronto Stock Exchange from June 29, 2004 until July 26, 2013 under the ticker symbol "MYG."
The Company also has an indirect, wholly-owned subsidiary, MethylGene US Inc., which was incorporated in Princeton, New
Jersey on December 20, 2011 and started business activity in 2012. MethylGene US Inc. ceased operations effective January 1,
2014. During the first half of 2013, the Company conducted the majority of its operations through MethylGene and MethylGene
US Inc. As a result of the arrangement agreement discussed in Note 2 under the heading "Basis of Presentation," Mirati became
the parent company in June 2013 and primary operating company during the last half of 2013. Refer to Note 2 for further discussion
of the Company’s corporate structure.
2. Summary of Significant Accounting Policies
Basis of Presentation
These consolidated financial statements are prepared in accordance with accounting principles generally accepted in the
United States ("U.S. GAAP"). These consolidated financial statements include the accounts of the Company, MethylGene and
MethylGene US Inc. All significant inter-company transactions, balances and expenses have been eliminated upon consolidation.
Mirati was incorporated under the laws of the State of Delaware on April 29, 2013. On May 8, 2013, the Company's
Board of Directors approved and the Company entered into an arrangement agreement with MethylGene. Upon completion of the
Arrangement, MethylGene became the Company's wholly-owned subsidiary.
These consolidated financial statements are presented in United States ("U.S.") Dollars, which effective January 1, 2013,
is also the functional currency of the Company.
Use of Estimates
The preparation of the Company's audited consolidated financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period.
Reported amounts and note disclosures reflect the overall economic conditions that are most likely to occur and anticipated
measures management intends to take. Actual results could differ materially from those estimates. Estimates and assumptions are
reviewed quarterly. Any revisions to accounting estimates are recognized in the period in which the estimates are revised and in
any future periods affected.
Cash, Cash Equivalents and Short-term Investments
Cash and cash equivalents consist of cash and highly liquid securities with original maturities at the date of acquisition
of ninety days or less. Investments with an original maturity of more than ninety days are considered short-term investments and
have been classified by management as available-for-sale. These investments are classified as current assets, even though the
stated maturity date may be one year or more beyond the current balance sheet date, which reflects management’s intention to use
the proceeds from sales of these securities to fund its operations, as necessary. Such investments are carried at fair value, with
unrealized gains and losses included as a separate component of stockholders’ equity. Realized gains and losses from the sale of
available-for-sale securities or the amounts, net of tax, reclassified out of accumulated other comprehensive income, if any, are
determined on a specific identification basis.
60
Concentration of Credit Risk
The Company invests its excess cash in accordance with its investment policy. The Company's investments are comprised
primarily of commercial paper and debt instruments of financial institutions, corporations, U.S. government-sponsored agencies
and the U.S. Treasury. The Company mitigates credit risk by maintaining a diversified portfolio and limiting the amount of
investment exposure as to institution, maturity and investment type. Financial instruments that potentially subject the Company
to significant credit risk consist principally of cash equivalents and short-term investments.
Foreign Currency Transactions
Foreign currency transactions are initially recorded by the Company using the exchange rates prevailing at the date of
the transaction. At the balance sheet date, monetary assets and liabilities denominated in foreign currencies are translated at the
period-end rates of exchange. Non-monetary assets and liabilities are translated at the historical exchange rates. Exchange gains
and losses arising from the translation of foreign currency items are included in other income (expense) in the Consolidated
Statements of Operations and Comprehensive Loss. The Company recognized net foreign exchange losses of $0.1 million, $0.2
million, and $1.3 million for the years ended December 31, 2015, 2014 and 2013, respectively.
Property and Equipment
Property and equipment is stated at historical cost less accumulated depreciation. Historical cost includes expenditures
that are directly attributable to the acquisition of the items. All repairs and maintenance are charged to net loss during the financial
period in which they are incurred.
Depreciation of property and equipment is calculated using the straight-line method over the estimated useful lives of
the assets, as follows:
Computer equipment
Office and other equipment
Laboratory equipment
Leasehold improvements
3 years
6 years
6 years
The lesser of the lease term or the life of the asset
On disposal or impairment of property and equipment, the cost and related accumulated depreciation is removed from
the consolidated financial statements and the net amount, less any proceeds, is included in net loss.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that
the carrying value of an asset may not be recoverable. If such circumstances are determined to exist, an estimate of undiscounted
future cash flows produced by the long-lived asset, including its eventual residual value, is compared to the carrying value to
determine whether impairment exists. In the event that such cash flows are not expected to be sufficient to recover the carrying
amount of the assets, the assets are written-down to their estimated fair values. Fair value is estimated through discounted cash
flow models to project cash flows from the asset. The Company recognized no impairment charges for the year ended December
31, 2015 and immaterial impairment charges related to property and equipment for the years ended December 31, 2014 and 2013.
Reclassification of Warrants
In 2011 and 2012, MethylGene issued common stock warrants in connection with the issuance of common stock through
private placements (the "2011 Warrants" and the "2012 Warrants"). The exercise prices of the 2011 and 2012 Warrants were
denominated in Canadian dollars. Upon the issuance of the 2011 and 2012 Warrants, the net proceeds were allocated to common
stock and warrants based on their relative fair values, and the fair value of the issued common stock warrants was calculated
utilizing the Black-Scholes option-pricing model. The allocated fair value was then recorded as warrants within stockholders’
equity on the consolidated balance sheet.
Effective January 1, 2013, the Company changed its functional currency which changed how the 2011 and 2012 warrants
were accounted for as they continued to have exercise prices denominated in Canadian dollars. Upon the change in functional
currency, the warrants were classified as a current liability and a warrant liability of $16.2 million which represented the fair market
value of the warrants at that date in accordance with accounting standards. The initial fair value recorded as warrants within
stockholders’ equity of $11.2 million was reversed. The change in fair value related to periods prior to January 1, 2013 of $5.0
61
million was recorded as an adjustment to accumulated deficit. At each reporting period subsequent to January 1, 2013, the fair
value of the warrant liability was recalculated and any corresponding increase or decrease to the warrant liability was recorded as
change in fair value of warrant liability on the consolidated statement of operations and comprehensive loss. The estimated fair
value was determined using the Black-Scholes option-pricing model based on the estimated value of the underlying common stock
at the valuation measurement date, the remaining contractual term of the warrants, risk-free interest rates, expected dividends and
expected volatility of the price of the underlying common stock. During the second half of 2014, the Company amended all of its
outstanding warrant agreements to allow for the warrants to be denominated in U.S. Dollars. As a result of this amendment, the
amended warrants qualified for equity classification and were reclassified into stockholders’ equity at their fair value as of the
amendment date, and as of the amendment date, revaluations of fair value are no longer required.
For the year ended December 31, 2015 the company recorded no warrant valuation expense. For the years ended December
31, 2014 and 2013, the Company recorded warrant valuation expense of $4.5 million and $19.8 million, respectively, which is
reported as change in fair value of warrant liability in the condensed consolidated statement of operations and comprehensive loss.
Reclassification of Share-Based Compensation Liability
The Company granted stock options denominated in Canadian dollars under its 1997 Equity Plan to Canadian and U.S.
employees and directors until July 26, 2013. Following the delisting of the Company’s shares from the Toronto Stock Exchange,
the options denominated in Canadian dollars that were granted to U.S.-based employees and U.S.-based directors were subject to
liability accounting ("liability options") with fair value calculated using the Black-Scholes option-pricing model. The Company
revalued the liability options as of July 26, 2013 and recorded a share-based compensation liability of $1.1 million with a
corresponding reduction of additional paid-in capital.
At each reporting period subsequent to July 26, 2013, the Company adjusted the fair value of the liability options and
any corresponding increase or decrease to the liability was recorded as either a reduction of additional paid in capital or as stock
compensation expense on the consolidated statement of operations and comprehensive loss, as appropriate. During the year ended
December 31, 2013 these fair value adjustments resulted in an increase to additional paid in capital of $0.3 million and total stock
compensation expense of $1.4 million. Effective November 30, 2013 the Company amended the agreements underlying the liability
options such that the exercise price was converted from Canadian dollars to the equivalent U.S. dollar exercise price by applying
the exchange rate for the conversion of Canadian dollars into U.S. dollars based on the Bank of Canada’s noon buying rate for
one U.S. dollar on the date the option was granted. The fair value of the liability options as of November 30, 2013 was $2.2 million
and was reclassified from share-based compensation liability to additional paid-in capital.
Share-Based Compensation
We measure and recognize compensation expense for share-based payments based on estimated fair value. We estimate
the fair value of stock options granted using the Black-Scholes option-pricing model. The Black-Scholes option- pricing model
requires the use of certain estimates and highly judgmental assumptions that affect the amount of share-based compensation
expense recognized in our consolidated financial statements. These assumptions include the historical volatility of our stock price,
expected term of the options, the risk-free interest rate and expected dividend yields. Share-based compensation is recognized
using the graded accelerated vesting method. If any of the assumptions used in our calculation change significantly, share-based
compensation expense may differ materially from what we have recorded in the current period.
Restructuring
Restructuring activities relate to the 2013 consolidation of the Company’s operations to the Company’s San Diego, California
facility and were reported as a separate line item in the accompanying condensed consolidated statement of operations and
comprehensive loss. The restructuring activities were completed as of March 31, 2014, with all restructuring costs incurred paid
as of March 31, 2014.
Investment Tax Credits
The Company's accounts include claims for investment tax credits ("ITCs") relating to scientific research and experimental
development activities of the Company. The qualification and recording of these activities for investment tax credit purposes are
established by the Canadian federal and Provincial Tax Acts and are subject to audit by the taxation authorities. Refundable ITCs
are reflected as reductions of expenses or reductions of the cost of the assets to which they relate when there is reasonable assurance
that the assistance will be received and all conditions have been complied with. The non-refundable ITCs are carried forward for
a time and will be recognized when it is more likely than not that the Company will become subject to Canadian federal taxes, at
62
which time, said ITCs are applied as a reduction of tax expense. As operations in Canada ceased in early 2014, there were no new
investment tax credits earned for the year ended December 31, 2015 or 2014.
Research and Development Expenses
Research and development expenditures are charged to net loss in the period in which they are incurred and are comprised
of the following types of costs incurred in performing research and development activities: clinical trial and related clinical
manufacturing costs, salaries and benefits including share-based compensation expense, allocated overhead and occupancy costs,
contract services, license fees paid in connection with our early discovery efforts and data management costs.
Income Taxes
Income taxes have been accounted for using the asset and liability method. Under the asset and liability method, deferred
tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial carrying
amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates applicable to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. A valuation allowance against deferred tax assets is recorded
if, based upon the weight of all available evidence, it is more likely than not that some or all of the deferred tax assets will not be
realized. For uncertain tax positions that meet "a more likely than not" threshold, the Company recognizes the benefit of uncertain
tax positions in the consolidated financial statements.
Segment Reporting
Operating segments are components of an enterprise about which separate discrete financial information is available for
evaluation by the chief operating decision-maker for purposes of making decisions regarding resource allocation and assessing
performance. To date, the Company has viewed its operations and managed its business as one segment operating primarily in the
United States.
Fair Value Measurements
The Company has certain financial assets and liabilities recorded at fair value which have been classified as Level 1, 2 or 3
within the fair value hierarchy as described in the accounting standards for fair value measurements.
The authoritative guidance for fair value measurements defines fair value as the exchange price that would be received for
an asset or paid to transfer a liability (an exit price) in the principal or the most advantageous market for the asset or liability in
an orderly transaction between market participants on the measurement date. Market participants are buyers and sellers in the
principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact. The guidance
prioritizes the inputs used in measuring fair value into the following hierarchy:
• Level 1- Quoted prices (unadjusted) in active markets for identical assets or liabilities;
• Level 2- Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable; and
• Level 3- Unobservable inputs in which little or no market activity exists, therefore requiring an entity to develop its
own assumptions about the assumptions that market participants would use in pricing.
63
The following table summarizes the assets and liabilities measured at fair value on a recurring basis (in thousands):
Assets
Cash and cash equivalents:
Cash
Money market funds
Corporate debt securities
Commercial paper
Total cash and cash equivalents
Short-term investments:
Corporate debt securities
Commercial paper
Total short-term investments
Total
Assets
Cash and cash equivalents:
Cash
Money market funds
Corporate debt securities
Total cash and cash equivalents
Short-term investments:
Corporate debt securities
Commercial paper
Total short-term investments
December 31, 2015
Total
Level 1
Level 2
Level 3
$
757
$
757
$
18,875
6,749
22,994
49,375
27,622
45,212
72,834
18,875
—
19,632
—
—
—
— $
—
6,749
22,994
29,743
27,622
45,212
72,834
$
122,209
$
19,632
$
102,577
$
December 31, 2014
Total
Level 1
Level 2
Level 3
$
1,025
$
1,025
$
— $
3,565
2,003
6,593
21,210
1,500
22,710
3,565
—
4,590
—
—
—
—
2,003
2,003
21,210
1,500
22,710
Total
$
29,303
$
4,590
$
24,713
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
The Company’s investments in Level 1 assets are valued based on publicly available quoted market prices for identical
securities as of December 31, 2015 and December 31, 2014. The Company determines the fair value of Level 2 related securities
with the aid of valuations provided by third parties using proprietary valuation models and analytical tools. These valuation models
and analytical tools use market pricing or prices for similar instruments that are both objective and publicly available, including
matrix pricing or reported trades, benchmark yields, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities,
bids and/or offers. There were no transfers between fair value measurement levels for the years ended December 31, 2015 and
2014.
Net Loss Per Share
Basic net loss per common share is calculated by dividing the net loss attributable to common stockholders by the weighted-
average number of common shares outstanding during the period, without consideration for potentially dilutive securities. Diluted
net loss per share is computed by dividing the net loss attributable to common stockholders by the weighted-average number of
common shares and potentially dilutive securities outstanding for the period. Common share equivalents outstanding, determined
using the treasury stock method, are comprised of shares that may be issued under the Company’s stock option and warrant
agreements.
64
The following table presents the weighted average number of potentially dilutive securities not included in the calculation
of diluted net loss per share due to the anti-dilutive effect of the securities:
Common stock options
Common stock warrants
Total
3. Recent Accounting Pronouncements
Year ended
December 31,
2014
253,595
1,515,445
1,769,040
2015
582,662
1,546,201
2,128,863
2013
495
644,426
644,921
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board ("FASB") or
other standard setting bodies that are adopted by the Company as of the specified effective date. Unless otherwise discussed, the
Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on our
consolidated financial position or results of operations upon adoption.
In May 2014, the FASB issued Accounting Standard Update ("ASU") 2014-09, Revenue from Contracts with Customers
(Topic 606), which will replace numerous requirements in U.S. GAAP, including industry-specific requirements, and provide
companies with a single revenue recognition model for recognizing revenue from contracts with customers. The core principle of
the new standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in
an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In
August 2015, the FASB approved a proposal to defer the effective date of the guidance until annual and interim reporting periods
beginning after December 15, 2017. The Company is currently evaluating the impact that this standard will have on its consolidated
financial statements.
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40):
Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. Under the new guidance, management will
be required to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures in certain
circumstances. The provisions of this ASU are effective for annual periods beginning after December 15, 2016, and for annual
and interim periods thereafter; early adoption is permitted. The Company has not elected to early adopt and is currently evaluating
the potential changes from this ASU to its future financial reporting and disclosures.
In January 2015, the FASB issued ASU 2015-01, Income Statement-Extraordinary and Unusual Items, which eliminates
the concept of extraordinary items. Extraordinary items are events and transactions that are distinguished by their unusual nature
and by the infrequency of their occurrence. Eliminating the extraordinary classification simplifies income statement presentation
by altogether removing the concept of extraordinary items from consideration. The standard is effective for fiscal years, and interim
periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted provided that the guidance is
applied from the beginning of the fiscal year of adoption. The Company does not believe the adoption of this standard will have
a material impact on its financial position, results of operations or related financial statement disclosures.
In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, to simplify the
presentation of deferred taxes. This amendment requires that all deferred tax assets and liabilities, along with any related valuation
allowances, be classified as noncurrent on the balance sheet. ASU 2015-17 is effective for annual and interim reporting periods
ending after December 15, 2016. Early adoption is permitted, and the new guidance is and may be applied either prospectively or
retrospectively. We have adopted this guidance prospectively as of December 31, 2015. Therefore, prior periods have not been
adjusted to reflect this adoption.
65
4. Investments
The following tables summarize our short-term investments (in thousands):
As of December 31, 2015
Corporate debt securities
Commercial paper
Corporate debt securities
Commercial paper
Maturity (in years)
1 year or less
Amortized
cost
$ 27,644
1 year or less
45,158
$ 72,802
Maturity (in years)
1 year or less
Amortized
cost
$ 21,208
1 year or less
1,500
$ 22,708
Gross
unrealized
gains
Gross
unrealized
losses
$
$
— $
54
54
$
Estimated
fair value
(22) $ 27,622
—
45,212
(22) $ 72,834
As of December 31, 2014
Gross
unrealized
gains
Gross
unrealized
losses
$
$
3
—
3
$
$
Estimated
fair value
(1) $ 21,210
—
1,500
(1) $ 22,710
Unrealized gains and losses on available-for-sale securities are included as a component of comprehensive loss. At
December 31, 2015, the Company did not have any securities in material unrealized loss positions. The Company reviews its
investments to identify and evaluate investments that have an indication of possible other-than-temporary impairment. Factors
considered in determining whether a loss is other-than-temporary include the length of time and extent to which fair value has
been less than the cost basis, the financial condition and near-term prospects of the investee, and the Company’s intent and ability
to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. The Company does
not intend to sell any investments prior to recovery of their amortized cost basis for any investments in an unrealized loss position.
5. Other Current Assets and Other Long-Term Assets
Other current assets consisted of the following (in thousands):
Prepaid expenses
Refundable research and development tax credits
Deposits and other receivables
Interest receivables
December 31,
2015
2014
$
$
2,287
—
551
237
3,075
$
$
1,827
809
622
96
3,354
The other long-term assets balance as of December 31, 2015 consists of $2.0 million in deposits paid in conjunction with
the Company's research and development activities compared to $0.3 million as of December 31, 2014.
66
6. Property and Equipment, Net
Property and equipment consisted of the following (in thousands):
Computer equipment
Office and other equipment
Laboratory equipment
Leasehold improvements
Gross property and equipment
Less: Accumulated depreciation
Net property and equipment
December 31,
2015
2014
$
$
329
256
425
51
1,061
(447)
614
$
$
329
56
346
—
731
(235)
496
The Company incurred depreciation expense of $0.2 million during the years ended December 31, 2015, 2014 and 2013.
7. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consisted of the following (in thousands):
Accounts payable
Accrued expenses
Accrued compensation and benefits
Other current liabilities
8. Stockholders' Equity
Common Stock
The following shares were reserved for future issuance:
Common stock options outstanding and available for future grant
Warrants to purchase common stock
Employee Stock Purchase Plan
Sale of Common Stock
December 31,
2015
2014
$
$
2,104
$
5,311
2,352
31
9,798
$
1,655
2,327
1,414
—
5,396
December 31,
2015
3,354,541
1,428,383
267,355
5,050,279
In February 2015, the Company completed a common stock offering whereby it issued an aggregate 2,587,500 shares of
common stock at $20.00 per share. Proceeds from the common stock offering, net of underwriting discounts, commissions and
offering expenses, were $48.4 million.
In September 2015, the Company completed an additional common stock offering whereby it issued an aggregate
2,250,000 shares of common stock at $45.00 per share. Proceeds from the common stock offering, net of underwriting discounts,
commissions and offering expenses, were $94.9 million.
67
Warrants
The Company issued warrants in connection with private placements of common stock in April 2011 and November
2012. As of December 31, 2015 the following warrants for common stock were issued and outstanding:
Issue date
April 4, 2011
November 21, 2012
Expiration date
April 4, 2016
November 21, 2017
Exercise price
Number of warrants
outstanding
$
$
6.74
7.86
733,000
695,383
1,428,383
During the years ended December 31, 2015 and 2014, warrants for 1,037,330 and 73,964 shares of the Company's common
stock were exercised via cashless exercises and the Company issued a total of 809,498 and 43,526 shares of common stock,
respectively.
9. Share-Based Compensation
Equity Incentive Plan
The Company has in place a stock option plan (the "Stock Option Plan") for the benefit of employees, directors, officers
and consultants of the Company. In May 2013 our Board of Directors adopted the 2013 Equity Incentive Plan (the "2013 Plan").
The 2013 Plan was approved by our stockholders in connection with the Arrangement. The 2013 Plan is a continuation of and
successor to the Stock Option Plan and no further grants will be made under the Stock Option Plan. As of December 31, 2015,
there were approximately 1.4 million stock options available to be issued.
To date, share-based compensation awards under either the Stock Option Plan or the 2013 Plan consist of incentive and
non-qualified stock options. Stock options granted under each of the plans must have an exercise price equal to at least 100% of
the fair market value of our common stock on the date of grant and generally vest over four years. The Stock Option Plan has
contractual terms ranging from five to seven years and the 2013 Plan has contractual terms ranging from seven to ten years.
The following table summarizes our stock option activity and related information for the year ended December 31, 2015:
Balance outstanding as of December 31, 2014
Granted
Exercised
Canceled/forfeited
Balance outstanding as of December 31, 2015
Options exercisable at December 31, 2015
Options vested and expected to vest at December 31, 2015
Weighted
average
exercise
price
Weighted-
Average
Remaining
Contractual
Term (years)
Aggregate
Intrinsic
Value
(millions)
14.00
24.21
14.91
24.35
16.71
13.82
16.71
7.1
6.1
7.1
$
$
$
28.93
15.32
28.93
Number of
options
$
1,454,860
525,091
$
(36,566) $
(10,505) $
$
1,932,880
861,598
1,932,880
$
$
The total intrinsic value of stock options exercised was $0.6 million for the years ended December 31, 2015 and 2014.
The Company received total cash of $0.6 million, $0.9 million and $0.5 million for the exercise of options for the years ended
December 31, 2015, 2014 and 2013. The total fair value of options vested during the years ended December 31, 2015, 2014 and
2013 was $6.5 million, $3.0 million and $2.0 million respectively. Upon option exercise, the Company issues new shares of our
common stock.
68
Total share-based compensation expense by operating statement classification is presented below (in thousands):
Research and development expense
General and administrative expense
Year ended December 31,
2015
2014
2013
$
$
3,669
6,585
10,254
$
$
2,565
4,485
7,050
$
$
245
2,947
3,192
For the years ended December 31, 2015, 2014 and 2013, no share-based compensation expense was capitalized and there
were no recognized tax benefits associated with the share-based compensation charge.
The fair value of options granted is estimated at the date of grant using the Black-Scholes option pricing model. The
assumptions used for the specified reporting periods and the resulting estimates of weighted-average estimated fair value per share
of options granted during those periods are as follows:
Risk-free interest rate
Dividend yield
Volatility factor
Expected term (in years)
Weighted average estimated fair value per share
Year Ended
December 31,
2014
2.1%
—%
113.0%
6.7
$16.09
2013
2.0%
—%
112.9%
7.0
$9.75
2015
1.5%
—%
104.3%
6.0
$19.44
Risk-Free Interest Rate - The risk-free interest rate is the rate for periods equal to the expected term of the stock option
based on either the Canadian Treasury yield (for grants prior to July 16, 2013), or U.S. Treasury zero-coupon bonds (for grants
after July 16, 2013).
Dividend Yield - The dividend yield is based on the Company’s history and expectation of dividend payouts. The Company
has not paid, and does not intend to pay, dividends.
Volatility Factor - The expected volatility assumption was determined by examining the historical volatility of the
Company's stock.
Expected Term - The expected term represents the weighted average period the stock options are expected to be outstanding.
The Company uses the simplified method for estimating the expected term as provided by the Securities and Exchange Commission.
The simplified method calculates the expected term as the average time-to-vesting and the contractual life of the options. The
Company believes this methodology is appropriate given the Company's limited history as a U.S. public company.
The total compensation cost not yet recognized as of December 31, 2015 related to non-vested option awards was $7.0
million which will be recognized over a weighted-average period of 1.1 years.
2013 Employee Stock Purchase Plan
In May 2013, the Company's Board of Directors adopted the ESPP. The ESPP was approved by the Company's stockholders
in connection with the Arrangement. In December 2014, the ESPP became effective and the first purchase period began. The ESPP
permits eligible employees to make payroll deductions to purchase up to $25,000 of the Company’s common stock on regularly
scheduled purchase dates at a discount. Offering periods under the ESPP are not more than six months in duration and shares are
purchased at 85% of the lower of the closing price for the Company’s common stock on the first day of the offering period or the
date of purchase. The ESPP initially authorized the issuance of 300,000 shares of the Company’s common stock pursuant to rights
granted to employees for their payroll deductions. As of December 31, 2015, 32,645 shares have been issued out of the plan.
10. Employee Benefit Plan
The Company has a defined contribution 401(k) plan (the "Plan") for all employees. Employees are eligible to participate
in the Plan if they are at least 21 years of age or older. Under the terms of the Plan, employees may make voluntary contributions
as a percentage of compensation. The Company matches up to 4% of an employee's contributions, subject to a limit of $2,500 per
69
year. Expense associated with the Company's matching contribution totaled $0.1 million for the years ended December 31, 2015
and 2014. No significant expense was incurred during the year ended December 31, 2013.
11. Income Taxes
The Company's provision for income tax benefit was as follows (in thousands):
Current:
Federal
State
Canada
Total current tax benefit
Year ended December 31,
2015
2014
2013
$
$
— $
—
—
— $
— $
—
—
— $
(23)
—
—
(23)
The differences between the effective income tax rate and the statutory tax rates during the years ended 2015, 2014 and
2013 are as follows (in thousands):
Net loss before tax
Statutory combined US federal and state tax rate
Statutory federal and state taxes
Increase (decrease) in taxes recoverable resulting from:
Effect of change in valuation allowance
Non-deductible share-based compensation
Non-deductible warrant expenses for tax purposes
Tax credits
Share issue costs - temporary difference
Share issue costs - permanent difference
Differential in income tax rates of foreign subsidiary
Other differences
Income tax benefit
Year Ended December 31,
2015
(64,544)
$
2014
(43,698)
$
$
34.00%
(21,945)
39.83%
(17,405)
2013
(52,882)
39.83%
(21,063)
22,350
923
—
(1,814)
(184)
—
31
639
12,273
930
1,799
(180)
(184)
—
3,047
(280)
$
— $
— $
8,537
1,085
8,403
(96)
(184)
206
3,059
30
(23)
70
Deferred Tax
The following table summarizes the significant components of our deferred tax assets (in thousands):
Deferred tax assets:
Tangible and intangible depreciable assets
Stock compensation
Manufactured drug product inventory to be used in research
Provisions
Financing fees
Net operating loss carry forwards
Capital loss carryforward
Scientific research and experimental development expenditures
Research and development tax credits
Total gross deferred tax assets
Less valuation allowance
Net deferred tax assets
December 31,
2015
2014
$
199
$
4,429
—
725
78
42,864
102
5,552
2,411
56,360
(56,360)
$
— $
185
2,360
1,425
554
261
23,243
—
5,715
266
34,009
(34,009)
—
Total valuation allowance increased by $22.4 million for the year ended December 31, 2015. The Company has established
a full valuation allowance against its deferred tax assets as of December 31, 2015 due to the uncertainty surrounding the realization
of such assets as evidenced by the cumulative losses from operations through December 31, 2015.
For Canadian federal income tax purposes, the Company's Canadian federal scientific research and experimental
development expenditures amounted to $19.9 million, $20.1 million and $20.7 million at December 31, 2015, 2014 and 2013,
respectively and for provincial income tax purposes amounted to $21.6 million, $22.7 million and $22.4 million at December 31,
2015, 2014 and 2013, respectively. As operations in Canada ceased during 2014, the expenditures incurred for the year ended
December 31, 2015 and 2014 were much lower than previous years. These expenditures are available to reduce future taxable
income and have an unlimited carry forward period. Scientific research and development expenditures are subject to verification
by the taxation authorities, and accordingly, these amounts may vary by a material amount. In addition, the Company has research
and development tax credit carryforwards for U.S. federal and state income tax purposes as of December 31, 2015 of $2.2 million
and $1.4 million, respectively. The federal credits will begin to expire in 2034 unless utilized and the state credits have an indefinite
life.
The Company also has accumulated share issue expenses that have not been deducted for income tax purposes amounting
to approximately $0.3 million, $1.0 million and $1.7 million for the years ended December 31, 2015, 2014 and 2013, respectively.
The benefits of these expenses have not been recognized in the financial statements.
At December 31, 2015, the Company's net operating loss carry forwards ("NOLs") for U.S. federal and state income
taxes were $63.9 million and $24.4 million, respectively and the Company's NOLs for Canadian federal and provincial income
tax purposes were $78.4 million and $77.8 million, respectively.
71
The NOLs are available to offset future taxable income from both U.S. federal and state tax sources, as well as Canadian
federal and provincial tax sources and the tax benefits of which have not been recognized in the consolidated financial statements.
The NOLs expire as follows (in thousands):
US
Canada
Federal
State
Federal
Provincial
Expires in:
2030
2031
2032
2033
2034
2035
$
— $
—
—
3,236
7,276
53,341
$ 63,853
— $
—
—
2,286
22,162
—
$ 24,448
5,907
7,059
13,312
18,623
32,401
1,117
$ 78,419
$
5,985
7,066
12,433
19,385
31,809
1,116
$ 77,794
The future utilization of the US federal and state NOL carryforwards to offset future taxable income may be subject to
an annual limitation as a result of ownership changes that may have occurred previously or may occur in the future. The Tax
Reform Act of 1986 (the "Act") limits a company's ability to utilize certain tax credit carryforwards and net operating loss
carryforwards in the event of a cumulative change in ownership in excess of 50% as defined in the Act. The Canadian Federal and
Provincial Tax Acts maintain similar rules in the case of acquisition of control.
The Company files income tax returns in the U.S. (federal and state) and Canada (federal and provincial). The Company’s
U.S. operations have not been audited for any open taxation years. The Company has experienced losses for U.S. tax purposes
and therefore, the taxation authorities may review any loss year, if and when the losses are utilized.
For Canadian tax purposes, the Company remains subject to federal audit for the December 31, 2011 and subsequent
taxation years and to provincial for the December 31, 2010 and subsequent taxation years. Where taxation years remain open, the
Company considers it reasonably possible that issues may be raised or tax positions agreed to with the taxation authorities, which
may result in increases or decreases of the balance of non-refundable ITCs and NOLs. However, an estimate of such increases
and decreases cannot be currently made.
A reconciliation of the beginning and ending amounts of unrecognized tax positions are as follows (in thousands):
Federal
December 31,
Provincial/State
December 31,
2015
2014
2013
2015
2014
2013
Unrecognized tax positions, beginning of year
$
42
$
35
$
43
$
18
$
Gross increase — current period tax positions
Gross decrease — prior period tax positions
Gross increase — prior period tax positions
445
(4)
26
35
(28)
—
—
(13)
5
259
(3)
2,000
Unrecognized tax positions, end of year
$
509
$
42
$
35
$
2,274
$
6
12
—
—
18
$
$
2
—
—
4
6
If recognized, none of the unrecognized tax positions would impact the Company's income tax benefit or effective tax
rate as long as the Company's deferred tax assets remain subject to a full valuation allowance. The Company does not expect any
significant increases or decreases to the Company's unrecognized tax positions within the next 12 months.
The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense. The Company
had no accrual for interest or penalties on tax matters as of December 31, 2015 and 2014 and the Company had no ongoing tax
audits as of December 31, 2015.
72
12. Investment Tax Credits
The Company is eligible to claim Canadian federal and provincial ITCs for eligible scientific research and development
expenditures. The Company records ITCs based on management's best estimates of the amount to be recovered and ITCs claimed
are subject to audit by the taxation authorities and accordingly, may vary by a material amount.
The Company recorded provincial refundable ITCs as a reduction of research and development expenditures of $0.9
million for the year ended December 31, 2013. The Company did not record provincial refundable ITCs as a reduction of research
and development expenditures for the year ended December 31, 2015 or 2014 as the primary operations of the Company were
moved from Canada to San Diego, California in early 2014.
The Company's non-refundable Canadian federal ITCs as of December 31, 2015 are $3.9 million and relate to scientific
research and development expenditures, which may be utilized to reduce Canadian federal income taxes payable in future years.
The benefits of the non-refundable Canadian federal ITCs have not been recognized in the financial statements and will be recorded
as reduction of tax expense when realized.
The non-refundable investment tax credits expire as follows (in thousands):
Expires in:
2030
2031
2032
2033
FEDERAL ITC
$
$
764
1,000
1,125
1,018
3,907
13. Commitments and Contingencies
On June 24, 2014, the Company entered into a lease agreement for approximately 18,000 square feet of completed office
and laboratory space located in San Diego, California. The office space under the lease is the Company's corporate headquarters.
The lease commenced in phases, 2,300 square feet of space which commenced on July 1, 2014 at an initial monthly rent of $5,900
per month and 15,600 square feet of space which commenced on March 27, 2015 at an initial monthly rent of $18,200 per month.
The leased property is subject to a 3% annual rent increase following availability that result in the Company recording deferred
rent over the term of the lease. In addition to such base monthly rent, the Company is obligated to pay certain customary amounts
for its share of operating expenses and facility amenities. The lease will expire on January 31, 2018. Future minimum payments
required under the lease are summarized as follows (in thousands):
Year Ending December 31:
2016
2017
2018
Thereafter
Total minimum lease payments
$
$
296
305
26
—
627
Total lease expense for the year ended December 31, 2015 was $0.6 million. The lease expense during the years ended
December 31, 2014 and 2013 was $0.4 million.
73
14. Selected Quarterly Financial Data (Unaudited)
The following is a summary of the quarterly results of the Company for the years ended December 31, 2015 and
2014 (unaudited, in thousands, except for per share data):
Three Months Ended
Year Ended
Operating Loss
Net loss
Per common share:
Loss per share, basic (1)
Loss per share, diluted (1)
Operating Loss
Net loss
Per common share:
Loss per share, basic (1)
Loss per share, diluted (1)
3/31/15
6/30/15
9/30/15
12/31/15
$ (11,986) $ (15,516) $ (18,724) $ (18,488) $
(11,940)
(15,446)
(18,741)
(18,417)
December 31, 2015
(64,714)
(64,544)
$
$
$
(0.77) $
(0.77)
(0.95) $
(0.95)
(1.11) $
(1.11)
(0.96) $
(0.96)
(3.82)
(3.82)
Three Months Ended
Year Ended
3/31/14
6/30/14
9/30/14
12/31/14
(7,979) $ (10,134) $ (10,548) $ (10,443) $
(13,656)
(10,387)
(11,038)
(8,617)
December 31, 2014
(39,104)
(43,698)
(1.01) $
(1.01)
(0.82) $
(0.82)
(0.64) $
(0.72)
(0.77) $
(0.77)
(3.24)
(3.24)
(1) Net loss per share is computed independently for each of the quarters presented. Therefore, the sum of the quarterly per-
share calculations will not necessarily equal the annual per share calculation.
74
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: March 9, 2016
Date: March 9, 2016
MIRATI THERAPEUTICS, INC.
by:
/s/ Charles M. Baum, M.D., Ph.D.
Chief Executive Officer
by:
/s/ Mark J. Gergen
Executive Vice President and
Chief Operations Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Charles
M. Baum, Ph.D. and Mark J. Gergen as his or her true and lawful attorneys-in-fact, and each of them, with full power of substitution,
for him or her in any and all capacities, to sign any amendments to this Annual Report on Form 10-K and to file the same, with
exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite
and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact, and either of them, or his or their substitute or substitutes may do
or cause to be done by virtue hereof.
75
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been
signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
Chief Executive Officer and Director (Principal
Executive Officer)
March 9, 2016
Executive Vice President, Chief Operations Officer
(Principal Financial Officer)
March 9, 2016
Vice President, Finance (Principal Accounting Officer) March 9, 2016
Chairman of the Board
March 9, 2016
March 9, 2016
March 9, 2016
March 9, 2016
March 9, 2016
/S/ CHARLES M. BAUM
Charles M. Baum, M.D., Ph.D.
/S/ MARK J. GERGEN
Mark J. Gergen
/S/ JAMIE A. DONADIO
Jamie A. Donadio
/S/ RODNEY LAPPE
Rodney Lappe, Ph.D.
/S/ MICHAEL GREY
Michael Grey
/S/ HENRY J. FUCHS
Henry J. Fuchs, M.D.
/S/ CRAIG JOHNSON
Craig Johnson
Director
Director
Director
/S/ WILLIAM R. RINGO
William R. Ringo
Director
76
INDEX TO EXHIBITS
Description of document
Arrangement Agreement, dated May 8, 2013, by and between MethylGene Inc. and the Registrant.(2)
Amended and Restated Certificate of Incorporation.(1)
Bylaws.(1)
Form of Common Stock Certificate.(2)
Form of Securities Purchase Agreement relating to the 2011 private placement.(1)
Form of Securities Purchase Agreement relating to the 2012 private placement.(1)
Form of Warrant Certificate issued in connection with the 2011 private placement.(1)
Form of Warrant Certificate issued in connection with the 2012 private placement.(1)
Amended and Restated Incentive Stock Option Plan.(1)
Form of 2013 Equity Incentive Plan and Form of Stock Option Grant Notice and Form of Stock Option Agreement
thereunder.(1)
Form of 2013 Employee Stock Purchase Plan.(1)
Collaboration and License Agreement, dated October 16, 2003, by and between MethylGene Inc. and Taiho
Pharmaceutical Co. Ltd.(1)
Amendment Number One to Collaboration and License Agreement, dated January 25, 2005, by and between
MethylGene Inc. and Taiho Pharmaceutical Co., Ltd.(1)
Letter Agreement, dated January 25, 2005, by and between MethylGene Inc. and Taiho Pharmaceutical Co., Ltd.,
relating to Collaboration and License Agreement dated October 16, 2003.(1)
Senior Executive Employment Agreement, dated September 24, 2012, by and among MethylGene Inc. and
Dr. Charles M. Baum.(1)
Employment Agreement, dated February 15, 2013, by and between MethylGene Inc. and Mark J. Gergen.(1)
Amended and Restated Employment Agreement, dated July 2, 2013, by and between the Registrant and Dr. Charles
M. Baum.(3)
Amended and Restated Employment Agreement, dated July 2, 2013, by and between the Registrant and Mark J.
Gergen.(3)
Sublease Agreement, dated May 28, 2013, by and between Amylin Pharmaceuticals, LLC and MethylGene US, Inc.(4)
Lease Agreement, dated June 24, 2014, by and between the Company and ARE-SD Region No. 20, LLC. (6)
Letter Agreement, dated August 30, 2013, by and between the Registrant and Dr. Isan Chen.(5)
Letter Agreement, Dated May 20, 2013, by and between Methylgene Inc. and James Christensen(7)
Form of Indemnity Agreement.(5)
Amended and Restated Non-Employee Director Compensation Policy.
Subsidiaries of the Registrant.(1)
Consent of Independent Registered Public Accounting Firm- US.
Consent of Independent Registered Public Accounting Firm- Canada.
Certification of the Principal Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange
Act of 1934.
Certification of the Principal Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act
of 1934.
Certifications Pursuant to U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Public Company
Accounting Reform and Investor Protection Act of 2002.
Exhibit
number
2.1
3.1
3.2
4.1
10.1
10.2
10.3
10.4
10.5+
10.6+
10.7+
10.8*
10.9*
10.10*
10.11+
10.12+
10.13+
10.14+
10.15
10.16
10.17+
10.18+
10.19+
10.20+
21.1
23.1
23.2
31.1
31.2
32.1
101.INS XBRL Instance Document.
101.SCH XBRL Taxonomy Extension Schema Document.
101.CAL XBRL Taxonomy Extension Schema Document.
101.DEF XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB XBRL Taxonomy Extension Label Linkbase Document.
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document.
77
+
*
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Indicates management contract or compensatory plan.
We have received confidential treatment for certain portions of this agreement, which have been omitted and filed
separately with the SEC pursuant to Rule 406 under the Securities Act.
Incorporated by reference to Mirati Therapeutics, Inc.’s Registration Statement on Form 10-12B (No. 001-35921), filed
with the Securities and Exchange Commission on May 10, 2013.
Incorporated by reference to Mirati Therapeutics, Inc.’s Amended Registration Statement on Form 10-12B/A
(No. 001-35921), filed with the Securities and Exchange Commission on June 14, 2013.
Incorporated by reference to Mirati Therapeutics, Inc.’s Amended Registration Statement on Form 10-12B/A
(No. 001-35921), filed with the Securities and Exchange Commission on July 9, 2013.
Incorporated by reference to Mirati Therapeutics, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30,
2013, filed with the Securities and Exchange Commission on August 13, 2013.
Incorporated by reference to Mirati Therapeutics, Inc.’s Registration Statement on Form S-1 (No. 333-191544), filed with
the Securities and Exchange Commission on October 3, 2013.
Incorporated by reference to Mirati Therapeutics, Inc.’s Current Report on Form 8-K, filed with the Securities and
Exchange Commission on June 27, 2014.
Incorporated by reference to Mirati Therapeutics, Inc.’s Annual Report on Form 10-K for the year ended December 31,
2014, filed with the Securities and Exchange Commission on March 9, 2015.
78
CORPORATE INFORMATION
EXECUTIVE MANAGEMENT
BOARD OF DIRECTORS
President and Chief Executive Officer
Charles M. Baum
Chairman of the Board
Rodney Lappe
Chief Medical and Development Officer
Isan Chen
President and Chief Executive Officer
Charles M. Baum
Senior Vice President
James Christensen
and Chief Scientific Officer
Executive Vice President
Mark J. Gergen
and Chief Operations Officer
Senior Vice President
Jamie Donadio
and Chief Financial Officer
Vice President, Product Development
Dennis M. Hester
and Head of CMC
Vice President, Chief Legal Officer
Perry C. Johnston
Director
Henry J. Fuchs
Director
Michael Grey
Director
Craig Johnson
Director
William R. Ringo
TRANSFER AGENT
Computershare
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Vice President, Investor Relations and Corporate
Marcy Graham
Communications
Ernst & Young LLP
CORPORATE COUNSEL
CORPORATE HEADQUARTERS
9393 Towne Centre Drive
Suite 200
San Diego, CA 92121
Cooley LLP
INVESTOR RELATIONS/
MEDIA CONTACT
Marcy Graham
The letter to shareholders along with the Form 10-K in this Annual Report include “forward-looking” statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward looking statements are based on the current expectations of management and upon what management
believes to be reasonable assumptions based on information currently available to it. Such statements include, but are not limited to, statements regarding
Mirati’s development plans and timelines, potential regulatory actions, expected use of cash resources, the timing and results of clinical trials, and the
potential benefits of and markets for Mirati’s product candidates. Forward looking statements involve significant risks and uncertainties and are neither
a prediction nor a guarantee of future events or circumstances, and those future events or circumstances may not occur. Such risks include, but are not
limited to, potential delays in development timelines or negative clinical trial results, reliance on third parties for development efforts, changes in the
competitive landscape, changes in the standard of care, as well as other risks described in Mirati’s filings with the U.S. Securities and Exchange Commission.
We are including this cautionary note to make applicable, and to take advantage of, the safe harbor provisions of the Private Securities Litigation Reform
Act of 1995 for forward-looking statements. We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result
of new information, future events or otherwise, unless required by law.
MIRATI THERAPEUTICS, INC.
9393 Towne Centre Drive, Suite 200
San Diego, CA 92121
858.332.3410
www.mirati.com