S-1/A 1 d447329ds1a.htm AMENDMENT NO. 4 TO FORM S-1 Amendment No. 4 to Form S-1
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As filed with the Securities and Exchange Commission on May 15, 2013

Registration No.333-186760

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 4

to

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Ambit Biosciences Corporation

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   2834   33-0909648

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

11080 Roselle St.

San Diego, California 92121

(858) 334-2100

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Michael A. Martino

President and Chief Executive Officer

Ambit Biosciences Corporation

11080 Roselle St.

San Diego, California 92121

(858) 334-2100

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Thomas A. Coll, Esq.

Kenneth J. Rollins, Esq.

Cooley LLP

4401 Eastgate Mall

San Diego, California 92121

(858) 550-6000

 

Cheston J. Larson, Esq.

Divakar Gupta, Esq.

Matthew T. Bush, Esq.

Latham & Watkins LLP

12636 High Bluff Drive, Suite 400

San Diego, CA 92130

(858) 523-5400

 

 

Approximate date of commencement of proposed sale to the public:

As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box.    ¨

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering.    ¨

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    ¨    Accelerated filer    ¨
Non-accelerated filer    x  (Do not check if a smaller reporting company)    Smaller reporting company    ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of

securities to be registered

 

Proposed
maximum

aggregate

offering price(1)

 

Amount of

registration fee

Common Stock, $0.001 par value per share

  $74,750,000   $10,196(2)

 

 

(1) Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended. Includes the offering price of shares that the underwriters have the option to purchase to cover over-allotments, if any.
(2) Previously paid.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED MAY 15, 2013

PRELIMINARY PROSPECTUS

8,125,000 Shares

 

LOGO

Ambit Biosciences Corporation

Common Stock

$         per share

 

 

This is the initial public offering of our common stock. We currently expect the initial public offering price to be $8.00 per share of common stock.

We have granted the underwriters an option to purchase up to 1,218,750 additional shares of common stock to cover over-allotments.

Our common stock has been approved for listing on the Nasdaq Global Market under the symbol “AMBI”.

 

 

Investing in our common stock involves risks. See “Risk Factors” beginning on page 11.

We are an emerging growth company as that term is used in the Jumpstart Our Business Startups Act of 2012, and, as such, we have elected to take advantage of certain reduced public company reporting requirements for this prospectus and future filings.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

 

     Per
Share
     Total  

Public Offering Price

   $                    $                

Underwriting Discount(1)

   $                    $                

Proceeds to Ambit (before expenses)

   $                    $                

 

(1) We refer you to “Underwriting” beginning on page 162 for additional information regarding underwriting compensation.

Certain of our existing stockholders have agreed to purchase an aggregate of $25.1 million of our common stock in a separate private placement concurrent with the completion of this offering at a price per share equal to the initial public offering price. The sale of such shares will not be registered under the Securities Act of 1933, as amended.

The underwriters expect to deliver the shares on or about                 , 2013 through the book-entry facilities of The Depository Trust Company.

 

 

 

Citigroup   Leerink Swann

 

 

BMO Capital Markets

 

 

Baird

                    , 2013


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We are responsible for the information contained in this prospectus. We have not authorized anyone to provide you with different information, and we take no responsibility for any other information others may give you. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front of this prospectus.

TABLE OF CONTENTS

 

     Page  

Summary

     1   

Risk Factors

     11   

Special Note Regarding Forward-Looking Statements

     44   

Use of Proceeds

     46   

Dividend Policy

     47   

Capitalization

     48   

Dilution

     50   

Selected Consolidated Financial Data

     53   

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

     55   

Business

     74   

Management

     113   

Executive and Director Compensation

     120   

Certain Relationships and Related Party Transactions

     138   

Principal Stockholders

     144   

Description of Capital Stock

     148   

Shares Eligible for Future Sale

     155   

Material U.S. Federal Income Tax Consequences to Non-U.S. Holders

     157   

Underwriting

     161   

Legal Matters

     167   

Experts

     167   

Where You Can Find More Information

     167   

Index to the Consolidated Financial Statements

     F-1   

 

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SUMMARY

This summary highlights information contained in other parts of this prospectus. Because it is only a summary, it does not contain all of the information that you should consider before investing in shares of our common stock and it is qualified in its entirety by, and should be read in conjunction with, the more detailed information appearing elsewhere in this prospectus. You should read the entire prospectus carefully, especially “Risk Factors,” “Business” and our audited consolidated financial statements and the related notes included at the end of this prospectus, before deciding to buy shares of our common stock. Unless the context requires otherwise, references in this prospectus to “Ambit,” “we,” “us,” “our” and “the company” refer to Ambit Biosciences Corporation and its subsidiaries, Ambit Biosciences (Canada) Corporation, or Ambit Canada, and Ambit Europe Limited, taken as a whole .

AMBIT BIOSCIENCES CORPORATION

Overview

We are a biopharmaceutical company focused on the discovery, development and commercialization of drugs to treat unmet medical needs in oncology, autoimmune and inflammatory diseases by inhibiting kinases that are important drivers for those diseases. Our pipeline currently includes three programs, each aimed at the inhibition of validated kinase targets. Our lead drug candidate, quizartinib, which we formerly referred to as AC220, is a once-daily, orally-administered, potent and selective inhibitor of FMS-like tyrosine kinase 3, or FLT3. Quizartinib is currently in Phase 2b clinical development in patients with relapsed/refractory acute myeloid leukemia, or AML, who express a genetic mutation in FLT3. To support a new drug application, or NDA, pending input from regulatory authorities, we plan to initiate a randomized, comparative Phase 3 clinical trial in relapsed/refractory AML patients who express a genetic mutation in FLT3 in early 2014. Our second drug candidate in clinical development, AC410, is a potent, selective, orally-administered, small molecule inhibitor of Janus kinase 2, or JAK2, that has potential utility for the treatment of autoimmune and inflammatory diseases. Our third program consists of a potent and exquisitely selective small molecule compound, AC708, which inhibits the colony-stimulating factor-1 receptor, or CSF1R, a receptor tyrosine kinase. This compound is in preclinical studies and has potential utility in oncology, autoimmune and inflammatory diseases. All of our drug candidates and clinical candidates have been internally discovered by us.

Kinases are a family of over 500 enzymes that play essential roles in signaling and regulation of important cellular processes such as activation, growth, proliferation, differentiation and survival. This key role in regulating the life cycle of cells also means that kinases can be involved in the underlying mechanisms for many human diseases, including oncology, autoimmune and inflammatory diseases. Kinases have, therefore, proven to be a rich source of targets for drug development with 19 approved drugs in oncology and inflammatory disease since 2001. However, the key technical limitation in the development of drugs that target kinases is the ability to design a drug that selectively inhibits the specific kinase underlying disease while minimizing activity against other kinases, or off-target activity, which can cause undesirable side effects and lead to suboptimal efficacy. Our core competency is the discovery, optimization and development of highly selective and potent, orally-available small molecule drug candidates that inhibit validated kinase targets in diseases with significant unmet medical need. We have built our pipeline using our proprietary chemical library of approximately 8,000 compounds designed to inhibit kinases and expect to continue to leverage this library to develop viable drug candidates in the future.

 

 

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Our Strategy

The key components of our strategy are:

 

   

Develop and seek regulatory approval for our lead drug candidate, quizartinib, in relapsed/refractory AML patients who express a genetic mutation in FLT3.

 

   

Maximize the therapeutic potential of quizartinib in AML and other hematological disease indications.

 

   

Maximize strategic value by establishing a commercial capability to market, sell and distribute quizartinib in North America.

 

   

Pursue strategic partnerships to accelerate development and expand the commercial opportunity for quizartinib.

 

   

Advance the development of our JAK2 and CSF1R programs through a combination of internal development and strategic partnerships.

 

   

Leverage our core competency and proprietary chemical library to continue discovering and developing a broad pipeline of novel drug candidates that inhibit validated kinase targets to address diseases with unmet medical need.

Our Pipeline of Targeted Therapies

We have developed a pipeline of small molecule targeted therapies using our expertise in kinase drug discovery and development. The following table summarizes this pipeline:

 

LOGO

Quizartinib – Our lead drug candidate, quizartinib, is a once-daily, orally-administered, potent and selective inhibitor of FLT3, a validated target in the treatment of AML, and is currently in Phase 2b clinical development. We believe there is a significant unmet need for more effective treatments of AML, particularly for the subset of patients expressing a genetic mutation in FLT3, known as the FLT3 internal tandem duplication, or FLT3-ITD, mutation. Over 35% of AML patients over age 55 are estimated to harbor this mutation. We refer to these patients as FLT3-ITD positive. The FLT3-ITD mutation acts like a “power switch” that causes leukemic cells, or blasts, to spread more aggressively and grow back more rapidly following chemotherapy, conferring an especially poor survival outcome. Quizartinib is designed to turn off this switch.

 

 

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Data from our single-arm, 333 patient Phase 2 clinical trial in relapsed/refractory AML patients was reported at the American Society of Hematology meeting in December 2012. When compared to reported results of clinical trials with other kinase inhibitors with FLT3 activity, quizartinib demonstrated superior single-agent activity in relapsed/refractory AML patients.

Our Phase 2 clinical trial demonstrated the following three key clinical benefits:

 

  1. Quizartinib, as a monotherapy, demonstrated a high response rate in relapsed/refractory FLT3-ITD positive patients;

 

  2. A substantial number of patients treated with quizartinib were bridged to a potentially curative hematopoietic stem cell transplantation, or an HSCT (commonly referred to as a bone marrow transplant); and

 

  3. Overall survival in FLT3-ITD positive patients treated with quizartinib compared favorably to historical survival data reported for both FLT3-ITD positive and negative AML patients.

In addition, nearly one of every five patients treated with quizartinib (irrespective of FLT3-ITD status) remained alive for more than 12 months and such patients are referred to as long term survivors. As of September 2012, approximately half of the long term survivors remained alive and continued to be followed for overall survival.

Since 2009, we have been developing quizartinib with a partner, Astellas Pharma Inc., and Astellas US LLC, collectively Astellas. Our agreement with Astellas will terminate effective in September 2013, following which we will own exclusive worldwide rights to quizartinib and any follow-on compounds and will be responsible for all development and commercialization activities and related costs. We and Astellas are currently in the process of developing a plan to transition the development activities currently being conducted by Astellas to us and do not anticipate that such transition will delay the clinical development activities described in this prospectus.

We are developing a companion diagnostic test with Genoptix Medical Laboratory, a Novartis company, to identify FLT3-ITD positive patients, and we believe approval of this test will be necessary for the approval of quizartinib. We plan to develop quizartinib in other AML therapeutic settings, irrespective of FLT3-ITD status, including use in newly diagnosed AML patients in combination with chemotherapy, or frontline therapy, followed by continuous single-agent maintenance therapy, as well as maintenance following an HSCT.

AC410 – Our second most advanced drug candidate, AC410, is a potent, selective, orally-administered, small molecule inhibitor of JAK2, which has potential utility for the treatment of autoimmune and inflammatory diseases. Signaling through JAK controls the activation, proliferation and survival of various types of immune cells, and overactivation of such cells can exacerbate a variety of normal inflammatory processes, resulting in inflammation. Our initial JAK2 drug candidate, AC430, is a racemic mixture (50/50) of two enantiomers (mirror images), AC410 and AC409, and was studied in a Phase 1 clinical trial. We have selected AC410 over AC430 and AC409 for further clinical development due to its superior pharmacokinetics as observed in this clinical trial. To our knowledge, AC430 was the first selective JAK2 inhibitor to be advanced into clinical development for inflammatory disease and we believe AC410 may offer distinct benefits in this commercially attractive drug category. We plan to advance AC410 to proof-of-concept clinical trials in one or more autoimmune and inflammatory diseases, independently or in collaboration with a strategic partner.

CSF1R Program – We are developing a potent and exquisitely selective small molecule compound, AC708, that inhibits CSF1R and has potential utility in oncology, autoimmune and inflammatory diseases. Signaling through CSF1R controls the activation, proliferation and survival of macrophages, which are key mediators of immune system function, and over-activation of macrophages may result in exacerbation of certain

 

 

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diseases. We have initiated investigational new drug, or IND, -enabling studies with AC708. We plan to further develop this program independently or in collaboration with a strategic partner.

Risk Factors

Our ability to implement our business strategy is subject to numerous risks and uncertainties. As a development stage biopharmaceutical company, we face many risks inherent in our business and our industry generally. You should carefully consider all of the information set forth in this prospectus and, in particular, the information under the heading “Risk Factors,” prior to making an investment in our common stock. These risks include, among others, the following:

 

   

We are highly dependent on the success of our lead drug candidate, quizartinib, which is still in clinical development, and we cannot give any assurance that it, or any other drug candidates, will receive regulatory approval, which is necessary before they can be commercialized.

 

   

Clinical drug development involves a lengthy and expensive process with an uncertain outcome, and because the results of earlier studies and trials may not be predictive of future trial results, quizartinib and our other drug candidates may not achieve favorable results in ongoing or subsequent clinical trials.

 

   

The regulatory approval process is lengthy, time consuming and inherently unpredictable, and if we are ultimately unable to obtain regulatory approval for quizartinib or our other drug candidates, our business will be substantially harmed.

 

   

Our collaboration agreement with Astellas for quizartinib terminates in September 2013. In connection with the termination of this collaboration, we and Astellas must agree to a plan for transitioning all development activities from Astellas to us. If we are unable to agree to a transition plan with Astellas or if we are unable to implement any transition plan agreed upon between us and Astellas, the further development and potential commercialization of quizartinib may be delayed.

 

   

We currently rely on a third party to develop the companion diagnostic test for quizartinib and in the future will rely on a third party to obtain marketing approval of such test which will be required in order to market quizartinib in the United States.

 

   

We rely on third parties to conduct our clinical trials and to manufacture and supply quizartinib and, with respect to us, our other drug candidates, and we cannot be certain that they will successfully carry out their contractual duties or meet required timelines.

 

   

We face significant competition from other biotechnology and pharmaceutical companies and our operating results will suffer if we fail to compete effectively or if we fail to attain significant market acceptance for our drug candidates, if approved.

 

   

We have a limited operating history, have incurred significant operating losses since our inception, including an accumulated deficit of $245.2 million as of March 31, 2013, and anticipate that we will continue to incur losses for the foreseeable future.

 

   

We have no approved products and no product revenue to date, and we may never become profitable.

 

   

If our efforts to protect the proprietary nature of the intellectual property related to our technologies are not adequate, we may not be able to compete effectively in our market.

 

   

If we fail to obtain additional financing, we may be unable to complete the development and commercialization of quizartinib or other drug candidates, or continue our other research and development programs.

 

 

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Concurrent Private Placement

Certain of our existing stockholders have agreed to purchase an aggregate of $25.1 million of our common stock in a separate private placement concurrent with the completion of this offering at a price per share equal to the initial public offering price. The sale of such shares will not be registered under the Securities Act of 1933, as amended.

Our Corporate Information

We were incorporated as Aventa Biosciences Corporation in Delaware in May 2000. We changed our name to Ambit Biosciences Corporation in November 2001. Our principal executive offices are located at 11080 Roselle St., San Diego, California 92121, and our telephone number is (858) 334-2100. Our website address is www.ambitbio.com. The information contained on, or that can be accessed through, our website is not a part of this prospectus. Investors should not rely on any such information in deciding whether to purchase our common stock. We have included our website address in this prospectus solely as an inactive textual reference.

We use “AMBIT” as a registered trademark in the United States, European Union and Japan. This prospectus also includes references to trademarks and service marks of other entities, and those trademarks and service marks are the property of their respective owners.

Emerging Growth Company

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012. We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completions of this offering, (b) in which we have total annual gross revenue of at least $1.0 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeded $700.0 million as of the prior June 30th, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period. We refer to the Jumpstart Our Business Startups Act of 2012 herein as the “JOBS Act” and references herein to “emerging growth company” shall have the meaning associated with it in the JOBS Act.

As an emerging growth company, we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable generally to public companies. These provisions include:

 

   

only two years of audited consolidated financial statements in addition to any required unaudited interim financial statements with correspondingly reduced “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” disclosure;

 

   

reduced disclosure about our executive compensation arrangements;

 

   

no requirement that we hold non-binding advisory votes on executive compensation or golden parachute arrangements; and

 

   

exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting.

We have taken advantage of some of these reduced burdens, and thus the information we provide stockholders may be different from what you might receive from other public companies in which you hold shares.

 

 

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THE OFFERING

 

Common stock offered by us

8,125,000 shares

 

Common stock to be sold by us to certain of our existing stockholders in the concurrent private placement, assuming an initial public offering price of $8.00 per share

3,134,495 shares

 

Common stock to be outstanding after this offering and the concurrent private placement

17,712,558 shares

 

Over-allotment option

We have granted the underwriters an option for a period of 30 days to purchase up to 1,218,750 additional shares of our common stock at the initial public offering price.

 

Use of proceeds

We estimate that the net proceeds from this offering will be approximately $57.6 million, or approximately $66.7 million if the underwriters exercise their over-allotment option in full, assuming an initial public offering price of $8.00 per share, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. We also expect to receive $25.1 million from the sale by us of shares of our common stock in the concurrent private placement to certain of our existing stockholders at a price per share equal to the initial public offering price. We intend to use the net proceeds from this offering and the concurrent private placement to fund the continued clinical development of quizartinib, our lead drug candidate, to fund the continued development of our other programs and for working capital and other general corporate purposes. See “Use of Proceeds” on page 46 for a more complete description of the intended use of proceeds from this offering.

 

Risk factors

You should read the “Risk Factors” section of this prospectus beginning on page 11 for a discussion of factors to consider carefully before deciding to invest in shares of our common stock.

 

Nasdaq Global Market symbol

“AMBI”

The number of shares of our common stock to be outstanding after this offering and the concurrent private placement is based on 6,453,063 shares of common stock outstanding as of March 31, 2013, and excludes:

 

   

1,214,212 shares of common stock issuable upon exercise of stock options outstanding as of March 31, 2013, at a weighted-average exercise price of $8.75 per share;

 

   

6,117 shares of common stock reserved for future issuance under our 2011 amended and restated equity incentive plan (referred to herein as the 2011 pre-IPO plan) as of March 31, 2013 and an aggregate of 625,000 additional shares of common stock that will be available under our new 2013

 

 

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equity incentive plan (referred to herein as our 2013 post-IPO plan), which will become effective upon the closing of this offering;

 

   

125,000 shares of common stock reserved for issuance under our 2013 employee stock purchase plan, or ESPP, which will become effective upon the closing of this offering; and

 

   

1,800,920 shares of common stock issuable upon the exercise of warrants outstanding as of March 31, 2013, at a weighted-average exercise price of $3.30 per share.

 

 

Unless otherwise noted, all information contained in this prospectus, and the number of shares of common stock outstanding as of March 31, 2013:

 

   

reflects a 1-for-24 reverse stock split of our common stock effected on April 24, 2013;

 

   

assumes the filing of our amended and restated certificate of incorporation and the adoption of our amended and restated bylaws immediately prior of the closing of this offering;

 

   

assumes no exercise by the underwriters of their option to purchase up to an additional 1,218,750 shares of common stock to cover over-allotments;

 

   

reflects the issuance by us of 1,538,461 shares of our Series C-2 redeemable convertible preferred stock, 612,649 shares of our Series D redeemable convertible preferred stock, 3,666,169 shares of our Series D-2 redeemable convertible preferred stock and 6,163,916 shares of our Series E redeemable convertible preferred stock prior to the closing of this offering pursuant to the exercise of the GrowthWorks put right;

 

   

reflects the conversion of all of our outstanding shares of convertible preferred stock, including the shares issued upon exercise of the GrowthWorks put right into an aggregate of 6,449,073 shares of common stock upon the closing of this offering; and

 

   

reflects the adjustment of outstanding warrants to purchase shares of our convertible preferred stock into warrants to purchase 645,598 shares of common stock upon the closing of this offering.

 

 

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SUMMARY CONSOLIDATED FINANCIAL INFORMATION

The following summary consolidated financial information should be read together with our consolidated financial statements and accompanying notes and information under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus. The summary consolidated financial data in this section are not intended to replace our consolidated financial statements and the related notes. Our historical results are not necessarily indicative of results that may be expected in the future and results of interim periods are not necessarily indicative of the results for the entire year.

The summary consolidated statement of operations data for the years ended December 31, 2011 and 2012 and the summary consolidated balance sheet data as of December 31, 2012 are derived from our audited consolidated financial statements appearing elsewhere in this prospectus. The summary consolidated statement of operations data for the three months ended March 31, 2012 and 2013 and consolidated balance sheet data as of March 31, 2013 are derived from our unaudited consolidated financial statements and related notes appearing elsewhere in this prospectus. The unaudited consolidated financial statements have been prepared on a basis consistent with our audited consolidated financial statements included in this prospectus and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, necessary to fairly state our financial position as of March 31, 2013 and results of operations for the three months ended March 31, 2012 and 2013.

 

    Years Ended
December 31,
    Three Months
Ended March 31,
 
        2011             2012             2012             2013      
          (unaudited)  
    (in thousands, except share and per share data)  

Consolidated Statement of Operations Data:

       

Revenues:

       

Collaboration agreements

  $ 23,843      $ 17,633      $ 5,233      $ 6,592   

Operating expenses:

       

Research and development

    50,705        36,731        11,140        9,005   

General and administrative

    8,905        6,550        1,750        1,776   

Gain on sale of kinase profiling services business

    (2,108     (2,497     (555  

 

 

 

—  

 

  

 

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    57,502        40,784        12,335       

 

 

10,781

 

 

  

 

 

 

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (33,659     (23,151     (7,102  

 

 

 

(4,189

 

Other income (expense):

       

Interest expense

    (4,502     (1,737     (356     (162

Other income

    1,538        29        —          7   

Change in fair value of warrant and derivative liabilities

    (795     (2,291     (547  

 

 

 

(3,957

 

 

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

    (3,759     (3,999     (903    

 

(4,112

 

 

 

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

    (37,418     (27,150     (8,005    

 

(8,301

 

 

Provision (benefit) for income taxes

           (121     1       

 

 

 

1

 

 

 

  

 

 

 

 

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net loss

    (37,418     (27,029     (8,006     (8,302

Net (income) loss attributable to redeemable non-controlling interest

    (213     382        98       

 

 

 

73

 

 

 

  

 

 

 

 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to Ambit Biosciences Corporation

    (37,631     (26,647     (7,908     (8,229

Accretion to redemption value of redeemable convertible preferred stock

    (2,000     (3,161     (440    

 

(2,319

 

 

Change in fair value of redeemable non-controlling interest

    4,477        (854     (217  

 

 

 

(1,499

 

 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

  $ (35,154   $ (30,662   $ (8,565   $

 

(12,047

 

 

 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to common stockholders, basic and diluted(1)

  $ (25,886.60   $ (16,591.99   $ (6,251.82   $ (3,019.30
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding, basic and diluted(1)

    1,358        1,848       

 

1,370

 

  

 

 

 

 

 

 

 

 

 

3,990

 

 

 

  

 

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share attributable to common stockholders, basic and diluted (unaudited)(1)

    $ (4.92     $
(1.11

   

 

 

     

 

 

 

Pro forma weighted average shares outstanding, basic and diluted (unaudited)(1)

      4,932,134         

 

 

6,422,243

 

 

  

 

 

   

 

 

     

 

 

 

 

(1) Please see Note 1 to our consolidated financial statements for an explanation of the method used to calculate the historical and pro forma net loss per share attributable to common stockholders, basic and diluted, and the number of shares used in computation of the per share amounts.

 

 

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     As of March 31, 2013  
     Actual     Pro Forma     Pro Forma
As Adjusted
 
    

(unaudited)

 
     (in thousands)  

Consolidated Balance Sheet Data:

      

Cash and cash equivalents

   $ 8,405      $ 8,405      $ 92,204   

Working capital (deficit)

     (31,873     (26,355     57,794   

Total assets

     12,424        12,424        94,750   

Warrant liabilities

     14,497        8,979        8,979   

Notes payable, net of debt discount

     3,083        3,083        3,083   

Redeemable non-controlling interest

     7,482        —          —     

Redeemable convertible preferred stock

     159,395        —          —     

Convertible preferred stock

     13,702        —          —     

Common stock

    
—  
  
    6        18   

Additional paid-in capital

    
35,258
  
   
221,349
  
    304,013   

Accumulated deficit

     (245,200     (245,200     (245,200

Total stockholders’ (deficit) equity

     (210,028     (23,931     58,745   

The above table sets forth our summary consolidated balance sheet data as of March 31, 2013:

 

   

on an actual basis;

 

   

on a pro forma basis to give effect to:

 

 

  (1) the issuance by us of 1,538,461 shares of our Series C-2 redeemable convertible preferred stock, 612,649 shares of our Series D redeemable convertible preferred stock, 3,666,169 shares of our Series D-2 redeemable convertible preferred stock and 6,163,916 shares our Series E redeemable convertible preferred stock prior to the closing of this offering pursuant to the exercise of the GrowthWorks put right and the resultant reclassification of our redeemable non-controlling interest to additional paid-in capital, a component of stockholders’ deficit;

 

  (2) the conversion of all of our outstanding shares of convertible preferred stock, including the shares to be issued pursuant to the exercise of the GrowthWorks put right, into an aggregate of 6,449,073 shares of common stock upon the closing of this offering;

 

  (3) the adjustment of our outstanding warrants to purchase convertible preferred stock into warrants to purchase 645,598 shares of common stock upon the closing of this offering, and the resultant reclassification of our redeemable convertible preferred stock warrant liabilities to additional paid-in capital, a component of stockholders’ deficit; and

 

   

on a pro forma as adjusted basis to additionally give effect to the sale by us in the concurrent private placement to certain of our existing stockholders of $25.1 million of our common stock and the sale of 8,125,000 shares of common stock in this offering, assuming an initial public offering price of $8.00 per share, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

A $1.00 increase (decrease) in the assumed initial public offering price would increase (decrease) each of the cash and cash equivalents, working capital, total assets and total stockholders’ deficit by $7.6 million, assuming the number of shares offered by us as stated on the cover page of this prospectus remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, a one million share increase (decrease) in the number of shares offered by us, as set forth on the cover page of this prospectus,

 

 

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would increase (decrease) each of cash and cash equivalents, working capital, total assets and total stockholders’ deficit by $7.4 million, assuming the assumed initial public offering price of $8.00 per share remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below together with all of the other information contained in this prospectus, including our audited consolidated financial statements and the related notes appearing at the end of this prospectus, before deciding to invest in our common stock. If any of the following risks actually occurs, our business, prospects, financial condition and results of operations could suffer materially, the trading price of our common stock could decline and you could lose all or part of your investment.

Risks Related to Our Business and Industry

We are highly dependent on the success of our lead drug candidate, quizartinib, which is still in clinical development, and we cannot give any assurance that it, or any other drug candidates, will receive regulatory approval, which is necessary before they can be commercialized.

Our future success is substantially dependent on our ability to obtain regulatory approval for, and then successfully commercialize quizartinib, our lead drug candidate, for which a Phase 2 clinical trial and a Phase 2b clinical trial are ongoing. Our other drug candidates are in earlier stages of development. Our business depends entirely on the successful development and commercialization of our drug candidates. We have not completed the development of any drug candidates, we currently generate no revenues from sales of any drugs, and we may never be able to develop a marketable drug.

Quizartinib will require additional clinical development, evaluation of clinical, preclinical and manufacturing activities, regulatory approval in multiple jurisdictions, substantial investment, access to sufficient commercial manufacturing capacity and significant marketing efforts before we can generate any revenues from product sales. The U.S. Food and Drug Administration, or FDA, has also informed us that an approved companion diagnostic is required in order to obtain approval of quizartinib. Companion diagnostics are subject to regulation as medical devices and must be separately approved for marketing by the FDA. We are not permitted to market or promote quizartinib, or any other drug candidates before we receive regulatory approval from the FDA and comparable foreign regulatory authorities, and we may never receive such regulatory approvals.

We expect, pending regulatory authority input, to initiate a randomized, comparative Phase 3 clinical trial of quizartinib in patients with relapsed/refractory acute myeloid leukemia, or AML, in early 2014. There is no guarantee that this trial will commence or be completed on time or at all. Even if the trial is successfully completed, we cannot guarantee that the FDA or foreign regulatory authorities will interpret the results as we do. To the extent that the results of the trial are not satisfactory to the FDA or foreign regulatory authorities for support of a marketing application, we may be required to expend significant additional resources to conduct additional trials in support of potential approval of quizartinib.

We cannot anticipate when or if we will seek regulatory review of quizartinib for any other indications. We have not previously submitted a New Drug Application, or NDA, to the FDA, or similar drug approval filings to comparable foreign authorities, or received marketing approval for any drug candidate, and we cannot be certain that quizartinib will be successful in clinical trials or receive regulatory approval for any indication. If we do not receive regulatory approvals for and successfully commercialize quizartinib on a timely basis or at all, we may not be able to continue our operations. Even if we successfully obtain regulatory approvals to market quizartinib, our revenues will be dependent, in part, on our collaborator’s ability to obtain regulatory approval of the companion diagnostic to be used with quizartinib, our collaborator’s ability to commercialize the test as well as the size of the markets in the territories for which we gain regulatory approval and have commercial rights. If the markets for the treatment of AML are not as significant as we estimate, our business and prospects will be harmed.

We plan to seek regulatory approval to commercialize quizartinib both in the United States and in select foreign countries. While the scope of regulatory approval is similar in other countries, in some countries there are additional regulatory risks and we cannot predict success in these jurisdictions.

 

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Clinical drug development involves a lengthy and expensive process with an uncertain outcome, and results of earlier studies and trials may not be predictive of future trial results.

Clinical testing is expensive and can take many years to complete, and its outcome is inherently uncertain. Failure can occur at any time during the clinical trial process. The results of preclinical studies and early clinical trials of our drug candidates may not be predictive of the results of later-stage clinical trials. Drug 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. A number of companies in the biopharmaceutical industry have suffered significant setbacks in advanced clinical trials due to lack of efficacy or safety profiles, notwithstanding promising results in earlier trials.

We may experience delays in clinical trials of our drug candidates. We completed enrollment for a Phase 2 clinical trial of quizartinib for the treatment of AML in late 2011. We have been collaborating with Astellas Pharma Inc. and Astellas US LLC, or collectively Astellas, on the development of quizartinib. Astellas is currently conducting a Phase 2b clinical trial to determine the optimal dose for a Phase 3 clinical trial that we are planning to initiate in early 2014 in patients with relapsed/refractory AML. We have not yet finalized the design of this trial or received feedback on the proposed study design from the FDA. The Phase 3 clinical trial design will be based on data from the Phase 2 trial, the ongoing Phase 2b clinical trial and an ongoing drug-drug interaction study and on guidance we will seek from the FDA. The FDA may require us to conduct additional studies before proceeding with the Phase 3 clinical trial.

Our collaboration with Astellas for the development of quizartinib terminates in September 2013. Any interruptions or delays in transitioning full responsibility for clinical development to us in connection with such termination could delay the commencement of the Phase 3 clinical trial. In addition, any delays in obtaining data from the drug-drug interaction study or in the completion of the Phase 2b clinical trial could delay the commencement of the Phase 3 clinical trial. We are currently evaluating quizartinib in two other indications in AML and plan, in the future, to initiate additional clinical trials in AML and other indications. We do not know whether ongoing clinical trials will be completed on schedule or at all, or whether planned clinical trials will begin on time, need to be redesigned, enroll patients on time or be completed on schedule, if at all. Clinical trials can be delayed for a variety of reasons, including delays related to:

 

   

obtaining regulatory approval to commence a trial;

 

   

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

 

   

obtaining institutional review board approval at each clinical trial site;

 

   

recruiting suitable patients to participate in a trial;

 

   

developing and validating the companion diagnostic to be used in the trial on a timely basis;

 

   

having patients complete a trial or return for post-treatment follow-up;

 

   

clinical trial sites deviating from trial protocol or dropping out of a trial;

 

   

adding new clinical trial sites; or

 

   

manufacturing sufficient quantities of drug candidates for use in clinical trials.

Patient enrollment, a significant factor in the timing of clinical trials, is affected by many factors including the size and nature of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the trial, the design of the clinical trial, competing clinical trials and clinicians’ and patients’ perceptions as to the potential advantages of the drug being studied in relation to other available therapies, including any new drugs that may be approved for the indications we are investigating. Furthermore, we rely on Astellas, CROs and clinical trial sites to ensure the proper and timely conduct of our clinical trials and, while we have agreements governing their committed activities, we have limited influence over their actual performance.

 

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We could encounter delays if physicians encounter unresolved ethical issues associated with enrolling patients in clinical trials of our drug candidates in lieu of prescribing existing treatments that have established safety and efficacy profiles. Further, a clinical trial may be suspended or terminated by us, our collaborators, the institutional review boards, or IRBs, in the institutions in which such trials are being conducted, the Data Safety Monitoring Board, or DSMB, for such trial, or by the FDA or other regulatory authorities due to a number of factors, including failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols, inspection of the clinical trial operations or trial site by the FDA or other regulatory authorities resulting in the imposition of a clinical hold, unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from using a drug candidate, changes in governmental regulations or administrative actions or lack of adequate funding to continue the clinical trial. If we experience termination of, or delays in the completion of, any clinical trial of our drug candidates, the commercial prospects of our drug candidates will be harmed, and our ability to generate product revenues from any of these drug candidates will be delayed. In addition, any delays in completing our clinical trials will increase our costs, slow down our product development and approval process and jeopardize our ability to commence product sales and generate revenues. Any of these occurrences may harm our business, prospects, financial condition and results of operations significantly. Furthermore, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of our drug candidates.

The FDA regulatory approval process is lengthy, time consuming and inherently unpredictable, and if we are ultimately unable to obtain regulatory approval for quizartinib or our other drug candidates, our business will be substantially harmed.

The time required to obtain approval by the FDA and similar foreign authorities is unpredictable but typically takes many years following the commencement of clinical trials, depending upon numerous factors, including the substantial discretion of the regulatory authorities. In addition, approval policies, regulations, or the type and amount of clinical data necessary to gain approval may change during the course of a drug candidate’s clinical development and may vary among jurisdictions. We have not obtained regulatory approval for any drug candidate.

Quizartinib and our other drug candidates could fail to receive regulatory approval for many reasons, including the following:

 

   

the FDA or comparable foreign regulatory authorities may disagree with the design or implementation of our clinical trials;

 

   

we may be unable to demonstrate to the satisfaction of the FDA or comparable foreign regulatory authorities that a drug candidate is safe and effective for its proposed indication;

 

   

the results of clinical trials may not meet the level of statistical significance required by the FDA or comparable foreign regulatory authorities for approval;

 

   

we may be unable to demonstrate that a drug candidate’s clinical and other benefits outweigh its safety risks;

 

   

the FDA or comparable foreign regulatory authorities may disagree with our interpretation of data from preclinical studies or clinical trials;

 

   

the data collected from clinical trials of our drug candidates may not be sufficient to the satisfaction of FDA or comparable foreign regulatory authorities to support the submission of an NDA or other comparable submission in foreign jurisdictions or to obtain regulatory approval in the United States or foreign jurisdictions, on an accelerated basis or otherwise;

 

   

the FDA or comparable foreign regulatory authorities may not accept new surrogate endpoints, which are endpoints intended to substitute for clinical endpoints, as a basis for submission of an NDA or other comparable submission in foreign jurisdictions or as a basis for regulatory approval on an accelerated basis or otherwise;

 

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the FDA or comparable foreign regulatory authorities may fail to approve the manufacturing processes or facilities of third-party manufacturers with which we or our collaborators contract for clinical and commercial supplies;

 

   

the FDA or comparable foreign regulatory authorities, as applicable, may fail to approve the premarket approval application, or PMA, for the companion diagnostic we are developing with Genoptix Medical Laboratory, a Novartis company, or Genoptix; and

 

   

the approval policies or regulations of the FDA or comparable foreign regulatory authorities may significantly change in a manner rendering our clinical data insufficient for approval.

This lengthy approval process as well as the unpredictability of future clinical trial results may result in our failure to obtain regulatory approval to market quizartinib, or any of our other drug candidates, which would significantly harm our business, prospects, financial condition and results of operations. In addition, even if we were to obtain approval, regulatory authorities may approve any of our drug candidates for fewer or more limited indications than we request, may not approve the price we intend to charge for our products, may grant approval contingent on the performance of costly post-marketing clinical trials, or may approve a drug candidate with a label that does not include the labeling claims necessary or desirable for the successful commercialization of that drug candidate. Any of the foregoing scenarios could materially harm the commercial prospects for our drug candidates.

Our collaboration agreement with Astellas for quizartinib terminates in September 2013. In connection with the termination of this collaboration, we and Astellas must agree to a plan for transitioning all development activities from Astellas to us. If we are unable to agree to a transition plan with Astellas or if we are unable to implement any transition plan agreed upon between us and Astellas, the further development and potential commercialization of quizartinib may be delayed.

In March 2013, Astellas exercised the right to terminate our collaboration agreement, effective in September 2013, under which we collaborated with Astellas for the development of quizartinib and under which we and Astellas shared agreed-upon development costs equally. As a result of the termination of our collaboration, we will be solely responsible for developing and commercializing quizartinib within the United States and the rest of the world and will be responsible for many of the functions previously expected to be Astellas’ responsibility, including management and oversight of certain ongoing clinical trials and the planned Phase 3 clinical trial, as well as submitting the NDA for quizartinib to the FDA. We and Astellas are in the process of developing a plan to transition the development activities currently being conducted by Astellas to us. Currently, no such plans have been agreed upon and we cannot assure you that our efforts to transition Astellas’ collaboration responsibilities will proceed on a timely basis, or at all. If we are unable to successfully transition Astellas’ quizartinib development activities to us on a timely basis, our development plans may be delayed, which could harm our business, prospects, financial condition and results of operations.

We currently rely on Genoptix to develop the companion diagnostic test for quizartinib and in the future will rely on a third party to obtain marketing approval of such test, which will be required to market quizartinib in the United States. There is no guarantee that the FDA will grant timely approval of this test, if at all, and failure to obtain such timely approval would adversely affect our ability to obtain approval for quizartinib.

We intend to initially seek approval of quizartinib in relapsed/refractory AML patients with internal tandem duplication, or ITD, mutations in the FMS-like tyrosine kinase 3, or FLT3, gene, which we refer to as FLT3-ITD positive. The initial proposed drug label being sought for quizartinib specific to this patient population would indicate a potential for enhanced efficacy and/or a greater likelihood of a positive response in patients that carry the FLT3-ITD positive genotype. Accordingly, it is expected that the Phase 3 trial designed to support marketing approval for quizartinib will use a diagnostic test to select patients that are FLT3-ITD positive. In the United States, the FDA requires that the diagnostic test used to select patients in a pivotal trial be approved in parallel with the drug candidate as a companion diagnostic. A companion diagnostic is an in vitro diagnostic device that provides information that is essential for the safe and effective use of a corresponding therapeutic

 

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product. We believe a companion diagnostic to test for the FLT3-ITD positive genotype will be required for the approval of quizartinib. Companion diagnostics are subject to regulation as medical devices by the FDA and may be subject to regulation by comparable regulatory authorities in various foreign countries. The process of complying with the requirements of the FDA and comparable foreign agencies to support marketing authorization of a companion diagnostic is costly, time consuming and burdensome.

We do not develop companion diagnostics internally and thus we are dependent on the sustained cooperation and effort of third parties in developing and obtaining approval for these companion diagnostics. We have entered into an agreement with Genoptix, pursuant to which Genoptix will be responsible for developing the companion diagnostic and obtaining marketing authorization from the FDA. We believe Genoptix will need to submit a premarket approval application, or PMA, for such test, which we anticipate will happen in parallel with our submission of an NDA for quizartinib in accordance with FDA guidance that a novel therapeutic product and companion diagnostic device should generally be developed and approved contemporaneously to support the therapeutic product’s safe and effective use. We currently do not believe that any clinical trials other than the quizartinib Phase 3 clinical trial will be required to support the PMA for the companion diagnostic. However, the FDA may require Genoptix to perform further tests requiring access to patient samples for the test submission and/or future products. We intend to provide access to patient samples to Genoptix for such purposes and our informed consents with patients allow us to permit a third party to test these samples, as required.

We and Genoptix may encounter difficulties in developing and obtaining approval for the companion diagnostic, including issues relating to the selectivity/specificity, analytical validation, reproducibility, or clinical validation of the device. Despite the time and expense expended, regulatory approval of a companion diagnostic is never guaranteed. Any delay or failure by Genoptix to develop or obtain regulatory approval of the companion diagnostic could delay or prevent approval of quizartinib. In addition, while Genoptix has the right under our collaboration agreement to commercialize the companion diagnostic, it is not obligated to do so. Genoptix may elect to not commercialize, or even if it does elect to commercialize the companion diagnostic, Genoptix may decide to discontinue selling or manufacturing the companion diagnostic. We may not be able to enter into arrangements with another diagnostic company to obtain supplies of an alternate diagnostic test for use in connection with the development and commercialization of quizartinib or do so on commercially acceptable terms, which could adversely affect and/or delay the development or commercialization of quizartinib. In addition, Genoptix or any other diagnostic company may encounter production difficulties that could constrain the supply of the companion diagnostic, and both Genoptix and we may have difficulties gaining acceptance of the use of the companion diagnostic in the clinical community. If such companion diagnostic fails to gain market acceptance, it would have an adverse effect on our ability to derive revenues from sales of quizartinib. The commercial launch of quizartinib may be significantly and adversely affected if Genoptix is unable to obtain FDA approval of the companion diagnostic test in parallel with the approval of quizartinib or at all, or if a third party is unable to commercialize the test successfully and in a manner that effectively supports our commercial efforts.

Adverse side effects or other safety risks associated with our drug candidates could delay or preclude approval of quizartinib or any of our other current or future drug candidates, cause us to suspend or discontinue clinical trials, limit the commercial profile of an approved label, or result in significant negative consequences following marketing approval, if any.

Undesirable side effects caused by our drug candidates could result in the delay, suspension or termination of our clinical trials by us, our collaborators, IRBs, the FDA or other regulatory authorities for a number of reasons. If we elect or are required to delay, suspend or terminate any clinical trial of any drug candidates that we develop, the commercial prospects of such drug candidates will be harmed and our ability to generate product revenues from any of these drug candidates will be delayed or eliminated. Any of these occurrences may harm our business, prospects, financial condition and results of operations significantly.

To date, the clinical development program for quizartinib includes over 400 patients treated in our Phase 1 and Phase 2 clinical trials in relapsed/refractory AML. The adverse events we have observed to date are manageable and the most common all grade treatment-emergent adverse events (reported in ³ 20% of subjects) in our Phase 2

 

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clinical trials included gastrointestinal toxicities, fatigue, anemia, QT prolongation (changes in the patient’s electrocardiogram pattern), and dysgeusia (distortion of the sense of taste). Overall, there were no major differences between safety findings in FLT3-ITD positive and FLT3-ITD negative patients or between the Phase 1 and Phase 2 clinical trials. QT prolongation is a common adverse event associated with multiple other kinase inhibitors and may be a class effect. The majority of cases of QT prolongation with quizartinib are asymptomatic and occur within the first month of treatment. Additionally, the majority of patients that experienced QT prolongation did not discontinue quizartinib treatment due to this adverse event. Nonetheless, QT prolongation may be associated with changes in electric conduction in the heart and may cause irregularities of the heart beat which could be potentially serious, life-threatening or fatal and require ECG monitoring and treatment. To date, there has been one case of Grade 4 QT interval prolongation with Torsade de pointes (an abnormal cardiac rhythm) in a patient taking quizartinib with multiple concomitant medications in our Phase 2 clinical trial. Results of our current and anticipated trials could reveal a high and unacceptable severity and prevalence of these or other 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 drug candidates for any or all targeted indications. In addition, the drug-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, prospects, financial condition and results of operations significantly.

Additionally if quizartinib or any of our other drug candidates receive marketing approval, the FDA could require us to adopt a Risk Evaluation and Mitigation Strategy, or REMS, to ensure that the benefits outweigh its risks, which in the case of quizartinib may include, among other things, a medication guide outlining the risks of QT prolongation for distribution to patients and a communication plan to health care practitioners. Furthermore, if we or others later identify undesirable side effects caused by the product, a number of potentially significant negative consequences could result, including:

 

   

regulatory authorities may withdraw approvals of such product;

 

   

regulatory authorities may require additional warnings on the label;

 

   

we may be required to create a medication guide outlining the risks of such side effects for distribution to patients;

 

   

we may be required to change the way quizartinib is administered or conduct additional clinical trials;

 

   

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 quizartinib or the particular drug candidate at issue and could significantly harm our business, prospects, financial condition and results of operations.

If we are unable to obtain FDA approval of our drug candidates, we will not be able to commercialize them in the United States and our business will be adversely impacted.

We need FDA approval prior to marketing our drug candidates in the United States, and in the case of quizartinib, we must also ensure approval of a companion diagnostic. If we fail to obtain FDA approval to market our drug candidates, we will be unable to sell our drug candidates in the United States, which will significantly impair our ability to generate any revenues.

This regulatory review and approval process, which includes evaluation of preclinical studies and clinical trials of our drug candidates as well as the evaluation of our manufacturing processes and our third-party contract manufacturers’ facilities, is lengthy, expensive and uncertain. To receive approval, we must, among other things, demonstrate with substantial evidence from clinical trials that the drug candidate is both safe and effective for each indication for which approval is sought, and failure can occur in any stage of development. Satisfaction of the approval requirements typically takes several years and the time needed to satisfy them may vary substantially, based on the

 

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type, complexity and novelty of the pharmaceutical product. We cannot predict if or when we might receive regulatory approvals for any of our drug candidates currently under development. Moreover, any approvals that we obtain may not cover all of the clinical indications for which we are seeking approval, or could contain significant limitations in the form of narrow indications, warnings, precautions or contra-indications with respect to conditions of use. In such event, our ability to generate revenues from such products would be greatly reduced and our business would be harmed.

The FDA has substantial discretion in the approval process and may either refuse to consider our application for substantive review or may form the opinion after review of our data that our application is insufficient to allow approval of our drug candidates. If the FDA does not consider or approve our application, it may require that we conduct additional clinical, preclinical or manufacturing validation studies and submit that data before it will reconsider our application. Depending on the extent of these or any other studies, approval of any applications that we submit may be delayed by several years, or may require us to expend more resources than we have available. It is also possible that additional studies, if performed and completed, may not be successful or considered sufficient by the FDA to support approval. If any of these outcomes occur, we may be forced to abandon one or more of our applications for approval, which might significantly harm our business, prospects, financial condition and results of operations.

Even if we do receive regulatory approval to market a drug candidate, any such approval may be subject to limitations on the indicated uses for which we may market the product. It is possible that none of our existing drug candidates or any drug candidates we may seek to develop in the future will ever obtain the appropriate regulatory approvals necessary for us or our collaborators to commence product sales. Any delay in obtaining, or an inability to obtain, applicable regulatory approvals would prevent us from commercializing our drug candidates, generating revenues and achieving and sustaining profitability.

Even if we obtain and maintain approval for quizartinib from the FDA, we may never obtain approval for quizartinib outside of the United States, which would limit our market opportunities and adversely affect our business.

Sales of quizartinib outside of the United States, if approved, will be subject to foreign regulatory requirements governing clinical trials and marketing approval. Even if the FDA grants marketing approval for a product candidate, comparable regulatory authorities of foreign countries must also approve the manufacturing and marketing of the product candidates in those countries. Approval procedures vary among jurisdictions and can involve requirements and administrative review periods different from, and greater than, those in the United States, including additional preclinical studies or clinical trials. In many countries outside the United States, a product candidate must be approved for reimbursement before it can be approved for sale in that country. In some cases, the price that we intend to charge for our products is also subject to approval. We may decide to submit a marketing authorizations application, or MAA to the European Medicines Agency, or EMA, for approval in the European Union. As with the FDA, obtaining approval of an MAA from the EMA is a similarly lengthy and expensive process and the EMA has its own procedures for approval of product candidates. Even if a product is approved, the FDA or the EMA, as the case may be, may limit the indications for which the product may be marketed, require extensive warnings on the product labeling or require expensive and time-consuming clinical trials or reporting as conditions of approval. Regulatory authorities in countries outside of the United States and the European Union also have requirements for approval of drug candidates with which we must comply prior to marketing in those counties. Obtaining foreign regulatory approvals and compliance with foreign regulatory requirements could result in significant delays, difficulties and costs for us and could delay or prevent the introduction of our products in certain countries. Further, clinical trials conducted in one country may not be accepted by regulatory authorities in other countries and regulatory approval in one country does not ensure approval in any other country, while a failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory approval process in others. Also, regulatory approval for any of our product candidates may be withdrawn. If we fail to comply with the regulatory requirements in international markets and/or receive applicable marketing approvals, our target market will be reduced and our ability to realize the full market potential of quizartinib will be harmed, which would adversely affect our business, prospects, financial condition and results of operations.

 

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Even if we receive regulatory approval for any of our drug candidates, we will be subject to ongoing regulatory obligations and continued regulatory review, which may result in significant additional expense. Additionally, our drug candidates, if approved, could be subject to labeling and other restrictions and market withdrawal and we may be subject to penalties if we fail to comply with regulatory requirements or experience unanticipated problems with our products.

Any regulatory approvals that we or our strategic partners receive for our drug candidates may also be subject to limitations on the approved indicated uses for which the product may be marketed or to 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 drug candidate. In addition, if the FDA or a comparable foreign regulatory authority approves any of our drug candidates, the manufacturing processes, labeling, packaging, distribution, adverse event reporting, storage, advertising, promotion, import, export 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 current good manufacturing practices, or cGMPs, and current good clinical practices, or cGCPs, for any clinical trials that we conduct post-approval. Later discovery of previously unknown problems with a product, including adverse events of unanticipated severity or frequency, or with our third-party manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may result in, among other things:

 

   

restrictions on the marketing or manufacturing of the product, withdrawal of the product from the market, or voluntary or mandatory product recalls;

 

   

fines, warning letters or holds on clinical trials;

 

   

refusal by the FDA to approve pending applications or supplements to approved applications filed by us or our strategic partners, or suspension or revocation of product license approvals;

 

   

product seizure or detention, or refusal to permit the import or export of products; and

 

   

injunctions or the imposition of civil or criminal penalties.

The FDA’s policies may change and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of our drug candidates. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the United States or abroad. If we are slow or unable to adapt to changes in existing requirements or the adoption of 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 and we may not achieve or sustain profitability, which would adversely affect our business, prospects, financial condition and results of operations.

We rely on third parties to conduct our clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we and our collaborators may not be able to obtain regulatory approval for or commercialize our drug candidates and our business could be substantially harmed.

We have agreements with third-party CROs to conduct or monitor and manage data for our ongoing preclinical and clinical programs, including our ongoing Phase 2 clinical trials for quizartinib. We anticipate that we will engage one or more third party CROs in connection with our planned Phase 3 clinical trial. We rely heavily on these parties for execution of our preclinical and clinical trials, and we control only certain aspects of their activities. Nevertheless, we are responsible for ensuring that each of our studies is conducted in accordance with applicable protocol, legal, regulatory and scientific standards, and our reliance on our CROs does not relieve us of our regulatory responsibilities. We and our CROs are required to comply with cGCPs, which are regulations and guidelines enforced by the FDA and comparable foreign regulatory authorities for all of our drug candidates in clinical development. Regulatory authorities enforce these cGCPs through periodic inspections of trial sponsors, principal investigators and trial sites. If we or any of these CROs fail to comply with applicable cGCP regulations, the clinical data generated in our clinical trials may be deemed unreliable and the FDA or

 

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comparable foreign regulatory authorities may require us to perform additional clinical trials before approving our marketing applications. We cannot assure you that, upon inspection, such regulatory authorities will determine that any of our clinical trials comply with the cGCP regulations. In addition, our clinical trials must be conducted with drug product produced under cGMP regulations and will require a large number of test subjects. Our or our respective CROs’ failure to comply with these regulations or to recruit a sufficient number of patients may require us to repeat clinical trials, which would delay the regulatory approval process. Moreover, our business may be implicated if any of our CROs violates federal or state fraud and abuse or false claims laws and regulations or healthcare privacy and security laws.

Our CROs are not our employees and, except for remedies available to us under our agreements with such CROs, we cannot control whether or not they devote sufficient time and resources to our ongoing preclinical, clinical and nonclinical programs. These CROs may also have relationships with other commercial entities, including our competitors, for whom they may also be conducting clinical studies or other drug development activities, which could harm our competitive position. If CROs do not successfully carry out their contractual duties or obligations or meet expected deadlines, if they need to be replaced or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements or for other reasons, our clinical trials may be extended, delayed or terminated and we may not be able to complete development of, obtain regulatory approval for or successfully commercialize our drug candidates. As a result, our financial results and the commercial prospects for quizartinib and our other drug candidates would be harmed, our costs could increase and our ability to generate revenues could be delayed.

Switching or adding CROs involves substantial cost and requires extensive management time and focus. In addition, there is a natural transition period when a new CRO commences work. As a result, delays occur, which can 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 similar challenges or delays in the future or that these delays or challenges will not have a material adverse impact on our business, prospects, financial condition and results of operations.

We rely completely on third parties to manufacture our preclinical and clinical drug supplies and we intend to rely on third parties to produce commercial supplies of any approved drug candidate. The development and commercialization of any of our drug candidates, including quizartinib, could be stopped, delayed or made less profitable if those third parties fail to obtain and maintain regulatory approval of their facilities, fail to provide us with sufficient quantities of drug product or fail to do so at acceptable quality levels or prices.

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 drug candidates on a clinical or commercial scale. Instead, we rely on contract manufacturers for the production of quizartinib and our other drug candidates. The facilities used by our contract manufacturers to manufacture our drug candidates must be approved by the applicable regulatory authorities, including the FDA, pursuant to inspections that will be conducted after an NDA is submitted to the FDA. We do not control the manufacturing process of quizartinib and are completely dependent on our contract manufacturing partners for compliance with the FDA’s requirements for manufacture of both the active drug substances and finished quizartinib drug product. If our contract manufacturers cannot successfully manufacture material that conforms to our specifications and the FDA’s strict regulatory requirements, they will not be able to secure or maintain FDA approval for the manufacturing facilities. In addition, we have no control over the ability of our contract manufacturers to maintain adequate quality control, quality assurance and qualified personnel. If the FDA or any other applicable regulatory authorities does not approve these facilities for the manufacture of our drug candidates or if it withdraws any such approval in the future, or if our suppliers or contract manufacturers decide they no longer want to supply or manufacture our products, we may need to find alternative manufacturing facilities, in which case we might not be able to identify manufacturers for clinical or commercial supply on acceptable terms, or at all, which would significantly impact our ability to develop, obtain regulatory approval for or market our drug candidates.

 

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We rely on our manufacturers to purchase from third-party suppliers the materials necessary to produce our drug candidates for our clinical trials. There are a small number of suppliers for certain capital equipment and raw materials that we use to manufacture our drugs. We do not have any control over the process or timing of the acquisition of these raw materials by our manufacturers. Moreover, we currently do not have any agreements for the commercial production of these raw materials. Although we generally do not begin a clinical trial unless we believe we have a sufficient supply of a drug candidate to complete the clinical trial, any significant delay in the supply of a drug candidate or the raw material components thereof for an ongoing clinical trial due to the need to replace a third-party manufacturer could considerably delay completion of our clinical trials, product testing and potential regulatory approval of our drug candidates. If our manufacturers or we are unable to purchase these raw materials after regulatory approval has been obtained for our drug candidates, the commercial launch of our drug candidates would be delayed or there would be a shortage in supply, which would impair our ability to generate revenues from the sale of our drug candidates.

In addition, the manufacture of pharmaceutical products is complex and requires significant expertise and capital investment, including the development of advanced manufacturing techniques and process controls. Manufacturers of pharmaceutical products often encounter difficulties in production, particularly in scaling up and validating initial production and absence of contamination. These problems include difficulties with production costs and yields, quality control, including stability of the product, quality assurance testing, operator error, shortages of qualified personnel, as well as compliance with strictly enforced federal, state and foreign regulations. Furthermore, if contaminants are discovered in our products or in the manufacturing facilities in which our products are made, such manufacturing facilities may need to be closed for an extended period of time to investigate and remedy the contamination. We cannot assure you that any stability or other issues relating to the manufacture of any of our products will not occur in the future. Additionally, our manufacturers may experience manufacturing difficulties due to resource constraints or as a result of labor disputes or unstable political environments. If our manufacturers were to encounter any of these difficulties, or otherwise fail to comply with their contractual obligations, our ability to provide any drug candidates to patients in clinical trials would be jeopardized. Any delay or interruption in the supply of clinical trial supplies could delay the completion of clinical trials, increase the costs associated with maintaining clinical trial programs and, depending upon the period of delay, require us to commence new clinical trials at additional expense or terminate clinical trials completely. In addition, quizartinib has, to date, been dosed as a liquid oral treatment. We have recently developed a solid dosage form (tablet) of quizartinib and successfully completed a Phase 1 clinical trial in healthy volunteers to confirm the equivalent bioavailability between the liquid and the tablet forms. We anticipate incorporating the tablet in future clinical development, including our planned Phase 3 clinical trial, subject to guidance from the FDA. We may encounter delays in the manufacture of this tablet form, in which case we would need to continue to use the liquid form in future trials. In any event, if approved, our commercial strategy is to have both the tablet form and liquid forms in order to address the needs of multiple patient populations.

Any adverse developments affecting our clinical or commercial manufacturing operations for our products may result in shipment delays, inventory shortages, lot failures, product withdrawals or recalls, or other interruptions in the supply of our products. We may also have to take inventory write-offs and incur other charges and expenses for products that fail to meet specifications, undertake costly remediation efforts or seek more costly manufacturing alternatives. Accordingly, failures or difficulties faced at any level of our supply chain could materially adversely affect our business and delay or impede the development and commercialization of quizartinib or any of our other drug candidates and could have a material adverse effect on our business, prospects, financial condition or results of operations.

We currently do not have the capability to package quizartinib finished drug product for distribution to hospitals and other customers. We have entered into an agreement with a contract manufacturer to supply us with finished product. Prior to commercial launch, we intend to enter into a similar agreement with an alternate fill/finish drug product supplier for quizartinib so that we can ensure proper supply chain management once we are authorized to make commercial sales of quizartinib. Once finalized, we expect that the selected alternate supplier will provide us with finished drug product. If we receive marketing approval from the FDA, we intend to sell drug product finished and packaged by either our current contract manufacturer or this alternate supplier.

 

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We have not entered into long-term agreements with our current contract manufacturers or with any alternate fill/finish suppliers. Although we intend to do so prior to commercial launch of quizartinib in order to ensure that we maintain adequate supplies of finished drug product, we may be unable to enter into such an agreement or do so on commercially reasonable terms, which could have a material adverse impact upon our business and our ability to commercialize quizartinib.

We believe we will have sufficient quantities of manufactured drug substance to support planned development activities. Further, we plan to have our existing contract manufacturers and any alternate suppliers later identified manufacture and package additional bulk drug substance and finished drug product in connection with commercial launch in the event quizartinib is approved for sale by regulatory authorities. If we are unable to do so in a timely manner, the commercial introduction of quizartinib, if approved by the FDA, would be adversely affected.

Obtaining Fast Track designation from the FDA for our drug candidate quizartinib does not guarantee faster approval.

We received Fast Track designation for our drug candidate quizartinib for the treatment of patients 60 years of age or older with FLT3-ITD positive AML in first relapse or refractory to first line chemotherapy and treatment of patients 18 years or older with FLT3-ITD positive AML in second relapse or refractory to second line salvage therapy. Fast track designation is a process designed to facilitate the development and expedite the review of new drugs intended to treat serious or life-threatening diseases or conditions and that have the potential to address an unmet medical need for such disease or condition. Fast Track designation applies to the product and the specific indication for which it is being studied. Once a Fast Track designation is obtained, the FDA may consider for review on a rolling basis sections of the NDA before the complete application is submitted if the applicant provides and the FDA approves a schedule for the submission of the sections of the NDA and the applicant pays applicable user fees upon submission of the first section of the NDA. However, the time period specified in the Prescription Drug User Fee Act, which governs the time period goals the FDA has committed to reviewing an application, does not begin until the complete application is accepted for filing. Although we received Fast Track designation for quizartinib, the FDA may later decide that quizartinib no longer meets the conditions for qualification. In addition, Fast Track designation may not provide us with a material commercial advantage.

We currently have no marketing and sales organization and have no experience in marketing products. If we are unable to establish marketing and sales capabilities or enter into agreements with third parties to market and sell our drug candidates, we may not be able to generate product revenues.

We currently do not have a commercial organization for the marketing, sales and distribution of pharmaceutical products. In order to commercialize any products, we must build our marketing, sales, distribution, managerial and other non-technical capabilities or make arrangements with third parties to perform these services. We contemplate establishing (either internally or through a contract sales force) our own commercial capabilities to market, sell and distribute quizartinib, if approved, in North America and plan to partner with third parties to commercialize quizartinib in other markets.

The establishment and development of our own sales force or the establishment of a contract sales force to market any products we may develop will be expensive and time-consuming and could delay any product launch. Moreover, we cannot be certain that we will be able to successfully develop this capability. We will have to compete with other pharmaceutical and biotechnology companies to recruit, hire, train and retain marketing and sales personnel. We also face competition in our search for third parties to assist us with the sales and marketing efforts of our drug candidates. To the extent we rely on third parties to commercialize our approved products, if any, we may have little or no control over the marketing and sales efforts of such third parties and our revenues from product sales may be lower than if we had commercialized these products ourselves. In the event we are unable to develop our own marketing and sales force or collaborate with a third-party marketing and sales organization, we would not be able to commercialize our drug candidates.

If we fail to develop and commercialize other drug candidates, we may be unable to grow our business.

As a significant part of our growth strategy, we intend to develop and commercialize drug candidates in addition to quizartinib. These other drug candidates will require additional, time-consuming development efforts prior to

 

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commercial sale, including preclinical studies, extensive clinical trials and approval by the FDA and applicable foreign regulatory authorities. All drug candidates are prone to the risks of failure that are inherent in pharmaceutical product development, including the possibility that the drug candidate will not be shown to be sufficiently safe and/or effective for approval by regulatory authorities. In addition, we cannot assure you that any such products that are approved will be manufactured or produced economically, successfully commercialized or widely accepted in the marketplace or be more effective than other commercially available alternatives. A significant portion of the research that we are conducting involves new and unproven technologies. Research programs to identify new drug candidates require substantial technical, financial and human resources whether or not we ultimately identify any candidates. If we are unable to develop our drug candidates, our business and prospects will suffer.

We cannot be certain that our drug candidates will produce commercially viable drugs that safely and effectively treat cancer or other diseases. To date, our technology platform has yielded only a small number of drug candidates other than quizartinib. In addition, we have limited preclinical and clinical data with respect to any of these other potential drug candidates. Even if we are successful in completing preclinical and clinical development and receiving regulatory approval for one commercially viable drug for the treatment of one disease, we cannot be certain that we will also be able to develop and receive regulatory approval for other drug candidates for the treatment of other forms of that disease or other diseases. If we fail to develop and commercialize viable drugs, we will not be successful in developing a pipeline of potential drug candidates to follow quizartinib, and our business prospects would be harmed significantly.

Our commercial success depends upon attaining significant market acceptance of our drug candidates, if approved, including quizartinib, among physicians, patients, healthcare payors and, in the cancer market, acceptance by the major operators of cancer clinics.

Even if we obtain regulatory approval for quizartinib or any other drug candidate that we may develop or acquire in the future, the product may not gain market acceptance among physicians, health care payors, patients and the medical community. Market acceptance of quizartinib or any other drug candidates for which we receive approval depends on a number of factors, including:

 

   

the efficacy and safety of such drug candidates as demonstrated in clinical trials;

 

   

the clinical indications for which the drug candidate is approved;

 

   

acceptance by physicians, major operators of cancer clinics and patients of the drug as a safe and effective treatment;

 

   

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

 

   

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

 

   

the prevalence and severity of any side effects;

 

   

product labeling or product insert requirements of the FDA or other regulatory authorities;

 

   

the timing of market introduction of our products as well as competitive products;

 

   

the cost of treatment in relation to alternative treatments;

 

   

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

 

   

relative convenience and ease of administration; and

 

   

the effectiveness of our sales and marketing efforts and those of our collaborators.

If quizartinib or any other drug candidate is approved but fails to achieve market acceptance among physicians, patients, or health care payors, we will not be able to generate significant revenues, which would have a material adverse effect on our business, prospects, financial condition and results of operations.

 

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We face significant competition from other biotechnology and pharmaceutical companies and our operating results will suffer if we fail to compete effectively.

The biotechnology and pharmaceutical industries are intensely competitive. We have competitors both in the United States and internationally, including major multinational pharmaceutical companies, biotechnology companies and universities and other research institutions. Many of our competitors have substantially greater financial, technical and other resources, such as larger research and development staff and experienced marketing and manufacturing organizations and well-established sales forces. Additional mergers and acquisitions in the biotechnology and pharmaceutical industries may result in even more resources being concentrated in our competitors. Competition may increase further as a result of advances in the commercial applicability of technologies and greater availability of capital for investment in these industries. Our competitors may succeed in developing, acquiring or licensing on an exclusive basis drug products that are more effective or less costly than quizartinib or any drug candidate that we are currently developing or that we may develop.

Currently there are no approved therapies for relapsed/refractory AML beyond traditional chemotherapy. Quizartinib may face competition in the United States from the off-label use of commercially available kinase inhibitors such as Bayer AG’s and Onyx Pharmaceuticals, Inc.’s Nexavar® (sorafenib) and Pfizer Inc.’s Sutent® (sunitinib), two multi-kinase inhibitors that inhibit FLT3 approved for the treatment of certain solid tumors. However, these multi-kinase inhibitors are not currently approved for the treatment of AML. In addition, several other companies have small molecule and biologic drug candidates in development that target the FLT3 pathway and, if approved, could compete with quizartinib, including Novartis AG’s PKC-412 (midostaurin).

Pfizer’s Xeljanz® (tofacitinib), a pan-JAK inhibitor, was recently approved in the United States for the treatment of rheumatoid arthritis, and several companies have inhibitors of the JAK family of kinases in clinical development for inflammatory disease. A number of companies have oral small molecule and biologic colony-stimulating factor-1 receptor, or CSF1R, inhibitors in clinical development. Daiichi-Sankyo Company Limited’s, and F. Hoffman-LaRoche Ltd’s Zelboraf® (vemurafenib), a BRAF kinase inhibitor, was approved by the FDA in 2011 for the treatment of metastatic melanoma patients harboring the V600E BRAF mutation, and several other companies have BRAF inhibitors in clinical development.

Our ability to compete successfully will depend largely on our ability to leverage our experience in drug discovery and development to:

 

   

discover and develop highly selective and potent small molecule drugs that inhibit validated kinase targets and that are superior to other products in the market;

 

   

attract qualified scientific, product development and commercial personnel;

 

   

obtain patent and/or other proprietary protection for our medicines and technologies;

 

   

obtain required regulatory approvals; and

 

   

successfully collaborate with pharmaceutical companies in the discovery, development and commercialization of new medicines.

The availability and price of our competitors’ products could limit the demand, and the price we are able to charge, for quizartinib or any of our other drug candidates, if approved. We will not achieve our business plan if the acceptance of quizartinib is inhibited by price competition or the reluctance of physicians to switch from existing drug products to quizartinib, or if physicians switch to other new drug products or choose to reserve quizartinib for use in limited circumstances. The inability to compete with existing or subsequently introduced drug products would have a material adverse impact on our business, prospects, financial condition and results of operations.

Established pharmaceutical companies may invest heavily to accelerate discovery and development of novel compounds or to in-license novel compounds that could make our drug candidates less competitive. In addition,

 

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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 to be commercially successful. Accordingly, our competitors may succeed in obtaining patent protection, receiving FDA approval or discovering, developing and commercializing medicines before we do, which would have a material adverse impact on our business.

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

We intend to seek approval to market quizartinib in both the United States and in selected foreign jurisdictions. If we obtain approval in one or more foreign jurisdictions for quizartinib or any of our other drug candidates, we will be subject to rules and regulations in those jurisdictions. In some foreign countries, particularly those in the European Union, the pricing of prescription pharmaceuticals and biologics is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a drug candidate. In addition, market acceptance and sales of our drug candidates will depend significantly on the availability of adequate coverage and reimbursement from third-party payors for any of our drug candidates and may be affected by existing and future health care reform measures.

Government authorities and third-party payors, such as private health insurers and health maintenance organizations, decide which drugs they will pay for and establish reimbursement levels. Reimbursement by a third-party payor may depend upon a number of factors, including the third-party payor’s determination that use of a product is:

 

   

a covered benefit under its health plan;

 

   

safe, effective and medically necessary;

 

   

appropriate for the specific patient;

 

   

cost-effective; and

 

   

neither experimental nor investigational.

Obtaining coverage and reimbursement approval for a product from a government or other third-party payor is a time-consuming and costly process that could require us to provide to the payor supporting scientific, clinical and cost-effectiveness data for the use of our products. We may not be able to provide data sufficient to gain acceptance with respect to coverage and reimbursement. If reimbursement of our future products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, we may be unable to achieve or sustain profitability.

In both the United States and certain foreign jurisdictions, there have been a number of legislative and regulatory changes to the health care system that could impact our ability to sell our products profitably. In particular, the Medicare Modernization Act of 2003 revised the payment methodology for many products under Medicare in the United States. This has resulted in lower rates of reimbursement. In 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, collectively, the Healthcare Reform Act, was enacted. The Healthcare Reform Act contains a number of provisions, including those governing enrollment in federal healthcare programs, the increased use of comparative effectiveness research on healthcare products, reimbursement and fraud and abuse changes, which will impact existing government healthcare programs and will result in the development of new programs. An expansion in the government’s role in the U.S. healthcare industry may further lower rates of reimbursement for pharmaceutical products.

We cannot predict whether legal challenges will result in changes to the Healthcare Reform Act or if other legislative changes will be adopted, or how such changes would affect our business. Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payers.

 

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There have been, and likely will continue to be, legislative and regulatory proposals at the federal and state levels directed at broadening the availability of healthcare and containing or lowering the cost of healthcare. We cannot predict the initiatives that may be adopted in the future. The continuing efforts of the government, insurance companies, managed care organizations and other payors of healthcare services to contain or reduce costs of healthcare may adversely affect:

 

   

the demand for any drug candidates for which we may obtain regulatory approval;

 

   

our ability to set a price that we believe is fair for our products;

 

   

our ability to generate revenues and achieve or maintain profitability;

 

   

the level of taxes that we are required to pay; and

 

   

the availability of capital.

In addition, governments may impose price controls, which may adversely affect our future profitability.

We may form strategic alliances in the future, and we may not realize the benefits of such alliances.

We may form strategic alliances, create joint ventures or collaborations or enter into licensing arrangements with third parties that we believe will complement or augment our existing business, including with respect to quizartinib and our JAK2 and CSF1R programs. These relationships or those like them may require us to incur non-recurring and other charges, increase our near- and long-term expenditures, issue securities that dilute our existing stockholders or disrupt our management and business. In addition, we face significant competition in seeking appropriate strategic partners and the negotiation process is time-consuming and complex. Moreover, we may not be successful in our efforts to establish a strategic partnership or other alternative arrangements for quizartinib or our JAK2 and CSF1R programs or any future drug candidates and programs because our research and development pipeline may be insufficient, our drug candidates and programs may be deemed to be at too early of a stage of development for collaborative effort and third parties may not view our drug candidates and programs as having the requisite potential to demonstrate safety and efficacy. If we license products or businesses, we may not be able to realize the benefit of such transactions if we are unable to successfully integrate them with our existing operations and company culture. We cannot be certain that, following a strategic transaction or license, we will achieve the revenues or specific net income that justifies such transaction. Any delays in entering into new strategic partnership agreements related to our drug candidates could also delay the development and commercialization of our drug candidates and reduce their competitiveness even if they reach the market.

If we are not successful in attracting and retaining highly qualified personnel, we may not be able to successfully implement our business strategy.

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, including our President and Chief Executive Officer, Michael A. Martino, our Chief Medical Officer, Athena Countouriotis, M.D., and our Chief Financial Officer, Alan Fuhrman. In order to induce valuable employees to remain at Ambit, in addition to salary and cash incentives, we have provided stock options that vest over time. The value to employees of stock options that vest over time may be 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.

Our scientific team has expertise in many different aspects of drug discovery and development. We conduct our operations at our facility in San Diego, California. This region is headquarters to many other biopharmaceutical companies and many academic and research institutions. Competition for skilled personnel in our market is very intense and may limit our ability to hire and retain highly qualified personnel on acceptable terms.

Despite our efforts to retain valuable employees, members of our management, scientific and development teams may terminate their employment with us on short notice. Although we have employment agreements with

 

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all of our employees, these employment agreements provide for at-will employment, which means that any of our employees could leave our employment 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 potentially harm our business, prospects, financial condition or results of operations. We do not maintain “key man” insurance policies on the lives of these individuals or the lives of any of our other employees. 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.

Many of the other biotechnology and 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. They may also provide more diverse opportunities and better chances for career advancement. Some of these characteristics may be more appealing to high quality candidates than what we can offer. If we are unable to continue to attract and retain high quality personnel, the rate and success at which we can discover, develop and commercialize drug candidates will be limited.

We will need to grow the size of our organization, and we may experience difficulties in managing this growth.

As of March 31, 2013, we employed 45 employees, 41 of whom were full-time. As our development and commercialization plans and strategies develop, and as we transition into operating as a public company, we expect to need additional managerial, operational, sales, marketing, financial and other personnel. Future growth would impose significant added responsibilities on members of management, including:

 

   

identifying, recruiting, integrating, maintaining and motivating additional employees;

 

   

managing our internal development efforts effectively, including the clinical and FDA review process for quizartinib and our other drug candidates, while complying with our contractual obligations to licensors, licensees, contractors, collaborators and third parties; and

 

   

improving our operational, financial and management controls, reporting systems and procedures.

Our future financial performance and our ability to commercialize quizartinib and other drug candidates will depend, in part, on our ability to effectively manage any future growth, and our management may also have to divert a disproportionate amount of its attention away from day-to-day activities in order to devote a substantial amount of time to managing these growth activities. To date, we have used the services of outside vendors to perform tasks including clinical trial management, statistics and analysis, regulatory affairs, formulation development and other drug development functions. Our growth strategy may also entail expanding our group of contractors or consultants to implement these tasks going forward. Because we rely on numerous consultants, effectively outsourcing many key functions of our business, we will need to be able to effectively manage these consultants to ensure that they successfully carry out their contractual obligations and meet expected deadlines. However, if we are unable to effectively manage our outsourced activities or if the quality or accuracy of the services provided by consultants is compromised for any reason, our clinical trials may be extended, delayed or terminated, and we may not be able to obtain regulatory approval for quizartinib and our other drug candidates or otherwise advance our business. There can be no assurance that we will be able to manage our existing consultants or find other competent outside contractors and consultants on economically reasonable terms, or at all. If we are not able to effectively expand our organization by hiring new employees and expanding our groups of consultants and contractors, we may not be able to successfully implement the tasks necessary to further develop and commercialize our drug candidates and, accordingly, may not achieve our research, development and commercialization goals.

Our business and operations would suffer in the event of system failures.

Despite the implementation of security measures, our internal computer systems and those of our current and any future CROs and other contractors and consultants and collaborators are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. While we have not

 

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experienced any such material system failure, accident or security breach to date, if such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our development programs and our business operations. For example, the loss of clinical trial data from completed or future clinical trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. Likewise, we rely on third parties to manufacture our drug candidates and conduct clinical trials, and similar events relating to their computer systems could also have a material adverse effect on our business. To the extent that any disruption or security breach were to result in a loss of, or damage to, our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability and the further development and commercialization of our drug candidates could be delayed.

Business disruptions could seriously harm our future revenues and financial condition and increase our costs and expenses.

Our operations could be subject to earthquakes, power shortages, telecommunications failures, water shortages, floods, hurricanes, typhoons, fires, extreme weather conditions, medical epidemics and other natural or manmade disasters or business interruptions, for which we are predominantly self-insured. The occurrence of any of these business disruptions could seriously harm our operations and financial condition and increase our costs and expenses. We rely on third-party manufacturers to produce our drug candidates. Our ability to obtain clinical supplies of quizartinib or our other drug candidates could be disrupted, if the operations of these suppliers is affected by a man-made or natural disaster or other business interruption. Our corporate headquarters is located in California near major earthquake faults and fire zones. The ultimate impact on us, our significant suppliers and our general infrastructure of being located near major earthquake faults and fire zones and being consolidated in certain geographical areas is unknown, but our operations and financial condition could suffer in the event of a major earthquake, fire or other natural disaster.

A variety of risks associated with marketing our drug candidates internationally could materially adversely affect our business.

If approved for commercialization in the United States, we also expect to seek approval to market quizartinib outside of the United States. Consequently, we expect that we will be subject to additional risks related to operating in foreign countries including:

 

   

differing regulatory requirements for drug approvals in foreign countries;

 

   

the potential for so-called parallel importing, which is what happens when a local seller, faced with high or higher local prices, opts to import goods from a foreign market (with low or lower prices) rather than buying them locally;

 

   

unexpected changes in tariffs, trade barriers, price and exchange controls and other regulatory requirements;

 

   

economic weakness, including inflation, or political instability in particular foreign economies and markets;

 

   

compliance with tax, employment, immigration and labor laws for employees living or traveling abroad;

 

   

foreign taxes, including withholding of payroll taxes;

 

   

foreign currency fluctuations, which could result in increased operating expenses and reduced revenues, and other obligations incident to doing business in another country;

 

   

difficulties staffing and managing foreign operations;

 

   

workforce uncertainty in countries where labor unrest is more common than in the United States;

 

   

potential liability under the Foreign Corrupt Practices Act of 1977 or comparable foreign regulations;

 

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challenges enforcing our contractual and intellectual property rights, especially in those foreign countries that do not respect and protect intellectual property rights to the same extent as the United States;

 

   

production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; and

 

   

business interruptions resulting from geo-political actions, including war and terrorism.

These and other risks associated with our international operations may materially adversely affect our ability to attain or maintain profitable operations.

Our employees may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements.

We are exposed to the risk of employee fraud or other misconduct. Misconduct by employees could include intentional failures to comply with FDA regulations, to provide accurate information to the FDA, to comply with manufacturing standards we have established, to comply with federal and state health-care fraud and abuse laws and regulations, to report financial information or data accurately or to disclose unauthorized activities to us. In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Employee misconduct could also involve the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to our reputation. We have adopted a Code of Business Conduct and Ethics, but it is not always possible to identify and deter employee misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of significant fines or other sanctions.

We may also be subject to healthcare laws, regulation and enforcement; our failure to comply with those laws could have a material adverse effect on our results of operations and financial conditions.

Although we currently do not have any products on the market, if any of our drug candidates are approved, once we begin commercializing our products, we may be subject to additional healthcare regulation and enforcement by the federal government and the states and foreign governments in which we conduct our business. The laws that may affect our ability to operate include, without limitation, state and federal anti-kickback, false claims, privacy and security and physician sunshine laws and regulations. If our operations are found to be in violation of any of such laws or any other governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, the curtailment or restructuring of our operations, the exclusion from participation in federal and state healthcare programs and imprisonment, any of which could adversely affect our ability to operate our business and our financial results.

If product liability lawsuits are brought against us, we may incur substantial liabilities and may be required to limit commercialization of our drug candidates.

We face an inherent risk of product liability as a result of the clinical testing of our drug candidates and will face an even greater risk if we commercialize any products. For example, we may be sued if any drug candidate we develop allegedly causes injury or is found to be otherwise unsuitable during clinical 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 acts. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit

 

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commercialization of our drug candidates. 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 drug candidates or products that we may develop;

 

   

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;

 

   

exhaustion of any available insurance and our capital resources;

 

   

the inability to commercialize our drug candidates; and

 

   

a decline in our share price.

Our inability to obtain and retain sufficient product liability insurance at an acceptable cost to protect against potential product liability claims could prevent or inhibit the commercialization of products we develop. We currently carry $10.0 million of product liability insurance covering 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. If we determine that it is prudent to increase our product liability coverage due to the commercial launch of any approved product, we may be unable to obtain such increased coverage on acceptable terms, or at all. 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.

If we use hazardous and biological materials in a manner that causes injury or violates applicable law, we may be liable for damages.

Our research and development activities involve the controlled use of potentially hazardous substances, including chemical and biological materials. In addition, our operations produce hazardous waste products and those of our manufacturers and some CROs may produce medical and radioactive waste products. We and our manufacturers are subject to federal, state and local laws and regulations in the United States governing the use, manufacture, storage, handling and disposal of medical, radioactive and hazardous materials. Although we believe that our and our manufacturers’ procedures for using, handling, storing and disposing of these materials comply with legally prescribed standards, we may incur significant additional costs to comply with applicable laws in the future. Also, even if we are in compliance with applicable laws, we cannot completely eliminate the risk of contamination or injury resulting from medical, radioactive or hazardous materials. As a result of any such contamination or injury we may incur liability or local, city, state or federal authorities may curtail the use of these materials and interrupt our business operations. In the event of an accident, we could be held liable for damages or penalized with fines, and the liability could exceed our resources. We do not have any insurance for liabilities arising from medical radioactive or hazardous materials. Compliance with applicable environmental laws and regulations is expensive, and current or future environmental regulations may impair our research, development and production efforts, which could harm our business, prospects, financial condition or results of operations.

 

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Risks Related to Our Financial Position and Capital Requirements

We have a limited operating history, have incurred significant operating losses since our inception and anticipate that we will continue to incur losses for the foreseeable future.

Our operations began in 2000 and we have only a limited operating history upon which you can evaluate our business and prospects. Our operations to date have been limited to conducting product development activities for quizartinib and other drug candidates and performing research and development with respect to our clinical and preclinical programs. In addition, as an early stage company, we have limited experience and have not yet demonstrated an ability to successfully overcome many of the risks and uncertainties frequently encountered by companies in new and rapidly evolving fields, particularly in the pharmaceutical area. Nor have we demonstrated an ability to obtain regulatory approval for or to commercialize a drug candidate. Consequently, any predictions about our future performance may not be as accurate as they would be if we had a history of successfully developing and commercializing pharmaceutical products.

To date, we have financed our consolidated operations primarily through private placements of convertible debt and preferred stock, venture debt and our collaboration and license arrangements, and we have incurred significant operating losses since our inception, including consolidated net losses of $37.4 million and $27.0 million for the years ended December 31, 2011 and 2012, respectively, and $8.3 million for the three months ended March 31, 2013. As of March 31, 2013, we had an accumulated deficit of $245.2 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. Our losses have resulted principally from costs incurred in our discovery and development activities. We anticipate that our operating losses will substantially increase over the next several years as we execute our plan to expand our discovery, research, development and commercialization activities, including the clinical development and planned commercialization of our lead drug candidate, quizartinib, and incur the additional costs of operating as a public company. In addition, if we obtain regulatory approval of quizartinib, we may incur significant sales and marketing expenses. Because of the numerous risks and uncertainties associated with developing pharmaceutical products, we are unable to predict the extent of any future losses or whether or when we will become profitable, if ever.

Our independent registered public accounting firm has included an explanatory paragraph relating to our ability to continue as a going concern in its report on our audited financial statements included in this prospectus.

Our report from our independent registered public accounting firm for the year ended December 31, 2012 includes an explanatory paragraph stating that our recurring losses from operations and negative cash flows raise substantial doubt about our ability to continue as a going concern. If we are unable to obtain sufficient funding, our business, prospects, financial condition and results of operations will be materially and adversely affected and we may be unable to continue as a going concern. If we are unable to continue as a going concern, we may have to liquidate our assets and may receive less than the value at which those assets are carried on our audited consolidated financial statements, and it is likely that investors will lose all or a part of their investment. After this offering, future reports from our independent registered public accounting firm may also contain statements expressing doubt about our ability to continue as a going concern. If we seek additional financing to fund our business activities in the future and there remains doubt about our ability to continue as a going concern, investors or other financing sources may be unwilling to provide additional funding on commercially reasonable terms or at all.

We have limited sources of revenues and have not generated any revenues to date from product sales. We may never achieve or sustain profitability, which could depress the market price of our common stock, and could cause you to lose all or a part of your investment.

Our ability to become profitable depends on our ability to develop and commercialize quizartinib and our other drug candidates. To date, we have no products approved for commercial sale and have not generated any revenues from sales of any drug candidate, and we do not know when, or if, we will generate revenues in the future. Substantially all of our revenues to date have come from research service fees, license or collaboration

 

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agreements and our screening business, which we sold in October 2010. We do not anticipate generating revenues, if any, from sales of quizartinib for at least the next several years and we will never generate revenues from quizartinib if we and Genoptix do not obtain regulatory approval for quizartinib and its companion diagnostic, respectively. Our ability to generate future revenues depends heavily on our and our collaborators’ success in:

 

   

developing and securing U.S. and/or foreign regulatory approvals for quizartinib and its companion diagnostic;

 

   

manufacturing commercial quantities of quizartinib at acceptable cost;

 

   

achieving broad market acceptance of quizartinib in the medical community and with third-party payors and patients;

 

   

commercializing quizartinib and any other drug candidates for which we receive approval;

 

   

pursuing clinical development of quizartinib in additional indications, as well as clinical development of other drug candidates; and

 

   

generating a pipeline of innovative drug candidates using our drug discovery platform or through licensing strategies.

Even if we do generate product sales, we may never achieve or sustain profitability on a quarterly or annual basis. Our failure to become and remain profitable would depress the market price of our common stock and could impair our ability to raise capital, expand our business, diversify our product offerings or continue our operations.

The terms of our secured debt facility require us to meet certain operating and financial covenants and place restrictions on our operating and financial flexibility. If we raise additional capital through debt financing, the terms of any new debt could further restrict our ability to operate our business.

On March 31, 2010, we entered into a $12.0 million venture loan and security agreement, or the Compass Loan, with Compass Horizon Funding Company LLC and Oxford Finance Corporation, collectively, the Lenders. The Compass Loan is secured by a lien covering substantially all of our assets, excluding intellectual property, and we also pledged as collateral a portion of our equity interests in our subsidiaries. The Compass Loan is amortizing and we are obligated to make monthly payments of principal and interest through the maturity date of October 1, 2013, assuming there is no default that results in acceleration of the debt. As of March 31, 2013, the outstanding principal balance of the Compass Loan was $3.1 million.

The loan agreement governing the Compass Loan contains customary affirmative and negative covenants and events of default. The affirmative covenants include, among others, covenants requiring us to maintain our legal existence and governmental approvals, deliver certain financial reports and maintain insurance coverage. The negative covenants include, among others, restrictions on transferring collateral, changing our business, incurring additional indebtedness, engaging in mergers or acquisitions, paying dividends or making other distributions, making investments and creating other liens on our assets, in each case subject to customary exceptions. If we default under the Compass Loan, the Lenders may accelerate all of our repayment obligations and take control of our pledged assets, potentially requiring us to renegotiate our agreement on terms less favorable to us or to immediately cease operations. Further, if we are liquidated, the Lenders’ right to repayment would be senior to the rights of the holders of our common stock to receive any proceeds from the liquidation. The Lenders could declare a default under the Compass Loan upon the occurrence of any event that they interpret as a material adverse change as defined under the loan agreement, thereby requiring us to repay the loan immediately or to attempt to reverse the declaration of default through negotiation or litigation. Any declaration by the Lenders of an event of default could significantly harm our business and prospects and could cause the price of our common stock to decline. If we raise any additional debt financing, the terms of such additional debt could further restrict our operating and financial flexibility.

 

 

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If we fail to obtain additional financing, we may be unable to complete the development and commercialization of quizartinib or other drug candidates, or continue our other research and development programs.

Our operations have consumed substantial amounts of cash since inception. We expect to continue to spend substantial amounts to:

 

   

continue the clinical development of quizartinib in AML, including our ongoing Phase 2 and Phase 2b clinical trials and planned Phase 3 clinical trial, as well as the preclinical and clinical development of other drug candidates;

 

   

continue our research and development programs to advance our internal product pipeline;

 

   

launch and commercialize quizartinib and any other drug candidates for which we receive regulatory approval, including building our own commercial capabilities to sell, market, and distribute quizartinib in North America; and

 

   

service and/or repay the Compass Loan.

We estimate that our net proceeds from this offering and the concurrent private placement will be approximately $82.7 million, based upon an assumed initial public offering price of $8.00 per share, after deducting the estimated underwriting discounts and commissions and offering expenses payable by us. We believe that such proceeds together with our existing cash and cash equivalents, will be sufficient to fund our operations through at least the next 12 months. In particular, we believe that the net proceeds from this offering and the concurrent private placement intended for clinical development of quizartinib and our existing cash and cash equivalents, together with interest thereon, will be sufficient to fund such development through receipt of topline data from our planned Phase 3 clinical trial in patients with relapsed/refractory AML. However, changing circumstances may cause us to consume capital significantly faster than we currently anticipate, and we may need to spend more money than currently expected because of circumstances beyond our control. We will require additional capital for the further development and commercialization of quizartinib and our other drug candidates and may need to raise additional funds sooner if we choose to expand more rapidly than we presently anticipate.

We cannot be certain that additional funding will be available on acceptable terms, or at all. Subject to limited exceptions, the Compass Loan prohibits us from incurring additional indebtedness. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back or discontinue the development or commercialization of one or more of our drug candidates or other research and development initiatives. We also could be required to:

 

   

seek collaborators for one or more of our current or future drug candidates at an earlier stage than otherwise would be desirable or on terms that are less favorable than might otherwise be available;

 

   

relinquish or license on unfavorable terms our rights to technologies or drug candidates that we otherwise would seek to develop or commercialize ourselves; or

 

   

license or acquire additional drug candidates.

Any of the above events could significantly harm our business, prospects, financial condition and results of operations and cause the price of our common stock to decline.

Raising additional capital may cause dilution to our existing stockholders, restrict our operations or require us to relinquish rights to our technologies or drug candidates.

We may seek additional capital through a combination of public and private equity offerings, debt financings, strategic partnerships and alliances and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms may include liquidation or other preferences that adversely affect your rights as a stockholder. The incurrence of indebtedness would result in increased fixed payment obligations and could involve certain

 

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restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. If we raise additional funds through strategic partnerships and alliances and licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies or drug candidates, or grant licenses on terms unfavorable to us.

Our ability to utilize our net operating loss carryforwards and certain other tax attributes may be limited.

Under Section 382 of the Internal Revenue Code of 1986, as amended, 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 net operating loss carryforwards and other pre-change tax attributes to offset its post-change income may be limited. We believe that, as a result of this offering, the concurrent private placement, our most recent private placement and other transactions that have occurred over the past three years, we have experienced, or may upon completion of this offering experience, an “ownership change.” We may also experience ownership changes in the future as a result of subsequent shifts in our stock ownership. As of December 31, 2012, we had federal and state net operating loss carryforwards of approximately $151.2 million and $143.1 million, respectively, and federal research and development credits of $5.0 million which could be limited if we experience an “ownership change.”

Unstable market and economic conditions may have serious adverse consequences on our business, financial condition and stock price.

As widely reported, global credit and financial markets have experienced extreme disruptions in the past several years, including severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, and uncertainty about economic stability. There can be no assurance that further deterioration in credit and financial markets and confidence in economic conditions will not occur. Our general business strategy may be adversely affected by any such economic downturn, volatile business environment or continued unpredictable and unstable market conditions. If the current equity and credit markets deteriorate, or do not improve, it may make any necessary debt or equity financing more difficult, more costly, and more dilutive. Failure to secure any necessary financing in a timely manner and on favorable terms could have a material adverse effect on our growth strategy, financial performance and stock price and could require us to delay or abandon clinical development plans. In addition, there is a risk that one or more of our current service providers, manufacturers and other partners may not survive these difficult economic times, which could directly affect our ability to attain our operating goals on schedule and on budget.

At March 31, 2013, we had $8.4 million of cash and cash equivalents. While we are not aware of any downgrades, material losses, or other significant deterioration in the fair value of our cash equivalents since March 31, 2013, no assurance can be given that further deterioration of the global credit and financial markets would not negatively impact our current portfolio of cash equivalents or marketable securities or our ability to meet our financing objectives. Furthermore, our stock price may decline due in part to the volatility of the stock market and the general economic downturn.

Risks Related to Our Intellectual Property

If our efforts to protect the proprietary nature of the intellectual property related to our technologies are not adequate, we may not be able to compete effectively in our market.

We rely upon a combination of patents, trade secret protection and confidentiality agreements to protect the intellectual property related to our technologies. Any disclosure to or misappropriation by third parties of our confidential proprietary information could enable competitors to quickly duplicate or surpass our technological achievements, thus eroding our competitive position in our market.

 

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Composition-of-matter patents on the active pharmaceutical ingredient are generally considered to be the strongest form of intellectual property protection for pharmaceutical products, as such patents provide protection without regard to any method of use. We cannot be certain that the claims in our patent applications covering composition-of-matter of our drug candidates will be considered patentable by the United States Patent and Trademark Office, or the U.S. PTO, courts in the United States, or by the patent offices and courts in foreign countries. Method-of-use patents protect the use of a product for the specified method. This type of patent does not prevent a competitor from making and marketing a product that is identical to our product for an indication that is outside the scope of the patented method. Moreover, even if competitors do not actively promote their product for our targeted indications, physicians may prescribe these products “off-label.” Although off-label prescriptions may infringe or contribute to the infringement of method-of-use patents, the practice is common and such infringement is difficult to prevent or prosecute.

The strength of patents in the biotechnology and pharmaceutical field involves complex legal and scientific questions and can be uncertain. The patent applications that we own or license may fail to result in issued patents in the United States or in other foreign countries. Even if the patents do successfully issue, third parties may challenge the validity, enforceability or scope thereof, which may result in such patents being narrowed, invalidated or held unenforceable. Furthermore, even if they are unchallenged, our patents and patent applications, including those that we license to Teva, may not adequately protect our intellectual property or prevent others from designing around our claims. If the breadth or strength of protection provided by the patent applications we hold with respect to quizartinib or the patents we hold or pursue with respect to other drug candidates is threatened, it could dissuade companies from collaborating with us to develop, and threaten our ability to commercialize, our drug candidates. Further, if we encounter delays in our clinical trials, the period of time during which we could market our drug candidates under patent protection would be reduced. Since patent applications in the United States and most other countries are confidential for a period of time after filing, we cannot be certain that we were the first to file any patent application related to quizartinib or our other candidates. Furthermore, for applications in which all claims are entitled to a priority date before March 16, 2013, an interference proceeding can be provoked by a third-party or instituted by the U.S. PTO, to determine who was the first to invent any of the subject matter covered by the patent claims of our applications. For applications containing a claim not entitled to priority before March 16, 2013, there is greater level of uncertainty in the patent law with the passage of the America Invents Act (2012) which brings into effect significant changes to the U.S. patent laws that are yet untried and untested, and which introduces new procedures for challenging pending patent applications and issued patents. A primary change under this reform is creating a “first to file” system in the U.S. This will require us to be cognizant after March 16, 2013 of the time from invention to filing of a patent application.

In addition to the protection afforded by patents, we seek to rely on trade secret protection and confidentiality agreements to protect proprietary know-how that is not patentable, processes for which patents are difficult to enforce and any other elements of our drug discovery and development processes that involve proprietary know-how, information or technology that is not covered by patents. Although we require all of our employees to assign their inventions to us, and require all of our employees, consultants, advisors and any third parties who have access to our proprietary know-how, information or technology to enter into confidentiality agreements, we cannot be certain that our trade secrets and other confidential proprietary information will not be disclosed or that competitors will not otherwise gain access to our trade secrets or independently develop substantially equivalent information and techniques. Furthermore, the laws of some foreign countries do not protect proprietary rights to the same extent or in the same manner as the laws of the United States. As a result, we may encounter significant problems in protecting and defending our intellectual property both in the United States and abroad. If we are unable to prevent unauthorized material disclosure of our intellectual property to third parties, we will not be able to establish or maintain a competitive advantage in our market, which could materially adversely affect our business, operating results and financial condition.

 

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Third-party claims of intellectual property infringement may prevent or delay our drug discovery and development efforts.

Our commercial success depends in part on our and our collaborators’ avoiding infringement of the patents and proprietary rights of third parties. There is a substantial amount of litigation involving patents and other intellectual property rights in the biotechnology and pharmaceutical industries, as well as administrative proceedings for challenging patents, including interference and reexamination proceedings before the U.S. PTO or oppositions and other comparable proceedings in foreign jurisdictions. Recently, under U.S. patent reform, new procedures including inter partes review and post grant review have been implemented or will be implemented as of March 16, 2013. As stated above, this reform is untried and untested and will bring uncertainty to the possibility of challenge to our patents in the future. Numerous U.S. and foreign issued patents and pending patent applications, which are owned by third parties, exist in the fields in which we and our collaborators are developing drug candidates. As the biotechnology and pharmaceutical industries expand and more patents are issued, the risk increases that our drug candidates may give rise to claims of infringement of the patent rights of others.

Third parties may assert that we are employing their proprietary technology without authorization. There may be third-party patents of which we are currently unaware with claims to materials, formulations, methods of manufacture or methods for treatment related to the use or manufacture of quizartinib and/or our other drug candidates. Because patent applications can take many years to issue, there may be currently pending patent applications which may later result in issued patents that our drug candidates may infringe. In addition, third parties may obtain patents in the future and claim that use of our technologies infringes upon these patents. If any third-party patents were held by a court of competent jurisdiction to cover the manufacturing process of any of our drug candidates, any molecules formed during the manufacturing process or any final product itself, the holders of any such patents may be able to block our ability to commercialize such drug candidate unless we obtained a license under the applicable patents, or until such patents expire or they are finally determined to be held invalid or unenforceable. Similarly, if any third-party patent were held by a court of competent jurisdiction to cover aspects of our formulations, processes for manufacture or methods of use, including combination therapy or patient selection methods, the holders of any such patent may be able to block our ability to develop and commercialize the applicable drug candidate unless we obtained a license or until such patent expires or is finally determined to be held invalid or unenforceable. In either case, such a license may not be available on commercially reasonable terms or at all. We are aware of a third party patent that relates to an inactive ingredient that we currently use in quizartinib, as well as a third party patent related to diagnostic testing for certain FLT3 mutations in patient samples. Should a license to either third party patent become necessary, we cannot predict whether we or our partners would be able to obtain a license to either of the above, or if a license were available, whether it would be available on commercially reasonable terms. If such patents have a valid claim relating to our use of the inactive ingredient or diagnostic testing required to detect FLT3 mutations and, in either case, a license under the applicable patent is unavailable on commercially reasonable terms, or at all, our ability to commercialize quizartinib may be impaired or delayed, which could in turn significantly harm our business.

Parties making claims against us may seek and obtain injunctive or other equitable relief, which could effectively block our ability to further develop and commercialize one or more of our drug 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 may have to pay substantial damages, including treble damages and attorneys’ fees for willful infringement, obtain one or more licenses from third parties, pay royalties or redesign our infringing products, which may be impossible or require substantial time and monetary expenditure. We cannot predict whether any such license would be available at all or whether it would be available on commercially reasonable terms. Furthermore, even in the absence of litigation, we may need to obtain licenses from third parties to advance our research or allow commercialization of our drug candidates, and we have done so from time to time. We may fail to obtain any of these licenses at a reasonable cost or on reasonable terms, if at all. In that event, we would be unable to further develop and commercialize one or more of our drug candidates, which could harm our business significantly.

 

 

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We may be involved in lawsuits to protect or enforce our patents or the patents of our licensors, which could be expensive, time consuming and unsuccessful.

Competitors may infringe our patents or the patents of our licensors. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time-consuming. In addition, in an infringement proceeding, a court may decide that a patent of ours or our licensors is not valid or is unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the technology in question. An adverse result in any litigation or defense proceedings could put one or more of our patents at risk of being invalidated, held unenforceable, or interpreted narrowly and could put our patent applications at risk of not issuing. 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 may have to pay substantial damages, including treble damages and attorneys’ fees for willful infringement, obtain one or more licenses from third parties, pay royalties or redesign our infringing products, which may be impossible or require substantial time and monetary expenditure.

Interference proceedings provoked by third parties or brought by the U.S. PTO may be necessary to determine the priority of inventions with respect to our patents or patent applications or those of our collaborators or licensors. 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. Litigation or interference proceedings may fail and, even if successful, may result in substantial costs and distract our management and other employees. We may not be able to prevent, alone or with our licensors, misappropriation of our trade secrets or confidential information, particularly in countries where the laws may not protect those rights as fully as in the United States.

Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock.

Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.

Periodic maintenance fees on any issued patent are due to be paid to the U.S. PTO and foreign patent agencies in several stages over the lifetime of the patent. The U.S. PTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. While an inadvertent lapse can in many cases be cured by payment of a late fee or by other means in accordance with the applicable rules, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. Non-compliance events that could result in abandonment or lapse of a patent or patent application include, but are not limited to, failure to respond to official actions within prescribed time limits, non-payment of fees and failure to properly legalize and submit formal documents. In such an event, our competitors might be able to enter the market, which would have a material adverse effect on our business.

We may be subject to claims that our employees, consultants or independent contractors have wrongfully used or disclosed confidential information of third parties, including entities that disclosed such information to us in connection with previously provided screening services.

We have received confidential and proprietary information from collaborators, prospective licensees and other third parties. In addition, we employ individuals who were previously employed at other biotechnology or pharmaceutical companies. We may be subject to claims that we or our employees, consultants or independent contractors have inadvertently or otherwise used or disclosed confidential information of these third parties or

 

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our employees’ former employers. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial cost and be a distraction to our management and employees.

Risks Related to This Offering and Ownership of our Common Stock

We do not know whether an active, liquid and orderly trading market will develop for our common stock or what the market price of our common stock will be and as a result it may be difficult for you to sell your shares of our common stock.

Prior to this offering there has been no public market for shares of our common stock. Although our common stock has been approved for listing on the Nasdaq Global Market, an active trading market for our shares may never develop or be sustained following this offering. You may not be able to sell your shares quickly or at the market price if trading in our common shares is not active. The initial public offering price for our common stock will be determined through negotiations with the underwriters, and the negotiated price may not be indicative of the market price of the common stock after the offering. As a result of these and other factors, you may be unable to resell your shares of our common stock at or above the initial public offering price. Further, an inactive market may also impair our ability to raise capital by selling shares of our common stock and may impair our ability to enter into strategic partnerships or acquire companies or products by using our shares of common stock as consideration.

The price of our stock may be volatile, and you could lose all or part of your investment.

The trading price of our common stock following this offering is likely to be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control, including limited trading volume. In addition to the factors discussed in this “Risk Factors” section and elsewhere in this prospectus, these factors include:

 

   

the commencement, enrollment or results of our planned Phase 3 clinical trial of quizartinib or any ongoing or future clinical trials we may conduct, or changes in the development status of quizartinib or any other drug candidate;

 

   

any delay in filing our NDA for quizartinib and any adverse development or perceived adverse development with respect to the FDA’s review of the NDA, including without limitation the FDA’s issuance of a “refusal to file” letter or a request for additional information;

 

   

adverse results or delays in clinical trials;

 

   

our decision to initiate a clinical trial, not to initiate a clinical trial or to terminate an existing clinical trial;

 

   

adverse regulatory decisions, including failure to receive regulatory approval for quizartinib or the companion diagnostic;

 

   

changes in laws or regulations applicable to our products, including but not limited to clinical trial requirements for approvals;

 

   

adverse developments concerning our collaborations and our manufacturers;

 

   

inability to obtain adequate product supply for any approved drug product or inability to do so at acceptable prices;

 

   

the termination of a collaboration or the inability to establish additional collaborations;

 

   

our failure to commercialize quizartinib and the companion diagnostic, develop additional drug candidates and commercialize additional drug products;

 

   

additions or departures of key scientific or management personnel;

 

   

unanticipated serious safety concerns related to the use of quizartinib or any of our other drug candidates;

 

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introduction of new products or services offered by us or our competitors;

 

   

announcements of significant acquisitions, strategic partnerships, joint ventures or capital commitments by us or our competitors;

 

   

our ability to effectively manage our growth;

 

   

the size and growth, if any, of the AML market and other targeted markets;

 

   

our ability to successfully enter new markets or develop additional drug candidates;

 

   

actual or anticipated variations in quarterly operating results;

 

   

our cash position;

 

   

failure to meet the estimates and projections of the investment community or that we may otherwise provide to the public;

 

   

publication of research reports about us or our industry or positive or negative recommendations or withdrawal of research coverage by securities analysts;

 

   

changes in the market valuations of similar companies;

 

   

overall performance of the equity markets;

 

   

issuances of debt or equity securities;

 

   

sales of our common stock by us or our stockholders in the future;

 

   

trading volume of our common stock;

 

   

changes in accounting practices;

 

   

ineffectiveness of our internal controls;

 

   

disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our technologies;

 

   

significant lawsuits, including patent or stockholder litigation;

 

   

general political and economic conditions; and

 

   

other events or factors, many of which are beyond our control.

In addition, the stock market in general, and the Nasdaq Global Market and biotechnology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors may negatively affect the market price of our common stock, regardless of our actual operating performance. If the market price of our common stock after this offering does not exceed the initial public offering price, you may not realize any return on your investment in us and may lose some or all of your investment. In the past, securities class action litigation has often been instituted against companies following periods of volatility in the market price of a company’s securities. This type of litigation, if instituted, could result in substantial costs and a diversion of management’s attention and resources, which would harm our business, operating results or financial condition.

We do not intend to pay dividends on our common stock so any returns will be limited to the value of our stock.

We have never declared or paid any cash dividend on our common stock. We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. In addition, the Compass Loan currently prohibits us from paying dividends on our equity securities, and any future debt financing arrangement may contain terms prohibiting or limiting the amount of dividends that may be declared or paid on our common stock. Any return to stockholders will therefore be limited to the appreciation of their stock.

 

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Our principal stockholders and management own a significant percentage of our stock and will be able to exert significant control over matters subject to stockholder approval.

Prior to this offering, our executive officers, directors, 5% stockholders and their affiliates owned approximately 86.6% of our voting stock and, upon the closing of this offering and the concurrent private placement, that same group will hold approximately 46.9% of our outstanding voting stock (assuming no exercise of the underwriters’ over-allotment option) in each case assuming an initial public offering price of $8.00 per share. Therefore, even after this offering these stockholders will have the ability to influence us through this ownership position. These stockholders may be able to determine all matters requiring stockholder approval. For example, these stockholders may be able to control elections of directors, amendments of our organizational documents, or approval of any merger, sale of assets, or other major corporate transaction. This may prevent or discourage unsolicited acquisition proposals or offers for our common stock that you may feel are in your best interest as one of our stockholders.

If you purchase our common stock in this offering, you will incur immediate and substantial dilution in the book value of your shares.

The initial public offering price is substantially higher than the net tangible book value per share of our common stock. Investors purchasing common stock in this offering will pay a price per share that substantially exceeds the book value of our tangible assets after subtracting our liabilities. As a result, investors purchasing common stock in this offering will incur immediate dilution of $4.68 per share, based on an initial public offering price of $8.00 per share. Further, investors purchasing common stock in this offering will contribute approximately 22% of the total amount invested by stockholders since our inception, but will own approximately 46% of the shares of common stock outstanding after giving effect to this offering.

In addition, as of March 31, 2013, options to purchase 1,214,212 shares of our common stock at a weighted-average exercise price of $8.75 per share and warrants exercisable for up to 1,800,920 shares of our common stock at a weighted-average price of $3.30 per share were outstanding. The exercise of any of these options or warrants would result in additional dilution. As a result of the dilution to investors purchasing shares in this offering, investors may receive significantly less than the purchase price paid in this offering, if anything, in the event of our liquidation. For a further description of the dilution that you will experience immediately after this offering, see “Dilution.”

We are an emerging growth company, and we cannot be certain if the reduced reporting requirements applicable to emerging growth companies will make our common stock less attractive to investors.

We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in this prospectus and our periodic reports and proxy statements and exemptions from the requirements of holding nonbinding advisory votes on executive compensation and stockholder approval of any golden parachute payments not previously approved. We could be an emerging growth company for up to five years, although circumstances could cause us to lose that status earlier, including if the market value of our common stock held by non-affiliates exceeds $700.0 million as of any June 30 before that time or if we have total annual gross revenue of $1.0 billion or more during any fiscal year before that time, in which cases we would no longer be an emerging growth company as of the following December 31 or, if we issue more than $1.0 billion in non-convertible debt during any three year period before that time, we would cease to be an emerging growth company immediately. Even after we no longer qualify as an emerging growth company, we may still qualify as a “smaller reporting company” which would allow us to take advantage of many of the same exemptions from disclosure requirements including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and reduced disclosure obligations regarding executive

 

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compensation in this prospectus and our periodic reports and proxy statements. We cannot predict if investors will find our common stock less attractive because we may 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.

Under the JOBS Act, emerging growth companies can also 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. As a result, changes in rules of U.S. generally accepted accounting principles or their interpretation, the adoption of new guidance or the application of existing guidance to changes in our business could significantly affect our financial position and results of operations.

We will incur significant increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives.

As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. We will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, which will require, among other things, that we file with the Securities and Exchange Commission, or the SEC, annual, quarterly and current reports with respect to our business and financial condition. In addition, the Sarbanes-Oxley Act, as well as rules subsequently adopted by the SEC, and the Nasdaq Global Market to implement provisions of the Sarbanes-Oxley Act, impose significant requirements on public companies, including requiring establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. Further, in July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, was enacted. There are significant corporate governance and executive compensation related provisions in the Dodd-Frank Act that require the SEC to adopt additional rules and regulations in these areas such as “say on pay” and proxy access. Recent legislation permits smaller “emerging growth companies” to implement many of these requirements over a longer period and up to five years from the pricing of this offering. We intend to take advantage of this new legislation but cannot guarantee that we will not be required to implement these requirements sooner than budgeted or planned and thereby incur unexpected expenses. Stockholder 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.

We expect the rules and regulations applicable to public companies to substantially increase our legal and financial compliance costs and to make some activities more time-consuming and costly. If these requirements divert the attention of our management and personnel from other business concerns, they could have a material adverse effect on our business, financial condition and results of operations. The increased costs will decrease our net income or increase our consolidated net loss, and may require us to reduce costs in other areas of our business or increase the prices of our products or services. For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to incur substantial costs to maintain the same or similar coverage. We cannot predict or estimate the amount or timing of additional costs we may incur to respond to these requirements. The impact of these requirements could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers.

Sales of a substantial number of shares of our common stock by our existing stockholders in the public market could cause our stock price to fall.

If our existing stockholders sell, or indicate an intention to sell, substantial amounts of our common stock in the public market after the lock-up and other legal restrictions on resale discussed in this prospectus lapse, the trading price of our common stock could decline. Based on shares of common stock outstanding as of

 

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March 31, 2013, upon the closing of this offering and the concurrent private placement, we will have outstanding a total of 17,712,558 shares of common stock, assuming no exercise of the underwriters’ overallotment option and no exercise of outstanding options and warrants. Of these shares, only the 8,125,000 shares of common stock sold in this offering by us, plus any shares sold upon exercise of the underwriters’ overallotment option, will be freely tradable without restriction in the public market immediately following this offering. Citigroup Global Markets Inc. and Leerink Swann LLC, however, may, in their sole discretion, permit our officers, directors and other stockholders who are subject to these lock-up agreements to sell shares prior to the expiration of the lock-up agreements.

We expect that the lock-up agreements pertaining to this offering will expire 180 days from the date of this prospectus. After the lock-up agreements expire, up to an additional 9,587,558 shares of common stock will be eligible for sale in the public market, 5,215,402 of which shares are held by directors, executive officers and other affiliates and will be subject to volume limitations under Rule 144 under the Securities Act of 1933, as amended, or the Securities Act, assuming an initial public offering price of $8.00 per share. In addition, 1,970,329 shares of common stock that are either subject to outstanding options or reserved for future issuance under our employee benefit plans will become eligible for sale in the public market to the extent permitted by the provisions of various vesting schedules, the lock-up agreements and Rule 144 and Rule 701 under the Securities Act. If these additional shares of common stock are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline.

After this offering, the holders of 5,005,963 shares of our common stock, or approximately 77.6% of our total outstanding common stock as of March 31, 2013, will be entitled to rights with respect to the registration of their shares under the Securities Act, subject to the 180-day lock-up agreements described above and assuming an initial public offering price of $8.00 per share. See “Description of Capital Stock—Registration Rights.” Registration of these shares under the Securities Act would result in the shares becoming freely tradable without restriction under the Securities Act, except for shares held by affiliates, as defined in Rule 144 under the Securities Act. Any sales of securities by these stockholders could have a material adverse effect on the trading price of our common stock.

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 may be needed in the future to continue our planned operations, including conducting clinical trials, commercialization efforts, expanded research and development activities and costs associated with operating a public company. To raise capital, 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. Such sales may also result in material dilution to our existing stockholders, and new investors could gain rights, preferences and privileges senior to the holders of our common stock, including shares of common stock sold in this offering.

Pursuant to our 2013 equity incentive plan, or 2013 post-IPO plan, our management is authorized to grant stock options to our employees, directors and consultants. The number of shares available for future grant under our 2013 post-IPO plan will automatically increase each year by an amount equal to 4% of all shares of our capital stock outstanding as of January 1st of each year, subject to the ability of our board of directors to take action to reduce the size of such increase in any given year. Unless our board of directors elects not to increase the number of shares available for future grant each year, our stockholders may experience additional dilution, which could cause our stock price to fall.

We could be subject to securities class action litigation.

In the past, securities class action litigation has often been brought against a company following a decline in the market price of its securities. This risk is especially relevant for us because pharmaceutical companies have

 

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experienced significant stock price volatility in recent years. If we face such litigation, it could result in substantial costs and a diversion of management’s attention and resources, which could harm our business.

We have broad discretion in the use of the net proceeds from this offering and the concurrent private placement and may not use them effectively.

Our management will have broad discretion in the application of the net proceeds from this offering and the concurrent private placement, including for any of the purposes described in the section entitled “Use of Proceeds,” and you will not have the opportunity as part of your investment decision to assess whether the net proceeds are being used appropriately. Because of the number and variability of factors that will determine our use of the net proceeds from this offering, their ultimate use may vary substantially from their currently intended use. Our management might not apply our net proceeds in ways that ultimately increase the value of your investment. We expect to use the net proceeds from this offering and the concurrent private placement to fund the continued development of quizartinib, to fund the continued development of our other programs and for working capital and other general corporate purposes. The failure by our management to apply these funds effectively could harm our business. Pending their use, we may invest the net proceeds from this offering in short-term, investment-grade, interest-bearing securities. These investments may not yield a favorable return to our stockholders. If we do not invest or apply the net proceeds from this offering and the concurrent private placement in ways that enhance stockholder value, we may fail to achieve expected financial results, which could cause our stock price to decline.

Some provisions of our charter documents and Delaware law may have anti-takeover effects that could discourage an acquisition of us by others, even if an acquisition would be beneficial to our stockholders, and may prevent attempts by our stockholders to replace or remove our current management.

Provisions in our amended and restated certificate of incorporation and bylaws, as well as provisions of Delaware law, could make it more difficult for a third-party to acquire us or increase the cost of acquiring us, even if doing so would benefit our stockholders or remove our current management. These provisions include:

 

   

authorizing the issuance of “blank check” preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval;

 

   

limiting the removal of directors by the stockholders;

 

   

creating a staggered board of directors;

 

   

prohibiting stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of our stockholders;

 

   

eliminating the ability of stockholders to call a special meeting of stockholders;

 

   

permitting our board of directors to accelerate the vesting of outstanding option grants upon certain transactions that result in a change of control; and

 

   

establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted upon at stockholder meetings.

These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. We are also subject to certain anti-takeover provisions under Delaware law which may discourage, delay or prevent someone from acquiring us or merging with us whether or not it is desired by or beneficial to our stockholders. Under Delaware law, a corporation may not, in general, engage in a business combination with any holder of 15% or more of its capital stock unless the holder has held the stock for three years or, among other things, the board of directors has approved the transaction. Any provision of our certificate of incorporation or bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.

 

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If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. Securities and industry analysts do not currently, and may never, publish research on our company. If no securities or industry analysts commence coverage of our company, the trading price for our stock would likely be negatively impacted. In the event securities or industry analysts initiate coverage, if one or more of the analysts who covers us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our stock could decrease, which might cause our stock price and trading volume to decline.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that involve substantial risks and uncertainties. The forward-looking statements are contained principally in the sections entitled “Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Business”. These statements relate to future events or to our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans and objectives of management, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. The words “may,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue,” “ongoing” or the negative of these terms or other similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

The forward-looking statements in this prospectus include, among other things, statements about:

 

   

the success and timing of our preclinical studies and clinical trials, including our ongoing Phase 2 and Phase 2b clinical trials and planned Phase 3 clinical trial for quizartinib;

 

   

our ability to obtain and maintain regulatory approval of our drug candidates, including quizartinib, and the labeling under any approval we may obtain;

 

   

our plans to develop and commercialize quizartinib and our other drug candidates, including our plan to enter into a transition agreement with Astellas for development activities of quizartinib and our plan to establish our own commercial capabilities;

 

   

the performance of our existing collaborators, including Genoptix, Inc. and Teva Pharmaceutical Industries Ltd., and our ability to maintain such collaborations;

 

   

our ability to leverage our proprietary chemical library to develop viable drug candidates;

 

   

our ability to establish additional collaborations for our drug candidates;

 

   

the loss of key scientific or management personnel;

 

   

the size and growth of the potential markets for quizartinib and our other drug candidates and our ability to serve those markets;

 

   

regulatory developments in the United States and foreign countries;

 

   

the rate and degree of market acceptance of any approved products;

 

   

our expectations regarding the period during which we will be an emerging growth company under the JOBS Act;

 

   

our use of the proceeds from this offering, and the clinical milestones we expect to fund with such proceeds;

 

   

the accuracy of our estimates regarding expenses, future revenues and capital requirements;

 

   

our ability to obtain funding for our operations;

 

   

our ability to obtain and maintain intellectual property protection for our drug candidates and our ability to operate our business without infringing on the intellectual property rights of others;

 

   

the success of competing drugs that are or become available; and

 

   

the performance of third-party manufacturers and clinical research organizations.

We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. You should refer to the “Risk Factors” section of this prospectus for a discussion of important factors

 

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that may cause actual results or events to differ materially from those expressed or implied by our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, collaborations, joint ventures or investments we may make. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results or events to differ materially from those contained in any forward-looking statements we may make. Given these uncertainties, you should not place undue reliance on these forward-looking statements. The Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act, do not protect any forward-looking statements that we make in connection with this offering.

You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement of which this prospectus is a part completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of the forward-looking statements in this prospectus by these cautionary statements.

The forward-looking statements in this prospectus represent our views as of the date of this prospectus. We anticipate that subsequent events and developments will cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this prospectus.

This prospectus also contains estimates and other statistical data made by independent parties and by us relating to market size and growth and other data about our industry. This data involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. In addition, projections, assumptions and estimates of our future performance and the future performance of the markets in which we operate are necessarily subject to a high degree of uncertainty and risk.

 

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USE OF PROCEEDS

We estimate that the net proceeds from our issuance and sale of 8,125,000 shares of common stock in this offering will be approximately $57.6 million. We expect to also receive $25.1 million from the sale by us of shares of our common stock in the concurrent private placement to certain of our existing stockholders at a price per share equal to the initial public offering price, for an aggregate amount to be raised by us in this offering and the concurrent private placement of $82.7 million, assuming an initial public offering price of $8.00 per share and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

A $1.00 increase (decrease) in the assumed initial public offering price of $8.00 per share would increase (decrease) our expected net proceeds from this offering by approximately $7.6 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

If the underwriters exercise their over-allotment option in full, we estimate that the net proceeds from this offering and the concurrent private placement will be approximately $91.7 million, assuming an initial public offering price of $8.00 per share and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The principal purposes of this offering are to obtain additional capital to support our operations, to create a public market for our common stock and to facilitate our future access to the public equity markets. We intend to use the net proceeds from this offering and the concurrent private placement as follows:

 

   

approximately $61.0 million to fund the continued clinical development of quizartinib;

 

   

approximately $3.0 million to fund the continued development of our other programs; and

 

   

the remainder for working capital and other general corporate purposes.

We believe that the net proceeds from this offering and the concurrent private placement and our existing cash and cash equivalents, together with interest thereon, will be sufficient to fund our operations through at least the next 12 months. In particular, we believe that the net proceeds from this offering and the concurrent private placement intended for clinical development of quizartinib and our existing cash and cash equivalents, together with interest thereon, will be sufficient to fund such development through receipt of topline data from our planned Phase 3 clinical trial in patients with relapsed/refractory AML.

The expected use of the net proceeds from this offering and the concurrent private placement represents our intentions based upon our current plans and business conditions. The amounts and timing of our actual expenditures depend on numerous factors, including the ongoing status of and results from clinical trials and other studies, as well as any strategic partnerships that we may enter into with third parties for our drug candidates and any unforeseen cash needs. As a result, our management will retain broad discretion over the allocation of the net proceeds from this offering and the concurrent private placement and could spend the proceeds in ways that do not improve our results of operations or enhance the value of our stock. Pending use of the proceeds from this offering and the concurrent private placement, we intend to invest the proceeds in a variety of short-term, investment-grade and interest-bearing instruments.

 

 

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DIVIDEND POLICY

We have never declared or paid any cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings to support our operations and finance the growth and development of our business. We do not intend to pay cash dividends on our common stock for the foreseeable future. Any future determination related to dividend policy will be made at the discretion of our board of directors and will depend on, among other factors, our results of operations, financial condition, capital requirements, contractual restrictions, business prospects and other factors our board of directors may deem relevant. In addition, unless waived, the terms of our Venture Loan and Security Agreement with Compass Horizon Funding Company LLC and Oxford Finance Corporation prohibit us from paying dividends on our common stock.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of March 31, 2013:

 

   

on an actual basis;

 

   

on an a pro forma basis to give effect to:

 

   

the issuance by us of 1,538,461 shares of our Series C-2 redeemable convertible preferred stock, 612,649 shares of Series D redeemable convertible preferred stock, 3,666,169 shares of our Series D-2 redeemable convertible preferred stock and 6,163,916 shares our Series E redeemable convertible preferred stock prior to the closing of this offering pursuant to the exercise of a put right held by GrowthWorks Canadian Fund Ltd., or the GrowthWorks put right, and the resultant reclassification of our redeemable non-controlling interest to additional paid-in capital, a component of stockholders’ deficit;

 

   

the conversion of all of our outstanding shares of convertible preferred stock, including the shares to be issued pursuant to the exercise of the GrowthWorks put right, into an aggregate of 6,449,073 shares of common stock upon the closing of this offering;

 

   

the adjustment of outstanding warrants to purchase shares of our convertible preferred stock into warrants to purchase 645,598 shares of common stock upon the closing of this offering, and the resultant reclassification of our redeemable convertible preferred stock warrant liabilities to additional paid-in capital, a component of stockholders’ deficit; and

 

   

the filing of our amended and restated certificate of incorporation and the adoption of our amended and restated bylaws as of the closing date of this offering.

 

   

on a pro forma as adjusted basis to additionally give effect to the sale by us in the concurrent private placement to certain of our existing stockholders of $25.1 million of our common stock and the sale of 8,125,000 shares of common stock in this offering, assuming an initial public offering price of $8.00 per share, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

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The pro forma as adjusted information below is illustrative only and our cash and cash equivalents and capitalization following the closing of this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. You should read this table together with our audited consolidated financial statements and the related notes appearing at the end of this prospectus, the sections entitled “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other financial information contained in this prospectus.

 

     As of March 31, 2013  
     Actual     Pro Forma      Pro Forma
As Adjusted(1)
 
    

(unaudited)

 
    

(in thousands except share and per share data)

 

Cash and cash equivalents

   $ 8,405      $ 8,405       $ 92,204   
  

 

 

   

 

 

    

 

 

 

Capitalization:

       

Warrant liabilities

   $ 14,497      $ 8,979       $ 8,979   

Redeemable non-controlling interest

     7,482        —           —     

Notes payable, net of debt discount

     3,083        3,083         3,083   

Preferred stock, $0.001 par value: 170,990,763 shares authorized; 123,416,438 shares issued and outstanding, actual; 10,000,000 shares authorized, no shares issued or outstanding, pro forma and pro forma as adjusted

     173,097        —           —     

Common stock, $0.001 par value: 225,000,000 shares authorized; 3,990 shares issued and outstanding, actual; 200,000,000 shares authorized and 6,453,063 shares issued and outstanding, pro forma; 200,000,000 shares authorized and 17,712,558 shares issued and outstanding, pro forma as adjusted

     —          6         18   

Additional paid-in capital

     35,258        221,349         304,013   

Accumulated other comprehensive income

     (86     (86      (86

Accumulated deficit

     (245,200     (245,200      (245,200
  

 

 

   

 

 

    

 

 

 

Total stockholders’ (deficit) equity

     (210,028     (23,931      58,745   
  

 

 

   

 

 

    

 

 

 

Total capital (deficit) equity

   $ (11,869   $ (11,869    $ 70,807   
  

 

 

   

 

 

    

 

 

 

 

(1) A $1.00 increase (decrease) in the assumed initial public offering price of $8.00 per share would increase (decrease) the pro forma as adjusted amount of each of cash and cash equivalents, additional paid-in capital, total stockholders’ deficit and total capitalization by approximately $7.6 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The number of shares in the table above excludes, as of March 31, 2013:

 

   

1,214,212 shares of common stock issuable upon exercise of stock options outstanding as of March 31, 2013, at a weighted-average exercise price of $8.75 per share;

 

   

6,117 shares of common stock reserved for future issuance under our 2011 pre-IPO plan as of March 31, 2013 and an aggregate of 625,000 additional shares of common stock that will be available under our 2013 post-IPO plan, which will become effective upon the closing of this offering;

 

   

125,000 shares of common stock reserved for issuance under our 2013 employee stock purchase plan, or ESPP, which will become effective upon the closing of this offering; and

 

   

1,800,920 shares of common stock issuable upon the exercise of warrants outstanding as of March 31, 2013, at a weighted-average exercise price of $3.30 per share.

 

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DILUTION

If you invest in our common stock in this offering, your ownership interest will be diluted to the extent of the difference between the initial public offering price per share and the pro forma as adjusted net tangible book value per share of our common stock after this offering.

Our historical net tangible book deficit of our common stock as of March 31, 2013 was approximately $(210.0) million, or $(52,638.60) per share, based on the 3,990 shares of common stock outstanding as of March 31, 2013. Historical net tangible book deficit per share is determined by dividing the number of shares of common stock outstanding as of March 31, 2013 into our total tangible assets (total assets less intangible assets) less total liabilities and convertible preferred stock.

On a pro forma basis, after giving effect to the conversion of all outstanding shares of convertible preferred stock into 6,449,073 shares of common stock, including the shares of redeemable convertible preferred stock to be issued pursuant to the exercise of the GrowthWorks put right, with the resulting reclassification of our redeemable non-controlling interest to additional paid-in capital, a component of stockholders’ deficit, and the reclassification of our redeemable convertible preferred stock warrant liabilities to additional paid-in capital, our net tangible book deficit as of March 31, 2013 would have been approximately $(23.9) million, or approximately $(3.71) per share.

Investors participating in this offering will incur immediate, substantial dilution. After giving effect to (1) the sale by us of shares of common stock in the concurrent private placement to certain of our existing stockholders at an assumed initial public offering price of $8.00 per share, (2) the sale of common stock offered by us in this offering at an assumed initial public offering price of $8.00 per share, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, and (3) the pro forma transactions described in the preceding paragraph, our pro forma as adjusted net tangible book value as of March 31, 2013 would have been approximately $58.7 million, or approximately $3.32 per share of common stock. This represents an immediate increase in pro forma as adjusted net tangible book value of $7.03 per share to existing stockholders, and an immediate dilution of $4.68 per share to investors participating in this offering. The following table illustrates this per share dilution to investors participating in this offering:

 

Assumed initial public offering price per share

     $ 8.00   

Historical net tangible book deficit per share as of March 31, 2013

   $ (52,638.60  

Pro forma decrease in net tangible book deficit per share attributable to pro forma transactions described in preceeding paragraphs

     52,634.89     
  

 

 

   

Pro forma net tangible book value (deficit) per share as of March 31, 2013

     (3.71  

Pro forma increase in net tangible book value per share attributable to investors participating in this offering

     7.03     
  

 

 

   

Pro forma as adjusted net tangible book value per share after this offering

       3.32   
    

 

 

 

Pro forma dilution per share to investors participating in this offering

     $ 4.68   
    

 

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $8.00 per share would increase (decrease) our pro forma as adjusted net tangible book value as of March 31, 2013 by approximately $7.6 million, our pro forma as adjusted net tangible book value per share after this offering by $0.43 and the dilution in pro forma as adjusted net tangible book value to investors participating in this offering by $0.43 per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

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If the underwriters exercise their over-allotment option in full to purchase 1,218,750 additional shares of common stock in this offering, our pro forma as adjusted net tangible book value per share after the offering and concurrent private placement would be $3.23 per share, the increase in the pro forma net tangible book value per share to existing stockholders would be $6.94 per share and the dilution to investors participating in this offering would be $4.77 per share.

The following table summarizes, on the pro forma as adjusted basis described above as of March 31, 2013, the differences between the number of shares of common stock purchased from us by existing stockholders, which includes the concurrent private placement to certain of our existing stockholders, and by new investors participating in this offering, the total consideration and the average price per share paid to us by existing stockholders and by investors participating in this offering, before deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, at an assumed initial public offering price of $8.00 per share:

 

     Shares Purchased     Total Consideration     Average
Price
Per
Share
 
     Number      Percentage     Amount      Percentage        

Existing stockholders before this offering

     9,587,558         54   $ 235,999,314         78   $ 24.62   

Investors participating in this offering

     8,125,000         46     65,000,000         22     8.00   
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

     17,712,558         100   $ 300,999,314         100  
  

 

 

    

 

 

   

 

 

    

 

 

   

A $1.00 increase (decrease) in the assumed initial public offering price of $8.00 per share would increase (decrease) total consideration paid to us by investors participating in this offering by approximately $7.6 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

Except as otherwise indicated, the discussion and tables above assume no exercise of the underwriters’ over-allotment option or any outstanding options or warrants. If the underwriters’ over-allotment option is exercised in full, the number of shares of common stock held by existing stockholders will be reduced to 51% of the total number of shares of common stock to be outstanding after this offering, and the number of shares of common stock held by investors participating in this offering will be further increased to 9,343,750, or 49% of the total number of shares of common stock to be outstanding after this offering.

The number of shares in the table above excludes, as of March 31, 2013:

 

   

1,214,212 shares of common stock issuable upon exercise of stock options outstanding as of March 31, 2013, at a weighted-average exercise price of $8.75 per share;

 

   

6,117 shares of common stock reserved for future issuance under our 2011 pre-IPO plan as of March 31, 2013 and an aggregate of 625,000 additional shares of common stock that will be available under our 2013 post-IPO plan, which will become effective upon the closing of this offering;

 

   

125,000 shares of common stock reserved for issuance under our 2013 employee stock purchase plan, or ESPP, which will become effective upon the closing of this offering; and

 

   

1,800,920 shares of common stock issuable upon the exercise of warrants outstanding as of March 31, 2013, at a weighted-average exercise price of $3.30 per share.

 

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Effective immediately upon the signing of the underwriting agreement for this offering, an aggregate of 631,117 and 125,000 shares of our common stock will be reserved for future issuance under our 2013 post-IPO plan and ESPP, respectively, which includes 6,117 shares of common stock reserved for future issuance under our 2011 pre-IPO plan as of March 31, 2013 that will be allocated to our 2013 post-IPO plan, and these share reserves will also be subject to automatic annual increases in accordance with the terms of the plans. Furthermore, we may choose to raise additional capital through the sale of equity or convertible debt securities due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that any of these options or warrants is exercised, new options are issued under our equity incentive plans or we issue additional shares of common stock, other equity securities or convertible debt securities in the future, there will be further dilution to investors participating in this offering.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The following selected financial data should be read together with our consolidated financial statements and accompanying notes and information under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus. The selected consolidated financial data in this section are not intended to replace our consolidated financial statements and the related notes. Our historical results are not necessarily indicative of future results that may be expected in the future and results of interim periods are not necessarily indicative of the results for the entire year.

The selected consolidated statement of operations data for the years ended December 31, 2011 and 2012 and the selected consolidated balance sheet data as of December 31, 2011 and 2012 are derived from our audited consolidated financial statements appearing elsewhere in this prospectus. The selected consolidated statement of operations data for the three months ended March 31, 2012 and 2013 and the selected consolidated balance sheet data as of March 31, 2013 are derived from our unaudited consolidated financial statements appearing elsewhere in this prospectus. The unaudited consolidated financial statements have been prepared on a basis consistent with our audited consolidated financial statements included in this prospectus and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, necessary to fairly state our financial position as of March 31, 2013 and results of operations for the three months ended March 31, 2012 and 2013.

 

    Years Ended December 31,     Three Months Ended
March 31,
 
    2011     2012     2012     2013  
         

(unaudited)

 
    (in thousands, except share and per share data)  

Consolidated Statement of Operations Data:

       

Revenues:

       

Collaboration agreements

  $ 23,843      $ 17,633      $ 5,233      $ 6,592   

Operating expenses:

       

Research and development

    50,705        36,731        11,140        9,005   

General and administrative

    8,905        6,550        1,750        1,776   

Gain on sale of kinase profiling services business

    (2,108 )       (2,497     (555     —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    57,502        40,784        12,335        10,781   
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (33,659     (23,151     (7,102     (4,189

Other income (expense):

       

Interest expense

    (4,502 )       (1,737     (356     (162

Other income

    1,538        29        —          7   

Change in fair value of warrant and derivative liabilities

    (795 )       (2,291     (547     (3,957
 

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

    (3,759 )       (3,999     (903     (4,112
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

    (37,418     (27,150     (8,005     (8,301

Provision (benefit) for income taxes

    —          (121     1        1   
 

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net loss

    (37,418     (27,029     (8,006     (8,302

Net (income) loss attributable to redeemable non-controlling interest

    (213 )       382        98        73   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to Ambit Biosciences Corporation

    (37,631     (26,647     (7,908     (8,229

Accretion to redemption value of redeemable convertible preferred stock

    (2,000 )       (3,161     (440     (2,319

Change in fair value of redeemable non-controlling interest

    4,477        (854     (217     (1,499
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

  $ (35,154   $ (30,662   $ (8,565   $ (12,047
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to common stockholders, basic and diluted(1)

  $ (25,886.60   $ (16,591.99  

 

$

 

(6,251.82

 

 

 

$

 

(3,019.30

 

 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding, basic and diluted(1)

    1,358        1,848     

 

 

 

 

 

 

1,370

 

 

 

  

 

 

 

 

 

 

 

 

 

3,990

 

 

 

  

 

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share attributable to common stockholders, basic and diluted (unaudited)(1)

    $ (4.92     $ (1.11
   

 

 

     

 

 

 

Pro forma weighted average shares outstanding, basic and diluted (unaudited)(1)

      4,932,134          6,422,243   
   

 

 

     

 

 

 

 

(1) Please see Note 1 to our consolidated financial statements for an explanation of the method used to calculate the historical and pro forma net loss per share attributable to common stockholders, basic and diluted, and the number of shares used in computation of the per share amounts.

 

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     As of December 31,     As of March  31,
2013
 
     2011     2012    
     (in thousands)  

Consolidated Balance Sheet Data:

      

Cash and cash equivalents

   $ 16,417      $ 17,481      $ 8,405   

Working capital (deficit)

     (6,023 )       (11,113    
(31,873

Total assets

     22,820        19,989        12,424   

Notes payable, net of debt discount

     8,911        4,320        3,083   

Warrant liabilities

     4,916        10,540        14,497   

Redeemable non-controlling interest

     1,322        3,323        7,482   

Redeemable convertible preferred stock

     132,340        157,076        159,395   

Convertible preferred stock

     13,752        13,702        13,702   

Accumulated deficit

     (210,324     (236,971     (245,200

Total stockholders’ deficit

     (177,364     (198,246     (210,028

 

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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 audited consolidated financial statements and the related notes appearing at the end of this prospectus. Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. You should read the “Risk Factors” section of this prospectus for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

We are a biopharmaceutical company focused on the discovery, development and commercialization of drugs to treat unmet medical needs in oncology, autoimmune and inflammatory diseases by inhibiting kinases that are important drivers for those diseases. Our pipeline currently includes three programs, each aimed at the inhibition of validated kinase targets. Our lead drug candidate, quizartinib, which we formerly referred to as AC220, is a once-daily, orally-administered, potent and selective inhibitor of the FMS-like tyrosine kinase 3, or FLT3. Quizartinib is currently in Phase 2b clinical development in patients with relapsed/refractory acute myeloid leukemia, or AML, who express a genetic mutation in FLT3. Our second drug candidate in clinical development, AC410, is a potent, selective, orally-administered, small molecule inhibitor of Janus kinase 2, or JAK2, that has potential utility for the treatment of autoimmune and inflammatory diseases. Our third program consists of a potent and exquisitely selective small molecule compound, AC708, which inhibits the colony-stimulating factor-1 receptor, or CSF1R, a receptor tyrosine kinase. This compound is in preclinical studies and has potential utility in oncology, autoimmune and inflammatory diseases. All of our drug candidates and clinical candidates have been internally discovered by us.

We were incorporated in Delaware and commenced operations in 2000. Since 2005, most of our activities have related to the research and development of our drug candidates. Prior to 2005, we were focused on the development of a kinase screening platform and services related to that platform. In order to focus on drug discovery and development, in October 2010 we sold all of the assets relating to our kinase profiling services business to DiscoveRx Corporation, pursuant to an asset purchase agreement. As part of the agreement, we made a $5.5 million aggregate commitment to purchase screening services in fiscal years ending December 31, 2011 and December 31, 2012, with payments of approximately $625,000 during each full calendar quarter during such periods. As a result of the commitment, we deferred $5.5 million of the gain on the sale transaction. In this transaction we acquired from DiscoveRx a non-exclusive, worldwide, sublicensable and royalty-free license to the intellectual property related to our former kinase profiling services business, as such intellectual property rights existed as of the date of the sale to DiscoveRx.

We have no products approved for sale, we have not generated any revenues from product sales and we have incurred significant operating losses since our inception. We have generated revenues from upfront payments and reimbursements associated with our collaboration agreements and from our former kinase profiling services business. We have never been profitable and have incurred consolidated net losses of approximately $37.4 million and $27.0 million in the years ended December 31, 2011 and 2012, respectively, and $8.3 million for the three months ended March 31, 2013. As of March 31, 2013, we had an accumulated deficit of $245.2 million.

We expect to continue to incur significant operating losses and negative cash flows from operating activities for the foreseeable future as we continue the clinical development of quizartinib, seek regulatory approval for and, if approved, pursue eventual commercialization of quizartinib, and advance our other drug candidates through preclinical studies and clinical trials. As of March 31, 2013, we had cash and cash equivalents of

 

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$8.4 million. Although it is difficult to predict future liquidity requirements, we believe that the net proceeds from this offering and the concurrent private placement and our existing cash and cash equivalents, together with interest thereon, will be sufficient to fund our operations through at least the next 12 months. However, successful transition to profitability is dependent upon achieving a level of revenues adequate to support our cost structure. We cannot assure you that we will ever be profitable or generate positive cash flow from operating activities and, unless and until we do, we will need to raise substantial additional capital through debt or equity financings or through collaborations or partnerships with other companies. We may not be able to raise additional capital on terms acceptable to us, or at all, and any failure to raise capital as and when needed could have a material adverse effect on our results of operations, financial condition and our ability to execute on our business plan. In its report on our financial statements for the year ended December 31, 2012, our independent registered public accounting firm included an explanatory paragraph expressing doubt regarding our ability to continue as a going concern.

We conduct the majority of our activities through Ambit Biosciences Corporation, a Delaware corporation, from our primary facility in San Diego, California. Additionally, as of March 31, 2013, we owned 36% of the outstanding capital stock, and 50% of the voting stock, of Ambit Canada which in the past conducted limited research and development activities in Toronto. We also have a wholly-owned subsidiary, Ambit Europe Limited, located in the United Kingdom, which has limited operations related to regulatory filings in the European Union. The following information is presented on a consolidated basis to include the accounts of these subsidiaries. All intercompany transactions and balances are eliminated in consolidation.

Collaboration Agreements

Astellas

In December 2009, we entered into a worldwide agreement with Astellas to jointly research, develop and commercialize certain FLT3 kinase inhibitors. In March 2013, we received a notice of termination of the agreement from Astellas, which termination will be effective in September 2013. As partial consideration for the exclusive license rights granted to Astellas, we received an upfront payment of $40.0 million. Under the agreement, we and Astellas share equally in agreed-upon development and research costs in the United States and European Union for quizartinib and certain designated follow-on compounds to quizartinib through the effective date of the termination. Under the agreement, Astellas was responsible for development and research costs for quizartinib in other geographic markets. Following the effective date of the termination, we will own all rights to quizartinib and any follow-on compounds and will be responsible for all development and commercialization activities and related costs in the United States, Europe and the rest of the world. We are planning to seek strategic partnerships to pursue development and commercialization activities of quizartinib outside of North America.

Teva

In November 2006, we entered into an exclusive collaboration agreement with Cephalon, Inc., aimed at identifying and developing clinical candidates that demonstrate activity towards the two designated target kinases of the collaboration: the BRAF kinase and a second kinase determined by a joint research committee. Under the agreement, both parties contributed certain intellectual property to the collaboration and agreed to a period of exclusivity during which neither party would engage in any research related to a collaboration target compound with any third-party. In October 2011, Teva Pharmaceutical Industries Ltd., or Teva, acquired Cephalon, Inc.

Cephalon, Inc. paid us an upfront fee of $15.5 million as partial consideration for access to our profiling technology and the licenses we contributed to the collaboration. We have received two milestone payments totaling $3.0 million under the agreement to date and we may be entitled to receive up to $44.5 million in additional payments upon the achievement of development, regulatory and sales milestones for CEP-32496, and up to $47.5 million in payments upon the achievement of development, regulatory and sales milestones for the second compound under the agreement. In addition, we may receive tiered royalty payments ranging from the

 

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mid-single digits to the low double digits calculated as a percentage of net sales of the collaboration compounds, including CEP-32496, subject to certain offsets. Royalties are payable to us on a product-by-product, country-by-country basis beginning on the date of the first commercial sale in a country and ending on the later of 10 years after the date of such sale in that country or the expiration date of the last to expire patent covering the licensed product in that country. The collaboration portion of the agreement ended in November 2009, at which point we had completed all our research obligations under the agreement. The agreement remains in effect on a product-by-product, country-by-country basis until all royalty obligations expire.

Genoptix

In September 2010, we entered into a collaboration agreement with Genoptix, Inc. to develop a laboratory diagnostic test to identify patients that harbor ITD mutations in their FLT3 receptor tyrosine kinase. Genoptix, Inc. was subsequently acquired by Novartis AG and Genoptix Medical Laboratory, a Novartis company, or Genoptix, assumed all rights and responsibilities of the agreement. Under this agreement, Genoptix will contribute its expertise in developing laboratory tests and we will supply certain patient samples to the collaboration. Genoptix has the right to commercialize the approved test. We will initially pay for the development activities under the collaboration and pursuant to an agreed-upon budget, and are entitled to single-digit royalty payments from Genoptix until we have recouped the development costs plus an additional predetermined percentage of such costs. We intend for this test to be approved by the FDA as a companion diagnostic test in concert with quizartinib. We believe the FDA approval of this test will satisfy the FDA’s requirement that a companion diagnostic test be approved with quizartinib.

Financial Overview

Revenues

We have generated revenues from upfront, milestone and collaborative research activity payments received under our collaboration agreements. Reimbursements paid to us from Astellas for 50% of the eligible research and development costs incurred by us under our collaboration agreement are recorded as revenue. Any amounts due to Astellas for our share of costs incurred by Astellas are recorded as research and development costs.

We currently have no products approved for sale, and we have not generated any revenues from product sales or product royalties and do not expect to receive any revenues from any drug candidates unless and until they obtain regulatory approval. To date, we have not submitted any drug candidate for regulatory approval. In the future, we may generate revenues from a combination of additional milestone payments, reimbursements, and royalties in connection with our existing and any future collaborations, as well as product sales for any approved products. However, other than reimbursement from Astellas through the effective date of the termination of our agreement and potential milestone payments from Teva, we do not expect to receive revenues unless and until we receive approval for quizartinib or potentially enter into additional collaboration agreements for quizartinib or our other drug candidates. If we fail to achieve clinical success in the development of quizartinib in a timely manner and/or obtain regulatory approval for this drug candidate, our ability to generate future revenues would be materially adversely affected.

Research and Development Expenses

The majority of our operating expenses to date have been incurred in research and development activities. Research and development expenses relate primarily to the discovery and development of our drug candidates. Our business model is dependent upon our continuing to conduct a significant amount of research and development. To date, quizartinib represents the largest portion of our research and development expense. From the date of our agreement with Astellas and through the effective date of the termination, we share equally in any agreed-upon research and development costs for quizartinib and any follow-on compounds in the United States and European Union and Astellas is solely responsible for development costs outside of the United States and European Union. Following

 

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the effective date of the termination, we will be responsible for all world-wide development costs for quizartinib and any follow-on compounds. Our research and development expenses consist primarily of:

 

   

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

 

   

employee-related expenses, which include salaries and benefits;

 

   

the cost of developing our chemistry, manufacturing and controls capabilities, or CMC, and acquiring clinical trial materials;

 

   

facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities and equipment, and depreciation of fixed assets;

 

   

stock-based compensation expense to employees and consultants; and

 

   

costs associated with other research activities and regulatory approvals.

Research and development costs are expensed as incurred.

The following table indicates our research and development expense by project/category for the periods indicated (in thousands):

 

     Years Ended
December 31,
     Three Months Ended
March 31,
     Total January 1,
2007 through
March 31,

2013
 
     2011      2012      2012      2013     

Quizartinib

   $ 35,491       $ 26,880       $ 8,260       $ 6,992       $ 112,418   

AC410 /AC430

     3,723         792         457         38         15,661   

CSF1R

     2,739         1,440         469         351         11,680   

Discovery projects

     4,866         4,625         1,119         672         59,215   

R&D administration

     3,886         2,994         835         952         14,364   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 50,705       $ 36,731       $ 11,140       $ 9,005       $ 213,338   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Prior to 2007, we did not track research and development costs by project/category.

At this time, due to the inherently unpredictable nature of preclinical and clinical development and given the early stage of our preclinical programs, we are unable to estimate with any certainty the costs we will incur in the continued development of quizartinib and our other clinical and preclinical programs. Clinical development timelines, the probability of success and development costs can differ materially from expectations. While we are currently focused on advancing quizartinib, our future research and development expenses will depend on the preclinical and clinical success of each drug candidate that we develop, as well as ongoing assessments of the commercial potential of such drug candidates. In addition, we cannot forecast with any degree of certainty which drug candidates may be subject to future collaborations, when such arrangements will be secured, if at all, and to what degree such arrangements would affect our development plans and capital requirements.

Research and development expenditures will continue to be significant and will increase as we continue development of quizartinib and advance the development of our proprietary pipeline of novel drug candidates over at least the next several years. We expect to incur significant research and development costs as we and Astellas complete the ongoing clinical trials of quizartinib and we conduct our planned Phase 3 clinical trial in relapsed/refractory AML patients, which we plan to initiate in early 2014, subject to receiving input from regulatory authorities.

The costs of clinical trials may vary significantly over the life of a project owing to factors that include but are not limited to the following:

 

   

per patient trial costs;

 

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the number of patients that participate in the trials;

 

   

the number of sites included in the trials;

 

   

the countries in which the trial is conducted;

 

   

the length of time required to enroll eligible patients;

 

   

the number of doses that patients receive;

 

   

the drop-out or discontinuation rates of patients;

 

   

potential additional safety monitoring or other studies requested by regulatory agencies;

 

   

the duration of patient follow-up; and

 

   

the efficacy and safety profile of the drug candidate.

We do not expect quizartinib to be commercially available, if at all, for at least the next several years. We base our expenses related to clinical trials on estimates which are based on our experience and estimates from CROs and other third parties.

General and Administrative Expenses

General and administrative expenses consist principally of salaries and related costs for personnel in executive, finance, business development, marketing, and legal functions. Other general and administrative expenses include facility costs, patent filing costs, and professional fees for legal, consulting, auditing and tax services.

We anticipate that our general and administrative expenses will continue to be significant and will increase as a result of being a public company and associated increased payroll, expanded infrastructure and higher consulting, legal, accounting and investor relations costs, and director and officer insurance premiums. We expect these increases to be partially offset by a reduction in costs related to a facility move completed in the first quarter of 2013.

In addition, we expect to incur increased expenses associated with building a sales and marketing team. We expect to start incurring such expenses prior to receiving regulatory approval of quizartinib. We do not expect to receive any such regulatory approval for at least the next several years.

Interest Expense

Interest expense consists primarily of coupon interest, amortization of debt discount and amortization of deferred financing costs associated with our 2010 and 2012 bridge loans, our equipment notes payable and our venture loans.

Other Income

Other income consists primarily of: (i) interest income earned on our cash and cash equivalents; and (ii) exchange rate gains and losses on transactions denominated in a currency other than our functional currency, the U.S. dollar. Other income has historically included one-time, non-operating transactions such as the receipt of a federal grant or investment tax credit.

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the

 

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reporting periods. These items are monitored and analyzed by us for changes in facts and circumstances, and material changes in these estimates could occur in the future. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Changes in estimates are reflected in reported results for the period in which they become known. Actual results may differ materially from these estimates under different assumptions or conditions.

While our significant accounting policies are more fully described in Note 1 to our audited consolidated financial statements appearing elsewhere in this prospectus, we believe that the following accounting policies are critical to the process of making significant judgments and estimates in the preparation of our financial statements and understanding and evaluating our reported financial results.

Revenue Recognition

Our revenues generally consist of upfront, milestone and collaborative research activity payments received under our collaboration agreements. Some of our agreements contain multiple elements, including technological and territorial licenses and research and development services. In accordance with these agreements, we may be eligible for upfront fees, collaborative research funding and milestones. Revenues are recognized when all four of the following criteria are met: (i) persuasive evidence that an arrangement exists; (ii) delivery of the products and/or services has occurred; (iii) the selling price is fixed or determinable; and (iv) collectability is reasonably assured. Additional information on each type of revenue is outlined below.

Collaboration Agreements entered into prior to 2011

For multiple-element agreements entered into prior to January 1, 2011 and not materially modified thereafter, such as our agreements with Astellas, Teva and Genoptix, we analyzed the agreement to determine whether the elements within the agreement could be separated or whether they must be accounted for as a single unit of accounting. If the delivered element, which for us is commonly a license, has stand-alone value and the fair value of the undelivered elements, which for us are generally collaborative research activities, can be determined, we recognized revenue separately under the residual method as the elements under the agreement are delivered. If the delivered element does not have stand-alone value or if the fair value of the undelivered element cannot be determined, the agreement is then accounted for as a single unit of accounting, with consideration received under the agreement recognized as revenue on the straight-line basis over the estimated period of performance, which for us is generally the expected term of the research and development plan.

Collaboration Agreements entered into or materially modified after December 31, 2010

In October 2009, the Financial Accounting Standards Board, or FASB, issued a new accounting standard which amends the guidance on accounting for arrangements involving the delivery of more than one element. This standard addresses the determination of the unit(s) of accounting for multiple-element arrangements and how the arrangement’s consideration should be allocated to each unit of accounting. We adopted this new accounting standard on a prospective basis for all multiple-element arrangements entered into on or after January 1, 2011 and for any multiple-element arrangements that were entered into prior to January 1, 2011 but materially modified on or after January 1, 2011. We have not entered into nor materially modified any agreements since December 31, 2010.

Pursuant to the new standard, each required deliverable is evaluated to determine if it qualifies as a separate unit of accounting. For us, this determination is generally based on whether the deliverable has “stand-alone value” to the customer. The arrangement’s consideration is then allocated to each separate unit of accounting based on the relative selling price of each deliverable. The estimated selling price of each deliverable is determined using the following hierarchy of values: (i) vendor-specific objective evidence of fair value; (ii) third-party evidence of selling price; and (iii) best estimate of selling price, or BESP. The BESP reflects our best estimate of what the selling price would be if the deliverable was regularly sold by us on a stand-alone basis. We

 

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expect, in general, to use the BESP for allocating consideration to each deliverable. In general, the consideration allocated to each unit of accounting is then recognized as the related goods or services are delivered limited to the consideration that is not contingent upon future deliverables.

Milestones

Revenue from milestones is accounted for in accordance with Accounting Standards Codification, or ASC, 605-28, Revenue Recognition — Milestone Method. Revenue is recognized when earned, as evidenced by written acknowledgement from the collaborator or other persuasive evidence that the milestone has been achieved, provided that the milestone event is substantive. A milestone event is considered to be substantive if its achievability was not reasonably assured at the inception of the arrangement and our efforts led to the achievement of the milestone (or if the milestone was due upon the occurrence of a specific outcome resulting from our performance). Events for which the occurrence is either contingent solely upon the passage of time or the result of a counterparty’s performance are not considered to be milestone events. If both of these criteria are not met, the milestone payment is recognized over the remaining minimum period of our performance obligations under the arrangement, if any. We assess whether a milestone is substantive at the inception of each arrangement.

Generally, the milestone events contained in our collaborative agreements coincide with the progression of the drug candidates from clinical trial to regulatory approval and then to commercialization. The process of guiding a clinical trial candidate through clinical trials, having it approved and ultimately commercialized is highly uncertain. As such, the milestone payments we may earn from our partners involve a significant degree of risk to achieve. Therefore, as a drug candidate progresses through the stages of its life-cycle, the value of the drug candidate generally increases.

Other

Collaboration agreements also include potential payments for product royalties and sharing of operating profits. To date, we have not received payments or recorded any revenue from any of these other sources.

Stock-Based Compensation

We account for stock-based compensation by measuring and recognizing compensation expense for all stock-based payments made to employees and directors based on estimated grant date fair values. We use the straight-line method to allocate compensation cost to reporting periods over each optionee’s requisite service period, which is generally the vesting period. We estimate the fair value of our stock-based awards to employees and directors using the Black-Scholes option pricing model. The Black-Scholes model requires the input of subjective assumptions, including the risk-free interest rate, expected volatility, expected term and the fair value of the underlying common stock on the date of grant, among other inputs.

The following table summarizes our weighted-average assumptions used in the Black-Scholes model to value employee option grants. No data is presented in the table below for the three months ended March 31, 2013 since we granted no equity awards during that period.

 

     Years Ended December 31,     Three Months Ended
March 31, 2012
 
     2011     2012    

Risk-free interest rate

     1.2     0.9     1.3

Expected dividend yield

     —          —          —     

Expected volatility

     63.1     67.4     64.8

Expected term (in years)

     6.1        6.0        6.1   

Risk-free Interest Rate. The risk-free interest rate assumption is based on zero-coupon U.S. Treasury instruments that have terms consistent with the expected term of our stock option grants.

Expected Dividend Yield. We have never declared or paid any cash dividends and do not presently plan to pay cash dividends in the foreseeable future.

 

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Expected Volatility. Due to our limited operating history and lack of Company-specific historical and implied volatility, the expected volatility rate used to value stock option grants is estimated based on volatilities of a peer group of similar companies whose share prices are publicly available. The peer group was developed based on companies in the pharmaceutical and biopharmaceutical industry in a similar stage of development.

Expected Term. We elected to utilize the “simplified” method for “plain vanilla” options to estimate the expected term of stock option grants. Under this approach, the weighted-average expected term is presumed to be the average of the vesting term and the contractual term of the option.

Common Stock Value

From inception through December 31, 2012, due to the absence of an active market for our common stock, we had determined the exercise prices for all options granted based on the estimated fair value as determined contemporaneously on the date of grant by our board of directors, with input from management. All options to purchase shares of our common stock are intended to be granted with an exercise price per share no less than the fair value per share of our common stock underlying those options on the date of grant, based on the information known to us on the date of grant.

In connection with the preparation of the consolidated financial statements necessary for inclusion in the registration statement related to this offering, we reassessed the estimated fair value of our common stock during each quarterly period in 2011, 2012 and 2013. Our reassessments of the fair value of our common stock were done using methodologies, approaches and assumptions consistent with the American Institute of Certified Public Accountants, or AICPA, Audit and Accounting Practice Aid Series: Valuation of Privately Held Company Equity Securities Issued as Compensation, or the AICPA Practice Guide. In addition, our board of directors considered various objective and subjective factors to determine the fair value of our common stock, including: external market conditions affecting the biopharmaceutical industry, trends within the biopharmaceutical industry, the superior rights and preferences of the preferred stock relative to our common stock at the time of each grant, our results of operations and financial position, status of our research and development efforts, our stage of development and business strategy, the lack of an active public market for our common and our preferred stock, and the likelihood of achieving a liquidity event such as an initial public offering, or IPO, or sale of our company in light of prevailing market conditions. The reassessments included both the determination of the appropriate valuation model and related inputs. We concluded that the reassessed fair value of our common stock was at or below the exercise price of options granted during each quarterly period in 2011 and 2012 and we did not grant any equity awards during the quarter ended March 31, 2013. As a result, no incremental fair value was added to the stock based compensation recorded for options issued from January 1, 2011 to December 31, 2012.

Our reassessment analyses were based on a methodology that first estimated the fair value of our business as a whole, or enterprise value. The determination of enterprise value was based on two primary factors: (i) a market approach using IPO comparables; and (ii) a market approach using mergers and acquisitions, or M&A, transaction comparables. Once we determined the expected enterprise value we then adjusted for expected cash and debt balances, allocated value to the various stockholders, adjusted to present value and discounted for lack of marketability.

During 2011, 2012 and 2013, we utilized the probability weighted expected return method, or PWERM, to allocate estimated enterprise value to our common stock. The PWERM considers the present value of the returns afforded to stockholders under each expected liquidity event at each valuation date. These scenarios varied over time as to timing and probability and generally consisted of: (i) IPOs; (ii) M&A or reverse merger transactions; and (iii) liquidation. The timing of the future liquidity event scenarios was determined based primarily on input from our board of directors and management. Under the IPO scenarios, value was allocated on a fully diluted basis while the sale scenarios took into account the conversion rights and liquidation preferences of each class of stock. Under each scenario the option and warrant holders were assumed to exercise to the extent the exercise prices of their options and warrants were below the estimated fair value of the underlying securities. The resulting values were then adjusted to present value based on the estimated time to liquidity, discounted for lack of marketability, and then probability weighted based on our estimate of the likelihood and timing of each liquidity scenario considered at each valuation date.

 

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The key subjective factors and assumptions used in our valuations primarily consisted of: (i) the selection of the appropriate valuation model, (ii) the selection of the appropriate market comparable transactions, (iii) the financial forecasts utilized to determine future cash balances and necessary capital requirements, (iv) the probability and timing of the various possible liquidity events, (v) the estimated weighted average cost of capital and (vi) the discount for lack of marketability of our common stock.

Given the limited number of biopharmaceutical IPOs and public and private M&A transactions from 2010 through March 31, 2013, we considered the population of all biopharmaceutical IPOs and all public and private biopharmaceutical M&A transactions, beginning with transactions in 2010 and including transactions through the related valuation date, across all stages of development and therapeutic areas. Comparables in Phase 3 clinical development (or later) were removed as we had an expectation that our IPO date and/or M&A transaction date would occur while our lead drug candidate was still in Phase 2 clinical development. Certain very large and very small transactions were eliminated as outliers. The remaining comparables provided a wide range of therapeutic areas, addressable markets and stages of development. During 2011 and 2012, we generally selected either the low-end, average or high-end of the comparables based on our assessment of which valuation was most likely, given the timing of each event, our expected development progress and financial condition at the expected liquidity event date. During the first quarter of 2013, we selected a higher level of comparable transactions as we progressed towards our IPO and achieved certain operational and business milestones, as further discussed below.

At each valuation date we used our then current board of directors approved budget or forecast to determine our estimated financing needs and forecasted cash balances for each exit scenario and exit date and estimated the probability and timing of each potential liquidity event based on management’s best estimate taking into consideration all available information as of the valuation date, including the stage of clinical development of our lead drug candidate, industry clinical success rates, our expected near-term and long-term funding requirements, and an assessment of the current financing and biopharmaceutical industry environments at the time of the valuation.

Our May 2011 valuation utilized probabilities of potential liquidity events including: (i) IPO in February 2012 of 10%, (ii) IPO in February 2013 of 10%, (iii) IPO in September 2013 of 15%, (iv) M&A-low in February 2013 of 15%, (v) M&A-high in February 2013 of 10%, (vi) M&A in September 2013 of 15%, (vii) reverse merger in February 2012 of 5% and (viii) liquidation in February 2013 of 20%. Our December 31, 2011, March 31, 2012 and June 30, 2012 valuations utilized probabilities of potential liquidity events including: (i) IPO in September 2013 of 20%, (ii) M&A-low in December 2013 of 25%, (iii) M&A-high in December 2013 of 10%, (iii) reverse merger in September 2013 of 15% and (iv) liquidation in December 2013 of 30%. Our September 30, 2012 valuation utilized probabilities of potential liquidity events including: (i) IPO in March 2013 of 45%, (ii) IPO in September 2013 of 15%, (iii) M&A in September 2013 of 25% and (iv) liquidation in December 2013 of 15%. Our December 31, 2012 valuation utilized probabilities of potential liquidity events including: (i) IPO in March 2013 of 50%, (ii) IPO in September 2013 of 15%, (iii) M&A in September 2013 of 25% and (iv) liquidation in December 2013 of 10%. Our March 31, 2013 valuation utilized probabilities of potential liquidity events including (i) IPO in May 2013 of 60%, (ii) IPO in October 2013 of 10%, (iii) M&A in October 2013 of 20% and (iv) liquidation in December 2013 of 10%.

We used a 20% weighted average cost of capital for each quarterly valuation in 2011 and 2012 and we used discounts for lack of marketability based on option pricing models utilizing the expected time to liquidity in each scenario. The discounts for lack of marketability used in the valuations at May 2011, December 31, 2011, March 31, 2012, June 30, 2012, September 30, 2012 and December 31, 2012 were 21% – 59%, 40%, 35%, 19% – 30% and 18% – 25%, respectively. During the first quarter of 2013, we reduced our range of discounts for lack of marketability to 5% – 15%.

In October 2012 and April 2013, our stockholders approved a 1-for-100 reverse common stock split and a 1-for-24 reverse common stock split, respectively, for which we have retroactively adjusted all of our historical common stock price, share and fair value disclosures including the amounts presented in the table below.

From our August 18, 2011 grant date to our September 30, 2011 grant date we experienced a significant decrease in our common stock valuation primarily as a result of revisions to our planned regulatory approval path

 

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of our lead drug candidate which extended the expected time until commercialization of such drug candidate. From our September 30, 2011 grant date to our April 24, 2012 grant date the fair value of our common stock remained relatively consistent as we did not have any material operational or development milestones that would cause material changes in our overall enterprise value.

In October 2012, in connection with the 1-for-100 reverse common stock split, the conversion rates of our preferred stock were adjusted to reflect a 1-for-1 (rather than a 1-for-100) conversion rate (except Series D which was adjusted back to its previous 2.21-for-1 conversion rate). These conversion rate adjustments were unrelated to the dilution protections afforded to the holders of our preferred stock under our certificate of incorporation. The impact of this conversion rate adjustment further diluted the value held by the common stockholders for shares or rights to purchase shares acquired prior to October 26, 2012, and is reflected on a prospective basis. As a result of this adjustment, the fair value of our common stock decreased from $168.00 per share in April 2012 to $6.00 per share as of December 2012. This decrease reflects the fact that the adjustment to the conversion rates of our preferred stock allocated a greater percentage of our estimated enterprise value to the preferred stockholders and essentially rendered valueless all previously granted common stock instruments.

From December 31, 2012 to our March 31, 2013 valuation date, the fair value of our common stock increased from $6.00 per share to $8.64 per share. The increase in the fair value per share was primarily due to our selection of higher market comparables in our first quarter 2013 valuation, our decision to increase the near-term probability of an IPO and our use of lower discounts for lack of marketability in our valuation models. These changes were due to several key events occurring in the first quarter of 2013, namely our February 2013 meeting with the FDA and the termination of our agreement with Astellas (ending in September 2013). We believe the positive results from our meeting with the FDA served to remove some near-term development risk for quizartinib, and the meeting resulted in our initiation of discussions with the FDA related to the possible acceptance of two novel surrogate endpoints that could support an accelerated approval of quizartinib based on the results of our Phase 2 clinical trials. Negative feedback from the FDA would have been highly detrimental to our near-term business model. In March 2013, we were notified by our partner, Astellas, of its exercise of the termination for convenience clause of our collaboration agreement. As a result, the agreement will terminate effective in September 2013, following which we will own exclusive world-wide rights to quizartinib and any follow-on compounds and will be responsible for all development and commercialization activities and related costs. Although the long-term impact of this termination is not fully known, we have factored the change in status with Astellas into our valuation models and we considered our retention of the exclusive rights to quizartinib when we selected higher market comparables in our first quarter 2013 valuation.

There is no significant difference between the $8.64 per share fair value of our common stock at March 31, 2013 and our assumed initial public offering price of $8.00 per share.

Summary of Stock Option Grants

The following table compares the originally determined value (exercise price) and reassessed value for all option grants from January 1, 2011 to December 31, 2012:

 

Grant Date

   Number of
Shares Subject to
Options Granted
     Exercise Price
per Share
     Reassessed Estimated
Fair Value of
Common Stock per
Share at Date of
Grant
     Intrinsic Value
per Share at
Date of Grant
 

August 18, 2011

     1,768       $ 600.00       $ 576.00       $ —     

September 30, 2011

     36         600.00         144.00         —     

September 30, 2011 (repricing)

     1,291         1,680.00         144.00         —     

January 12, 2012

     2,864         600.00         144.00         —     

April 24, 2012

     520         600.00         168.00         —     

December 13, 2012

     1,214,750         6.00         6.00         —     

 

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We did not grant any stock options during the three months ended March 31, 2013.

In August 2011, our board of directors authorized the repricing of the exercise price of 1,291 options previously granted to employees, consultants and directors. We analyzed the fair value of the options immediately before and after the repricing and determined that the incremental value of the repricing was immaterial, as the repriced options were granted at an exercise price above the fair market value of our common stock.

Total stock-based compensation expense included in the consolidated statement of operations was allocated as follows (in thousands):

 

     Years Ended
December  31,
     Three Months Ended
March 31,
 
     2011      2012      2012      2013  

Research and development

   $ 224       $ 129       $ 39       $ 111   

General and administrative

     1,163         612         168         287   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,387       $ 741       $ 207       $ 398   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense related to unvested stock option grants not yet recognized as of March 31, 2013 was approximately $3.6 million and the weighted-average period over which these grants are expected to vest is 3.6 years.

Based on the assumed initial public offering price of $8.00 per share, the intrinsic value of stock options outstanding as of March 31, 2013 would be $2.4 million, of which $0.2 million and $2.2 million would have been related to stock options that were vested and unvested, respectively, at that date.

Equity instruments issued to non-employees are recorded at their fair values and are periodically revalued as the options vest and are recognized as expense over the related service period. No non-employee stock-based compensation expense was recorded for the years ended December 31, 2011 and 2012 and the three months ended March 31, 2013.

Warrant Liabilities

We have issued freestanding warrants to purchase shares of our redeemable convertible preferred stock and common stock. The redeemable convertible preferred stock warrants are exercisable for shares of Series C, Series D and Series D-2 redeemable convertible preferred stock and are classified as liabilities in the accompanying consolidated balance sheets, as the terms for redemption of the underlying security are outside our control. The warrants are recorded at fair value using either the Black-Scholes option pricing model, probability weighted expected return model or a binomial model. We used the Black-Scholes option pricing model to value all warrants except the warrants issued in connection with our venture loans in March 2010 and the warrants issued in conjunction with the sale of Series D-2 preferred stock in May 2011. A binomial model was used to value the March 2010 warrants, as these warrants included anti-dilution terms that could change the settlement amount. The final share amounts and exercise price of these warrants became fixed upon the closing of our Series D-2 financing in May 2012 and the warrants have been valued using the Black-Scholes option pricing model thereafter. The grant date fair value of the Series D-2 warrants issued in May 2011 was determined as part of a probability weighted expected return model since the warrants contained provisions whereby the ultimate number of warrants that would become exercisable was based on operational milestones included in the warrants. Subsequent to our determination in 2011 that the warrants would become fully exercisable, we began to value the warrants using the Black-Scholes option pricing model. Our outstanding common stock warrants issued in connection with our Series E financing in 2012 are classified as liabilities in the accompanying consolidated balance sheet as they contain provisions that could require us to settle the warrants in cash. The fair value of all warrants, except as noted below, is re-measured at each financial reporting date with any changes in fair value being recognized in change in fair value of warrant and derivative liabilities, a component of other income (expense), in the accompanying consolidated statements of operations. We will continue to re-measure the fair

 

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value of the warrant liabilities until: (i) exercise, (ii) expiration of the related warrant, or (iii) upon conversion of the redeemable convertible preferred stock underlying the security into common stock. We do not re-measure the fair value of warrants unless they are required to be accounted for as liabilities. As such, all of our outstanding preferred stock warrants and only the common stock warrants issued in 2012 in connection with our Series E financing are re-measured on a periodic basis. The consummation of this offering will result in the conversion of all classes of our preferred stock into common stock. Upon such conversion of the underlying classes of preferred stock, the preferred stock warrants will be classified as a component of stockholders’ equity and will no longer be subject to remeasurement.

Redeemable Non-Controlling Interest

The redeemable non-controlling interest in our subsidiary, Ambit Canada, was created through the issuance of redeemable convertible preferred stock put obligations, or the puts, which have elements similar to a liability instrument and are classified as liabilities in the accompanying consolidated balance sheets at fair value. At each reporting period, we adjust the carrying value of the redeemable non-controlling interest by the net loss attributable to the redeemable non-controlling interest. Any difference between the fair value and the adjusted carrying value of the redeemable non-controlling interest is recorded as an adjustment to additional paid-in capital and presented as a component of net loss attributable to common stockholders in the accompanying consolidated statements of operations. The redeemable non-controlling interest will continue to be measured at fair value until the time at which no Class C, Series D or Series D-2 shares of Ambit Canada are held by GrowthWorks Canadian Fund Ltd., or GrowthWorks, or any other third party, at which time the redeemable non-controlling interest will be reclassified to additional paid-in capital.

Net Operating Loss and Research and Development Tax Credit Carryforwards

As of December 31, 2012, we had federal and California tax net operating loss carryforwards of $151.2 million and $143.1 million, respectively, which begin to expire in 2022 and 2013, respectively, unless previously utilized. As of December 31, 2012, we also had federal and California research and development tax credit carryforwards of $5.0 million and $5.7 million, respectively. The federal research and development tax credit carryforwards will begin to expire in 2024. The California research and development tax credit carryforwards are available indefinitely.

Utilization of the net operating losses and credits may be subject to a substantial annual limitation due to ownership change limitations provided by the Internal Revenue Code of 1986, as amended. The annual limitation may result in the expiration of our net operating losses and credits before we can use them. We have recorded a valuation allowance on all of our deferred tax assets, including our deferred tax assets related to our net operating loss and research and development tax credit carryforwards.

JOBS Act

In April 2012, the JumpStart Our Business Startups Act of 2012, or the JOBS Act, was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for an “emerging growth company.” As an “emerging growth company,” we are electing not to take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision not to take advantage of the extended transition period is irrevocable. In addition, we are in the process of evaluating the benefits of relying on the other exemptions and reduced reporting requirements provided by the JOBS Act. Subject to certain conditions set forth in the JOBS Act, if as an “emerging growth company” we choose to rely on such exemptions, we may not be required to, among other things, (i) provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404, (ii) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act, (iii) comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding

 

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mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis), and (iv) disclose certain executive compensation-related items such as the correlation between executive compensation and performance and comparisons of the Chief Executive Officer’s compensation to median employee compensation. These exemptions will apply for a period of five years following the completion of our initial public offering or until we no longer meet the requirements of being an “emerging growth company,” whichever is earlier.

The above listing is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP. There are also areas in which our management’s judgment in selecting any available alternative would not produce a materially different result. Please see our audited consolidated financial statements and notes thereto included elsewhere in this prospectus, which contain accounting policies and other disclosures required by GAAP.

Results of Operations

Comparison of the Three Months Ended March 31, 2012 and 2013

Collaboration Agreement Revenues. We recorded revenues of $5.2 million and $6.6 million for the three months ended March 31, 2012 and 2013, respectively, under our agreement with Astellas. The increase of approximately $1.4 million was primarily due to an increase in license fee amortization revenue being recognized during the three months ended March 31, 2013. In March 2013, we received a notice of termination of the agreement from Astellas, which termination will be effective in September 2013. Accordingly, the remaining deferred revenue related to the upfront license fee is being recognized over the period from March 2013 through September 2013. This increase was partially offset by a reduction in cost reimbursement revenue due to lower quizartinib research and development expenses. The reduction in quizartinib research and development expenses was due to a reduction in the number of patients being treated and followed in our Phase 2 clinical trial.

Research and Development Expenses. Our research and development expenses were $11.1 million and $9.0 million for the three months ended March 31, 2012 and 2013, respectively. A comparison of research and development expenses by category is as follows (in thousands):

 

     Three Months Ended
March 31, 
     Increase/
(Decrease)
 
     2012      2013     

Outside services

   $ 8,613       $ 6,708       $ (1,905

Salaries and personnel

     1,660         1,704         44   

Facilities and operations

     867         593         (274
  

 

 

    

 

 

    

 

 

 

Total

   $ 11,140       $ 9,005       $ (2,135
  

 

 

    

 

 

    

 

 

 

Outside Services. Expenses for outside services, such as for CROs and investigator sites, decreased approximately $1.9 million from $8.6 million for the three months ended March 31, 2012 to $6.7 million for the three months ended March 31, 2013. This decrease was due to lower quizartinib research and development expenses, resulting from a reduction in the number of patients being treated and followed in our Phase 2 clinical trial.

Facilities and Operations. Expenses for facilities and operations decreased approximately $274,000 from $867,000 for the three months ended March 31, 2012 to $593,000 for the three months ended March 31, 2013. The decrease was primarily due to a decrease in our rent expense, as our monthly rent expense for our Sorrento Valley Boulevard facility was reduced to approximately $55,000 per month effective July 2012.

Interest Expense. Interest expense decreased approximately $194,000 from $356,000 for the three months ended March 31, 2012 to $162,000 for the three months ended March 31, 2013. The decrease in interest expense

 

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was due to the decrease in the principal balance of our outstanding venture loan as we pay down more principal near the maturity of the loan.

Change in Fair Value of Warrant Liabilities. During the three months ended March 31, 2012 and 2013, the change in fair value of the stock warrant liabilities related primarily to increases in the fair value of the underlying preferred or common securities. The change in fair value in 2013 was $3.4 million higher than the change in fair value in 2012 due primarily to the impact of common stock value increases on the 1.1 million common stock warrants issued in October 2012 in connection with our Series E preferred stock financing.

Comparison of the Years Ended December 31, 2011 and 2012

Collaboration Agreement Revenues. We recorded revenues of $23.8 million and $17.6 million for the years ended December 31, 2011 and 2012, respectively, under our agreement with Astellas. The decrease of approximately $6.2 million was primarily due to a reduction in reimbursement from Astellas due to lower quizartinib research and development expenses. The reduction in quizartinib research and development expenses was due to a reduction in the number of patients being treated and followed in our Phase 2 clinical trial for quizartinib.

Research and Development Expenses. Our research and development expenses were $50.7 million and $36.7 million for the years ended December 31, 2011 and 2012, respectively. A comparison of research and development expenses by category is as follows (in thousands):

 

     Years Ended
December  31,
     Decrease  
     2011      2012     

Outside services

   $ 36,334       $ 27,287       $ (9,047

Salaries and personnel

     8,836         6,304         (2,532

Facilities and operations

     5,535         3,140         (2,395
  

 

 

    

 

 

    

 

 

 

Total

   $ 50,705       $ 36,731       $ (13,974
  

 

 

    

 

 

    

 

 

 

Outside Services. Expenses for outside services, such as for CROs and investigator sites, decreased approximately $9.0 million from $36.3 million for the year ended December 31, 2011 to $27.3 million for the year ended December 31, 2012. The decrease was due to lower quizartinib research and development expenses, resulting from a reduction in the number of patients being treated and followed in the Phase 2 clinical trial. The reduction was also due in part to a reduction in pre-clinical activities and lower CMC development costs.

Salaries and Personnel. Expenses for salaries and personnel decreased approximately $2.5 million from $8.8 million for the year ended December 31, 2011 to $6.3 million for the year ended December 31, 2012. The decrease was primarily due to reductions in headcount which reflected our focus on cost reduction in light of uncertainty in the public and private financial markets. As of December 31, 2012, we employed 27 full-time employees in research and development.

Facilities and Operations. Expenses for facilities and operations decreased approximately $2.4 million from $5.5 million for the year ended December 31, 2011 to $3.1 million for the year ended December 31, 2012. The decrease was due to the accrual of an early termination fee in July 2011 upon our exercise of the early termination provision of our lease agreement and to a reduction in monthly rent expense for our Sorrento Valley Boulevard facility.

General and Administrative Expense. General and administrative expenses decreased approximately $2.3 million from $8.9 million for the year ended December 31, 2011 to $6.6 million for the year ended December 31, 2012. The decrease was primarily due to decreases in severance, legal and accounting costs and stock-based compensation expense. The decrease in severance costs was primarily due to reductions in headcount which reflected our focus on cost reduction in light of uncertainty in the public and private financial markets. The decrease in stock-based compensation expense was due to a combination of headcount turnover resulting in

 

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cancellation of options, coupled with a decline in our common stock value. As of December 31, 2012, we employed 13 full-time employees in general and administrative.

Interest Expense. Interest expense decreased approximately $2.8 million from $4.5 million for the year ended December 31, 2011 to $1.7 million for the year ended December 31, 2012. The decrease in interest expense was primarily due to the $2.1 million decrease in 2012 non-cash interest associated with the 2012 bridge loans compared to the 2011 non-cash interest associated with the 2010 bridge loans. In addition, there was a $528,000 decrease in cash interest expense related to venture loans as we pay down more principal near the maturity of the loans.

Other Income. Other income decreased approximately $1.5 million from $1.5 million for the year ended December 31, 2011 to $29,000 for the year ended December 31, 2012. The decrease was primarily due to our earning a credit of $1.3 million in 2011 under the 2010 Canadian Scientific Research and Experimental Development, or SR&ED, Tax Incentive Program. The SR&ED program provides certain Canadian controlled companies with a refundable investment tax credit for a portion of qualified research and experimental expenditures. We were not eligible for a similar credit in 2012.

Change in Fair Value of Warrant and Derivative Liabilities. During the year ended December 31, 2011, we recorded a $2.4 million loss and a $1.6 million gain, respectively, from the change in the fair value of redeemable convertible preferred stock warrant liabilities and derivative liability — conversion feature. The change in fair value of the redeemable convertible preferred stock warrant liabilities in 2011 primarily related to an increase in the aggregate estimated value of the Series D-2 financing warrants as a result of delays in the clinical development process. Upon our conclusion in September 2011 that the Series D-2 financing warrants would become fully exercisable as a result of missing operational milestones, we changed from a probability-based model to a Black-Scholes option pricing model under which the full 26.6 million Series D-2 financing warrants were valued at current fair value. This increase in fair value related to the increase in expected warrant shares and was offset by declines in the estimated fair value of our Series D-2 redeemable convertible preferred stock. At the time of conversion, a final mark-to-market adjustment was recorded on our derivative liability–conversion feature, resulting in a $1.6 million gain. We determined the derivative had zero value at conversion since the effective conversion price of the related bridge loans was less than the fair value of the underlying preferred stock at the conversion date.

During the year ended December 31, 2012, the $2.3 million change in fair value of the warrant liabilities primarily related to an increase in the fair value of the underlying preferred securities. Although the various estimated enterprise values utilized in our probability-weighted valuation models did not change significantly, the timing and probabilities changed as we progressed toward the initial public offering contemplated by this prospectus.

Liquidity and Capital Resources

We have incurred losses since inception and negative cash flows from operating activities for 2011 and 2012 and for the three months ended March 31, 2013. As of March 31, 2013, we had an accumulated deficit of $245.2 million. We anticipate that we will continue to incur net losses for the foreseeable future as we: (i) continue the development and potential commercialization of our lead drug candidate, quizartinib, (ii) continue our research and development programs to advance our internal product pipeline and (iii) incur additional costs associated with being a public company.

On March 31, 2010, we received $12.0 million in gross proceeds from the issuance of two secured promissory notes under the Venture Loan and Security Agreement with Compass Horizon Funding Company LLC and Oxford Finance Corporation, or the Venture Loans. The Venture Loans were designated for general working capital and to repay $2.2 million of prior working capital notes. The annual interest rate, excluding the final payment, is fixed at 12.25%. The final payment due October 1, 2013 includes additional interest of 3.0% of the initial loan amount, or $360,000, which is being accreted over the life of the note using the effective interest method and is included in interest expense. In accordance with the terms of the Venture Loans, we made payments of interest only during the initial 12 month period May 1, 2010 through April 1, 2011 and commenced making principal and interest payments

 

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May 1, 2011 for the remaining 30 months. The Venture Loans are secured by a first priority security interest in all assets, excluding intellectual property, for which we have provided a negative pledge. As of March 31, 2013, the remaining principal balance on the Venture Loans was $3.1 million.

In May 2012, we entered into a series of agreements, pursuant to which certain investors loaned us a total of $11.5 million, or the 2012 Bridge Financing. Outstanding balances under the 2012 Bridge Financing accrue interest at a rate of 10% per annum. In October 2012, these notes, including accrued interest on the notes, were converted into 17,008,346 shares of our Series E redeemable convertible preferred stock in connection with the closing of the Series E financing.

In May 2012, we, Ambit Canada and GrowthWorks entered into a Note Purchase Agreement, or the 2012 Canadian Agreement, pursuant to which GrowthWorks loaned Ambit Canada $1.5 million, or the 2012 Canadian Bridge Financing. Outstanding balances under the 2012 Canadian Bridge Financing accrue interest at a rate of 10% per annum. The 2012 Canadian Convertible Promissory Notes are generally convertible on the same terms as the 2012 Convertible Promissory Notes, but for shares of Ambit Canada. In October 2012, these notes plus accrued interest were converted into 2,247,223 Class E non-voting shares of Ambit Canada in connection with the Series E financing.

The report of our independent registered public accounting firm on our audited consolidated financial statements for the year ended December 31, 2012 includes an explanatory paragraph stating that our recurring losses from operations and working capital deficit raise doubt about our ability to continue as a going concern. If we are unable to obtain additional financing on commercially reasonable terms, our business, financial condition and results of operations will be materially adversely affected and we may be unable to continue as a going concern. If we are unable to continue as a going concern, we may have to liquidate our assets and may receive less than the value at which those assets are carried on our financial statements.

We estimate that our net proceeds from this offering and the concurrent private placement will be approximately $82.7 million, based upon an assumed initial public offering price of $8.00 per share, after deducting the estimated underwriting discounts and commissions and offering expenses payable by us. We expect that the net proceeds from this offering and the concurrent private placement and our existing cash and cash equivalents, together with interest thereon, will be sufficient to fund our capital requirements for at least the next 12 months.

From our inception through March 31, 2013, we have funded our consolidated operations primarily through the private placements of equity and convertible debt securities and upfront payments from our collaboration agreements. Additionally, we have funded a portion of our operations from service revenues and additional funding under our collaboration agreements. As of March 31, 2013, we had cash and cash equivalents of approximately $8.4 million.

The following table sets forth a summary of the net cash flow activity for each of the periods set forth below (in thousands):

 

     Years Ended
December  31,
    Three Months Ended
March 31,
 
     2011     2012     2012     2013  
                          

Net cash used in operating activities

   $ (39,626   $ (28,772   $ (5,582   $ (9,106

Net cash (used in) provided by investing activities

     (153     46        (2     (499

Net cash provided by (used in) financing activities

     18,594        29,759        (1,164     664   

Effect of exchange rate changes on cash

     (246     31        36        (135
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

   $ (21,431   $ 1,064      $ (6,712   $ (9,076
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Cash used in operating activities decreased $10.9 million from $39.6 million for the year ended December 31, 2011 to $28.8 million for the year ended December 31, 2012. This decrease was driven by a decrease in our net loss of $10.4 million from $37.4 million for the year ended December 31, 2011 to $27.0 million for the year ended December 31, 2012. Changes in working capital and deferrals in the years ended December 31, 2011 and 2012 used cash of $8.6 million and $6.3 million, respectively. Non-cash expenses decreased approximately $1.9 million from $6.4 million for the year ended December 31, 2011 to $4.5 million for the year ended December 31, 2012.

Cash used in operating activities increased $3.5 million from $5.6 million for the three months ended March 31, 2012 to $9.1 million for the three months ended March 31, 2013. Non-cash expenses increased $3.9 million from $622,000 for the three months ended March 31, 2012 to $4.5 million for the three months ended March 31, 2013. Changes in working capital and deferrals provided cash of $1.8 million for the three months ended March 31, 2012, and used cash of $5.3 million for the three months ended March 31, 2013.

During the year ended December 31, 2011, investing activities used cash of $153,000, primarily due to purchases of property and equipment, partially offset by proceeds associated with the sale of our kinase profiling services business in October 2010. During the year ended December 31, 2012, investing activities provided cash of $46,000, primarily due to proceeds from the sale of property and equipment.

During the three months ended March 31, 2012 and 2013, investing activities used cash of $2,000 and $499,000, respectively, primarily due to purchases of property and equipment.

Financing activities in the year ended December 31, 2011 provided net cash of $18.6 million, compared to $29.8 million during the year ended December 31, 2012. During the year ended December 31, 2011, we issued redeemable convertible preferred stock, net of issuance costs, of approximately $19.1 million. We also issued Series D-2 put shares, which provided approximately $2.6 million. During the year ended December 31, 2012, we issued convertible notes of approximately $13.0 million. Additionally, we issued redeemable convertible preferred stock, net of issuance costs, which provided approximately $22.0 million.

Principal debt payments increased from $3.1 million for the year ended December 31, 2011 to $4.8 million for the year ended December 31, 2012, as principal payments on our venture loan commenced in April 2011.

Financing activities used cash of $1.2 million for the three months ended March 31, 2012 and provided cash of $664,000 for the three months ended March 31, 2013. During the three months ended March 31, 2013, we issued Series E put shares, which provided approximately $2.7 million. Principal debt payments increased from $1.2 million for the three months ended March 31, 2012 to $1.3 million for the three months ended March 31, 2013.

The financial statements of our Canadian subsidiary are measured using the local currency as the functional currency. The effect of exchange rate on cash relates to the fluctuation in exchange rate of the Canadian dollar to the U.S. dollar.

Operating Capital Requirements

Contractual Obligations. Under our collaboration agreement with Astellas, through the effective date of the termination, we share equally with Astellas all agreed-upon development costs related to quizartinib in the United States and European Union, and research costs on other compounds under the agreement.

 

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Our most significant clinical trial expenditures are to CROs. The contracts with CROs generally are cancellable, with notice, at our option and do not have any cancellation penalties. These items are not included in the table below.

The following table summarizes our contractual obligations at December 31, 2012 including interest (in thousands):

 

     Payments Due by Period  
     Total      Less than
1 Year
     1-3
Years
     3-5
Years
     More than
5 Years
 

Long-term debt (including interest)

   $ 5,024       $ 5,024       $ —         $ —         $ —     

Operating lease obligations

     3,976         615         1,497         1,339         525   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 9,000       $ 5,639       $ 1,497       $ 1,339       $ 525   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Our commitment for long-term debt relates primarily to the $12.0 million venture loan executed in March 2010, of which $4.3 million was outstanding as of December 31, 2012.

Our commitments for operating leases relate primarily to our lease of office and laboratory space in San Diego, California.

We believe that the net proceeds from this offering and the concurrent private placement and our existing cash and cash equivalents, together with interest thereon, will be sufficient to fund our operations through at least the next 12 months and will be sufficient to fund the continued development of quizartinib through receipt of topline data from our planned Phase 3 clinical trial in patients with relapsed/refractory AML. However, our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially.

Our future capital requirements are difficult to forecast and will depend on many factors, including:

 

   

the progress, costs and results of our Phase 2 and Phase 2b clinical trials and our anticipated Phase 3 clinical trial for quizartinib;

 

   

the initiation, progress, timing and results of preclinical studies and clinical trials for any of our other drug candidates;

 

   

the outcome, timing and cost of regulatory approvals;

 

   

the costs and timing of establishing sales, marketing and distribution capabilities;

 

   

delays that may be caused by changing regulatory requirements;

 

   

the costs involved in filing and prosecuting patent applications and enforcing and defending patent claims; and

 

   

the extent to which we acquire or invest in businesses, products or technologies.

Off-Balance Sheet Arrangements

We do 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.

 

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Related Party Transactions

For a description of our related party transactions, see “Related Party Transactions.”

Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

Our cash and cash equivalents as of March 31, 2013 consisted of cash and money market funds. Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of U.S. interest rates. However, because of the short-term nature of the instruments in our portfolio, a sudden change in market interest rates would not be expected to have a material impact on our financial condition and/or results of operation.

Our long-term debt bears interest at a fixed rate and therefore has minimal exposure to changes in interest rates.

Foreign Currency Risk

Our balance sheet as of March 31, 2013 includes cash and cash equivalent balances of $5.0 million denominated in Canadian dollars through our Canadian subsidiary, Ambit Canada. The majority of Ambit Canada’s operational activities are denominated in Canadian dollars. We do not participate in any foreign currency hedging activities and we do not have any other derivative financial instruments. We did not recognize any significant exchange rate losses during the years ended December 31, 2011 and 2012 and the three months ended March 31, 2013.

Effects of Inflation

We do not believe that inflation and changing prices had a significant impact on our results of operations for any periods presented herein.

 

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BUSINESS

Overview

We are a biopharmaceutical company focused on the discovery, development and commercialization of drugs to treat unmet medical needs in oncology, autoimmune and inflammatory diseases by inhibiting kinases that are important drivers for those diseases. Our pipeline currently includes three programs, each aimed at the inhibition of validated kinase targets. Our lead drug candidate, quizartinib, which we formerly referred to as AC220, is a once-daily, orally-administered, potent and selective inhibitor of FMS-like tyrosine kinase 3, or FLT3. Quizartinib is currently in Phase 2b clinical development in patients with relapsed/refractory acute myeloid leukemia, or AML, who express a genetic mutation in FLT3. Our second drug candidate in clinical development, AC410, is a potent, selective, orally-administered, small molecule inhibitor of Janus kinase 2, or JAK2, that has potential utility for the treatment of autoimmune and inflammatory diseases. Our third program consists of a potent and exquisitely selective small molecule compound, AC708, which inhibits the colony-stimulating factor-1 receptor, or CSF1R, a receptor tyrosine kinase. This compound is in preclinical studies and has potential utility in oncology, autoimmune and inflammatory diseases. All of our drug candidates and clinical candidates have been internally discovered by us.

Kinases are a family of over 500 enzymes that play essential roles in signaling and regulation of important cellular processes such as activation, growth, proliferation, differentiation and survival. This key role in regulating the life cycle of cells also means that kinases can be involved in the underlying mechanisms for many human diseases, including oncology, autoimmune and inflammatory diseases. Kinases have, therefore, proven to be a rich source of targets for drug development with 19 approved drugs in oncology and inflammatory disease since 2001. However, the key technical limitation in the development of drugs that target kinases is the ability to design a drug that selectively inhibits the specific kinase underlying disease while minimizing activity against other kinases, or off-target activity, which can cause undesirable side effects and lead to suboptimal efficacy. Our core competency is the discovery, optimization and development of highly selective and potent, orally-available small molecule drug candidates that inhibit validated kinase targets in diseases with significant unmet medical need. We have built our pipeline using our proprietary chemical library of approximately 8,000 compounds designed to inhibit kinases and expect to continue to leverage this library to develop viable drug candidates in the future. Our current pipeline includes the following:

Quizartinib – Our lead drug candidate, quizartinib, is a once-daily, orally-administered, potent and selective inhibitor of FLT3, a validated target in the treatment of AML, and is currently in Phase 2b clinical development. We believe there is a significant unmet need for more effective treatments of AML, particularly for the subset of patients expressing a genetic mutation in FLT3, known as the FLT3 internal tandem duplication, or FLT3-ITD, mutation. The FLT3-ITD mutation acts like a “power switch” that causes leukemic cells, or blasts, to spread more aggressively and grow back more rapidly following chemotherapy, conferring an especially poor survival outcome. Quizartinib is designed to turn off this switch. Data from our single-arm, 333 patient Phase 2 clinical trial in relapsed/refractory AML patients was reported at the American Society of Hematology meeting in December 2012. When compared to reported results of clinical trials with other kinase inhibitors with FLT3 activity, quizartinib demonstrated superior single-agent activity in relapsed/refractory AML patients. We are developing a companion diagnostic test with Genoptix Medical Laboratory, a Novartis company, or Genoptix, to identify FLT3-ITD positive patients. We plan to develop quizartinib in other AML therapeutic settings, irrespective of FLT3-ITD status, including use in newly diagnosed AML patients in combination with chemotherapy, or frontline therapy, followed by continuous single-agent maintenance therapy, as well as maintenance following a hematopoietic stem cell transplantation, or an HSCT (commonly referred to as a bone marrow transplant).

AC410 – Our second most advanced drug candidate, AC410, is a potent, selective, orally-administered, small molecule inhibitor of JAK2, which has potential utility for the treatment of autoimmune and inflammatory diseases. Signaling through JAK controls the activation, proliferation and survival of various types of immune

 

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cells, and overactivation of such cells can exacerbate a variety of normal inflammatory processes, resulting in inflammation. Our initial JAK2 drug candidate, AC430, is a racemic mixture (50/50) of two enantiomers (mirror images), AC410 and AC409, and was studied in a Phase 1 clinical trial. We have selected AC410 over AC430 and AC409 for further clinical development due to its superior pharmacokinetics as observed in this clinical trial. To our knowledge, AC430 was the first selective JAK2 inhibitor to be advanced into clinical development for inflammatory disease and we believe AC410 may offer distinct benefits in this commercially attractive drug category. We plan to advance AC410 to proof-of-concept clinical trials in one or more autoimmune and inflammatory diseases, independently or in collaboration with a strategic partner.

CSF1R Program – We are developing a potent and exquisitely selective small molecule compound, AC708, that inhibits CSF1R and has potential utility in oncology, autoimmune and inflammatory diseases. Signaling through CSF1R controls the activation, proliferation and survival of macrophages, which are key mediators of immune system function, and over-activation of macrophages may result in exacerbation of certain diseases. We have initiated investigational new drug, or IND, -enabling studies with AC708. We plan to further develop this program independently or in collaboration with a strategic partner.

Our Strategy

The key components of our strategy are:

 

   

Develop and seek regulatory approval for our lead drug candidate, quizartinib, in relapsed/refractory AML patients who express a genetic mutation in FLT3. To support a new drug application, or NDA, pending input from regulatory authorities, we plan to initiate a randomized, comparative Phase 3 clinical trial in relapsed/refractory AML patients with the FLT-ITD mutation by early 2014.

 

   

Maximize the therapeutic potential of quizartinib in AML and other hematological disease indications. Beyond our initial focus in relapsed/refractory AML, we plan to develop quizartinib in other AML therapeutic settings, irrespective of FLT3-ITD status, including use in newly diagnosed AML patients in combination with chemotherapy, or frontline, followed by continuous single-agent maintenance therapy as well as maintenance following HSCT.

 

   

Maximize strategic value by establishing a commercial capability to market, sell and distribute quizartinib in North America. We plan to build the capabilities to effectively commercialize quizartinib in North America.

 

   

Pursue strategic partnerships to accelerate development and expand the commercial opportunity for quizartinib . We plan to retain commercial rights to quizartinib in North America, however, we are considering strategic partners as a means to accelerate the broader clinical development of quizartinib and maximize its therapeutic and market potential. Additionally, we plan to enter into collaborative arrangements for commercialization of quizartinib in markets outside of North America.

 

   

Advance the development of our JAK2 and CSF1R programs through a combination internal development and strategic partnerships. We intend to leverage our experience in the discovery and development of kinase inhibitors and may enter into future strategic partnerships for these programs to optimize the therapeutic and commercial potential of future drug candidates from these programs.

 

   

Leverage our core competency and proprietary chemical library to continue discovering and developing a broad pipeline of novel drug candidates that inhibit validated kinase targets to address diseases with unmet medical need. We believe that there is significant opportunity in the continued development of drugs that selectively inhibit kinases to address unmet medical needs. We have a proprietary chemical library of approximately 8,000 compounds designed to inhibit kinases. We intend to leverage this library and our expertise and experience to build sustainable value through the discovery, optimization and development of an even broader pipeline of kinase-targeted drug candidates.

 

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Background

Kinases are a large family of over 500 enzymes, collectively known as the kinome, that function as important mechanisms of signaling and regulation of important cellular processes such as activation, growth, proliferation, differentiation and survival. This key role in regulating the life cycle of cells also means that kinases can be involved in the underlying mechanisms for many human diseases, including cancer, autoimmune and inflammatory diseases. Therefore, kinases have proven to be a rich source of targets for drug development with 19 approved drugs since 2001 in oncology and inflammatory disease.

Aberrant kinase function, caused by mutations 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. These therapies, in some cases, 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® (imatinib), a BCR-ABL kinase inhibitor for the treatment of Philadelphia chromosome positive chronic myelogenous leukemia, and GlaxoSmithKline plc’s Tykerb® (lapatinib), a HER2 kinase inhibitor for the treatment of a subset of breast cancer patients over-expressing the HER2 kinase. Further examples of targeted, oral oncology drugs include Pfizer Inc.’s Xalkori® (crizotinib) and Bosulf® (bosutinib) and Bristol-Myers Squibb’s Sprycel® (dasatinib). We believe that therapies that target specific genetic abnormalities in subsets of cancer patients identified through diagnostic tests will result in streamlined clinical trials, stratified patient populations and improved patient outcomes and will be increasingly important in the continued evolution of the treatment of cancer.

Opportunities for kinase drug development extend beyond oncology. The immune system and inflammatory processes are increasingly understood to play important roles in many disease states, and kinases are key mediators of cellular signaling, activation, proliferation, survival and differentiation of immune and inflammatory cells. Autoimmune and inflammatory diseases are often characterized by an overactive immune system response, which can be controlled through the inhibition of specific kinase signaling pathways. For example, rheumatoid arthritis, or RA, an autoimmune disease, has been the focus of significant effort in the discovery and development of kinase inhibitors, and Pfizer Inc.’s Xeljanz® (tofacitinib), targeting the JAK family of kinases, was recently approved for treatment of RA. While there is a large opportunity for the development of kinase inhibitors in autoimmune and inflammatory diseases, the chronic nature of these diseases requires a safety profile to accommodate long term dosing. The safety profile of kinase inhibitors is often predicted by their selectivity profile, which represents their ability to target a single or small number of kinases.

Due to structural similarities among kinases, the key technical challenge in the development of targeted kinase inhibitors is the ability to design a drug that selectively and potently inhibits the specific kinase underlying disease while minimizing activity against other kinases, or off-target activity, which can lead to undesirable side effects and result in suboptimal efficacy. Our core competency is our ability to discover, optimize and develop drug candidates that are highly selective and potent against specific kinases.

 

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Our Pipeline of Targeted Therapies

We have developed a pipeline of small molecule targeted therapies using our expertise in kinase drug discovery and development. The following table summarizes this pipeline:

 

LOGO

Quizartinib – an Oral FLT3 Inhibitor for AML

Overview of Quizartinib

Our lead drug candidate, quizartinib, is a once-daily, orally-administered, potent and selective inhibitor of FLT3, a validated target in the treatment of AML, and is currently in Phase 2b clinical development in relapsed/refractory AML patients who express the FLT3-ITD mutation, or FLT3-ITD positive patients. The FLT3-ITD mutation acts like a “power switch” that causes blasts to spread more aggressively and grow back more rapidly following chemotherapy, conferring an especially poor survival outcome. Quizartinib is designed to turn off this switch. Since 2009, we have been developing quizartinib with a partner, Astellas Pharma Inc. and Astellas US LLC, collectively Astellas. Our agreement with Astellas will terminate effective in September 2013, following which we will own exclusive worldwide rights to quizartinib and any follow-on compounds and will be responsible for all development and commercialization activities and related costs. We and Astellas are currently working on a transition plan for current and future development activities and do not anticipate that such transition will delay the clinical development activities described in this prospectus.

We initiated a Phase 2 clinical trial of quizartinib in relapsed/refractory AML patients in November 2009 and completed enrollment in November 2011. In this 333 patient single-arm clinical trial, quizartinib demonstrated the ability to significantly reduce the number of blasts in the bone marrow of a substantial number of patients, often for a clinically meaningful duration of time. The reduction of blasts benefited patients who, as a result of responding to quizartinib, may have become eligible for a potentially-curative HSCT which has been shown to prolong survival for these patients. Reduction in bone marrow blasts generally equates to a positive impact on the overall quality of life and the overall survival of patients, irrespective of HSCT eligibility. Based on our clinical trial data and our review of published results from clinical trials of other drug candidates that inhibit FLT3 that are in, or have been in, clinical development for the treatment of AML, we believe that quizartinib has demonstrated superior ability to reduce bone marrow blasts, which we believe is due to quizartinib’s unique combination of potency, selectivity and favorable pharmacokinetics. Quizartinib is currently in a Phase 2b clinical trial to identify the optimal dose for our planned Phase 3 clinical trial.

We believe there is a significant unmet need for more effective treatment of AML, particularly for FLT3-ITD positive patients. Our initial regulatory strategy for quizartinib is focused on relapsed/refractory AML

 

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patients that are FLT3-ITD positive and, in concert with Genoptix, we are developing a companion diagnostic test to identify FLT3-ITD positive patients. We believe this initial indication will require a randomized, comparative Phase 3 clinical trial to support an NDA submission to the FDA and equivalent submissions to foreign regulatory authorities. Based on our clinical trial results to date, we plan to develop quizartinib in other AML patient populations including newly-diagnosed patients, FLT3-ITD negative patients and post-HSCT patients.

Background of Current Treatment for AML

AML is the most common type of acute leukemia in adults and is projected to account for approximately 29% of all new leukemia cases in 2012. AML results in uncontrolled growth and accumulation of malignant white blood cells which fail to function normally and interfere with the production of normal blood cells. According to the American Cancer Society, approximately 13,780 patients will be newly diagnosed with AML in 2012 in the United States and approximately 10,200 are expected to die of the disease in 2012. AML is generally a disease of older people and the median age of a patient at initial diagnosis is 66 years. The five-year survival rate for all AML patients, irrespective of age and FLT3-ITD status, is 23%.

The standard of care for AML has not changed appreciably for decades. Treatment decisions for AML are typically based on the patient’s age (60 years of age being generally referred to as “elderly” and used as a treatment indicator), overall health, cytogenetics and FLT3-ITD status. These prognostic factors determine the aggressiveness of the treatment approach given the high toxicity associated with currently approved treatment options for AML. Importantly, the National Comprehensive Cancer Network recommends participation in clinical trials as a treatment option for all AML patients.

The goal of treatment in AML is to reduce the blasts in the bone marrow to below 5% and return the blood cell counts to normal levels. This is considered a complete remission, or CR. Variations of CR include CRi, which is a complete remission with incomplete neutrophil recovery with or without complete platelet recovery, and CRp, which is a complete remission with incomplete platelet recovery. An HSCT is generally recognized as the only curative treatment option. Typically, patients who are able to achieve a reduction in bone marrow blasts below 5% are more suitable candidates for an HSCT and have an improved projected outcome following an HSCT.

Newly diagnosed patients that are less than 60 years of age are typically treated with an initial regimen of intense chemotherapy, referred to as induction chemotherapy. Due to the toxicity and significant myelosuppression associated with induction chemotherapy, patients are frequently hospitalized for the duration of induction chemotherapy to reduce the risk of infections and manage such toxicities. Patients that achieve a CR from induction chemotherapy typically have two treatment options, (1) one or more rounds of additional chemotherapy, referred to as consolidation therapy, which is intended to eliminate any remaining cancer cells and maintain a remission for the patient and, if eligible, (2) an HSCT. We estimate, based on public information, information available to us from third-party physician and market surveys and our clinical experience that approximately 70% of AML patients will be treated with induction chemotherapy or a similarly aggressive treatment, as the first line of therapy and that a majority of those treated will achieve a CR from this treatment. We further estimate that approximately 80% of all AML patients will either be refractory to this first line of therapy (ie. not achieve a CR) or will relapse after achieving the CR. For patients who have relapsed or did not respond to one or more rounds of chemotherapy, referred to as refractory, the next treatment option is typically a clinical trial or palliative care.

Given the high toxicity associated with induction chemotherapy, newly diagnosed AML patients over 60 years of age are often not treated with induction chemotherapy and are candidates for participation in clinical trials. Even with hospitalization, the chemotherapy-related mortality rate for elderly patients undergoing induction chemotherapy is as high as 29%. More recently, this elderly patient population has also been treated with hypomethylating agents such as Celgene Corporation’s Vidaza® (azacitidine) and Eisai Inc.’s Dacogen®

 

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(decitabine), which are both injectable drugs. While these agents have shown modest activity in patients with AML, neither of these agents have been approved in the United States for the treatment of AML.

While patients with poor cytogenetics or FLT3-ITD mutations are considered to have more aggressive disease and a higher likelihood of relapse, the standard of care for this patient population has been the same induction and consolidation regimens used in patients without these poor prognostic factors. The primary difference in the treatment paradigms for this patient population is that an HSCT is frequently recommended after induction chemotherapy given the high likelihood of relapse. For these patients, the goal of treatment is to use induction chemotherapy to induce remission and bridge the patient to transplant as quickly as possible. Increasingly, following an HSCT, patients have also been treated with hypomethylating or other agents to help maintain the remission. More recently, patients with FLT3-ITD mutations have been treated with non-selective multi-kinase inhibitors approved for other indications that have shown some activity against FLT3. This class of agents represents the first targeted approach to the treatment of AML. While this class has shown promise, most of these agents have either failed in clinical trials or have not been specifically developed for this indication. As a result, today there is no approved targeted therapy for the treatment of AML.

We believe that there is a significant need for an approved agent that offers a targeted and effective approach to AML and that can be used either as monotherapy or in combination with chemotherapy. In addition, we believe there is a need for a better tolerated and more convenient therapy which can be used across multiple patient populations and settings, including younger and elder patients, newly diagnosed and relapsed/refractory patients, and patients that have undergone an HSCT.

Role of FLT3 in AML

AML is a particularly aggressive and deadly disease, especially for patients with the FLT3-ITD mutation. FLT3 is a kinase receptor expressed on hematopoietic progenitor cells (immature blood cells) and plays a critical role in regulating their activation, growth, proliferation, survival and differentiation into mature blood cells. Over 35% of AML patients over age 55 are estimated to harbor the FLT3-ITD mutation. We estimate, based on publicly-available information about the disease and treatment courses, third-party market surveys, our clinical trial experience and an interpolation of data on the relative incidence of AML (irrespective of FLT3-ITD status) among geographies that, approximately 4,800, 5,300 and 1,800 newly-diagnosed AML patients each year in the United States, Europe and Japan, respectively have the FLT3-ITD mutation. The FLT3-ITD mutation results in the constant ligand-independent activation of FLT3, leading to aggressive proliferation of immature, irregular blasts that lack the ability to differentiate into normal blood cells. Physicians, as a standard part of diagnosis, routinely test patients for the FLT3-ITD mutation. Patients who harbor the FLT3-ITD mutation are known as FLT3-ITD positive, and have a significantly worse prognosis compared to FLT3-ITD negative patients. FLT3-ITD positive patients typically respond to induction chemotherapy; however, they tend to relapse more quickly and at a higher rate, leading to an overall survival rate that is much lower than FLT3-ITD negative patients, as shown in Figure 1 below.

 

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Figure 1: Overall Survival for Patients with Normal Cytogenetics Stratified by Absence (N=125) or Presence (N=67) of the FLT3-ITD Mutation. Adopted from Fröhling et al, Blood. 2002 100: 4372-4380.

 

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Furthermore, clinical evidence from a pediatric study suggests that in addition to those AML patients who harbor the FLT3-ITD mutation, there are FLT3-ITD negative AML patients who over-express the normal, or wild-type FLT3 receptor. Progression of the disease in these patients is believed to be driven at least in part by an overactive FLT3 signaling pathway, resulting in a similarly aggressive proliferation of blasts. In this study, it was demonstrated that the 25% of FLT3-ITD negative patients with the highest level of FLT3 over-expression had a prognostic outcome that was equally as poor as for those patients with the FLT3-ITD mutation. These data suggest that AML patients with high levels of overexpression may benefit from treatment with a FLT3 inhibitor.

Figure 2: High Normal (Wild-Type) FLT3 Expressers Overall Survival Compared to FLT3-ITD Patients. Adopted from Brown et al, Blood (ASH Annual Meeting Abstracts) 2008 112: Abstract 147.

 

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FLT3 as a Validated Target — Quizartinib Opportunity

Several kinase inhibitors with activity against FLT3 have been evaluated as single agents in AML patients, including Pfizer’s Sutent® (sunitinib), Cephalon, Inc.’s CEP-701(lestaurtinib), Novartis’ PKC-412 (midostaurin), Millennium Pharmaceuticals, Inc.’s MLN-518 (tandutinib), Bayer AG’s and Onyx Pharmaceuticals, Inc.’s Nexavar® (sorafenib) and ARIAD Pharmaceuticals, Inc.’s Iclusig® (ponatinib). The level of bone marrow blast reduction with quizartinib demonstrated in our Phase 2 clinical trial was greater when compared historically to the level of bone marrow blast reduction observed in other Phase 1 and Phase 2 clinical trials primarily in relapsed or refractory AML patients treated with the kinase inhibitors listed above, as shown in Figure 3 below.

 

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Figure 3: Incidence of Bone Marrow Blast Reduction to <5% Patients in Monotherapy Trials of other Kinase Inhibitors with FLT3 Activity in Relapsed / Refractory AML.

 

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* Adopted from Knapper et al, Expert Opin. Investig. Drugs (2011) 20(10):1377-1395 (for sunitinib, lestaurtinib, midostaurin, tandutinib, sorafenib) Adopted from Talpaz et al, ASCO 2011 (for ponatinib). Blast reduction (<5%) data based on pooled clinical trial results for sorafenib (Phase 1 N=16, 0/16; Phase 1 N=20, 1/20).

In most cases, these kinase inhibitors were not initially developed to be specifically selective for FLT3 as they each target other kinases, in addition to FLT3. We believe that the lack of selectivity and potency in targeting FLT3, combined with their promiscuity with other kinases, may limit the therapeutic activity of these drugs for the treatment of AML. Quizartinib was specifically designed as a selective and potent FLT3 inhibitor for the treatment of AML, which we believe makes it a better treatment alternative for these patients.

Because of the lack of treatment options for this patient population, commercially-available kinase inhibitors, such as sunitnib and sorafenib, are often used off-label despite the low response rate generated by these drugs. PKC-412 (midostaurin) is the only kinase inhibitor listed above currently in a Phase 3 clinical trial for the treatment of newly diagnosed FLT3-ITD positive patients with AML.

We believe that the prior trials with other kinase inhibitors listed above validate the FLT3 target but there is a significant unmet need for an effective, well-tolerated drug that inhibits FLT3 and that can be dosed as a continuous, once-daily, orally-administered treatment. We believe quizartinib has the desirable combination of potency, selectivity, and favorable pharmacokinetics necessary for the continuous FLT3 inhibition to be effective as an oral monotherapy agent. We also believe that the results from our ongoing Phase 2 clinical trial showing effectiveness in reducing bone marrow blasts, ability to facilitate a bridge to an HSCT and the potential for longer overall survival, demonstrate that quizartinib has the potential to be a transformative treatment for AML patients with the FLT3-ITD mutation.

Our Clinical Program for Quizartinib

We initiated our clinical program in 2007 and to date over 400 patients have been treated in our Phase 1 and Phase 2 clinical trials. We plan to initiate a Phase 3 clinical trial in relapsed/refractory AML patients in early 2014, pending input from regulatory authorities.

 

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Phase 2 Clinical Trial

We initiated our multi-center, open label Phase 2 clinical trial of quizartinib as monotherapy in relapsed/refractory AML patients in November 2009 and completed enrollment in November 2011. This trial was designed to evaluate the efficacy and safety of quizartinib in relapsed/refractory AML patients both with and without the FLT3-ITD mutation. Overall, a total of 333 patients were enrolled at clinical sites in the United States (highest enrolling country), Canada, and select European countries (France, Germany, Italy, Netherlands, Spain, United Kingdom and Poland). A total of 248 FLT3-ITD positive patients with relapsed/refractory AML were enrolled in this clinical trial. A total of 84 patients without the FLT3-ITD mutation were enrolled as well as one patient with an unknown FLT3-ITD status at time of enrollment. Multiple doses were explored in this study, including 200 mg/day (17 patients), 135 mg/day (166 patients) and 90 mg/day (150 patients).

This clinical trial enrolled two distinct patient populations that we believe can be treated effectively with quizartinib:

 

   

Cohort 1 focused on elderly patients who were ³ 60 years of age who relapsed after one first-line chemotherapy regimen and who were either in complete remission of less than 12 months or were primary refractory to first-line chemotherapy treatment. The median age of patients in Cohort 1 was 69 years, with patients up to the age of 86 years enrolled.

 

   

Cohort 2 focused on patients who were, on average, younger and had received more extensive prior therapy than those enrolled in Cohort 1, and included patients who were ³ 18 years of age (this includes patients ³ 60 years of age) who were relapsed or refractory after one second-line (salvage)-chemotherapy regimen or were relapsed or refractory after an HSCT. The median age of patients in Cohort 2 was 51, with patients up to the age of 77 years enrolled.

We conducted two analyses of data during the course of this clinical trial. The first analysis was an interim data analysis that occurred when the first 62 patients had received at least one cycle of treatment. We refer to this first portion of the clinical trial as the exploratory stage. The second data analysis was based on the 190 FLT3-ITD positive patients, 80 FLT3-ITD negative patients, and 1 patient with unknown FLT3 status. We refer to this second portion of the clinical trial as the confirmatory stage. The number of patients enrolled in each stage of the trial, with further breakdown by FLT3-ITD status and cohort are set forth in Table A below.

Table A: Number of Patients Enrolled by Stage, Cohort, and FLT3-ITD Status

 

     Cohort 1     Cohort 2      Total  
     FLT3-ITD
positive
     FLT3-ITD
negative
    FLT3-ITD
positive
     FLT3-ITD
negative
    

Exploratory Stage

     22         2        36         2         62   

Confirmatory Stage

     90         43 1      100         38         271   

Total

     112         45 1      136         40         333   

 

1

includes one patient of unknown FLT3-ITD status

 

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The co-primary endpoints of this clinical trial were the following measurements of the reduction of bone marrow blasts, as defined in accordance with modified Cheson criteria (2003): (1) the composite complete response rate (CR+CRp+CRi), or CRc; and (2) the complete response rate, or CR. The response criteria for each of CR, CRp and CRi is as follows:

 

CR

   Reduction in bone marrow blasts to < 5% of bone marrow cells with full hematological recovery

CRp

   Reduction in bone marrow blasts to < 5% of bone marrow cells with incomplete platelet recovery

CRi

   Reduction in bone marrow blasts to < 5% of bone marrow cells with incomplete neutrophil recovery and with or without complete platelet recovery

Secondary endpoints included transplantation rate, (rate for patients for whom treatment with quizartinib enabled them to become eligible for an HSCT, which we sometimes refer to as, bridged to an HSCT), overall survival, duration of response, disease-free survival and overall response rate, which includes partial response rate (reduction in bone marrow blasts to between 5% and £ 25% of bone marrow cells and ³ 50% reduction in the bone marrow blasts from baseline), or PR.

Overall, the data for the primary and secondary endpoints from the confirmatory stage of this Phase 2 clinical trial were consistent with and confirmed the data from the interim data analysis from the exploratory stage. In the discussion of our Phase 2 clinical trial that follows, we have combined the data from the exploratory and confirmatory stages.

Quizartinib in FLT3-ITD positive patients

Our Phase 2 clinical trial demonstrated the following three key clinical benefits (each of which is described in more detail below):

 

  1. Quizartinib, as a monotherapy, demonstrated a high response rate in relapsed/refractory FLT3-ITD positive patients;

 

  2. A substantial number of patients treated with quizartinib were bridged to a potentially curative HSCT; and

 

  3. Overall survival in FLT3-ITD positive patients treated with quizartinib compared favorably to historical survival data reported for both FLT3-ITD positive and negative AML patients.

In addition, nearly one of every five patients treated with quizartinib (irrespective of FLT3-ITD status) remained alive for more than 12 months and such patients are referred to as long term survivors. As of September 2012, approximately half of the long term survivors remained alive and continued to be followed for overall survival.

 

  1. Quizartinib, as a monotherapy, demonstrated a high response rate in relapsed/refractory FLT3-ITD positive patients

The overall CRc rate in FLT3-ITD positive patients in both cohorts of the Phase 2 clinical trial was 50% (125/248 patients) with a median time for such patients to achieve CRc being 4.3 weeks. A majority of the patients achieved a CRi. Of importance, for relapsed/refractory AML patients, the objective of treatment is achieving remission through a reduction in blasts and then, if available, bridge to an HSCT. In addition, for patients who cannot undergo an HSCT, we believe that the high level of blast reduction correlates with improved quality of life especially given that quizartinib is given orally as an outpatient therapy.

 

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The median duration of CRc for FLT3-ITD positive patients was 12.1 weeks in Cohort 1 and 10.6 weeks in Cohort 2. The duration of CRc was calculated from the time that a patient first achieved a CRc (bone marrow blasts fell below 5%) until the time that such patient relapsed (bone marrow blasts rose above 5%). See Table B below. As is standard for clinical trials in leukemia, for patients where documented relapse does not occur, i.e. in patients who are bridged to an HSCT in remission, the duration of response is censored and those patients who are last known as responders are not counted as an event of relapse. This potentially impacts the duration of response due to censoring at the time of an HSCT, which often occurs very quickly after a response to quizartinib is achieved. Those bridged to an HSCT without a documented relapse are no longer considered at risk for relapse and therefore we cannot determine whether they could have contributed to an overall longer duration of response.

Table B. Clinical Trial AC220-002: Response in FLT3-ITD Positive Patients (Total N = 248)

 

Response

To Quizartinib

  

Cohort 1

N = 112

n (%)

  

Cohort 2

N = 136

n (%)

CRc (CR+CRp + CRi)

  

63 (56.3)

  

62 (45.6)

CR

  

3 (2.6)

  

5 (3.7)

CRp

  

4 (3.6)

  

2 (1.5)

CRi

  

56 (50.0)

  

55 (40.4)

PR

  

23 (20.5)

  

38 (27.9)

Median Duration of CRc, (weeks) [range]

  

12.1 [0.1-58.9]

  

10.6 [0.1-102.1+]

 

+ indicates that a patient is still being censored for response

The mean duration of treatment for FLT3-ITD positive patients achieving either a CRc or PR, referred to as responders, was 21.8 weeks in Cohort 1, and 15.9 weeks in Cohort 2. See Table C below. Similar to duration of response, duration of treatment is potentially impacted by the number of patients bridged to an HSCT, as treatment with quizartinib is discontinued prior to transplantation.

Table C. Clinical Trial AC220-002: Duration of Treatment in FLT3-ITD Positive Patients (Total N = 248)

 

     Cohort 1
N = 112
Treatment Time in Weeks
    Cohort 2
N = 136
Treatment Time in Weeks
 
      Mean      Median      Min      Max     Mean      Median      Min      Max  

Responders (CRc or PR)

     21.8         17.5         2.0         70.6     15.9         10.0         2.7         108.1

Non-responders

     5.0         4.4         0.1         12.4        6.9         5.0         0.3         23.3   

 

+ indicates that a patient is still receiving treatment with quizartinib

In addition, and importantly, within both cohorts, a total of 131 FLT3-ITD positive patients were refractory to their last prior therapy. Of those, 74% achieved at least a PR (with 48% achieving a CRc) with quizartinib (not shown). This high level of response allowed many patients to be bridged to an HSCT (especially within Cohort 2) who likely would not have been able to receive an HSCT given their high bone marrow blast percentage while on their previous therapy.

 

  2. Quizartinib bridged a substantial number of patients to a potentially curative HSCT

We believe that bridge to an HSCT is an important clinical benefit of quizartinib. An HSCT remains the only recognized potential cure for relapsed/refractory AML patients and therefore bridge to an HSCT is a key objective in the treatment of patients who are healthy enough to undergo the procedure. Because patients who are refractory to or have relapsed after one or more prior lines of therapy do not typically achieve remission from

 

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additional therapy, very few relapsed/refractory AML patients are eligible for an HSCT. However, we believe that the level of bone marrow blast reduction and duration of response in patients who responded to quizartinib enabled them to be more likely to become candidates for a potentially curative HSCT.

Of the 248 FLT3-ITD positive patients, 11 out of 112 (9.8%) patients in Cohort 1 and 47 out of 136 (34.6%) patients in Cohort 2 (those receiving their third line of therapy or therapy after a prior HSCT) were bridged to an HSCT. Table D outlines the number of patients who were bridged to an HSCT, as well as analyzes overall survival based on whether or not a patient was bridged to an HSCT. The results below demonstrate the numerical improvement in the median overall survival based on whether or not a patient was bridged to an HSCT.

Table D. Overall Survival by an HSCT for FLT3-ITD Positive Patients (Total N=248)

 

     

Cohort 1

N = 112

n (%)

  

Cohort 2

N = 136

n (%)

# (%) Bridged to an HSCT

  

11 (9.8)

  

47 (34.6)

Median Overall Survival (OS) (weeks), [range] (n=248)

  

25.4 [0.4-96.0+]

  

24.0 [0.7-109.1+]

Median OS if bridged to an HSCT (weeks), [range] (n=58)

  

32.7 [12.7-93.0+]

  

34.1 [13.6-109.1+]

Median OS if not bridged to an HSCT (weeks), [range] (n=190)

  

24.9 [0.4-96.0+]

  

18.4 [0.7-108.3+]

 

+ indicates that subjects are still alive

Within Cohort 2, the one-year survival rate for the patients who were bridged to an HSCT following treatment with quizartinib was 36.2% (17 out of 47 patients remained alive over 1 year). See Figure 4 below. In addition, the median overall survival was 34.1 weeks in those who were bridged to a an HSCT compared to a median overall survival of 18.4 weeks in those who did not undergo an HSCT after treatment with quizartinib. We believe that the significantly higher number of patients who bridged to an HSCT in Cohort 2 is due to the fact that patients in Cohort 2 were, on average, younger than patients in Cohort 1 and older patients are less likely to be eligible for an HSCT.

 

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Figure 4: Cohort 2 Overall Survival for FLT3-ITD Positive Patients Who Were Bridged (N=47) to an HSCT Compared to Those Who Were Unable to Receive an HSCT (N=89)

 

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Three patients (n=3/47) that received an HSCT and did not achieve a CRc or PR, had overall survival of 18.3, 30, and 49 weeks, respectively.

 

  3. Overall survival in FLT3-ITD positive patients treated with quizartinib compared favorably to historical survival data reported for both FLT3-ITD positive and negative AML patients.

AML is a deadly disease, particularly for FLT3-ITD positive patients. FLT3-ITD positive patients who are relapsed or refractory generally have very poor response rates to additional therapy and poor overall survival.

Distinct Survival Benefit for Cohort 1: FLT3-ITD positive patients in Cohort 1 (elderly and relapsed after one first-line chemotherapy treatment or who were refractory to first-line chemotherapy treatment) had a median overall survival of 25.4 weeks. As a comparison, in a 2009 report in Leukemia Research on a study conducted by researchers in the Department of Leukemia, University of Texas M.D. Anderson Cancer Center of 109 patients who were FLT3-ITD positive treated from 1995-2004, the median overall survival for patients who were relapsed after their first therapy was 13.0 weeks.

In addition, as shown in Figure 5 below, in patients who were available for response at day 28, if a patient achieved a PR or CRc to quizartinib, the median overall survival was 31.1 weeks compared to a median overall survival of 12.9 weeks in those who did not achieve at least a PR to quizartinib. This figure is based on 106 patients who lived long enough to have a response assessment (at least 28 days) out of the total of 112 FLT3-ITD positive patients in Cohort 1. See Figure 5 below.

 

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Figure 5: Cohort 1 Overall Survival for FLT3-ITD Positive Patients Who Were Available for Response at Day 28 and Who Responded to Quizartinib (N=84) Compared to Patients Who Were Available for Response at Day 28 and Who Did Not Respond to Quizartinib (N=22)

 

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Distinct Survival Benefit for Cohort 2: In Cohort 2 (patients relapsed after two lines of therapy or who were relapsed or refractory to an HSCT), the median overall survival in the FLT3-ITD positive patients, which typically confers a particularly poor survival outcome, was 24.0 weeks (approximately 6.0 months). Overall there is very little published literature on AML patients in their third line of therapy. In a 2005 publication in Cancer on a study conducted by researchers in the Department of Leukemia, University of Texas M.D. Anderson Cancer Center, of 594 AML patients (both FLT3-ITD positive and negative) treated from 1980-2004 undergoing their third line of treatment, the median overall survival for patients was 1.5 months.

Long Term Survivors: Of the total 333 patients (both FLT3-ITD positive and negative) in the Phase 2 clinical trial, 59 (17.7%) patients had an overall survival of greater than 12 months. 43 of the 59 long-term survivors (72.8%) were FLT3-ITD positive. Of the 59 long-term survivors, 22 patients (37.3%) were from Cohort 1, of which only one (4.5%) underwent an HSCT, and 10/22 (45.5%) remained alive as of September 2012; and 37 patients (62.7%) were from Cohort 2, of which 26/37 (70.3%) underwent an HSCT, and 21/37 (56.8%) remained alive as of September 2012. The median duration of treatment for the patients who had an overall survival of greater than 12 months was 46.5 weeks (range 5.3-77.1 weeks) for Cohort 1 and 10.0 weeks (range 3.3-108+weeks) for Cohort 2.

 

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Quizartinib in FLT3-ITD negative patients

While our development plans for quizartinib are currently focused on the treatment of FLT3-ITD positive patients, we did see responses from FLT3-ITD negative patients in our Phase 2 clinical trial, see Table E. A total of 84 FLT3-ITD negative patients were enrolled in the Phase 2 trial and the co-primary endpoint of CRc was achieved in 28/84 (33.3%) of those patients, with a majority of the patients achieving a CRi. The median duration of CRc was 10.8 weeks in Cohort 1 and 7.0 weeks in Cohort 2.

Table E. Clinical Trial AC220-002: Response in FLT3-ITD Negative Patients (Total N = 84)

 

Response

To Quizartinib

  

Cohort 1

N = 44

n (%)

  

Cohort 2

N = 40

n (%)

CRc (CR+CRp+CRi)

  

16(36.4)

  

12(30.0)

CR

  

2(4.5)

  

1(2.5)

CRp

  

1(2.3)

  

1(2.5)

CRi

  

13(29.5)

  

10(25.0)

PR

  

4(9.1)

  

6(15.0)

Median Duration of CRc, (weeks) [range]

  

10.8[2.0-57.1]

  

7.0[0.1-8.1]

Table F. Clinical Trial AC220-002: Duration of Treatment in FLT3-ITD Negative Patients (Total N = 84)

 

     Cohort 1
N= 44
Treatment Time in Weeks
     Cohort 2
N= 40
Treatment Time in Weeks
 
      Mean      Median      Min      Max      Mean      Median      Min      Max  

Responders (CRc or PR)

     28.7         24.0         5.9         77.0         10.0         8.6         4.0         21.9   

Non-responders

     7.1         4.1         1.1         32.6         9.7         6.7         1.0         38.1   

We believe that some of the responses seen in the FLT3-ITD negative patients can be attributed to the 10% ITD level cut-off used to identify FLT3-ITD positive patients in our currently validated diagnostic test, which resulted in patients with less than 10% ITD mutation classified as ITD negative. A test with a lower level of ITD expression detection may be able to appropriately identify more patients as FLT3-ITD positive, and we believe that patients with lower ITD expression should respond similarly to those we identified as FLT3-ITD positive for the purposes of this clinical trial. Based on this, additional work is currently ongoing to validate a lower cut-off on the companion diagnostic to better identify the FLT3-ITD positive population. However, the results from this clinical trial also suggest that patients without the FLT3-ITD mutation may also respond to quizartinib and we are evaluating the potential use of quizartinib for that patient population as an opportunity for expansion of the target population for quizartinib in the future.

Similar to the FLT3-ITD positive patients, one of the most important clinical benefits of treatment with quizartinib for patients identified as FLT3-ITD negative in the Phase 2 clinical trial was the ability of quizartinib to bridge patients to an HSCT. One patient (2.3%) in Cohort 1 and 14 patients (35.0%) in Cohort 2 were bridged to an HSCT.

The median overall survival for Cohort 1 was 19.1 weeks and 25.1 weeks for Cohort 2. Additionally, the median overall survival in Cohort 2 for those bridged to an HSCT has yet to be reached compared to the median overall survival of 19.2 weeks for those within Cohort 2 that did not undergo a subsequent HSCT.

 

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Figure 6: Cohort 2 Overall Survival for FLT3-ITD Negative Patients Who Were Bridged to an HSCT (N=14) Compared to Those Who Were Unable to Receive an HSCT (N=26)

 

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Safety

To date, the clinical development program for quizartinib includes over 400 patients treated in our Phase 1 and Phase 2 clinical trials in relapsed/refractory AML. The adverse events that we have observed to date are manageable and the most common all grade treatment-emergent adverse events (reported in ³ 20% of subjects) in the Phase 2 clinical trial included gastrointestinal toxicities, febrile neutropenia (fever with reduction in white blood cell count), fatigue, pyrexia (fever), anemia, QT prolongation (changes in the patient’s electrocardiogram pattern), edema peripheral (swelling of legs) and dysgeusia (distortion of the sense of taste). Overall, there were no major differences between safety findings in FLT3-ITD positive and FLT3-ITD negative patients or between the Phase 1 and Phase 2 clinical trials.

 

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Table G : Clinical Trial AC220-002: Treatment Emergent Adverse Events Occurring in ³ 20% of Patients by Maximum Grade (Total N = 333)

 

Adverse Event

   Grade 1/2
n (% of  N)
    Grade3/4
n (% of  N)
    Total Patients (1)
n (% of N)
 

Nausea

     169  (51)      (3)      178  (53) 

Febrile neutropenia (2)

     NA        137  (41)      139  (42) 

Diarrhea

     122  (37)      14  (4)      136  (41) 

Vomiting

     120  (36)      11  (3)      131  (39) 

Fatigue

     95  (29)      18  (5)      113  (34) 

Pyrexia (3)

     89  (27)      12  (4)      103  (31) 

Anemia

     11 (3)      87  (26)      98  (29) 

Electrocardiogram QT prolonged (4)

     63  (19)      35  (11)      98  (29) 

Edema peripheral

     88  (26)      (1)      91  (27) 

Decreased appetite

     81  (24)      (3)      90  (27) 

Dysgeusia

     78  (23)      0        78  (23) 

Constipation

     68  (20)      (1)      71  (21) 

 

Note: Patients are counted once only for each adverse event based on the maximum grade experienced for that event.
(1) Totals may exceed sums of columns due to reporting of adverse events without an associated Grade.
(2) Febrile neutropenia cannot be reported as Grade 1 or 2.
(3) One case of Grade 5 pyrexia and pancytopenia (abnormally low reduction in all blood cells produced by bone marrow) was reported.
(4) All but one case of Grade 3/4 electrocardiogram QT prolongation was Grade 3.

The initial dose of quizartinib in our Phase 2 clinical trial was 200mg/day, the maximum tolerated dose determined in our Phase 1 clinical trial. After observing asymptomatic Grade 3 QT prolongation in 35% of the first 17 patients who were dosed at 200 mg once daily on a continuous basis in the Phase 2 clinical trial, we reduced the dose to 135 mg/day and 90 mg/day for males and females, respectively. This dose reduction was applied to all subsequent patients and successfully decreased the incidence of asymptomatic Grade 3 QT prolongation in these subsequent patients to 16% (higher than the investigator-reported number in Table G, as a result of an independent review of patient electrocardiograms). The different doses for male and female patients are due to the fact that QT prolongation was also observed at a higher rate in females compared to males, consistent with supporting literature which indicates that women have a higher prevalence of QT prolongation in general than men for many hypothesized factors.

QT prolongation is a common adverse event associated with multiple other kinase inhibitors and is possibly considered a class effect. The majority of cases of QT prolongation with quizartinib are asymptomatic, and occur within the first month of treatment. Additionally, the majority of patients that experienced QT prolongation did not discontinue quizartinib due to this adverse event. To date, there has been one case of Grade 4 QT interval prolongation with Torsade de pointes (an abnormal cardiac rhythm) in a patient taking quizartinib with multiple concomitant medications in our Phase 2 clinical trial. This event resolved after quizartinib discontinuation.

Ongoing Phase 2b Clinical Trial in FLT3-ITD positive relapsed/refractory AML

We and Astellas initiated a Phase 2b clinical trial in April 2012 to study the efficacy and safety of two lower doses of quizartinib. From and after the effectiveness of the termination of our collaboration with Astellas in September 2013, we will assume all responsibility for the continuation and completion of this clinical trial. This Phase 2b clinical trial is a randomized, open-label clinical trial of quizartinib monotherapy in FLT3-ITD positive patients with AML who are refractory or relapsed after two prior lines of therapy, with or without a prior HSCT. Patients will be randomized equally between two doses of quizartinib, 30 and 60 mg/day, with male and female patients randomized equally between doses. The proposed doses of quizartinib are based on evidence of efficacy

 

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and safety in doses studied in our Phase 1 clinical trial of quizartinib in relapsed/refractory AML patients, as well as preclinical data demonstrating FLT3 target suppression at doses as low as 30 mg daily. We believe that reducing the dose may improve safety while maintaining efficacy. The primary endpoints of the Phase 2b clinical trial are CRc rate and rate of Grade 2, 3 or 4 QT prolongation at the different doses of quizartinib. The secondary endpoints include bridge to an HSCT, CR rate, duration of remission, and overall survival. As of April 2013, a total of 76 patients have been enrolled. This clinical trial will enroll within the United States and select European countries including France, Germany, Italy, and the United Kingdom.

Preliminary Review of Patient Records

Upon review of patient records from 34 patients in this clinical trial who had initiated dosing at least 28 days prior to January 28, 2013, we observed a CRc rate of 37.5% (6/16) in the 30 mg cohort and 38.9% (7/18) in the 60 mg cohort. Based on the small number of patients with limited follow-on included in this initial review, we believe that this represents similar response rates when compared to the results from our Phase 2 clinical trial. Additionally, four out of the 16 (25%) patients in the 30 mg cohort, and six of the 18 (33.3%) patients in the 60 mg cohort were bridged to transplant, similar to the rate observed in the Phase 2 clinical trial.

The observed rate of QT prolongation decreased in comparison to the Phase 2 clinical trial in the evaluable population of 39 patients who had at least one post-baseline QTc measurement. The observed rate of Grade 3 QT prolongation was 0% (0/20) in patients dosed at 30 mg, and 5.3% (1/19) in patients dosed at 60 mg. In addition, based on an updated safety review as of March 26, 2013 for adverse events, the other treatment emergent adverse events appear to be similar to what we observed in our Phase 1 and Phase 2 clinical trials.

Table H. Clinical Trial AC220-2004: Preliminary Review of Evaluable Patients (Total N = 34)

 

Response To

Quizartinib

  

30mg Cohort

N = 16

n (%)

  

60 mg Cohort

N = 18

n (%)

CRc (CR + CRp + CRi)

   6 (37.5)    7 (38.9)

CR

   0    1 (5.6)

CRp

   0    1 (5.6)

CRi

   6 (37.5)    5 (27.8)

PR

   1 (6.3)    7 (38.9)

Table I: Clinical Trial AC220-2004: Treatment Emergent Adverse Events (All Grades) Occurring in ³ 15% of Patients in Either Dose Group (Total N = 41)

 

     30mg Cohort    60mg Cohort
     N =21    N =20

Adverse Event

   Grade 1/2
n (% of  N)
   Grade 3/4
n (% of  N)
   Total Patients
n (% of N)
   Grade 1/2
n (% of  N)
   Grade 3/4
n (% of  N)
   Total Patients
n (% of N)

Nausea

   2(10)    0    2(10)    6(30)    1(5)    7(35)

Diarrhea

   1(5)      0    1(5)      6(30)    1(5)    7(35)

Febrile neutropenia (1)

   NA    3(14)    3(14)    NA      6(30)    6(30)

Fatigue

   2(10)    0    2(10)    4(20)    0    4(20)

Abdominal pain

   1(5)      0    1(5)      4(20)    0    4(20)

Headache

   1(5)      1(5)      2(10)    3(15)    0    3(15)

Vomiting

   2(10)    0    2(10)    2(10)    1(5)    3(15)

Pneumonia

   0    0    0    2(10)    1(5)    3(15)

Acute renal failure

   0    0    0    1(5)      1(5)      3(15)*

Neutropenia

   0    0    0    0      3(15)    3(15)

Anemia

   1(5)      3(14)    4(19)    0      2(10)    2(10)

 

* Includes 1 case of Grade 5 acute renal failure that was assessed as not drug related.
(1) Febrile neutropenia cannot be reported as Grade 1 or 2.

 

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Quizartinib Development Strategy

The initial development strategy for quizartinib in the United States is focused on FLT3-ITD positive patients with relapsed or refractory AML. Pending input from regulatory authorities, we plan to initiate a randomized, comparative Phase 3 clinical trial studying quizartinib as monotherapy versus physician’s choice of standard chemotherapy in approximately 350 relapsed/refractory AML patients over the age of 18 who are in first salvage therapy in early 2014. The primary endpoint of this clinical trial will be overall survival and we expect to receive topline data in late 2015. The design of this clinical trial is being finalized, and will be based on the full data from the Phase 2 clinical trial, the ongoing Phase 2b clinical trial and an ongoing drug-drug interaction study as well as input from the FDA and other regulatory authorities. This Phase 3 clinical trial will, if successful, be expected to support marketing approval submissions in the United States, the European Union and potentially other countries. In addition, we have initiated discussions with the FDA related to acceptance of two novel surrogate endpoints that could support an accelerated approval based upon the results of our Phase 2 clinical trials, namely CRc rate and bridge to an HSCT. We plan to continue these discussions with the FDA at an end of Phase 2 meeting anticipated to occur in September 2013. Accelerated approval is uncertain and would depend on both the FDA’s acceptance of such novel surrogate endpoints as well as the results of our ongoing Phase 2 clinical trials and other components of our NDA.

Based on the responses seen in patients who were classified as FLT3-ITD negative in our Phase 2 clinical trial we plan to evaluate the potential use of quizartinib for that patient population as an opportunity for label expansion following potential approval of quizartinib for the treatment of FLT3-ITD positive patients and also plan to develop quizartinib in other AML therapeutic settings, including in combination with chemotherapy for frontline therapy and as a maintenance therapy following an HSCT and in multiple other hematologic disease indications.

In addition to AML, quizartinib is being evaluated in combination with standard chemotherapeutic agents such as cytarabine and azacitidine in investigator sponsored studies for the treatment of high risk myelodysplastic syndrome, or MDS. The results of these studies will contribute to the future life cycle plan for quizartinib.

Other Ongoing Clinical Trials for Quizartinib

Ongoing Phase I Clinical Trial of Quizartinib in Combination with Chemotherapy for Frontline Therapy

In November 2011, we and Astellas initiated a Phase 1 dose-escalating clinical trial evaluating quizartinib in combination with standard induction and consolidation chemotherapy in newly diagnosed AML patients, as well as quizartinib maintenance after consolidation chemotherapy for patients between the ages of 18 and 60 years of age with newly diagnosed AML, irrespective of FLT3-ITD status. We believe quizartinib’s tolerability profile allows the possibility of dosing in combination with chemotherapy for the treatment of newly diagnosed AML patients. We also believe that the use of quizartinib in these patient populations will increase the overall CR rate and increase the durability of that response. From and after the effectiveness of the termination of our collaboration with Astellas in September 2013, we will assume all responsibility for the continuation and completion of this clinical trial.

Ongoing Phase I Clinical Trial of Quizartinib as Maintenance Therapy Following an HSCT

In June 2012, we and Astellas initiated a Phase 1 dose-escalating clinical trial to evaluate quizartinib as a maintenance therapy for patients, irrespective of FLT3-ITD status, with AML who have received an allogeneic HSCT and are currently in remission. We believe quizartinib dosed as a continuous maintenance therapy following an HSCT will increase duration of remission, thus increasing overall survival. The goal of this clinical trial will evaluate the safety and tolerability of quizartinib as maintenance therapy with a goal of increasing the duration of remission. From and after the effectiveness of the termination of our collaboration with Astellas in September 2013, we will assume all responsibility for the continuation and completion of this clinical trial.

 

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Ongoing Investigator-Sponsored Phase 1 Clinical Trial

In addition to the clinical development plan for the treatment of adult patients, in August 2011, we initiated a Phase 1 clinical trial of quizartinib in pediatric patients with either relapsed acute lymphoblastic leukemia, or ALL, or relapsed AML. This clinical trial is ongoing and is being sponsored by the Therapeutic Advances in Childhood Leukemia & Lymphoma Cooperative Group. Currently there are 14 patients enrolled and this clinical trial is expected to enroll no more than 39 pediatric patients. The maximum tolerated dose in this clinical trial will help determine the dose for a planned follow-on Phase 2 clinical trial in pediatric patients to help fulfill the pediatric investigational plan requirement by the European regulatory authorities for marketing approval of quizartinib in Europe.

Completed Phase 1 Clinical Trial in Relapsed/Refractory AML

In May 2012, we concluded an open-label Phase 1 dose-escalation clinical trial in which we evaluated quizartinib as monotherapy in 76 relapsed/refractory AML patients (irrespective of FLT3-ITD status). The primary objectives of this clinical trial were to determine the safety and tolerability, including dose limiting toxicity, of quizartinib. The patients in this clinical trial had undergone a median of three prior treatment regimens. The maximum tolerated dose, with continuous dosing, was determined to be 200 mg/day and the dose limiting toxicity was Grade 3 asymptomatic QT prolongation. Across all dose groups studied in this Phase 1 clinical trial, the overall response rate was 23/76 (30%) with 10 subjects achieving a CRc and 13 subjects achieving a PR. Of the 10 subjects with CRc, two achieved a CR and three achieved a CRp with quizartinib.

Completed Bio-availability Study

Quizartinib has, to date, been dosed as a liquid oral treatment. We have recently developed a solid dosage form (tablet) of quizartinib and successfully completed a Phase 1 clinical trial in healthy volunteers to confirm the equivalent bioavailability between the liquid form and the tablet. We anticipate incorporating the tablet in future clinical development, including our planned Phase 3 clinical trial, subject to guidance from the FDA. If approved, our commercial strategy is to have both the tablet form and liquid forms in order to address the needs of multiple patient populations.

Companion Diagnostic

In May 2003, Murphy et al. first published on the development of a routine PCR-based assay to determine the presence or absence of FLT3-ITD mutations in a patient’s blood or bone marrow sample. Over the past decade this test has been adopted as a routine component of AML genetic testing laboratories in the United States certified under the federal Clinical Laboratory Improvement Amendments of 1988, or CLIA, and at similarly accredited laboratories across the globe. We believe this assay will help identify patients who are most likely to benefit from quizartinib, and have included this assay as part of the screening criteria for our clinical trials. We expect that regulatory approval of quizartinib will require FDA approval of this FLT3-ITD assay in the form of a companion diagnostic test that has been validated for accuracy, precision and reproducibility. We have partnered with Genoptix to develop a validated companion diagnostic for use in our clinical trials and to prepare and submit a premarket approval application, or PMA, for this companion diagnostic to the FDA in connection with our NDA submission. To support this effort, in partnership with Genoptix, we have had multiple discussions with the Center for Drug Evaluation and Research, or CDER, and the Center for Devices and Radiological Health, or CDRH, at the FDA to collect guidance and feedback on our validation plan for the FLT3-ITD companion diagnostic for quizartinib.

AC410: JAK2-Kinase Specific Inhibitor for Inflammatory Diseases

Overview

Our lead clinical-stage drug candidate that inhibits JAK2, AC410, is a potent, selective, orally-administered, small molecule inhibitor of JAK2, which has potential utility for the treatment of autoimmune and inflammatory diseases.

 

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The JAK family comprises of four intracellular, non-receptor tyrosine kinases: JAK1, JAK2, JAK3 and Tyk2. JAK plays a central role in the cytokine signaling processes within the immune system, and each family member mediates the signaling of a distinct, but overlapping, subset of cytokines. Inflammatory diseases are frequently characterized by an over-active immune response driven by pro-inflammatory cytokines. In recent years, JAK inhibitors have gained significant attention as a mechanism of action in the treatment both of oncology and inflammatory diseases. The class of drugs includes two marketed products: Ruxolitinib, a JAK1/2 inhibitor for myelofibrosis (approved in November 2011 and marketed as Jakafi® by Incyte Corporation and Novartis); and tofacitinib, a pan-JAK inhibitor for RA (approved in November 2012 and marketed as Xeljanz® by Pfizer).

Much of the clinical development of JAK inhibitors in autoimmune and inflammatory diseases has focused on JAK1 and JAK3, but given the complexity and heterogeneity of these diseases, we believe therapeutic opportunities exist for each of the individual JAK family members, and that there is no “best” JAK target. The cytokines believed to promote inflammation vary greatly across diseases, and it is unlikely that any one JAK target will prove most efficacious in all inflammatory diseases or patient subsets. Furthermore, we believe a selective approach to JAK inhibition has the potential to improve safety by narrowing the spectrum of activity, while maintaining efficacy by inhibiting the key cytokines driving inflammation.

JAK2 mediates the signaling of a unique subset of cytokines that is distinct from JAK1 and JAK3. These cytokines include IL-6, IL-12, and IL-23 which play a key role in the autoimmune diseases such as psoriasis and rheumatoid arthritis, and IL-5, IL-13, and GM-CSF which play a key role in allergic diseases such as asthma. We believe this distinct activity could potentially deliver a competitive alternative to other JAK inhibitors while opening up first-in-class opportunities in novel therapeutic areas where JAK inhibitors have yet to be studied in the clinic.

Our initial JAK2 drug candidate, AC430, is a racemic mixture (50/50) of two enantiomers, AC410 and AC409, and was studied in a Phase 1 clinical trial. We have selected AC410 over AC430 and AC409 for further clinical development due to its superior pharmacokinetics as observed in this clinical trial. To our knowledge, AC430 was the first selective JAK2 inhibitor to be advanced into clinical development for inflammatory disease and we believe AC410 may offer distinct benefits in this commercially attractive drug category.

Opportunity for Ambit

Inflammatory diseases are complex and heterogeneous, involving numerous and varying cytokines, and include RA, psoriasis, asthma, multiple sclerosis and Crohn’s Disease. Current standards of care include biologic therapies that are directed against a single cytokine or drug target and are administered via infusion or subcutaneous injection. AC410 is an orally-administered small molecule drug candidate that inhibits JAK2 which can affect multiple pro-inflammatory cytokines. We believe it may provide additional therapeutic benefit in a wide range of autoimmune and inflammatory diseases when compared to current standards of care, including the convenience of once-daily oral dosing.

Autoimmune Disease

The cytokines IL-12 and IL-23 are implicated as central mediators in the development of autoimmune disease due to their key roles in induction of Th1 and Th17 immune responses, respectively, and therapeutic monoclonal antibodies directed against these cytokines, such as Janssen Biotech Inc.’s Stelara (ustekinumab), have been shown to be safe and effective in the treatment of psoriasis, and investigation in other autoimmune diseases is ongoing. The cytokine IL-6 is implicated as one of the most important mediators in the acute phase inflammatory response, and therapeutic antibodies directed against this cytokine, such as Genentech’s Actemra (tocilizumab), have been shown to be safe and effective in the treatment of rheumatoid arthritis, and investigation in other autoimmune diseases is ongoing. Combined, this data suggests that a small molecule JAK2 inhibitor that blocks IL-6, IL-12, and IL-23 may be able to provide therapeutic benefit in autoimmune and inflammatory diseases such as psoriasis and rheumatoid arthritis.

 

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Allergic Disease

The cytokine IL-5 has been implicated in the proliferation, survival and trafficking of eosinophils, which play a role in allergic diseases such as asthma. One investigational monoclonal antibody that is directed against this cytokine, GlaxoSmithKline’s mepoluzimab, has demonstrated a signification reduction in asthma exacerbations and the reliance on corticosteroids over a twelve month period in a subpopulation of severe asthmatics, and other IL-5 antibodies have also signaled the potential for therapeutic benefit in severe allergic asthma. The cytokine GM-CSF plays an important role in the differentiation, proliferation and survival of granulocytes (e.g. eosinophils, neutrophils and macrophages), and investigational agents appear to have activity in both allergic and non-allergic asthma. The cytokine IL-13 is believed to be a central mediator in allergen-induced asthma, and several monoclonal antibodies have shown activity in investigational clinical studies, particularly in patients with elevated periostin levels. Combined, this data suggests that a small molecule JAK2 inhibitor that blocks IL-5, IL-13, and GM-CSF may be able to provide therapeutic benefit in allergic diseases such as asthma.

AC410 / AC430 Development Summary

AC430 Preclinical Development

We have completed preclinical development and filed an IND for AC430, a potent and selective JAK2 inhibitor. Characterization of AC430 in in vitro and in vivo studies has demonstrated potent inhibition of JAK2 and the inhibition of signaling of JAK2-mediated cytokines. AC430 demonstrated robust and consistent efficacy in preclinical animal models of arthritic, respiratory, and central nervous system inflammation. IND-enabling toxicology studies have shown AC430 to be very well tolerated in rats and monkeys at exposures significantly higher than what was required to demonstrate cytokine inhibition in the Phase 1 clinical trial.

Selection of AC410

Our initial JAK2 drug candidate, AC430, is a racemic mixture of two enantiomers, AC410 and AC409 and was studied in a Phase 1 clinical trial. We have selected AC410 over AC430 and AC409 for further clinical development due to its superior pharmacokinetics as observed in this clinical trial. AC410 demonstrated potent anti-inflammatory effect in a preclinical animal model of arthritic inflammation and was 40-, 150- and 20- fold more potent for JAK2 activity compared to JAK1, JAK3 and TYK2, respectively, in cellular assays. The FDA has indicated that we can continue the clinical development of AC410 under our IND for AC430 without a need to repeat preclinical toxicology studies completed with AC430, contingent on review by the FDA of the manufacturing process for AC410.

AC430 Phase 1 Clinical Development

We completed enrollment in our dose-ranging Phase 1 clinical trial of AC430 in healthy volunteers to assess the safety, pharmacokinetics and pharmacodynamic effects of AC430. The Phase 1 clinical trial evaluated 84 subjects up to 14 days of continuous dosing. Both once-a-day dosing and twice-a-day dosing regimens of AC430 were evaluated in the multiple ascending dose component of the clinical trial. AC430 was well tolerated and adverse events were all mild-to-moderate, and the most common included dysguesia (effect on sense of taste), gastrointestinal toxicities, headache and fatigue. There were no serious adverse events and we did not observe thrombocytopenia (platelet decrease), neutropenia (neutrophil decrease), anemia (red blood cell decrease), or dyslipidemia (LDL increase), which have been observed in clinical trials of other JAK inhibitors. Although the dosing in this study was of insufficient duration to conclusively determine an absence of these effects, we believe these early signals may translate into potential differentiation in the safety profile of AC410 compared to other JAK inhibitors. Additionally, in pharmacodynamic/biomarker assays, AC430 demonstrated significant and dose-dependent inhibition of JAK2 specific cytokine signaling, at well-tolerated doses. Based on our preclinical and clinical data we believe that AC410 will have a substantially similar safety and activity profile to AC430. Further, we believe the safety and activity demonstrated in the Phase 1 clinical trial data supports further development of AC410 as a once-daily oral therapy for autoimmune and inflammatory diseases.

 

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AC410 Clinical Development Strategy

We plan to advance AC410 to proof-of-concept clinical trials in one or more autoimmune and inflammatory diseases, independently or in collaboration with a strategic partner.

CSF1R Program: Selective Kinase Inhibitors for Oncology and Inflammation

Overview

We are developing a potent and exquisitely selective small molecule compound, AC708, that inhibits CSF1R and has potential utility in oncology, autoimmune and inflammatory diseases.

Signaling through CSF1R controls the activation, proliferation and survival of macrophages, which are key mediators of immune system function, and over-activation of macrophages may result in exacerbation of certain diseases.

The tumor microenvironment is increasingly understood to be a source of therapeutic targets for the treatment of cancer, and tumor associated macrophages, or TAMs, are thought to play a key role. TAMs can release a wide range of growth factors, enzymes, cytokines, and other inflammatory mediators, which promote angiogenesis (blood vessel formation in tumors), survival and metastasis of tumors and may confer resistance to standard oncology therapies. Cancer cells secrete a variety of growth factors, including CSF-1 (a cytokine that signals through CSF1R), which macrophages require to survive, thereby establishing a co-dependence between macrophages and tumor cells. We believe that a drug that inhibits CSF1R could interrupt the co-dependence between TAMs and tumors, and could be complementary and augment existing standards of care, thereby improving the treatment of cancer.

Macrophages are also a key cellular mediator in the secretion of cytokines and growth factors that can promote inflammation. Over-activation of macrophages is believed to play a role in conditions such as RA, inflammatory bowel diseases, lupus nephritis, atherosclerosis, and even conditions such as obesity. CSF1R plays a central role in the recruitment, activation and survival of macrophages and, as such, CSF1R also represents an attractive target for the treatment of numerous autoimmune and inflammatory diseases.

We are currently conducting IND-enabling studies with AC708.

Opportunity for Ambit

CSF1R is a member of the same kinase family as FLT3, cKIT, and PDGFR, and all share a highly similar structure. While the CSF1R kinase has been a target of interest in the pharmaceutical industry for several years, a key challenge has been the identification of inhibitors with sufficient selectivity for CSF1R (and minimal to no off-target activity on FLT3, cKit and PDGFR) and there are currently no approved therapies that specifically target CSF1R. The underlying treatment hypothesis requires chronic dosing, which necessitates exceptionally well tolerated compounds. We believe that a CSF1R inhibitor that also provides potent inhibition of FLT3 and/or cKIT may result in myelosuppression, a side effect which would limit dosing in oncology indications and be unacceptable in non-oncology indications. We believe there is therapeutic potential for our CSF1R inhibitor program in oncology and/or autoimmune and inflammatory diseases due to maximized selectivity and potency on CSF1R and minimized/eliminated off-target activity.

CSF1R Program Pre-clinical Development Summary

We have discovered and are developing a potent compound, AC708, that is exquisitely selective for CSF1R, including significantly reduced activity against FLT3, cKIT and PDGFR. Characterization of this preclinical compound in in vitro and in vivo studies has demonstrated potent inhibition of CSF1R and inhibition of macrophage activity and proliferation. Initial toxicology studies have shown AC708 to be generally well

 

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tolerated in rats at exposures significantly higher than what we believe will be necessary to achieve a therapeutic response in patients. Our preclinical studies in oncology and non-oncology disease models are ongoing.

CSF1R Program Development Strategy

We initiated IND-enabling studies in 2013 with AC708. We plan to further develop this program independently or in collaboration with a strategic partner.

CEP-32496 – BRAF Kinase Inhibitor for Oncology

CEP-32496 is a small molecule drug candidate that inhibits the BRAF kinase, discovered by us that is now being developed by Teva Pharmaceutical Industries Ltd., or Teva, pursuant to a collaboration agreement initiated in 2006 between Ambit and Cephalon, Inc. (subsequently acquired by Teva in October 2011). Pursuant to this collaboration, Teva has full responsibility for the worldwide development and commercialization of CEP-32496 and we are entitled to receive development, regulatory and commercialization milestones and sales-based royalty payments.

The BRAF gene is a key component of a pathway involved in normal cell growth and survival. The mutations of the BRAF gene are believed to be drivers of disease, including forms of melanoma, thyroid, colon, ovarian, and lung cancers, and can lead to uncontrolled cell growth and disease progression. BRAF mutations have been identified in approximately seven percent of all cancers and we believe that it represents a promising target for pharmacological intervention. Daiichi-Sankyo Company Limited’s and F. Hoffman-LaRoche Ltd’s Zelboraf® (vemurafenib), a BRAF kinase inhibitor, was approved by the FDA in 2011 for the treatment of metastatic melanoma patients harboring the V600E BRAF mutation.

CEP-32496 has been shown to be potent and sustains anti-tumor activity in mouse xenograft models of melanoma and colon carcinoma. CEP-32496 possesses attractive pharmacokinetic properties upon oral administration and compares favorably with respect to other BRAF kinase inhibitors. Teva submitted an IND for CEP-32496 in oncology in the second quarter of 2012 and preparations for initiation of clinical development are ongoing.

Further Kinase Drug Discovery Opportunities

Our approach to kinase drug discovery is chemistry-centric, focusing on biological targets where we have compounds which have demonstrated selective activity for such target. We believe that it is easier to increase the potency of a selective compound than to increase the selectivity of a potent compound. Throughout our discovery process, from hit identification through lead optimization, our scientists screen every compound synthesized against a comprehensive panel of kinases, ensuring that selectivity is a key driver for optimization along with the standard parameters such as potency and pharmacokinetics. Lack of selectivity significantly increases development risk as off-target toxicities can quickly outweigh clinical benefit. Therefore, we believe our approach reduces development risk and creates the potential for best-in-class compounds.

Our proprietary, kinase-focused chemical library has been developed internally over years of discovery efforts and currently contains approximately 8,000 compounds that are fully-annotated against a comprehensive kinase panel. This library represents a wealth of potential opportunities to rapidly initiate novel kinase inhibitor programs beyond our existing pipeline of drug candidates with highly potent and selective leads. Our collective experience in kinase discovery represents a core expertise that, together with our fully-annotated chemical library, provides the potential for sustainable pipeline expansion.

 

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Our Strategic Alliances and Collaboration Agreements

Our Collaboration with Astellas

In December 2009, we entered into an agreement with Astellas to jointly research, develop and commercialize certain FLT3 kinase inhibitors in oncology and non-oncology indications. Under the agreement, we granted Astellas an exclusive, worldwide license, with limited rights to sublicense, to develop, commercialize and otherwise exploit quizartinib and certain metabolites and derivatives of those compounds. In March 2013, we received a notice of termination of the agreement from Astellas, which termination will be effective in September 2013.

Pursuant to the agreement, in December 2009, Astellas paid us an upfront, non-refundable fee of $40.0 million. We and Astellas share equally in agreed upon development and research costs in the United States and European Union for quizartinib and certain designated follow-on compounds to quizartinib through the effective date of the termination. Astellas is responsible for research and development costs for quizartinib in other geographic markets through September 2013, the effective date of the termination. Following the effective date of the termination, the license and rights granted to Astellas terminate and we will own all rights to quizartinib and any follow-on compounds. We will thereafter be responsible for all world-wide development and commercialization activities and related costs. As contemplated by the agreement, we expect to enter into a transition agreement with Astellas before the effective date of the termination, which agreement is expected to cover, among other things, the transition of the execution and management of ongoing clinical trials and the transfer of data, materials and other related information.

Our Collaboration with Teva

In November 2006, we entered into an exclusive collaboration agreement with Cephalon, Inc., aimed at identifying and developing clinical candidates that demonstrate activity towards the two designated target kinases of the collaboration: the BRAF kinase and a second kinase determined by a joint research committee. In October 2011, Teva acquired Cephalon, Inc. Under the agreement, both parties contributed certain intellectual property to the collaboration and agreed to a period of exclusivity during which neither party would engage in any research related to a collaboration target compound with any third-party Teva is solely responsible for worldwide clinical development and commercialization of collaboration compounds, subject to our option, exercisable during certain periods following completion of the first proof-of-concept study in humans and only with the consent of Teva, to co-develop and co-promote CEP-32496.

Cephalon, Inc. paid us an upfront fee of $15.5 million as partial consideration for access to our profiling technology and the licenses we contributed to the collaboration. We have received two milestone payments totaling $3.0 million under the agreement to date and we may be entitled to receive up to $44.5 million in additional payments upon the achievement of development, regulatory and sales milestones for CEP-32496, and up to $47.5 million in payments upon the achievement of development, regulatory and sales milestones for the second compound under the agreement. In addition, we may receive tiered royalty payments ranging from the mid-single digits to the low double digits calculated as a percentage of net sales of the collaboration compounds, including CEP-32496, subject to certain offsets. Royalties are payable to us on a product-by-product, country-by-country basis beginning on the date of the first commercial sale in a country and ending on the later of 10 years after the date of such sale in that country or the expiration date of the last to expire patent covering the licensed product in that country.

The collaboration portion of the agreement ended in November 2009, at which point we had completed all our research obligations under the agreement. The agreement remains in effect on a product-by-product, country-by-country basis until all royalty obligations expire. Both parties have a right to terminate the agreement early if the other party enters bankruptcy or upon an uncured breach by the other party. Teva may also terminate the agreement in its discretion upon 90 days’ written notice to us, or if our available cash falls below a certain threshold.

 

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Our Collaboration with Genoptix

In September 2010, we entered into a collaboration agreement with Genoptix to develop a laboratory diagnostic test to identify patients that harbor ITD mutations in their FLT3 receptor tyrosine kinase. Under this agreement, Genoptix will contribute its expertise in developing laboratory tests and we will supply certain patient samples to the collaboration. Genoptix has the right to commercialize the approved test. We will initially pay for the development activities under the collaboration pursuant to an agreed-upon budget, and are entitled to single-digit tiered royalty payments from Genoptix until we have recouped the development costs plus an additional predetermined percentage of such costs. We intend for this test to be approved by the FDA as a companion diagnostic test in concert with quizartinib. We believe the FDA approval of this test will satisfy the FDA’s requirement that a companion diagnostic test be approved with quizartinib.

We and Genoptix may assign this agreement to a third party in connection with the transfer or sale of all or substantially all of the business to which the agreement relates, whether by merger, sale of stock, sale of assets or otherwise, provided that in the event of such a transaction with a third party, intellectual property rights of such third-party will not be included in the intellectual property rights licensed under our agreement with Genoptix to the extent such intellectual property rights would not have been licensed under the agreement in the absence of such transaction.

Our agreement with Genoptix expires when the last payment obligation of either party under the agreement is fulfilled. Both parties have a right to terminate the agreement early upon an uncured material breach by the other party. Genoptix may terminate the agreement upon 45 days’ notice for an unresolved dispute between the parties regarding the development of the laboratory diagnostic test, upon 30 days’ notice if there is an unresolved dispute regarding our payment of specified development costs and upon written notice if we, our affiliates, or our sublicensees of certain intellectual property, where we do not, within ten days of receipt of notice from Genoptix, terminate such sublicense, contest or assist other parties in contesting Genoptix’s rights regarding such intellectual property. We may terminate the agreement upon 60 days’ notice for any reason subject to our payment of any outstanding development costs, and immediately if Genoptix or a party providing services to Genoptix relating to the development of the laboratory diagnostic test is debarred under the provisions of the Generic Drug Enforcement Act of 1992.

Intellectual Property

We are building an intellectual property portfolio around our clinical drug programs and our drug discovery programs. A large part of our strategy for portfolio building is to seek patent protection in the United States and in major market countries that we consider important to the development of our business worldwide. Our success depends in part on our ability to obtain and maintain proprietary protection for our drug candidates and other discoveries, inventions, trade secrets and know-how that are critical to our business operations. Our success also depends in part on our ability to operate without infringing the proprietary rights of others, and in part, on our ability to prevent others from infringing our proprietary rights. A comprehensive discussion on risks relating to intellectual property is provided under “Risk Factors” under the subsection “Risks Related to Our Intellectual Property”. We have developed and continue to develop a patent portfolio around our lead drug candidate quizartinib. A composition of matter patent application covering the small molecule drug quizartinib (and a chemical genus to which quizartinib belongs) issued in the United States as U.S. Patent 7,820,657 and corresponding foreign patents have issued in China, Hong Kong, Japan, Malaysia, Mexico, New Zealand, Russia, Singapore and South Africa, while corresponding foreign patent applications remain pending in Argentina, Australia, Brazil, Canada, Europe, India, Israel, South Korea, Norway, the Philippines, and Taiwan. The U.S. composition of matter patent covering quizartinib will expire in 2028 if we continue to pay the maintenance fees and annuities when due, with the possibility of additional term from patent term extension that may be granted under the relevant statutes upon our application for such extension. We also have pending applications that cover stable crystalline forms of quizartinib, metabolites of quizartinib, formulations of quizartinib, methods of manufacturing quizartinib and various therapeutic uses of quizartinib. Collectively, these patents, if they issue, would have patent expirations ranging from

 

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2028 to 2030 if we continue to pay the maintenance fees and annuities when due, not including any possible additional terms for patent term adjustments or patent term extensions. We do not know if any patent will issue from any of these applications and, if any issue, we do not know whether the issued patents will provide significant proprietary protection or commercial advantage against our competitors or generics. Even if they issue, our patents may be circumvented, challenged, opposed and found to be invalid or unenforceable. We also have a composition of matter patent that contains a chemical genus claim covering AC430 and its enantiomers AC409 and AC410 that issued in the United States as U.S. 8,349,851 and we have corresponding patent applications in the following foreign countries: Argentina, Australia, Brazil, Canada, China, Europe, Hong Kong, India, Indonesia, Israel, Japan, South Korea, Malaysia, Mexico, New Zealand, the Philippines, Russia, Singapore, South Africa and Taiwan. We also filed a composition of matter application that is specific to AC410 (one of the enantiomeric forms, or mirror image forms, of AC430), under the Patent Co-operation Treaty, or PCT, in the U.S. and in Argentina and Taiwan, which are not signatories to the PCT. We have also filed composition of matter patent applications that cover a chemical genus encompassing our most advanced CSF1R candidate, AC708, under the PCT and also in the U.S., Argentina and Taiwan. We have filed patent applications covering solid forms of AC430 and AC410 in the United States. We intend to file additional U.S. and foreign applications based on our ongoing research programs directed to formulations, therapeutic uses, combination therapies and methods of manufacture, to the extent they are discovered or invented.

In addition to patent protection, we seek to rely on trade secret protection, trademark protection and know-how to expand our proprietary position around our chemistry, technology and other discoveries and inventions that we consider important to our business. We also seek to protect our intellectual property in part by entering into confidentiality agreements with companies with whom we share proprietary and confidential information in the course of business discussions, and by having confidentiality terms in our agreements with our employees, consultants, scientific advisors, clinical investigators and other contractors and also by requiring our employees, commercial contractors, and certain consultants and investigators, to enter into invention assignment agreements that grant us ownership of any discoveries or inventions made by them.

Furthermore, we seek trademark protection in the United States and internationally where available and when we deem appropriate. We have obtained registrations for the AMBIT trademark, which we use in connection with our pharmaceutical research and development services as well as our clinical-stage products. We currently have such registrations for AMBIT in the United States, Europe and Japan.

We are aware of a third party patent that relates to an inactive ingredient that we currently use in quizartinib, as well as a third party patent related to diagnostic testing for certain FLT3 mutations in patient samples. Should a license to either third party patent be necessary, we cannot predict whether we or our partners would be able to obtain such a license, or if a license were available, whether it would be available on commercially reasonable terms. If such patents have a valid claim relating to our use of the inactive ingredient or diagnostic testing required to detect FLT3 mutations and, in either case, a license under the applicable patent is unavailable on commercially reasonable terms, or at all, our ability to commercialize quizartinib may be impaired or delayed, which could in turn significantly harm our business if we are sued for infringement. We would vigorously defend ourselves, but we cannot predict whether the patents would be found valid, enforceable or infringed.

Sales and Marketing

We currently do not have a commercial organization for the marketing, sales and distribution of pharmaceutical products. We intend to build the commercial infrastructure necessary to effectively support the commercialization of quizartinib and future drug candidates, if approved, in North America and to partner with third parties for commercialization in other markets.

The commercial infrastructure of specialty oncology products typically consists of a targeted, specialty sales force that calls on a limited and focused group of physicians supported by sales management, internal sales support, an internal marketing group and distribution support. Additional capabilities important to the oncology

 

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marketplace include the management of key accounts such a managed care organizations, group-purchasing organizations, specialty pharmacies, oncology group networks, and government accounts. Based on the number of physicians that treat AML and the size of competitive sales forces, we believe that we can effectively target the relevant audience for quizartinib in North America by establishing a sales force either internally or through a contract sales force. To develop the appropriate commercial infrastructure, we will have to invest significant amounts of financial and management resources, some of which will be committed prior to any confirmation that quizartinib will be approved.

Manufacturing

We do not own or operate manufacturing facilities for the production of quizartinib or other drug candidates that we develop, nor do we have plans to develop our own manufacturing operations in the foreseeable future. We currently depend on third-party contract manufacturers for all of our required raw materials, active pharmaceutical ingredient and finished products for our preclinical research and clinical trials. We do not have any current contractual arrangements for the manufacture of commercial supplies of quizartinib or any other drug candidates that we develop. Prior to receipt of approval from the FDA, we intend to enter into agreements with third-party contract manufacturers for the commercial production of quizartinib. We currently employ internal resources and third-party consultants to manage our manufacturing contractors.

Competition

A number of multinational pharmaceutical companies, as well as large biotechnology companies, including Abbvie Inc., Akinion Pharmaceuticals AB, Amgen Inc., ARIAD Pharmaceuticals, Inc., AROG Pharmaceuticals, LLC, ArQule, Inc., Astellas, AstraZeneca plc, Bayer AG, Celgene Corporation, Daiichi-Sankyo Company Limited, Galapagos NV, GlaxoSmithKline plc, Incyte Corporation, Janssen Pharmaceuticals, Inc., Johnson & Johnson, Eli Lilly and Company, Novartis, Onyx Pharmaceuticals, Inc., Pfizer, Rigel Pharmaceuticals, Inc., F. Hoffman-LaRoche Ltd, or Roche, and Vertex Pharmaceuticals Incorporated, are pursuing the development or are currently marketing pharmaceuticals that target the kinases or kinase-signaling pathways and in the specific therapeutic areas on which we are focusing. It is probable that the number of companies seeking to develop products and therapies for the treatment of unmet needs in oncology, autoimmune and inflammatory diseases will increase.

Many of our competitors, either alone or with their strategic partners, have substantially greater financial, technical and human resources than we do and significantly greater experience in the discovery and development of drug candidates, obtaining FDA and other regulatory approvals of drug candidates and the commercialization of those products. Accordingly, our competitors may be more successful than we may be in obtaining approval for drugs and achieving widespread market acceptance. Our competitors’ drugs may be more effective, or more effectively marketed and sold, than any drug we may commercialize and may render our drug candidates obsolete or non-competitive before we can recover the expenses of developing and commercializing any of our drug candidates. We anticipate that we will face intense and increasing competition as new drugs enter the market and advanced technologies become available.

Competition for Quizartinib

Pfizer’s Sutent® (sunitinib) and Bayer’s and Onyx’s Nexavar® (sorafenib), two multi-kinase inhibitors that inhibit the FLT3 kinase, are approved for the treatment of certain solid tumors; however, these drugs also inhibit other kinases with equal or greater potency and are not approved for the treatment of AML. Sutent® is approved as monotherapy for renal cell carcinoma, or RCC, for gastrointestinal stromal tumors, or GIST, and pancreatic neuroendocrine tumors, or pNET; and Nexavar® is approved as monotherapy for advanced RCC and unresectable hepatocellular cancer, or HCC. Each of these drugs is believed to work through inhibition of kinases other than FLT3. Because of the lack of treatment options for this patient population, commercially-available kinase inhibitors, such as sunitinib and sorafenib, are often used off-label for the treatment of AML despite the

 

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low response rate observed with these drugs. Currently there are no approved therapies for relapsed/refractory AML beyond traditional chemotherapy. We are aware of only one FLT3 inhibitor, Novartis’ PKC-412 (midostaurin), that is in a Phase 3 clinical trial for the treatment of newly diagnosed FLT3-ITD positive AML patients. Additionally, FLT3 inhibitors in Phase 1 and Phase 2 development for AML include AROG Pharmaceuticals’ crenolanib, ARIAD Pharmaceuticals’ Iclusig® (ponatinib), Daiichi-Sankyo’s PLX-3397 and Akinion Pharmaceuticals’ AKN-028.

Competition for AC410

Pfizer’s Xeljanz® (tofacitinib), a pan-JAK inhibitor, was recently approved in the United States for the treatment of RA, becoming the first inhibitor of the JAK family of kinases to be approved worldwide to treat an inflammatory disease. There are several companies with inhibitors of the JAK family of kinases in clinical development for inflammatory disease, including Astellas/Janssen Pharmaceuticals, Incyte/Eli Lilly, Galapagos/Abbvie, Rigel Pharmaceuticals/AstraZeneca and Vertex, and, to our knowledge, there are no clinical-stage JAK inhibitors targeting respiratory diseases.

Competition for CSF1R

We are not aware of any commercialized products that target CSF1R. There are a number of companies with oral small molecule CSF1R inhibitors in clinical development, including Celgene, Daiichi-Sankyo and Johnson & Johnson. In addition, we are aware of several companies with biologic CSF1R inhibitors in clinical development, including Amgen, Eli Lilly, Pfizer and Roche.

Competition for CEP-32496

Daiichi-Sankyo’s and Roche’s Zelboraf® (vemurafenib), a BRAF kinase inhibitor, was approved by the FDA in 2011 for the treatment of metastatic melanoma patients harboring the V600E BRAF mutation, becoming the first BRAF kinase inhibitor to be approved worldwide. We are aware of a number of companies with BRAF inhibitors in clinical development, including ArQule, GlaxoSmithKline and Novartis.

Government Regulation and Product Approval

Government authorities in the United States (at the federal, state and local level) and in other countries extensively regulate, among other things, the research, development, testing, manufacturing, quality control, approval, labeling, packaging, storage, record-keeping, promotion, advertising, distribution, post-approval monitoring and reporting, marketing and export and import of drug products and companion diagnostic devices such as those we and our partners are developing. Quizartinib and any other drug candidates that we develop must be approved by the FDA before they may be legally marketed in the United States and by the appropriate foreign regulatory agency before they may be legally marketed in foreign countries. In addition, the FDA is currently requiring regulatory approval of a companion diagnostic for market approval of quizartinib.

United States Drug Development Process

In the United States, the FDA regulates drugs under the Federal Food, Drug and Cosmetic Act, or FDCA, and implementing regulations. Drugs are also subject to other federal, state and local statutes and regulations. The process of obtaining regulatory approvals and the subsequent compliance with appropriate federal, state, local and foreign statutes and regulations require the expenditure of substantial time and financial resources. Failure to comply with the applicable United States requirements at any time during the product development process, approval process or after approval, may subject an applicant to administrative or judicial sanctions. FDA sanctions could include, among other actions, refusal to approve pending applications, withdrawal of an approval, a clinical hold, warning letters, product recalls or withdrawals from the market, product seizures, total or partial suspension of production or distribution injunctions, fines, refusals of government contracts, restitution,

 

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disgorgement or civil or criminal penalties. Any agency or judicial enforcement action could have a material adverse effect on us. The process required by the FDA before a drug may be marketed in the United States generally involves the following:

 

   

Completion of extensive preclinical laboratory tests, preclinical animal studies and formulation studies in accordance with applicable regulations, including the FDA’s Good Laboratory Practice, or GLP, or other applicable regulations;

 

   

Submission to the FDA of an IND, which must become effective before human clinical trials may begin;

 

   

Performance of adequate and well-controlled human clinical trials in accordance with applicable regulations, including the FDA’s current good clinical practices, or GCPs, to establish the safety and efficacy of the proposed drug for its proposed indication;

 

   

Submission to the FDA of an NDA for a new drug;

 

   

A determination by the FDA within 60 days of its receipt of an NDA to file the NDA for review;

 

   

Satisfactory completion of an FDA inspection of the manufacturing facility or facilities where the drug is produced to assess compliance with the FDA’s current good manufacturing practice standards, or cGMP, to assure that the facilities, methods and controls are adequate to preserve the drug’s identity, strength, quality and purity;

 

   

Potential FDA audit of the preclinical and/or clinical trial sites that generated the data in support of the NDA; and

 

   

FDA review and approval of the NDA prior to any commercial marketing or sale of the drug in the United States.

Before testing any compounds with potential therapeutic value in humans, the drug candidate enters the preclinical testing stage. Preclinical tests include laboratory evaluations of product chemistry, toxicity and formulation, as well as animal studies to assess the potential safety and activity of the drug candidate. The conduct of the preclinical tests must comply with federal regulations and requirements including GLPs. The sponsor must submit the results of the preclinical tests, together with manufacturing information, analytical data, any available clinical data or literature and a proposed clinical protocol, to the FDA as part of the IND. An IND is a request for authorization from the FDA to administer an investigational drug product to humans. The central focus of an IND submission is on the general investigational plan and the protocol(s) for human studies. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA raises concerns or questions regarding the proposed clinical trials and places the IND on clinical hold within that 30-day time period. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. The FDA may also impose clinical holds on a drug candidate at any time before or during clinical trials due to safety concerns or non-compliance. Accordingly, we cannot be sure that submission of an IND will result in the FDA allowing clinical trials to begin, or that, once begun, issues will not arise that suspend or terminate such trial.

Clinical trials involve the administration of the drug candidate to healthy volunteers or patients under the supervision of qualified investigators, generally physicians not employed by or under the trial sponsor’s control, in accordance with GCPs, which include the requirement that all research subjects provide their informed consent for their participation in any clinical trial. Clinical trials are conducted under protocols detailing, among other things, the objectives of the clinical trial, dosing procedures, subject selection and exclusion criteria, and the parameters to be used to monitor subject safety and assess efficacy. Each protocol, and any subsequent amendments to the protocol, must be submitted to the FDA as part of the IND. Further, each clinical trial must be reviewed and approved by an independent institutional review board, or IRB, at or servicing each institution at which the clinical trial will be conducted. An IRB is charged with protecting the welfare and rights of trial participants and considers such items as whether the risks to individuals participating in the clinical trials are

 

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minimized and are reasonable in relation to anticipated benefits. The IRB also approves the informed consent form that must be provided to each clinical trial subject or his or her legal representative and must monitor the clinical trial until completed. There are also requirements governing the reporting of ongoing clinical trials and completed clinical trial results to public registries.

Human clinical trials are typically conducted in three sequential phases that may overlap or be combined:

 

   

Phase 1. The drug is initially introduced into healthy human subjects and tested for safety, dosage tolerance, absorption, metabolism, distribution and excretion, the side effects associated with increasing doses, and if possible, to gain early evidence of effectiveness. In the case of some products for severe or life-threatening diseases, especially when the product may be too inherently toxic to ethically administer to healthy volunteers, the initial human testing is often conducted in patients.

 

   

Phase 2. The drug is evaluated in a limited patient population to identify possible adverse effects and safety risks, to preliminarily evaluate the efficacy of the product for specific targeted diseases or conditions and to determine dosage tolerance, optimal dosage and dosing schedule.

 

   

Phase 3. Clinical trials are undertaken to further evaluate dosage, clinical efficacy and safety in an expanded patient population at geographically dispersed clinical trial sites. These clinical trials are intended to establish the overall benefit/risk ratio of the product and provide an adequate basis for product approval. Generally, two adequate and well-controlled Phase 3 clinical trials are required by the FDA for approval of an NDA. Phase 3 clinical trials usually involve several hundred to several thousand participants.

Post-approval studies, or Phase 4 clinical trials, may be conducted after initial marketing approval. These studies are used to gain additional experience from the treatment of patients in the intended therapeutic indication. In certain instances, FDA may mandate the performance of Phase 4 studies.

Progress reports detailing the results of the clinical trials must be submitted at least annually to the FDA and written IND safety reports must be submitted to the FDA and the investigators for serious and unexpected adverse events or any finding from tests in laboratory animals that suggests a significant risk for human subjects. Phase 1, Phase 2 and Phase 3 clinical trials may not be completed successfully within any specified period, if at all. The FDA, the IRB, or the sponsor may suspend or terminate a clinical trial at any time on various grounds, including a finding that the research subjects or patients are being exposed to an unacceptable health risk. Similarly, an IRB can suspend or terminate approval of a clinical trial at its institution if the clinical trial is not being conducted in accordance with the IRB’s requirements or if the drug has been associated with unexpected serious harm to patients. Additionally, some clinical trials are overseen by an independent group of qualified experts organized by the clinical trial sponsor, known as a data safety monitoring board or committee. This group provides authorization for whether or not a trial may move forward at designated check points based on access to certain data from the study. We may also suspend or terminate a clinical trial based on evolving business objectives and/or competitive climate.

Concurrent with clinical trials, companies usually complete additional animal studies and must also develop additional information about the chemistry and physical characteristics of the drug as well as finalize a process for manufacturing the product in commercial quantities in accordance with cGMP requirements. The manufacturing process must be capable of consistently producing quality batches of the drug candidate and, among other things, must develop methods for testing the identity, strength, quality and purity of the final drug. Additionally, appropriate packaging must be selected and tested and stability studies must be conducted to demonstrate that the drug candidate does not undergo unacceptable deterioration over its shelf life.

U.S. Review and Approval Processes

The results of product development, preclinical studies and clinical trials, along with descriptions of the manufacturing process, analytical tests conducted on the chemistry of the drug, proposed labeling and other

 

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relevant information are submitted to the FDA as part of an NDA requesting approval to market the product. The application includes both negative or ambiguous results of preclinical and clinical trials as well as positive findings. Data may come from company-sponsored clinical trials intended to test the safety and effectiveness of a use of a product, or from a number of alternative sources, including studies initiated by investigators. To support marketing approval, the data submitted must be sufficient in quality and quantity to establish the safety and effectiveness of the investigational drug product to the satisfaction of the FDA. The submission of an NDA is subject to the payment of substantial user fees; a waiver of such fees may be obtained under certain limited circumstances.

In addition, under the Pediatric Research Equity Act, or PREA, an NDA or supplement to an NDA must contain data to assess the safety and effectiveness of the drug for the claimed indications in all relevant pediatric subpopulations and to support dosing and administration for each pediatric subpopulation for which the product is safe and effective. The FDA may grant deferrals for submission of data or full or partial waivers. Unless otherwise required by regulation, PREA does not apply to any drug for an indication for which orphan designation has been granted. However, if only one indication for a product has orphan designation, a pediatric assessment may still be required for any applications to market that same product for the non-orphan indication(s).

The FDA reviews all NDAs submitted before it accepts them for filing and may request additional information rather than accepting an NDA for filing. The FDA must make a decision on accepting an NDA for filing within 60 days of receipt. Once the submission is accepted for filing, the FDA begins an in-depth review of the NDA. Under the goals and policies agreed to by the FDA under the Prescription Drug User Fee Act, or PDUFA, the FDA has 12 months from its date of receipt in which to complete its initial review of a standard NDA for a new molecular entity and respond to the applicant, and eight months from date of receipt for a priority NDA. The FDA does not always meet its PDUFA goal dates for standard and priority NDAs, and the review process is often significantly extended by FDA requests for additional information or clarification.

After the NDA submission is accepted for filing, the FDA reviews the NDA to determine, among other things, whether the proposed product is safe and effective for its intended use, and whether the product is being manufactured in accordance with cGMP to assure and preserve the product’s identity, strength, quality and purity. The FDA may refer applications for novel drug or biological products or drug or biological products which present difficult questions of safety or efficacy to an advisory committee, typically a panel that includes clinicians and other experts, for review, evaluation and a recommendation as to whether the application should be approved and under what conditions. The FDA is not bound by the recommendations of an advisory committee, but it considers such recommendations carefully when making decisions.

Before approving an NDA, the FDA will inspect the facilities at which the product is manufactured. The FDA will not approve the product unless it determines that the manufacturing processes and facilities are in compliance with cGMP requirements and adequate to assure consistent production of the product within required specifications. Additionally, before approving an NDA, the FDA may inspect one or more clinical sites to assure compliance with GCP requirements. After the FDA evaluates the application, manufacturing process and manufacturing facilities, it may issue an approval letter or a Complete Response Letter. An approval letter authorizes commer