S-1/A 1 d536956ds1a.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 September 5, 2013

Registration No. 333-190194

 

 

 

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

 

 

Five Prime Therapeutics, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   2834   26-0038620
(State or other jurisdiction of incorporation or organization)   (Primary Standard Industrial Classification Code Number)   (I.R.S. Employer Identification Number)

Two Corporate Drive

South San Francisco, California 94080

(415) 365-5600

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

Lewis T. Williams

President and Chief Executive Officer

Five Prime Therapeutics, Inc.

Two Corporate Drive

South San Francisco, California 94080

(415) 365-5600

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

Copies to:

 

Laura A. Berezin

Jon Layman

Hogan Lovells US LLP

525 University Avenue

Palo Alto, California 94301

(650) 463-4000

 

Francis W. Sarena

Senior Vice President, General Counsel & Secretary

Five Prime Therapeutics, Inc.

Two Corporate Drive

South San Francisco, California 94080

(415) 365-5600

 

David G. Peinsipp

Charles S. Kim

Andrew S. Williamson

Cooley LLP

101 California Street

San Francisco, California 94111

(415) 693-2000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

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, 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 statement 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 (Do not check if a smaller reporting company)  x   Smaller reporting company  ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

TITLE OF EACH CLASS OF
SECURITIES TO BE REGISTERED
  AMOUNT OF
SHARES TO BE
REGISTERED(1)
  PROPOSED
MAXIMUM
OFFERING PRICE
PER  SHARE(2)
 

PROPOSED
MAXIMUM

AGGREGATE
OFFERING PRICE(2)

 

AMOUNT OF

REGISTRATION
FEE(3)

Common Stock, $0.001 par value per share

  4,600,000   $13.00   $59,800,000   $8,157

 

 

(1)   

Includes the shares of common stock that the underwriters have an option to purchase to cover over-allotments, if any.

(2)   

Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(a) under the Securities Act of 1933, as amended.

(3)   

The total registration fee was previously paid on July 26, 2013.

 

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, as amended, or until this 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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EXPLANATORY NOTE

As a result of filing an amended and restated certificate of incorporation with the Secretary of State for the State of Delaware on September 4, 2013 to effect the 1-for-12.3 reverse stock split, the Registrant is filing this Amendment No. 4 to its Registration Statement on Form S-1 (File No. 333-190194) (the “Registration Statement”) to reflect that the reverse stock split occurred on September 4, 2013, to file the unlegended audit opinion of Ernst & Young LLP, to update Part II – Item 15 and to file the revised Exhibits 3.1 and 23.1. Unless otherwise indicated, all references to share numbers in the prospectus previously filed as part of Amendment No. 3 to the Registration Statement already reflected the effects of this reverse stock split.


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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED SEPTEMBER 5, 2013

 

PRELIMINARY PROSPECTUS

4,000,000 Shares

 

LOGO

Five Prime Therapeutics, Inc.

Common Stock

We are offering 4,000,000 shares of our common stock. This is our initial public offering and no public market currently exists for our common stock. We expect the initial public offering price to be between $12.00 and $14.00 per share.

We applied to list our common stock on the NASDAQ Global Market under the symbol “FPRX.” We are an “emerging growth company” as defined by the Jumpstart Our Business Startups Act of 2012 and, as such, we have elected to comply with certain reduced public company reporting requirements for this prospectus and future filings.

Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 9 of this prospectus.

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  

Initial Public Offering Price

   $                    $                

Underwriting Discounts and Commissions (1)

   $         $     

Proceeds, before expenses, to us

   $         $     

 

 

(1)  

See “Underwriting” for a description of the compensation payable to the underwriters.

Certain of our existing stockholders, including certain affiliates of our directors, have indicated an interest in purchasing up to an aggregate of approximately $10.0 million of shares of our common stock in this offering at the initial public offering price. However, because indications of interest are not binding agreements or commitments to purchase, the underwriters may determine to sell more, less or no shares in this offering to any of these stockholders, or any of these stockholders may determine to purchase more, less or no shares in this offering.

Delivery of the shares of common stock purchased in this offering is expected to be made on or about                     , 2013. We have granted the underwriters an option for a period of 30 days to purchase up to 600,000 additional shares of common stock solely to cover their over-allotment.

Joint Book-Running Managers

 

Jefferies    BMO Capital Markets    Wells Fargo Securities

Co-Manager

Guggenheim Securities

Prospectus dated                     , 2013


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TABLE OF CONTENTS

 

 

 

     PAGE  

Prospectus Summary

     1   

Risk Factors

     9   

Special Note Regarding Forward-Looking Statements and Industry Data

     35   

Use of Proceeds

     36   

Dividend Policy

     37   

Capitalization

     38   

Dilution

     40   

Selected Financial Data

     43   

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

     45   

Business

     70   

Management

     104   

Executive and Director Compensation

     111   

Certain Relationships and Related Party Transactions

     124   

Principal Stockholders

     125   

Description of Capital Stock

     129   

Shares Eligible for Future Sale

     133   

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

     135   

Underwriting

     138   

Legal Matters

     143   

Experts

     143   

Where You Can Find More Information

     143   

Index to Financial Statements

     F-1   

 

 

You should rely only on the information contained in this prospectus and any free writing prospectus prepared by or on behalf of us or to which we have referred you. We have not authorized anyone to provide you with information that is different. We are offering to sell shares of our common stock, and seeking offers to buy shares of our common stock, only in jurisdictions where offers and sales are permitted. The information in this prospectus is complete and accurate only as of the date on the front cover of this prospectus, regardless of the time of delivery of this prospectus or any sale of shares of our common stock.


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Until and including                     , 2013 (25 days after the date of this prospectus), all dealers that buy, sell or trade shares of our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

For investors outside the United States: neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of shares of our common stock and the distribution of this prospectus outside the United States.

Except as otherwise indicated herein or as the context otherwise requires, references in this prospectus to “Five Prime,” “the company,” “we,” “us,” “our” and similar references refer to Five Prime Therapeutics, Inc. The Five Prime logo and RIPPS® are our registered trademarks. This prospectus also contains registered marks, trademarks and trade names of other companies. All other trademarks, registered marks and trade names appearing in this prospectus are the property of their respective holders.

 

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PROSPECTUS SUMMARY

The following summary highlights information contained elsewhere in this prospectus and is qualified in its entirety by the more detailed information and financial statements included elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. Before you decide to invest in our common stock, you should read and carefully consider the following summary together with the entire prospectus, including our financial statements and the related notes thereto appearing elsewhere in this prospectus and the matters discussed in the sections in this prospectus entitled “Risk Factors,” “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Some of the statements in this prospectus constitute forward-looking statements that involve risks and uncertainties. See “Special Note Regarding Forward-Looking Statements and Industry Data.” Our actual results could differ materially from those anticipated in such forward-looking statements as a result of certain factors, including those discussed in the “Risk Factors” and other sections of this prospectus.

Our Company

We are a clinical-stage biotechnology company focused on discovering and developing novel protein therapeutics. Protein therapeutics are antibodies or drugs developed from extracellular proteins or protein fragments that block disease processes, including cancer and inflammatory diseases. We have developed a library of more than 5,600 human extracellular proteins, which we believe represent substantially all of the body’s medically important targets for protein therapeutics. We screen this comprehensive library with our proprietary high-throughput protein screening technologies to identify new targets for protein therapeutics. This platform has allowed us to develop a pipeline of novel product candidates for cancer and inflammatory diseases and to generate over $220 million under our collaboration arrangements.

Each of our product candidates has an innovative mechanism of action and addresses patient populations for which better therapies are still needed. In addition, we are pursuing companion diagnostics for each of our lead programs to allow us to select patients most likely to benefit from treatment and therefore accelerate clinical development and improve patient care. Our most advanced product candidates are as follows:

 

  n  

FP-1039/GSK3052230, or FP-1039, is a protein therapeutic that “traps” and neutralizes cancer-promoting fibroblast growth factors, or FGFs, involved in cancer cell proliferation and new blood vessel formation. FGFs are a family of related extracellular proteins that normally regulate cell proliferation and survival in humans. They act by binding to and activating FGF receptors, or FGFRs, which are cell surface proteins that transmit growth signals to cells. Certain FGFs promote growth of multiple solid tumors by binding and activating FGFRs. Unlike other therapies that indiscriminately block all FGFs, FP-1039 is designed to only block cancer-promoting FGFs and therefore may be associated with better tolerability than other known drug candidates targeting the FGF pathway. We have completed a Phase 1 clinical trial, and our partner, GlaxoSmithKline, or GSK, commenced a multi-arm Phase 1b clinical trial in July 2013 in patients with abnormally high levels of FGFR1. We expect preliminary data from this trial in the second half of 2014. GSK is responsible for the development and commercialization of FP-1039 in the United States, the European Union and Canada. Under our agreement, we received a $50 million license fee and are eligible to receive up to $435 million in contingent payments. We have an option to co-promote FP-1039 in the United States.

 

  n  

FPA008 is an antibody that inhibits colony stimulating factor-1 receptor, or CSF1R, and is being developed to treat patients with inflammatory diseases, including rheumatoid arthritis, or RA. CSF1R is a cell surface protein that controls the survival and function of certain inflammatory cells called monocytes and macrophages. By inhibiting CSF1R activation, FPA008 prevents the production of multiple inflammatory factors, such as tumor necrosis factor, interleukin-6 and interleukin-1, that are individually targeted by approved therapeutics such as Humira® (adalimumab), Actemra® (tocilizumab) and Kineret® (anakinra), respectively. As a result, we believe FPA008 has the potential to have better efficacy than each of these approved drugs. In addition, unlike currently marketed RA

 

 

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drugs, FPA008 directly inhibits bone-destroying cells called osteoclasts. We plan to begin a Phase 1 clinical trial for FPA008 by the end of 2013 and expect preliminary data by the end of 2014.

 

  n  

FPA144 is an antibody that inhibits FGF receptor 2b, or FGFR2b, and is being developed to treat patients with gastric cancer and potentially other solid tumors. In preclinical studies, FPA144 was highly effective in blocking the growth of gastric tumors that had abnormally high levels of FGFR2b. We plan to begin a Phase 1 clinical trial for FPA144 in the second half of 2014 in patients with tumors expressing high levels of FGFR2b and expect preliminary data by the end of 2015.

Our Platform

The process of discovering targets for protein therapeutics has historically proven to be difficult and slow. There are more than 5,600 proteins in the body that represent potential protein therapeutic targets, but only about 30 are targeted by currently marketed protein drugs in cancer and inflammatory diseases. We spent seven years successfully developing a platform to improve and accelerate the protein therapeutic discovery process. Our platform is based on two components:

 

  n  

a proprietary library of more than 5,600 human extracellular proteins that we believe is the most comprehensive collection of fully functional extracellular proteins available and is an abundant source of medically relevant novel targets for protein therapeutics; and

 

  n  

proprietary and new technologies for producing and testing thousands of proteins at a time.

We believe our platform improves and accelerates the discovery of new protein targets and protein therapeutics because it can:

 

  n  

identify novel medically relevant protein targets and protein therapeutics that have little or no previously known biological function or are not in the public domain and cannot easily be discovered by other methods;

 

  n  

determine the best protein target among many alternatives for a particular disease by screening and comparing nearly all possible medically important targets simultaneously; and

 

  n  

identify new targets more quickly and efficiently than previously possible because it can produce and test thousands of proteins at a time, rather than one or just a few at a time.

In the past several years we have used this platform to identify dozens of targets validated in rodent models and to build a growing pipeline of drug candidates. We have attracted numerous partnerships with leading biopharmaceutical companies, which have generated over $220 million in funding for our business since 2006. In addition to our FP-1039 license and collaboration agreement, under which we are eligible to receive up to $435 million in contingent payments, we have ongoing discovery collaborations with GSK and UCB Pharma, S.A., or UCB. We are eligible to receive potential option exercise fees and contingent payments up to $124.3 million per target under the GSK muscle diseases collaboration, $193.8 million per target under the GSK respiratory diseases collaboration and $92.2 million per target under the UCB fibrosis and CNS collaboration. We believe our platform will continue to provide funding opportunities through product and discovery collaborations.

Our Strategy

Our goal is to use our proprietary platform to maintain our leadership position in the discovery of innovative protein therapeutics and to develop and commercialize protein therapeutics to treat cancer and inflammatory diseases. The key elements of our strategy to achieve this goal are to:

 

  n  

focus on protein therapeutics to treat cancer and inflammatory diseases;

 

  n  

continue to advance and expand our internal pipeline;

 

  n  

employ smarter drug development techniques, including selecting indications where activity can be assessed in early clinical development and using companion diagnostics;

 

 

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  n  

build a commercial enterprise by retaining rights for products in targeted specialty markets; and

 

  n  

enter into additional discovery and product collaborations to supplement our internal development capabilities and generate funding.

Management

Our executive management team has extensive experience in leading the discovery and development of innovative protein therapeutics and significant expertise in operational and business development functions. Our founder, President and Chief Executive Officer, Lewis T. “Rusty” Williams is a member of the National Academy of Sciences and was a co-founder and a member of the board of directors of COR Therapeutics, Inc., which was sold to Millennium Pharmaceuticals, Inc. for approximately $2.0 billion, and the Chief Scientific Officer and a member of the board of directors of Chiron Corporation. Our Senior Vice President and Chief Medical Officer, Julie Hambleton, led clinical development programs across all phases, including regulatory approvals, at Genentech, Inc. and Clovis Oncology, Inc. Our Senior Vice President and Chief Business Officer, Aron M. Knickerbocker, led oncology business development at Genentech, Inc. Our Senior Vice President and Chief Scientific Officer, W. Michael Kavanaugh, led protein therapeutic programs at Novartis Institutes for Biomedical Research and Chiron Corporation.

Risks Associated with Our Business

Our ability to implement our business strategy is subject to numerous risks and uncertainties. As a clinical-stage biotechnology 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:

 

  n  

we have no source of predictable revenue, have incurred losses nearly every year, may never become profitable and may incur substantial and increasing net losses for the foreseeable future as we continue development of, seek regulatory approvals for, and begin to commercialize our product candidates;

 

  n  

we will likely need to obtain additional funding to continue operations;

 

  n  

our success is primarily dependent on the successful development, regulatory approval and commercialization of our product candidates, all of which are in early development;

 

  n  

if clinical trials of our product candidates fail to demonstrate safety and efficacy, we may be unable to obtain regulatory approvals and commercialize our product candidates;

 

  n  

we are subject to regulatory approval processes that are lengthy, time-consuming and unpredictable. We may not obtain approval for any of our product candidates from the U.S. Food and Drug Administration or foreign regulatory authorities;

 

  n  

it is difficult and costly to protect our intellectual property rights;

 

  n  

we may be unable to recruit or retain key employees, including our senior management team; and

 

  n  

we depend on the performance of third parties, including contract research organizations and third-party manufacturers.

Our Corporate Information

We were incorporated under the laws of the State of Delaware in December 2001. Our principal executive offices are located at Two Corporate Drive, South San Francisco, California 94080, and our telephone number is (415) 365-5600. Our website address is www.fiveprime.com. Our website and the information contained on, or that can be accessed through, the website will not be deemed to be incorporated by reference in, and are not considered part of, this prospectus. You should not rely on any such information in making your decision whether to purchase our common stock.

 

 

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Implications of Being an Emerging Growth Company

As a company with less than $1.0 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other burdens that are otherwise applicable generally to public companies. These provisions include:

 

  n  

a requirement to have only two years of audited financial statements and only two years of related management’s discussion and analysis;

 

  n  

an exemption from compliance with the auditor attestation requirement on the effectiveness of our internal controls over financial reporting;

 

  n  

an exemption from compliance with any requirement that the Public Company Accounting Oversight Board may adopt regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements;

 

  n  

reduced disclosure about the company’s executive compensation arrangements; and

 

  n  

exemptions from the requirements to obtain a non-binding advisory vote on executive compensation or a stockholder approval of any golden parachute arrangements.

We may take advantage of these provisions for up to five years or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company if we have more than $1.0 billion in annual revenues, have more than $700 million in market value of our capital stock held by non-affiliates, or issue more than $1.0 billion of non-convertible debt over a three-year period. We may choose to take advantage of some, but not all, of the available benefits under the JOBS Act. We have taken advantage of some reduced reporting burdens in this prospectus. Accordingly, the information contained herein may be different than the information you receive from other public companies in which you hold stock.

In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This provision allows an emerging growth company to delay the adoption of some accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of delayed adoption of new or revised accounting standards and, therefore, we will be subject to the same requirements to adopt new or revised accounting standards as other public companies that are not emerging growth companies.

 

 

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THE OFFERING

 

Common stock to be offered

4,000,000 shares

 

Common stock to be outstanding immediately following this offering

15,216,807 shares

 

Over-allotment option

We have granted the underwriters an option for 30 days from the date of this prospectus to purchase up to 600,000 additional shares of common stock to cover over-allotments.

 

Use of proceeds

We expect to use the proceeds from this offering to fund a Phase 1 clinical trial of FPA008, a Phase 1 clinical trial of FPA144 and for working capital and general corporate purposes. See “Use of Proceeds” 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 for a discussion of factors to carefully consider before deciding to invest in shares of our common stock.

 

Proposed NASDAQ Global Market symbol

FPRX

 

 

Certain of our existing stockholders, including affiliates of our directors, have indicated an interest in purchasing up to an aggregate of approximately $10.0 million of shares of our common stock in this offering at the initial offering price. However, because indications of interest are not binding agreements or commitments to purchase, the underwriters may determine to sell more, less or no shares in this offering to any of these stockholders, or any of these stockholders may determine to purchase more, less or no shares in this offering.

The number of shares of our common stock outstanding immediately following this offering set forth above is based on 11,216,807 shares of our common stock outstanding as of June 30, 2013, which gives effect to the conversion of all outstanding shares of our convertible preferred stock into an aggregate of 9,929,159 shares of our common stock upon completion of this offering and the exercise, on a net issuance basis based on an assumed initial public offering price of $13.00 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, of two warrants into an aggregate of 4,376 shares of our common stock.

The number of shares of our common stock outstanding immediately following this offering excludes:

 

  n  

2,065,135 shares of our common stock issuable upon the exercise of stock options outstanding as of June 30, 2013, under our 2002 Equity Incentive Plan, or 2002 Plan, and our 2010 Equity Incentive Plan, or 2010 Plan, at a weighted-average exercise price of $5.29 per share;

 

  n  

2,304 shares of our common stock issuable upon the exercise of a warrant issued to General Electric Capital Corporation on January 26, 2004, or the GE Warrant, at an exercise price of $12.30 per share, which warrant is expected to remain outstanding upon completion of this offering;

 

  n  

3,500,000 shares of our common stock (which includes 1,320,374 shares reserved for issuance under our 2010 Plan as of June 30, 2013) reserved for issuance under our 2013 Omnibus Incentive Plan, or 2013 Plan, which will become effective upon completion of this offering, as well as any future increases in the number of shares of our common stock reserved for issuance under the 2013 Plan; and

 

  n  

250,000 shares of our common stock reserved for future issuance under our 2013 Employee Stock Purchase Plan, or the ESPP, which will become effective upon completion of this offering, as well as any future increases in the number of shares of our common stock reserved for issuance under the ESPP.

 

 

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Except as otherwise indicated, the information in this prospectus assumes or gives effect to:

 

  n  

a 1-for-12.3 reverse stock split of our common stock and convertible preferred stock effected on September 4, 2013;

 

  n  

no exercise by the underwriters of their over-allotment option to purchase up to 600,000 additional shares of common stock from us;

 

  n  

the conversion of all outstanding shares of our convertible preferred stock into an aggregate of 9,929,159 shares of our common stock upon completion of this offering;

 

  n  

no purchases by certain of our existing stockholders, including affiliates of our directors, who have indicated an interest in purchasing up to an aggregate of approximately $10.0 million of shares of our common stock in this offering;

 

  n  

the exercise, on a net issuance basis based on an assumed initial public offering price of $13.00 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, of a warrant issued to Harald Ekman Living Trust to purchase 36,585 shares of our Series A convertible preferred stock at an exercise price of $12.30 per share, or the Ekman Warrant, and a warrant issued to Stronghold Capital Trust to purchase 44,715 shares of our Series A convertible preferred stock at an exercise price of $12.30 per share, or the Stronghold Warrant, into an aggregate of 4,376 shares of our common stock upon conversion of the Series A convertible preferred stock issuable upon exercise of the Ekman Warrant and the Stronghold Warrant, both of which will expire upon completion of this offering if not exercised; and

 

  n  

the filing of our amended and restated certificate of incorporation and the adoption of our amended and restated bylaws, which will occur immediately prior to the completion of this offering.

 

 

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SUMMARY FINANCIAL DATA

The following table summarizes our financial data. We have derived the following statements of operations data for the years ended December 31, 2010, 2011 and 2012 from our audited financial statements, included elsewhere in this prospectus. The statements of operations data for the six months ended June 30, 2012 and 2013 and the balance sheet data as of June 30, 2013, are derived from our unaudited financial statements, included elsewhere in this prospectus. Our historical results are not necessarily indicative of results to be expected for the full year or any period in the future. The summary financial data presented below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes thereto, included elsewhere in this prospectus. The summary financial data in this section is not intended to replace our financial statements and the related notes thereto.

 

 

 

(in thousands, except per share amounts)   YEARS ENDED DECEMBER 31,     SIX MONTHS ENDED
JUNE 30,
 
    2010     2011     2012     2012     2013  
                      (unaudited)  

Statements of Operations Data:

         

Collaboration revenue

  $ 23,740      $ 64,916      $ 9,983      $ 4,197      $ 6,524   

Operating expenses:

         

Research and development

    29,417        34,039        28,778        14,790        16,515   

General and administrative

    8,338        11,216        9,009        4,439        4,778   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    37,755        45,255        37,787        19,229        21,293   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

    (14,015     19,661        (27,804     (15,032     (14,769

Interest income

    58        114        88        49        28   

Other income (expense), net

    491        (65     121        59        420   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before benefit from income taxes

    (13,466     19,710        (27,595     (14,924     (14,321

Benefit from income taxes

    5                               
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

  $ (13,461   $ 19,710      $ (27,595   $ (14,924   $ (14,321
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to participating securities

           18,823                        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to common stockholders

  $ (13,461   $ 887      $ (27,595   $ (14,924   $ (14,321
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic net (loss) income per share attributable to common stockholders (1)

  $ (12.22   $ 0.77      $ (23.05   $ (12.63   $ (11.55
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted net (loss) income per share attributable to common stockholders (1)

  $ (12.22   $ 0.72      $ (23.05   $ (12.63   $ (11.55
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares of common stock outstanding used in computing basic net (loss) income per share (1)

    1,102        1,152        1,197        1,182        1,240   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares of common stock outstanding used in computing diluted net (loss) income per share (1)

    1,102        1,904        1,197        1,182        1,240   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share—basic and diluted (unaudited) (1)

      $ (2.50     $ (1.28
     

 

 

     

 

 

 

Weighted average shares of common stock outstanding used in computing the pro forma net loss per share—basic and diluted (1)

        11,021          11,169   
     

 

 

     

 

 

 

 

 

(1)   

See Note 1 to our financial statements for an explanation of the method used to calculate basic and diluted net (loss) income per share of common stock, the unaudited pro forma basic and diluted net loss per share of common stock and the weighted average number of shares used in computation of the per share amounts.

 

 

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(in thousands)    AS OF JUNE 30, 2013  
   ACTUAL     PRO
FORMA (1)
     PRO FORMA
AS ADJUSTED  (2)
 

Balance Sheet Data:

       

Cash, cash equivalents and marketable securities

   $ 28,196      $ 28,196       $ 73,956   

Working capital

     14,363        14,363         60,123   

Total assets

     35,356        35,356         81,116   

Preferred stock warrant liability

     143        143           

Convertible preferred stock

     136,282                  

Total stockholders’ (deficit) equity

     (129,082     7,200         53,103   

 

 

(1)   

The pro forma column in the balance sheet data above gives effect to the conversion of all outstanding shares of our convertible preferred stock into an aggregate of 9,929,159 shares of our common stock upon completion of this offering if it had occurred as of June 30, 2013.

 

(2)   

The pro forma as adjusted column in the balance sheet data above gives further effect to the sale of 4,000,000 shares of common stock in this offering at an assumed initial public offering price of $13.00 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, as if the sale of the shares in this offering had occurred as of June 30, 2013, and the exercise, on a net issuance basis based on an assumed initial public offering price of $13.00 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, of the Ekman Warrant and the Stronghold Warrant into an aggregate of 4,376 shares of our common stock and the reclassification of the remaining outstanding preferred stock warrant liability to stockholders’ equity.

Each $1.00 increase (decrease) in the assumed initial public offering price of $13.00 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, would increase (decrease) each of cash and cash equivalents, working capital, total assets and total stockholders’ (deficit) equity by approximately $3.7 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 underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. Each increase (decrease) of 1.0 million shares in the number of shares offered by us would increase (decrease) each of cash and cash equivalents, working capital, total assets and total stockholders’ (deficit) equity by approximately $12.1 million, assuming that the assumed initial public offering price remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma as adjusted information discussed above is illustrative only and will adjust based on the actual initial public offering price and other terms of this offering determined at pricing.

 

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. Before making your decision to invest in shares of our common stock, you should carefully consider the risks described below, together with the other information contained in this prospectus, including our financial statements and the related notes appearing at the end of this prospectus. We cannot assure you that any of the events discussed below will not occur. These events could have a material and adverse impact on our business, results of operations, financial condition and cash flows. If that were to happen, the trading price of our common stock could decline, and you could lose all or part of your investment.

Risks Related to Our Financial Position and Capital Needs

We have incurred net losses in nearly every year since our inception and anticipate that we will continue to incur net losses in the future.

We are a clinical-stage biotechnology company with a limited operating history. Investment in biopharmaceutical product development is highly speculative because it entails substantial upfront capital expenditures and significant risk that any potential product candidate will fail to demonstrate adequate effect or an acceptable safety profile, gain regulatory approval and become commercially viable. We have no products approved for commercial sale and have not generated any revenue from product sales to date, and we continue to incur significant research and development and other expenses related to our ongoing operations. As a result, we are not profitable and have incurred losses in each period since our inception in 2001, with the exception of the fiscal year ended 2011 due to collaboration revenues from product candidates that we partnered. For the year ended December 31, 2012, and the six months ended June 30, 2013, we reported a net loss of $27.6 million and $14.3 million, respectively. As of June 30, 2013, we had an accumulated deficit of $137.0 million.

We expect to continue to incur significant losses for the foreseeable future, and we expect these losses to increase as we continue our research and development of, and seek regulatory approvals for, our product candidates. We may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. The size of our future net losses will depend, in part, on the rate of future growth of our expenses and our ability to generate revenues. Our prior losses and expected future losses have had and will continue to have an adverse effect on our stockholders’ equity and working capital.

We currently have no source of product revenue and may never become profitable.

To date, we have not generated any revenues from commercialization of our product candidates. Our ability to generate product revenue and ultimately become profitable depends upon our ability, alone or with our partners, to successfully commercialize products, including any of our current product candidates, or other product candidates that we may develop, in-license or acquire in the future. We do not anticipate generating revenue from the sale of products for the foreseeable future. Our ability to generate future product revenue from our current or future product candidates also depends on a number of additional factors, including our or our partners’ ability to:

 

  n  

successfully complete research and clinical development of current and future product candidates;

 

  n  

establish and maintain supply and manufacturing relationships with third parties, and ensure adequate and legally compliant manufacturing of bulk drug substances and drug products to maintain that supply;

 

  n  

launch and commercialize future product candidates for which we obtain marketing approval, if any, and if launched independently, successfully establish a sales force, marketing and distribution infrastructure;

 

  n  

obtain coverage and adequate product reimbursement from third-party payors, including government payors;

 

  n  

achieve market acceptance for our or our partners’ products, if any;

 

  n  

establish, maintain and protect our intellectual property rights; and

 

  n  

attract, hire and retain qualified personnel.

In addition, because of the numerous risks and uncertainties associated with pharmaceutical product development, including that our product candidates may not advance through development or achieve the endpoints of applicable clinical trials, we are unable to predict the timing or amount of increased expenses, or if or when we will achieve or maintain profitability. In addition, our expenses could increase beyond expectations if we decide to or are required by the U.S. Food and Drug Administration, or FDA, or foreign regulatory authorities to perform studies or trials in addition

 

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to those that we currently anticipate. Even if we complete the development and regulatory processes described above, we anticipate incurring significant costs associated with launching and commercializing these products.

Even if we generate revenues from the sale of any of our products that may be approved, we may not become profitable and may need to obtain additional funding to continue operations. If we fail to become profitable or do not sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce our operations.

We will require additional capital to finance our operations, which may not be available to us on acceptable terms, or at all. As a result, we may not complete the development and commercialization of our product candidates or develop new product candidates.

As a research and development company, our operations have consumed substantial amounts of cash since inception. We expect our research and development expenses to increase substantially in connection with our ongoing activities, particularly as we advance our product candidates into clinical trials. We believe that the net proceeds from this offering, together with our existing cash and cash equivalents and funding we expect to receive under existing collaboration agreements, will fund our projected operating requirements into the first quarter of 2015. However, circumstances may cause us to consume capital more rapidly than we currently anticipate. For example, as we move our lead product candidates other than FP-1039 through preclinical studies and submit Investigational New Drug Applications, which may occur as early as the end of 2013, we may have adverse results requiring us to find new product candidates, or our product collaboration partners may not elect to pursue the development and commercialization of any of our product candidates that are subject to their respective agreements with us. Any of these events may increase our development costs more than we expect. We may need to raise additional funds or otherwise obtain funding through product collaborations if we choose to initiate additional clinical trials for product candidates other than programs currently partnered. In any event, we will require additional capital to obtain regulatory approval for, and to commercialize, future product candidates.

If we need to secure additional financing, such additional fundraising efforts may divert our management from our day-to-day activities, which may adversely affect our ability to develop and commercialize future product candidates. In addition, we cannot guarantee that future financing will be available in sufficient amounts or on terms acceptable to us, if at all. If we do not raise additional capital when required or on acceptable terms, we may need to:

 

  n  

significantly delay, scale back or discontinue the development or commercialization of any product candidates or cease operations altogether;

 

  n  

seek strategic alliances for research and development programs at an earlier stage than we would otherwise desire or on terms less favorable than might otherwise be available; or

 

  n  

relinquish, or license on unfavorable terms, our rights to technologies or any future product candidates that we otherwise would seek to develop or commercialize ourselves.

If we need to conduct additional fundraising activities and we do not raise additional capital in sufficient amounts or on terms acceptable to us, we may be prevented from pursuing development and commercialization efforts, which will have a material adverse effect on our business, operating results and prospects.

Our forecast of the period of time through which our financial resources will adequately support our operations is a forward-looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors, including the factors discussed elsewhere in this “Risk Factors” section. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. Our future funding requirements, both short and long-term, will depend on many factors, including:

 

  n  

the initiation, progress, timing, costs and results of preclinical and clinical studies for our product candidates and future product candidates we may develop;

 

  n  

the outcome, timing and cost of seeking and obtaining regulatory approvals from the FDA and comparable foreign regulatory authorities, including the potential for such authorities to require that we perform more studies than those that we currently expect;

 

  n  

the cost to establish, maintain, expand and defend the scope of our intellectual property portfolio, including the amount and timing of any payments we may be required to make, or that we may receive, in connection

 

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with licensing, preparing, filing, prosecution, defense and enforcement of any patents or other intellectual property rights;

 

  n  

the effect of competing technological and market developments;

 

  n  

market acceptance of any approved product candidates;

 

  n  

the costs of acquiring, licensing or investing in additional businesses, products, product candidates and technologies;

 

  n  

the cost and timing of selecting, auditing and potentially validating a manufacturing site for commercial-scale manufacturing; and

 

  n  

the cost of establishing sales, marketing and distribution capabilities for our product candidates for which we may receive regulatory approval and that we determine to commercialize ourselves or in collaboration with our partners.

If a lack of available capital means that we cannot expand our operations or otherwise capitalize on our business opportunities, our business, financial condition and results of operations could be materially adversely affected.

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

Until we can generate a sufficient amount of revenue from our products, if ever, we expect to finance future cash needs through public or private equity or debt offerings. Additional capital may not be available on reasonable terms, if at all. If we raise additional funds through the issuance of additional debt or equity securities, that could result in dilution to our existing stockholders, and/or increased fixed payment obligations. Furthermore, these securities may have rights senior to those of our common stock and could contain covenants that would restrict our operations and potentially impair our competitiveness, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. Any of these events could significantly harm our business, financial condition and prospects.

We plan to use potential future operating losses and our federal and state net operating loss, or NOL, carryforwards to offset taxable income from revenue generated from operations or corporate collaborations. However, our ability to use NOL carryforwards could be limited as a result of issuance of equity securities.

We plan to use our current year operating losses to offset taxable income from any revenue generated from operations or corporate collaborations. To the extent that our taxable income exceeds any current year operating losses, we plan to use our NOL carryforwards to offset income that would otherwise be taxable. However, under the Tax Reform Act of 1986, the amount of benefits from our NOL carryforwards may be impaired or limited if we incur a cumulative ownership change of more than 50%, as interpreted by the U.S. Internal Revenue Service, over a three-year period. As a result, our use of federal NOL carryforwards could be limited by the provisions of Section 382 of the U.S. Internal Revenue Code of 1986, as amended, depending upon the timing and amount of additional equity securities that we issue. State NOL carryforwards may be similarly limited. Any such disallowances may result in greater tax liabilities than we would incur in the absence of such a limitation and any increased liabilities could adversely affect our business, results of operations, financial condition and cash flow.

Risks Related to Our Business and Industry

Only one of our product candidates is in clinical development. Preclinical testing of other product candidates may not lead to them advancing into clinical trials. If we do not successfully complete preclinical testing of our product candidates or experience significant delays in doing so, our business will be materially harmed.

We have invested a significant portion of our efforts and financial resources in the identification and preclinical development of product candidates. Our ability to generate product revenues, which we do not expect will occur for many years, if ever, will depend heavily on the ability to advance preclinical product candidates into clinical development. The outcome of preclinical studies may not predict the success of clinical trials. Moreover, preclinical data are often susceptible to varying interpretations and analyses, and many companies that have believed their product candidates performed satisfactorily in preclinical studies have nonetheless failed in clinical development. Our inability to successfully complete preclinical development could result in additional costs to us or impair our ability to generate product revenues or development, regulatory, commercialization and sales milestone payments and royalties on product sales.

 

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If clinical trials of our product candidates fail to demonstrate safety and efficacy to the satisfaction of regulatory authorities or do not otherwise produce positive results, we may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of our product candidates.

Before obtaining marketing approval from regulatory authorities for the sale of future product candidates, we or our partners must conduct extensive clinical trials to demonstrate the safety and efficacy of the product candidates in humans. Clinical testing is expensive and difficult to design and implement, can take many years to complete and is uncertain as to outcome. A failure of one or more clinical trials can occur at any stage of testing. The outcome of preclinical studies and early clinical trials may not predict the success of later clinical trials, and interim results of a clinical trial do not necessarily predict final results. A number of companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in advanced clinical trials due to lack of efficacy or unacceptable safety profiles, notwithstanding promising results in earlier trials. Despite the results reported in our Phase 1 clinical trial for FP-1039 and in preclinical studies for our other product candidates, we do not know whether the clinical trials we or our partners may conduct will demonstrate adequate efficacy and safety to result in regulatory approval to market any of our product candidates in any particular jurisdiction or jurisdictions. If later-stage clinical trials do not produce favorable results, our or our partners’ ability to achieve regulatory approval for any of our product candidates may be adversely impacted.

If we experience delays in clinical testing, we will be delayed in commercializing our product candidates, our costs may increase and our business may be harmed.

We do not know whether any clinical trials will begin as planned, will need to be restructured or will be completed on schedule, or at all. Our product development costs will increase if we experience delays in clinical testing. Significant clinical trial delays also could shorten any periods during which we may have the exclusive right to commercialize our product candidates or allow our competitors to bring products to market before we do, which would impair our ability to successfully commercialize our product candidates and may harm our business, results of operations and prospects. Events which may result in a delay or unsuccessful completion of clinical development include:

 

  n  

delays in reaching an agreement with or failure in obtaining authorization from the FDA, other regulatory authorities and institutional review boards, or IRBs;

 

  n  

imposition of a clinical hold following an inspection of our clinical trial operations or trial sites by the FDA or other regulatory authorities, or decision by the FDA, other regulatory authorities, IRBs or the company, or recommendation by a data safety monitoring board, to suspend or terminate clinical trials at any time for safety issues or for any other reason;

 

  n  

delays in reaching agreement on acceptable terms with prospective contract research organizations, or CROs, and clinical trial sites;

 

  n  

deviations from the trial protocol by clinical trial sites and investigators, or failing to conduct the trial in accordance with regulatory requirements;

 

  n  

failure of our third parties, such as CROs, to satisfy their contractual duties or meet expected deadlines;

 

  n  

delays in the testing, validation, manufacturing and delivery of the product candidates to the clinical sites;

 

  n  

for clinical trials in selected patient populations, delays in identification and auditing of central or other laboratories and the transfer and validation of assays or tests to be used to identify selected patients;

 

  n  

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

 

  n  

delays caused by patients dropping out of a trial due to side effects or disease progression;

 

  n  

withdrawal of clinical trial sites from our clinical trials as a result of changing standards of care or the ineligibility of a site to participate in our clinical trials; or

 

  n  

changes in government regulations or administrative actions or lack of adequate funding to continue the clinical trials.

Any inability of us or our partners to timely complete clinical development could result in additional costs to us or impair our ability to generate product revenues or development, regulatory, commercialization and sales milestone payments and royalties on product sales.

 

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If we are or our partners are unable to enroll patients in clinical trials, we will be unable to complete these trials on a timely basis.

The timely completion of clinical trials largely depends on patient enrollment. Many factors affect patient enrollment, including:

 

  n  

the size and nature of the patient population;

 

  n  

the number and location of clinical sites we enroll;

 

  n  

competition with other companies for clinical sites or patients;

 

  n  

the eligibility and exclusion criteria for the trial;

 

  n  

the design of the clinical trial;

 

  n  

inability to obtain and maintain patient consents;

 

  n  

risk that enrolled subjects will drop out before completion; and

 

  n  

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.

There is significant competition for recruiting cancer and rheumatoid arthritis patients in clinical trials, and we or our partners may be unable to enroll the patients we need to complete clinical trials on a timely basis or at all.

We may not successfully identify, develop or commercialize potential product candidates.

The success of our business depends primarily upon our ability to identify and validate new protein therapeutic targets, including through the use of our discovery platform, and identify, develop and commercialize protein therapeutics, which we may develop ourselves or in-license from others. Our research efforts may initially show promise in discovering potential new protein therapeutic targets or candidates, yet fail to yield product candidates for clinical development for a number of reasons, including because:

 

  n  

our research methodology, including our screening technology, may not successfully identify medically relevant protein therapeutic targets or potential product candidates;

 

  n  

we tend to identify and select from our discovery platform novel, untested targets in the particular disease indication we are pursuing, which we may fail to validate after further research work;

 

  n  

we may need to rely on third parties to generate antibody candidates for some of our product candidate programs;

 

  n  

we may encounter product manufacturing difficulties that limit yield or produce undesirable characteristics that increase the cost of goods, cause delays or make the product candidates unmarketable;

 

  n  

our product candidates may cause adverse effects in patients or subjects, even after successful initial toxicology studies, which may make the product candidates unmarketable;

 

  n  

our product candidates may not demonstrate a meaningful benefit to patients or subjects; and

 

  n  

our collaboration partners may change their development profiles or plans for potential product candidates or abandon a therapeutic area or the development of a partnered product.

If any of these events occur, we may be forced to abandon our development efforts for a program or programs, which would have a material adverse effect on our business, operating results and prospects and could potentially cause us to cease operations. Research programs to identify new product candidates require substantial technical, financial and human resources. We may focus our efforts and resources on potential programs or product candidates that ultimately prove to be unsuccessful.

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

The process of manufacturing our products is complex and subject to several risks, including:

 

  n  

the process of manufacturing biologics is susceptible to product loss due to contamination, equipment failure or improper installation or operation of equipment, or vendor or operator error. Even minor deviations from normal manufacturing processes could result in reduced production yields, product defects and other

 

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supply disruptions. If microbial, viral or other contaminations are discovered in our products or in the manufacturing facilities in which our products are made, such manufacturing facilities may need to be closed for an extended period of time to investigate and remedy the contamination;

 

  n  

the manufacturing facilities in which our products are made could be adversely affected by equipment failures, labor and raw material shortages, natural disasters, power failures and numerous other factors; and

 

  n  

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

Certain raw materials necessary for the manufacture of our FPA008 and FPA144 products under our current manufacturing process, such as growth media, resins and filters, are available from a single supplier. We do not have agreements in place that guarantee our supply or the price of these raw materials. Any significant delay in the acquisition or decrease in the availability of these raw materials could considerably delay the manufacture of our product candidates, which could adversely impact the timing of any planned trials or the regulatory approval of that product candidate.

We depend on third-party manufacturers for the manufacture of drug substance and drug product for clinical trials as well as on third parties for our supply chain. Any problems we experience with any of these third parties could delay the manufacturing of our product candidates, which could harm our results of operations.

We have process development and small-scale manufacturing capabilities. We do not have and we do not currently plan to acquire or develop the facilities or capabilities to manufacture bulk drug substance or filled drug product for use in human clinical trials or commercialization.

GSK is responsible for the manufacturing of FP-1039 for GSK’s use in clinical trials. Under our license and collaboration agreement with GSK, we have the right to require GSK to manufacture and supply us with FP-1039 bulk drug substance and filled FP-1039 drug product. We have contracted with third parties for the manufacture of FPA008 bulk drug substance and drug product and are in the process of engaging other third parties for the labeling and distribution of FPA008 drug product for our planned Phase 1 clinical trial of FPA008. We believe our current drug substance contractor has the scale, the systems and the experience to supply our planned Phase 1 clinical trial and may be considered for manufacturing for later clinical trials of FPA008. We have not yet contracted with a third party for the manufacture of FPA144 bulk drug substance or for the filling, labeling and distribution of FPA144 drug product for clinical trials. We have identified and negotiated with several third-party manufacturers with facilities and capabilities necessary to manufacture FPA144 bulk drug substance.

We have not contracted with alternate suppliers in the event the current organizations we utilize are unable to scale production, or if otherwise we experience any problems with them. If we are unable to arrange for alternative third-party manufacturing sources, or to do so on commercially reasonable terms or in a timely manner, we may be delayed in the development of our product candidates.

Reliance on third-party manufacturers entails risks to which we would not be subject if we manufactured product candidates or products ourselves, including reliance on the third party for regulatory compliance and quality assurance, the possibility of breach of the manufacturing agreement by the third party because of factors beyond our control (including a failure to manufacture our product candidates or any products we may eventually commercialize in accordance with our specifications) and the possibility of termination or nonrenewal of the agreement by the third party, based on its own business priorities, at a time that is costly or damaging to us.

The regulatory approval processes of the FDA and comparable foreign regulatory authorities are lengthy, time-consuming and inherently unpredictable. Our inability to obtain regulatory approval for our product candidates would substantially harm our business.

The time required to obtain approval by the FDA and comparable foreign regulatory authorities is unpredictable but typically takes many years following the commencement of preclinical studies and clinical trials and depends upon numerous factors, including the substantial discretion of the regulatory authorities. In addition, approval policies,

 

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regulations, or the type and amount of clinical data necessary to gain approval may change during the course of a product candidate’s clinical development and may vary among jurisdictions. We have not obtained regulatory approval for any product candidate and it is possible that none of our existing product candidates or any future product candidates will ever obtain regulatory approval.

Our product candidates could fail to receive regulatory approval from the FDA or a comparable foreign regulatory authority for many reasons, including:

 

  n  

disagreement with the design or implementation of our clinical trials;

 

  n  

failure to demonstrate that a product candidate is safe and effective for its proposed indication;

 

  n  

failure of clinical trials to meet the level of statistical significance required for approval;

 

  n  

failure to demonstrate that a product candidate’s clinical and other benefits outweigh its safety risks;

 

  n  

disagreement with our interpretation of data from preclinical studies or clinical trials;

 

  n  

the insufficiency of data collected from clinical trials of our product candidates to support the submission and filing of a Biologic License Application or other submission or to obtain regulatory approval;

 

  n  

failure to obtain approval of the manufacturing processes or facilities of third-party manufacturers with whom we contract for clinical and commercial supplies; or

 

  n  

changes in the approval policies or regulations that render our preclinical and clinical data insufficient for approval.

The FDA or a comparable foreign regulatory authority may require more information, including additional preclinical or clinical data to support approval, which may delay or prevent approval and our commercialization plans, or we may decide to abandon the development program. If we were to obtain approval, regulatory authorities may approve any of our product candidates for fewer or more limited indications than we request, may grant approval contingent on the performance of costly post-marketing clinical trials, or may approve a product candidate with a label that does not include the labeling claims necessary or desirable for the successful commercialization of that product candidate.

Our product candidates may cause undesirable side effects or have other properties that could delay or prevent their regulatory approval, limit the commercial profile of an approved label, or result in significant negative consequences following any marketing approval.

Undesirable side effects caused by our product candidates could cause us or regulatory authorities to interrupt, delay or halt clinical trials and could result in a more restrictive label or the delay or denial of regulatory approval by the FDA or other comparable foreign regulatory authority. Results of our trials could reveal a high and unacceptable severity and prevalence of side effects or unexpected characteristics. In such an event, we could suspend or terminate our trials or the FDA or comparable foreign regulatory authorities could order us to cease clinical trials or deny approval of our product candidates for any or all targeted indications. Drug-related side effects could affect patient recruitment or the ability of enrolled subjects to complete the trial or result in potential product liability claims. Any of these occurrences may harm our business, financial condition and prospects significantly.

Additionally, if one or more of our product candidates receives marketing approval, and we or others later identify undesirable side effects caused by such products, a number of potentially significant negative consequences could result, including:

 

  n  

we may suspend marketing of, or withdraw or recall, such product;

 

  n  

regulatory authorities may withdraw approvals of such product;

 

  n  

regulatory authorities may require additional warnings on the label;

 

  n  

the FDA or other regulatory bodies may issue safety alerts, Dear Healthcare Provider letters, press releases or other communications containing warnings about such product;

 

  n  

the FDA may require the establishment or modification of REMS or a comparable foreign regulatory authority may require the establishment or modification of a similar strategy that may, for instance, restrict distribution of our products and impose burdensome implementation requirements on us;

 

  n  

regulatory authorities may require that we conduct post-marketing studies;

 

  n  

we could be sued and held liable for harm caused to subjects or patients; and

 

  n  

our reputation may suffer.

 

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Any of these events could prevent us from achieving or maintaining market acceptance of the particular product candidate or otherwise materially harm the commercial prospects for the product candidate, if approved, and could significantly harm our business, results of operations and prospects.

If we are unable to successfully develop companion diagnostics for our therapeutic product candidates, or experience significant delays in doing so, we may not achieve marketing approval or realize the full commercial potential of our therapeutic product candidates.

We and certain of our partners plan to develop companion diagnostics for our therapeutic product candidates. We expect that, at least in some cases, the FDA and comparable foreign regulatory authorities may require the development and regulatory approval of a companion diagnostic as a condition to approving our therapeutic product candidates. We do not have experience or capabilities in developing or commercializing diagnostics and plan to rely in large part on third parties to perform these functions. We do not currently have any agreement in place with any third party to develop or commercialize companion diagnostics for any of our therapeutic product candidates.

Companion diagnostics are subject to regulation by the FDA and comparable foreign regulatory authorities as medical devices and may require separate regulatory approval prior to commercialization.

If we or our partners, or any third parties that either of us engage to assist us, are unable to successfully develop companion diagnostics for our therapeutic product candidates, or experience delays in doing so:

 

  n  

the development of our therapeutic product candidates may be adversely affected if we are unable to appropriately select patients for enrollment in our clinical trials;

 

  n  

our therapeutic product candidates may not receive marketing approval if their safe and effective use depends on a companion diagnostic; and

 

  n  

we may not realize the full commercial potential of any therapeutic product candidates that receive marketing approval if, among other reasons, we are unable to appropriately identify patients with the specific genetic alterations targeted by our therapeutic product candidates.

If any of these events were to occur, our business would be harmed, possibly materially.

Even if our product candidates receive regulatory approval, they may still face future development and regulatory difficulties.

Even if we obtain regulatory approval for a product candidate, it would be subject to ongoing requirements by the FDA and comparable foreign regulatory authorities governing the manufacture, quality control, further development, labeling, packaging, storage, distribution, safety surveillance, import, export, advertising, promotion, recordkeeping and reporting of safety and other post-market information. The FDA and comparable foreign regulatory authorities will continue to closely monitor the safety profile of any product even after approval. If the FDA or comparable foreign regulatory authorities become aware of new safety information after approval of any of our product candidates, they may require labeling changes or establishment of a REMS or similar strategy, impose significant restrictions on a product’s indicated uses or marketing, or impose ongoing requirements for potentially costly post-approval studies or post-market surveillance.

In addition, manufacturers of drug products and their facilities are subject to continual review and periodic inspections by the FDA and other regulatory authorities for compliance with current Good Manufacturing Practices, or cGMP, regulations and standards. If we or a regulatory agency discover previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured, a regulatory agency may impose restrictions on that product, the manufacturing facility or us, including requiring recall or withdrawal of the product from the market or suspension of manufacturing. If we, our product candidates or the manufacturing facilities for our product candidates fail to comply with applicable regulatory requirements, a regulatory agency may:

 

  n  

issue warning letters or untitled letters;

 

  n  

mandate modifications to promotional materials or require us to provide corrective information to healthcare practitioners;

 

  n  

require us to enter into a consent decree, which can include imposition of various fines, reimbursements for inspection costs, required due dates for specific actions and penalties for noncompliance;

 

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  n  

seek an injunction or impose civil or criminal penalties or monetary fines;

 

  n  

suspend or withdraw regulatory approval;

 

  n  

suspend any ongoing clinical studies;

 

  n  

refuse to approve pending applications or supplements to applications filed by us;

 

  n  

suspend or impose restrictions on operations, including costly new manufacturing requirements; or

 

  n  

seize or detain products, refuse to permit the import or export of products, or require us to initiate a product recall.

The occurrence of any event or penalty described above may inhibit our ability to commercialize our products and generate revenue.

Advertising and promotion of any product candidate that obtains approval in the United States will be heavily scrutinized by the FDA, the Department of Justice, the Department of Health and Human Services’ Office of Inspector General, state attorneys general, members of Congress and the public. Violations, including promotion of our products for unapproved (or off-label) uses, are subject to enforcement letters, inquiries and investigations, and civil and criminal sanctions by the government. Additionally, comparable foreign regulatory authorities will heavily scrutinize advertising and promotion of any product candidate that obtains approval outside of the United States.

In the United States, engaging in the impermissible promotion of our products for off-label uses can also subject us to false claims litigation under federal and state statutes, which can lead to civil and criminal penalties and fines and agreements that materially restrict the manner in which a company promotes or distributes drug products. These false claims statutes include the federal False Claims Act, which allows any individual to bring a lawsuit against a pharmaceutical company on behalf of the federal government alleging submission of false or fraudulent claims, or causing to present such false or fraudulent claims, for payment by a federal program such as Medicare or Medicaid. If the government prevails in the lawsuit, the individual will share in any fines or settlement funds. Since 2004, these False Claims Act lawsuits against pharmaceutical companies have increased significantly in volume and breadth, leading to several substantial civil and criminal settlements regarding certain sales practices promoting off-label drug uses involving fines in excess of $1.0 billion. This growth in litigation has increased the risk that a pharmaceutical company will have to defend a false claim action, pay settlement fines or restitution, agree to comply with burdensome reporting and compliance obligations, and be excluded from Medicare, Medicaid and other federal and state healthcare programs. If we do not lawfully promote our approved products, we may become subject to such litigation and, if we do not successfully defend against such actions, those actions may have a material adverse effect on our business, financial condition and results of operations.

The FDA’s policies may change and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of our product candidates. If we are slow or unable to adapt to changes in existing requirements or 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, which would adversely affect our business, prospects and ability to achieve or sustain profitability.

Our failure to obtain regulatory approval in international jurisdictions would prevent us from marketing our product candidates outside the United States.

In order to market and sell our products in other jurisdictions, we must obtain separate marketing approvals and comply with numerous and varying regulatory requirements. The approval procedure varies among countries and can involve additional testing. The time required to obtain approval may differ substantially from that required to obtain FDA approval. The regulatory approval process outside the United States generally includes all of the risks associated with obtaining FDA approval. In addition, in many countries outside the United States, we must secure product reimbursement approvals before regulatory authorities will approve the product for sale in that country. 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

 

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international markets and receive applicable marketing approvals, our target market will be reduced and our ability to realize the full market potential of our product candidates will be harmed and our business will be adversely affected. We may not obtain foreign regulatory approvals on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions. Approval by one regulatory authority outside the United States does not ensure approval by regulatory authorities in other countries or jurisdictions or by the FDA. Our failure to obtain approval of any of our product candidates by regulatory authorities in another country may significantly diminish the commercial prospects of that product candidate and our business prospects could decline.

We face substantial competition, which may result in others discovering, developing or commercializing products before or more successfully than us.

The biotechnology industry is intensely competitive and subject to rapid and significant technological change. We face competition with respect to our current product candidates and will face competition with respect to any future product candidates from major pharmaceutical companies, specialty pharmaceutical companies and biotechnology companies worldwide. Many of our competitors have significantly greater financial, technical and human resources. Smaller and early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies.

Our competitors may obtain regulatory approval of their products more rapidly than we may or may obtain patent protection or other intellectual property rights that limit our ability to develop or commercialize our product candidates. Our competitors may also develop drugs that are more effective, more convenient, more widely used and less costly or have a better safety profile than our products and these competitors may also be more successful than us in manufacturing and marketing their products.

Our competitors will also compete with us in recruiting and retaining qualified scientific, management and commercial personnel, establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies complementary to, or necessary for, our programs.

Although there are no approved therapies that specifically target the signaling pathways our product candidates are designed to modulate or inhibit, there are numerous currently approved therapies for treating the same diseases or indications for which our product candidates may be useful and many of these currently approved therapies act through mechanisms similar to our product candidates. Many of these approved drugs are well-established therapies or products and are widely accepted by physicians, patients and third-party payors. Some of these drugs are branded and subject to patent protection, and others are available on a generic basis. Insurers and other third-party payors may also encourage the use of generic products or specific branded products. We expect that if our product candidates are approved, they will be priced at a significant premium over competitive generic, including branded generic, products. This may make it difficult for us to differentiate our products from currently approved therapies, which may adversely impact our business strategy. In addition, many companies are developing new therapeutics, and we cannot predict what the standard of care will be as our product candidates progress through clinical development.

If FP-1039, our lead product candidate, were approved for the treatment of squamous non-small cell lung cancer, it could face competition from currently approved and marketed products, including carboplatin, cisplatin, paclitaxel, docetaxel, gemcitabine and Tarceva® (erlotinib). Further competition could arise from products currently in development, including several small molecules that act in the same pathway as FP-1039, including Novartis AG’s BGJ-398, AstraZeneca plc’s AZD-4547, Eli Lilly and Company’s LY-2874455, ArQule Inc.’s ARQ-087, Les Laboratoires Servier/EOS S.p.A.’s E-3810 and Janssen Pharmaceuticals, Inc.’s JNJ-42756493. Some of these programs have been advanced further in clinical development than FP-1039 and could receive approval before FP-1039 is approved, if it is approved at all.

If FPA008 were approved for the treatment of rheumatoid arthritis, it could face competition from currently approved and marketed products, including Humira®, Remicade® (infliximab) and Enbrel® (etanercept). Further competition could arise from products currently in development, including Daiichi Sankyo Co., Ltd./Plexxikon Inc.’s PLX5622 product, which acts in the same pathway as FPA008.

If FPA144 were approved for the treatment of gastric cancer, it could face competition from currently approved and marketed products, including 5-fluorouracil, capecitabine, doxorubicin, cisplatin and docetaxel, all of which are

 

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available as generics. Further competition could arise from products currently in development, including AstraZeneca plc’s AZD-4547.

We believe that our ability to successfully compete will depend on, among other things:

 

  n  

the efficacy and safety profile of our product candidates, including relative to marketed products and product candidates in development by third parties;

 

  n  

the time it takes for our product candidates to complete clinical development and receive marketing approval;

 

  n  

the ability to commercialize any of our product candidates that receive regulatory approval;

 

  n  

the price of our products, including in comparison to branded or generic competitors;

 

  n  

whether coverage and adequate levels of reimbursement are available under private and governmental health insurance plans, including Medicare;

 

  n  

the ability to establish, maintain and protect intellectual property rights related to our product candidates;

 

  n  

the ability to manufacture commercial quantities of any of our product candidates that receive regulatory approval; and

 

  n  

acceptance of any of our product candidates that receive regulatory approval by physicians and other healthcare providers.

Our product candidates may not achieve adequate market acceptance among physicians, patients, healthcare payors and others in the medical community necessary for commercial success.

Even if our product candidates receive regulatory approval, they may not gain adequate market acceptance among physicians, patients, healthcare payors and others in the medical community. Our commercial success also depends on coverage and adequate reimbursement of our product candidates by third-party payors, including government payors, generally, which may be difficult or time-consuming to obtain, may be limited in scope and may not be obtained in all jurisdictions in which we may seek to market our products. The degree of market acceptance of any of our approved product candidates will depend on a number of factors, including:

 

  n  

the efficacy and safety profile as demonstrated in clinical trials;

 

  n  

the timing of market introduction of the product candidate as well as competitive products;

 

  n  

the clinical indications for which the product candidate is approved;

 

  n  

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

 

  n  

the potential and perceived advantages of product candidates over alternative treatments, including any similar generic treatments;

 

  n  

the cost of treatment in relation to alternative treatments;

 

  n  

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

 

  n  

relative convenience and ease of administration;

 

  n  

the frequency and severity of adverse events;

 

  n  

the effectiveness of sales and marketing efforts; and

 

  n  

unfavorable publicity relating to the product candidate.

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

Even if we commercialize any of our product candidates, these products may become subject to unfavorable pricing regulations, third-party reimbursement practices or healthcare reform initiatives, which could harm our business.

The regulations that govern marketing approvals, pricing and reimbursement for new drug products vary widely from country to country. Current and future legislation may significantly change the approval requirements in ways that could involve additional costs and cause delays in obtaining approvals. Some countries require approval of the sale price of a drug before it can be marketed. In many countries, the pricing review period begins after marketing or product licensing approval is granted. In some foreign markets, prescription pharmaceutical pricing remains subject

 

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to continuing governmental control even after initial approval is granted. As a result, we might obtain marketing approval for a product in a particular country, but then be subject to price regulations that delay our commercial launch of the product, possibly for lengthy time periods, which could negatively impact the revenues we generate from the sale of the product in that particular country. Adverse pricing limitations may hinder our ability to recoup our investment in one or more product candidates even if our product candidates obtain marketing approval.

Our ability to commercialize any products successfully also will depend in part on the extent to which coverage and adequate reimbursement for these products and related treatments will be available from government health administration authorities, private health insurers and other organizations. Government authorities and other third-party payors, such as private health insurers and health maintenance organizations, determine which medications they will cover and establish reimbursement levels. Government authorities and other third-party payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medications. Increasingly, third-party payors are requiring that drug companies provide them with predetermined discounts from list prices and are challenging the prices charged for medical products. We cannot be sure that coverage and reimbursement will be available for any product that we commercialize and, if reimbursement is available, what the level of reimbursement will be. Coverage and reimbursement may impact the demand for, or the price of, any product candidate for which we obtain marketing approval. If coverage and reimbursement are not available or reimbursement is available only to limited levels, we may not successfully commercialize any product candidate for which we obtain marketing approval.

There may be significant delays in obtaining coverage and reimbursement for newly approved drugs, and coverage may be more limited than the purposes for which the drug is approved by the FDA or comparable foreign regulatory authorities. Moreover, eligibility for coverage and reimbursement does not imply that a drug will be paid for in all cases or at a rate that covers our costs, including research, development, manufacture, sale and distribution. Interim reimbursement levels for new drugs, if applicable, may also not be sufficient to cover our costs and may only be temporary. Reimbursement rates may vary according to the use of the drug and the clinical setting in which it is used, may be based on reimbursement levels already set for lower cost drugs and may be incorporated into existing payments for other services. Net prices for drugs may be reduced by mandatory discounts or rebates required by government healthcare programs or private payors and by any future relaxation of laws that presently restrict imports of drugs from countries where they may be sold at lower prices than in the United States. Our inability to promptly obtain coverage and profitable reimbursement rates from both government-funded and private payors for any approved products that we develop could have a material adverse effect on our operating results, our ability to raise capital needed to commercialize products and our overall financial condition.

Recently enacted and future legislation may increase the difficulty and cost for us to commercialize our product candidates and affect the prices we may obtain.

The United States and many foreign jurisdictions have enacted or proposed legislative and regulatory changes affecting the healthcare system that could prevent or delay marketing approval of our product candidates, restrict or regulate post-approval activities and affect our ability to profitably sell any product candidate for which we obtain marketing approval.

In the United States, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, or Medicare Modernization Act, changed the way Medicare covers and pays for pharmaceutical products. The legislation expanded Medicare coverage for drug purchases by the elderly by establishing Medicare Part D and introduced a new reimbursement methodology based on average sales prices for physician-administered drugs under Medicare Part B. In addition, this legislation provided authority for limiting the number of drugs that Medicare will cover in any therapeutic class under the new Medicare Part D program. Cost reduction initiatives and other provisions of this legislation could decrease the coverage and reimbursement rate that we receive for any of our approved products. While the Medicare Modernization Act applies only to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their own reimbursement rates. Therefore, any reduction in reimbursement that results from the Medicare Modernization Act may result in a similar reduction in payments from private payors.

In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, or, collectively, the Affordable Care Act, a law intended to

 

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broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against healthcare fraud and abuse, add new transparency requirements for healthcare and health insurance industries, impose new taxes and fees on pharmaceutical and medical device manufacturers and impose additional health policy reforms. Among other things, the Affordable Care Act expanded manufacturers’ rebate liability under the Medicaid Drug Rebate Program by increasing the minimum rebate for both branded and generic drugs, effective the first quarter of 2010 and revising the definition of “average manufacturer price,” or AMP, for reporting purposes, which could increase the amount of Medicaid drug rebates manufacturers are required to pay to states. The legislation also extended Medicaid drug rebates, previously due only on fee-for-service utilization, to Medicaid managed care utilization, and created an alternative rebate formula for certain new formulations of certain existing products that is intended to increase the amount of rebates due on those drugs. The Centers for Medicare and Medicaid Services, which administers the Medicaid Drug Rebate Program, also has proposed to expand Medicaid drug rebates to the utilization that occurs in the U.S. territories, such as Puerto Rico and the Virgin Islands. Also effective in 2010, the Affordable Care Act expanded the types of entities eligible to receive discounted 340B pricing, although, with the exception of children’s hospitals, these newly eligible entities will not be eligible to receive discounted 340B pricing on orphan drugs. In addition, because 340B pricing is determined based on AMP and Medicaid drug rebate data, the revisions to the Medicaid rebate formula and AMP definition described above could cause the required 340B discounts to increase. Furthermore, as of 2011, the new law imposes a significant annual fee on companies that manufacture or import branded prescription drug products and requires manufacturers to provide a 50% discount off the negotiated price of prescriptions filled by beneficiaries in the Medicare Part D coverage gap, referred to as the “donut hole.” Substantial new provisions affecting compliance have also been enacted, which may affect our business practices with healthcare practitioners. Notably, a significant number of provisions are not yet, or have only recently become, effective. Although it is too early to determine the full effect of the Affordable Care Act, the new law appears likely to continue the downward pressure on pharmaceutical pricing, especially under the Medicare program, and may also increase our regulatory burdens and operating costs.

In addition, other legislative changes have been proposed and adopted since the Affordable Care Act was enacted. For example, in August 2011, the President signed into law the Budget Control Act of 2011, which, among other things, created the Joint Select Committee on Deficit Reduction to recommend to Congress proposals in spending reductions. The Joint Select Committee on Deficit Reduction did not achieve a targeted deficit reduction of at least $1.2 trillion for fiscal years 2012 through 2021, triggering the legislation’s automatic reduction to several government programs. This includes aggregate reductions to Medicare payments to providers of up to 2% per fiscal year, starting in 2013.

We expect that the Affordable Care Act, as well as other healthcare reform measures that have and may be adopted in the future, may result in more rigorous coverage criteria and in additional downward pressure on the price that we receive for any approved product, and could seriously harm our future revenues. Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payors. The implementation of cost containment measures or other healthcare reforms may prevent us from being able to generate revenue, attain profitability or commercialize our products.

Product liability lawsuits against us could cause us to incur substantial liabilities and to limit commercialization of any products that we may develop.

We face an inherent risk of product liability exposure related to the testing of our product candidates in human clinical trials and will face an even greater risk if we commercially sell any products that we may develop. Product liability claims may be brought against us by subjects enrolled in our clinical trials, patients, healthcare providers or others using, administering or selling our products. If we cannot successfully defend ourselves against claims that our product candidates or products that we may develop caused injuries, we could incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:

 

  n  

decreased demand for any product candidates or products that we may develop;

 

  n  

termination of clinical trial sites or entire trial programs;

 

  n  

injury to our reputation and significant negative media attention;

 

  n  

withdrawal of clinical trial participants;

 

  n  

significant costs to defend the related litigation;

 

  n  

substantial monetary awards to trial subjects or patients;

 

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  n  

loss of revenue;

 

  n  

diversion of management and scientific resources from our business operations; and

 

  n  

the inability to commercialize any products that we may develop.

We currently hold $5 million in clinical trial liability insurance coverage, which may not adequately cover all liabilities that we may incur. We may not be able to maintain insurance coverage at a reasonable cost or in an amount adequate to satisfy any liability that may arise. We intend to expand our insurance coverage for products to include the sale of commercial products if we obtain marketing approval for our product candidates in development, but we may be unable to obtain commercially reasonable product liability insurance for any products approved for marketing. Large judgments have been awarded in class action lawsuits based on drugs that had unanticipated side effects. A successful product liability claim or series of claims brought against us, particularly if judgments exceed our insurance coverage, could decrease our cash and adversely affect our business.

Our relationships with customers and third-party payors will be subject to applicable anti-kickback, fraud and abuse, transparency and other healthcare laws and regulations, which could expose us to criminal sanctions, civil penalties, contractual damages, reputational harm, administrative burdens and diminished profits and future earnings.

Healthcare providers, physicians and third-party payors play a primary role in the recommendation and prescription of any product candidates for which we obtain marketing approval. Our future arrangements with third-party payors and customers may expose us to broadly applicable fraud and abuse and other healthcare laws and regulations that may constrain the business or financial arrangements and relationships through which we market, sell and distribute our products for which we obtain marketing approval. Restrictions under applicable federal and state healthcare laws and regulations, include the following:

 

  n  

the federal Anti-Kickback Statute prohibits persons from, among other things, knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward, or in return for, the referral of an individual for the furnishing or arranging for the furnishing, or the purchase, lease or order, or arranging for or recommending purchase, lease or order, any good or service for which payment may be made under a federal healthcare program such as Medicare and Medicaid;

 

  n  

the federal False Claims Act imposes criminal and civil penalties, including through civil whistleblower or qui tam actions, against individuals or entities for knowingly presenting, or causing to be presented, to the federal government, claims for payment that are false or fraudulent or making a false statement to avoid, decrease or conceal an obligation to pay money to the federal government;

 

  n  

the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, imposes criminal liability for knowingly and willfully executing a scheme to defraud any healthcare benefit program, knowingly and willfully embezzling or stealing from a health care benefit program, willfully obstructing a criminal investigation of a health care offense, or knowingly and willfully making false statements relating to healthcare matters;

 

  n  

HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009 and its implementing regulations, also imposes obligations on certain covered entity health care providers, health plans, and health care clearinghouses as well as their business associates that perform certain services involving the use or disclosure of individually identifiable health information, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable health information;

 

  n  

the federal Open Payments program, created under Section 6002 of the Affordable Care Act and its implementing regulations, requires manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program (with certain exceptions) to report annually to the U.S. Department of Health and Human Services information related to “payments or other transfers of value” made to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors) and teaching hospitals, and applicable manufacturers and applicable group purchasing organizations to report annually to the U.S. Department of Health and Human Services ownership and investment interests held by physicians (as defined above) and their immediate family members; and

 

  n  

analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws, which may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed

 

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by non-governmental third-party payors, including private insurers; state and foreign laws that require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government or otherwise restrict payments that may be made to healthcare providers; state and foreign laws that require drug manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures; and state and foreign laws that govern the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.

Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs. It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations or case law interpreting applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, imprisonment, exclusion from government funded healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of our operations. If any of the physicians or other healthcare providers or entities with whom we expect to do business is found not to be in compliance with applicable laws, that person or entity may be subject to criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs.

We must attract and retain highly skilled employees in order to succeed.

To succeed, we must recruit, retain, manage and motivate qualified clinical, scientific, technical and management personnel and we face significant competition for experienced personnel. If we do not succeed in attracting and retaining qualified personnel, particularly at the management level, it could adversely affect our ability to execute our business plan and harm our operating results. In particular, the loss of one or more of our executive officers could be detrimental to us if we cannot recruit suitable replacements in a timely manner. The competition for qualified personnel in the pharmaceutical field is intense and as a result, we may be unable to continue to attract and retain qualified personnel necessary for the development of our business or to recruit suitable replacement personnel.

Many of the other pharmaceutical companies that we compete against for qualified personnel have greater financial and other resources, different risk profiles and a longer history in the industry than we do. They also may 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 have to offer. If we are unable to continue to attract and retain high-quality personnel, the rate and success at which we can discover and develop product candidates and our business will be limited.

Our operations are vulnerable to interruption by fire, earthquake, power loss, telecommunications failure, terrorist activity and other events beyond our control, which could harm our business.

Our facility has been subject to electrical blackouts as a result of a shortage of available electrical power. Future blackouts could disrupt the operations of our facility. Our facility is located in a seismically active region. We have not undertaken a systematic analysis of the potential consequences to our business and financial results from a major earthquake, fire, power loss, terrorist activity or other disasters and do not have a recovery plan for such disasters. In addition, we do not carry sufficient insurance to compensate us for actual losses from interruption of our business that may occur, and any losses or damages incurred by us could harm our business. We maintain multiple copies of each of our protein libraries, most of which we maintain at our headquarters. We maintain one copy of each of our protein libraries offsite in Central California. If both facilities were impacted by the same event, we could lose all our protein libraries, which would have a material adverse effect on our ability to perform our obligations under our discovery collaborations and discover new targets.

 

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Risks Related to Our Dependence on Third Parties

We currently depend significantly on GlaxoSmithKline, or GSK, for the development and commercialization of our most advanced product candidate, FP-1039, and GSK’s failure to develop and/or commercialize FP-1039 would result in a material adverse effect on our business and operating results.

We have granted GSK an exclusive license to develop, subject to certain rights retained by us, and commercialize FP-1039 for all companion diagnostic, therapeutic and prophylactic uses for humans in the United States, the European Union and Canada. Our development collaboration with GSK on FP-1039 may not be scientifically, medically or commercially successful due to a number of important factors, including the following:

 

  n  

FP-1039 may fail to demonstrate sufficient safety or efficacy in clinical trials to support regulatory approval;

 

  n  

GSK may be unable to successfully develop, test and obtain regulatory approval for a companion diagnostic;

 

  n  

GSK may be unable to manufacture sufficient quantities of FP-1039 in a cost-effective manner;

 

  n  

GSK may be unable to obtain regulatory approval to commercialize FP-1039 even if clinical and preclinical testing is successful;

 

  n  

GSK may not be successful in obtaining sufficient reimbursement for FP-1039;

 

  n  

the prevalence of the target population we may observe in clinical trials may be lower than what is reported in the literature, which would result in slower enrollment and a smaller potential commercial patient population than what we are currently estimating for FP-1039; and

 

  n  

existing or future products or technologies developed by competitors may be safer, more effective or more conveniently delivered than FP-1039.

In addition, we could be adversely affected by:

 

  n  

GSK’s failure to timely perform its obligations under our collaboration agreement;

 

  n  

GSK’s failure to timely or fully develop or effectively commercialize FP-1039; and

 

  n  

a material contractual dispute between us and GSK.

Any of the foregoing could adversely impact the likelihood and timing of any milestone payments we are eligible to receive and could result in a material adverse effect on our business, results of operations and prospects and would likely cause our stock price to decline.

GSK can terminate our collaboration agreement under certain conditions and without cause, and in some cases on short notice. GSK could also separately pursue alternative potentially competitive products, therapeutic approaches or technologies as a means of developing treatments for the diseases targeted by FP-1039.

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

In addition to our current FP-1039 development collaboration with GSK, a part of our strategy is to enter into additional product development collaborations in the future, including collaborations with major biotechnology or pharmaceutical companies. We face significant competition in seeking appropriate development partners and the negotiation process is time-consuming and complex. Moreover, we may not succeed in our efforts to establish a development collaboration or other alternative arrangements for any of our other existing or future product candidates and programs because our research and development pipeline may be insufficient, our product candidates and programs may be deemed to be at too early a stage of development for collaborative effort and/or third parties may not view our product candidates and programs as having the requisite potential to demonstrate safety and efficacy. Even if we are successful in our efforts to establish new development collaborations, the terms that we agree upon may not be favorable to us and we may not be able to maintain such development collaborations if, for example, development or approval of a product candidate is delayed or sales of an approved product candidate are disappointing. Any delay in entering into new development collaboration agreements related to our product candidates could delay the development and commercialization of our product candidates and reduce their competitiveness if they reach the market.

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

 

  n  

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

 

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  n  

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

 

  n  

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

 

  n  

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

We may not succeed in maintaining our current discovery collaborations or establishing and maintaining new discovery collaborations, which would adversely affect our business plans.

Since 2006, we have entered into six discovery collaborations with Boehringer Ingelheim GmbH, or Boehringer, Centocor Research and Development Inc., or Centocor, GSK, Pfizer Inc., or Pfizer, and UCB Pharma, S.A., or UCB, under which we have developed and conducted cell-based and in vivo screens using our protein discovery platform. These discovery collaborations have provided us with approximately $104 million in non-equity funding through June 30, 2013, and allowed us to be less reliant on equity financing during this period. We currently have ongoing discovery collaborations with GSK and UCB. As of June 30, 2013, we are eligible to receive up to an additional $14.7 million of research funding and technology access fees through 2016 under these collaborations. While we expect we will receive all of this funding and these fees, if GSK or UCB terminates any of our discovery collaborations, we may not receive all or any of this $14.7 million, which would adversely affect our business or financial condition. The research obligations under each of our discovery collaborations with Boehringer, Centocor and Pfizer have ended. We have no ongoing performance obligations and do not expect to receive any significant additional payments under these discovery collaborations.

As part of our business strategy, we plan to continue to actively seek out discovery collaboration partners and engage in discussions with pharmaceutical and biotechnology companies regarding potential new discovery collaborations with the goal of entering into one new discovery collaboration per year. We face significant competition in seeking appropriate discovery collaboration partners, including from these partners’ internal research organizations, and the negotiation process is time-consuming and complex. Our failure to continue to enter into new discovery collaborations may require us to obtain financing earlier or in greater amounts than we currently plan.

We expect to rely on third parties to conduct our future clinical trials. The failure of these third parties to successfully carry out their contractual duties or meet expected deadlines, could substantially harm our business because we may not obtain regulatory approval for or commercialize our product candidates in a timely manner or at all.

We plan to rely upon third-party CROs to monitor and manage data for our future clinical programs. We will rely on these parties for execution of our clinical trials, and control only certain aspects of their activities. Nevertheless, we are responsible for ensuring that each of our studies is conducted in accordance with the applicable protocol and legal, regulatory and scientific standards, and our reliance on the CROs does not relieve us of our regulatory responsibilities. We and our CROs are required to comply with current Good Clinical Practices, or GCP, which are regulations and guidelines enforced by the FDA, the Competent Authorities of the Member States of the European Economic Area and comparable foreign regulatory authorities for all of our products in clinical development. Regulatory authorities enforce these GCP through periodic inspections of trial sponsors, principal investigators and trial sites. If we or any of our CROs fail to comply with applicable GCP, the clinical data generated in our clinical trials may be deemed unreliable and the FDA or comparable foreign regulatory authorities may require us to perform additional clinical trials before approving our marketing applications. We cannot assure you that upon inspection by a given regulatory authority, such regulatory authority will determine that any of our clinical trials comply with GCP requirements. In addition, we must conduct our clinical trials with product produced under cGMP requirements. Failure to comply with these regulations may require us to repeat preclinical and clinical trials, which would delay the regulatory approval process.

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 clinical, nonclinical and preclinical programs. If CROs do not successfully carry out their contractual duties or obligations or meet expected deadlines or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols, regulatory requirements or for other reasons, our clinical trials may be extended, delayed or terminated and we may not be able to obtain regulatory approval for or successfully commercialize our product candidates. As a result, our results of operations and the commercial prospects for our product candidates would be

harmed, our costs could increase and our ability to generate revenues could be delayed. To the extent we are unable

 

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to successfully identify and manage the performance of third-party service providers in the future, our business may be adversely affected.

Risks Related to Intellectual Property

If we are unable to obtain or protect intellectual property rights, we may not be able to compete effectively in our market.

Our success depends in significant part on our and our licensors’, licensees’ or collaborators’ ability to establish, maintain and protect patents and other intellectual property rights and operate without infringing the intellectual property rights of others. We have filed numerous patent applications both in the United States and in foreign jurisdictions to obtain patent rights to inventions we have discovered. We have also licensed from third parties rights to patent portfolios. Some of these licenses give us the right to prepare, file and prosecute patent applications and maintain and enforce patents we have licensed, and other licenses may not give us such rights.

The patent prosecution process is expensive and time-consuming, and we and our current or future licensors, licensees or collaborators may not be able to prepare, file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. It is also possible that we or our licensors, licensees or collaborators will fail to identify patentable aspects of inventions made in the course of development and commercialization activities before it is too late to obtain patent protection on them. Moreover, in some circumstances, we may not have the right to control the preparation, filing and prosecution of patent applications, or to maintain the patents, covering technology that we license from or license to third parties and are reliant on our licensors, licensees or collaborators. Therefore, these patents and applications may not be prosecuted and enforced in a manner consistent with the best interests of our business. If our current or future licensors, licensees or collaborators fail to establish, maintain or protect such patents and other intellectual property rights, such rights may be reduced or eliminated. If our licensors, licensees or collaborators are not fully cooperative or disagree with us as to the prosecution, maintenance or enforcement of any patent rights, such patent rights could be compromised.

The patent position of biotechnology and pharmaceutical companies generally is highly uncertain, involves complex legal and factual questions and has in recent years been the subject of much litigation. As a result, the issuance, scope, validity, enforceability and commercial value of our and our current or future licensors’, licensees’ or collaborators’ patent rights are highly uncertain. Our and our licensors’, licensees’ or collaborators’ pending and future patent applications may not result in patents being issued which protect our technology or products, in whole or in part, or which effectively prevent others from commercializing competitive technologies and products. The patent examination process may require us or our licensors, licensees or collaborators to narrow the scope of the claims of our or our licensors’, licensees’ or collaborators’ pending and future patent applications, which may limit the scope of patent protection that may be obtained. Our and our licensors’, licensees’ or collaborators’ patent applications cannot be enforced against third parties practicing the technology claimed in such applications unless and until a patent issues from such applications, and then only to the extent the issued claims cover the technology.

Furthermore, given the amount of time required for the development, testing and regulatory review of new product candidates, patents protecting such candidates might expire before or shortly after such candidates are commercialized. As a result, our owned and licensed patent portfolio may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours. We expect to seek extensions of patent terms where these are available in any countries where we are prosecuting patents. This includes in the United States under the Drug Price Competition and Patent Term Restoration Act of 1984, which permits a patent term extension of up to five years beyond the expiration of the patent. However the applicable authorities, including the FDA in the United States, and any equivalent regulatory authority in other countries, may not agree with our assessment of whether such extensions are available, and may refuse to grant extensions to our patents, or may grant more limited extensions than we request. If this occurs, our competitors may take advantage of our investment in development and clinical trials by referencing our clinical and preclinical data and launch their product earlier than might otherwise be the case.

We may not be able to protect our intellectual property rights throughout the world.

Filing, prosecuting, enforcing and defending patents on product candidates in all countries throughout the world would be prohibitively expensive, and our or our licensors’ or collaborators’ intellectual property rights in some

 

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countries outside the United States can be less extensive than those in the United States. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as federal and state laws in the United States. Consequently, we and our licensors or collaborators may not be able to prevent third parties from practicing our and our licensors’ or collaborators’ inventions in all countries outside the United States, or from selling or importing products made using our and our licensors’ or collaborators’ inventions in and into the United States or other jurisdictions. Competitors may use our and our licensors’ or collaborators’ technologies in jurisdictions where we have not obtained patent protection to develop their own products and further, may export otherwise infringing products to territories where we and our licensors or collaborators have patent protection, but enforcement is not as strong as that in the United States. These products may compete with our product candidates and our and our licensors’ or collaborators’ patents or other intellectual property rights may not be effective or sufficient to prevent them from competing.

Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to biopharmaceuticals, which could make it difficult for us and our licensors or collaborators to stop the infringement of our and our licensors’ or collaborators’ patents or marketing of competing products in violation of our and our licensors’ or collaborators’ proprietary rights generally. Proceedings to enforce our and our licensors’ or collaborators’ patent rights in foreign jurisdictions could result in substantial costs and divert our and our licensors’ or collaborators’ efforts and attention from other aspects of our business, could put our and our licensors’ or collaborators’ patents at risk of being invalidated or interpreted narrowly and our and our licensors’ or collaborators’ patent applications at risk of not issuing and could provoke third parties to assert claims against us or our licensors or collaborators. We or our licensors or collaborators may not prevail in any lawsuits that we or our licensors or collaborators initiate and the damages or other remedies awarded, if any, may not be commercially meaningful.

The requirements for patentability may differ in certain countries, particularly developing countries. For example, unlike other countries, China has a heightened requirement for patentability, and specifically requires a detailed description of medical uses of a claimed drug. In India, unlike the United States, there is no link between regulatory approval of a drug and its patent status. Furthermore, generic or biosimilar drug manufacturers or other competitors may challenge the scope, validity or enforceability of our or our licensors’ or collaborators’ patents, requiring us or our licensors or collaborators to engage in complex, lengthy and costly litigation or other proceedings. Generic or biosimilar drug manufacturers may develop, seek approval for, and launch biosimilar versions of our products. In addition to India, certain countries in Europe and developing countries, including China, have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties. In those countries, we and our licensors or collaborators may have limited remedies if patents are infringed or if we or our licensors or collaborators are compelled to grant a license to a third party, which could materially diminish the value of those patents. This could limit our potential revenue opportunities. Accordingly, our and our licensors’ or collaborators’ efforts to enforce intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we own or license.

Changes in patent law could diminish the value of patents in general, thereby impairing our ability to protect our product candidates.

As is the case with other biotechnology and pharmaceutical companies, our success is heavily dependent on intellectual property, particularly patents. Obtaining and enforcing patents in the biopharmaceutical industry involve technological and legal complexity, and obtaining and enforcing biopharmaceutical patents is costly, time-consuming, and inherently uncertain. The Supreme Court has ruled on several patent cases in recent years, either narrowing the scope of patent protection available in certain circumstances or weakening the rights of patent owners in certain situations. In addition to increasing uncertainty with regard to our and our licensors’ or collaborators’ ability to obtain patents in the future, this combination of events has created uncertainty with respect to the value of patents, once obtained. Depending on decisions by Congress, the federal courts, and the U.S. Patent and Trademark Office, or USPTO, the laws and regulations governing patents could change in unpredictable ways that would weaken our and our licensors’ or collaborators’ ability to obtain new patents or to enforce existing patents and patents we and our licensors or collaborators may obtain in the future.

 

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Recent patent reform legislation could increase the uncertainties and costs surrounding the prosecution of our and our licensors’ or collaborators’ patent applications and the enforcement or defense of our or our licensors’ or collaborators’ issued patents. On September 16, 2011, the Leahy-Smith America Invents Act, or the Leahy-Smith Act, was signed into law. The Leahy-Smith Act includes a number of significant changes to U.S. patent law. These include provisions that affect the way patent applications are prosecuted and may also affect patent litigation. The USPTO recently developed new regulations and procedures to govern administration of the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act, and in particular, the first to file provisions, only became effective on March 16, 2013. Accordingly, it is not clear what, if any, impact the Leahy-Smith Act will have on the operation of our business. However, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our or our licensors’ or collaborators’ patent applications and the enforcement or defense of our or our licensors’ or collaborators’ issued patents, all of which could have a material adverse effect on our business and financial condition.

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 and annuity fees on any issued patent are due to be paid to the USPTO and foreign patent agencies in several stages over the lifetime of the patent. The USPTO 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 failure to respond to official actions within prescribed time limits, non-payment of fees and failure to properly legalize and submit formal documents. If we or our licensors or collaborators fail to maintain the patents and patent applications covering our product candidates, our competitors might be able to enter the market, which would have a material adverse effect on our business.

We may become involved in lawsuits to protect or enforce our intellectual property, which could be expensive, time-consuming and unsuccessful and have a material adverse effect on the success of our business.

Third parties may infringe our or our licensors’ or collaborators’ patents or misappropriate or otherwise violate our or our licensors’ or collaborators’ intellectual property rights. In the future, we or our licensors or collaborators may initiate legal proceedings to enforce or defend our or our licensors’ or collaborators’ intellectual property rights, to protect our or our licensors’ or collaborators’ trade secrets or to determine the validity or scope of intellectual property rights we own or control. Also, third parties may initiate legal proceedings against us or our licensors or collaborators to challenge the validity or scope of intellectual property rights we own or control. The proceedings can be expensive and time-consuming and many of our or our licensors’ or collaborators’ adversaries in these proceedings may have the ability to dedicate substantially greater resources to prosecuting these legal actions than we or our licensors or collaborators can. Accordingly, despite our or our licensors’ or collaborators’ efforts, we or our licensors or collaborators may not prevent third parties from infringing upon or misappropriating intellectual property rights we own or control, particularly in countries where the laws may not protect those rights as fully as in the United States. Litigation could result in substantial costs and diversion of management resources, which could harm our business and financial results. In addition, in an infringement proceeding, a court may decide that a patent owned by or licensed to us is invalid or unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that our or our licensors’ or collaborators’ patents do not cover the technology in question. An adverse result in any litigation proceeding could put one or more of our or our licensors’ or collaborators’ patents at risk of being invalidated, held unenforceable or interpreted narrowly.

Third-party preissuance submission of prior art to the USPTO, or opposition, derivation, reexamination, inter partes review or interference proceedings, or other preissuance or post-grant proceedings in the United States or other jurisdictions provoked by third parties or brought by us or our licensors or collaborators may be necessary to determine the priority of inventions with respect to our or our licensors’ or collaborators’ patents or patent applications. An unfavorable outcome could require us or our licensors or collaborators to cease using the related technology and commercializing our product candidates, 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 or our licensors or collaborators a license on commercially

 

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reasonable terms or at all. Even if we or our licensors or collaborators obtain a license, it may be non-exclusive, thereby giving our competitors access to the same technologies licensed to us or our licensors or collaborators. In addition, if the breadth or strength of protection provided by our or our licensors’ or collaborators’ patents and patent applications is threatened, it could dissuade companies from collaborating with us to license, develop or commercialize current or future product candidates. Even if we successfully defend such litigation or proceeding, we may incur substantial costs and it may distract our management and other employees. We could be found liable for monetary damages, including treble damages and attorneys’ fees if we are found to have willfully infringed a patent.

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. There could also 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 material adverse effect on the price of shares of our common stock.

If we breach the license agreements related to our product candidates, we could lose the ability to continue the development and commercialization of our product candidates.

Our commercial success depends upon our ability, and the ability of our licensors and collaborators, to develop, manufacture, market and sell our product candidates and use our and our licensors’ or collaborators’ proprietary technologies without infringing the proprietary rights of third parties. A third party may hold intellectual property, including patent rights that are important or necessary to the development of our products. As a result, we are a party to a number of technology licenses that are important to our business and expect to enter into additional licenses in the future. For example, we have entered into a non-exclusive license with BioWa, Inc. and Lonza Sales AG to use their Potelligent® CHOK1SV technology, which is necessary to produce our FPA144 antibody, and non-exclusive licenses with each of the National Research Council of Canada and the Board of Trustees of the Leland Stanford Junior University to use materials and technologies that we use in the production of our protein library. If we fail to comply with the obligations under these agreements, including payment and diligence terms, our licensors may have the right to terminate these agreements, in which event we may not be able to develop, manufacture, market or sell any product that is covered by these agreements or may face other penalties under the agreements. Such an occurrence could materially adversely affect the value of the product candidate being developed under any such agreement. Termination of these agreements or reduction or elimination of our rights under these agreements may result in our having to negotiate new or reinstated agreements, which may not be available to us on equally favorable terms, or at all, or cause us to lose our rights under these agreements, including our rights to intellectual property or technology important to our development programs.

Third parties may initiate legal proceedings against us alleging that we infringe their intellectual property rights or we may initiate legal proceedings against third parties to challenge the validity or scope of intellectual property rights controlled by third parties, the outcome of which would be uncertain and could have a material adverse effect on the success of our business.

Third parties may initiate legal proceedings against us or our licensors or collaborators alleging that we or our licensors or collaborators infringe their intellectual property rights or we or our licensors or collaborators may initiate legal proceedings against third parties to challenge the validity or scope of intellectual property rights controlled by third parties, including in oppositions, interferences, reexaminations, inter partes reviews or derivation proceedings before the United States or other jurisdictions. These proceedings can be expensive and time-consuming and many of our or our licensors’ or collaborators’ adversaries in these proceedings may have the ability to dedicate substantially greater resources to prosecuting these legal actions than we or our licensors or collaborators can.

An unfavorable outcome could require us or our licensors or collaborators to cease using the related technology or developing or commercializing our product candidates, 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 or our licensors or collaborators a license on commercially reasonable terms or at all. Even if we or our licensors or collaborators obtain a license, it may be non-exclusive, thereby giving our competitors access to the same technologies licensed to us or our licensors or collaborators. In addition, we could be found liable for monetary damages, including treble damages and attorneys’ fees, if we are found to have willfully infringed a patent. A finding of infringement could prevent us from commercializing our product candidates or force us to cease some of our business operations, which could materially harm our business.

 

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In May 2011, the European Patent Office, or the EPO, granted European Patent No. 2092069, or the ‘069 patent, to Aventis Pharma S.A., or Aventis. The ‘069 patent claimed soluble fibroblast growth factor receptor Fc fusion proteins having certain levels of glycosylation, some of which claims could have been relevant to our FP-1039 product candidate. In February 2012, we filed an opposition to the ‘069 patent. In March 2013, we attended oral proceedings before the Opposition Division of the EPO and presented our arguments regarding our opposition to the ‘069 patent. In April 2013, the Opposition Division of the EPO published an Interlocutory Decision regarding the outcome of the oral proceedings. In the Interlocutory Decision the EPO maintained certain claims of the ‘069 patent covering FGFR2 fusion proteins, but not FGFR1 fusion proteins such as FP-1039. We and Aventis had the right until June 18, 2013, to appeal the Opposition Division’s April 2013 decision, however, neither we nor Aventis appealed this decision and this proceeding has concluded. Aventis has pursued claims in other countries that are similar to those originally granted by the EPO in the ‘069 patent and we may need to initiate similar opposition or other legal proceedings in other jurisdictions with respect to patents that may issue with similar scope of claims as those originally granted in the ‘069 patent. If we unsuccessfully oppose Aventis’ similar patents in a country, we could be required to obtain a license from Aventis to continue developing and commercializing FP-1039 in that country.

We may be subject to claims by third parties asserting that our employees or we have misappropriated their intellectual property, or claiming ownership of what we regard as our own intellectual property.

Many of our employees, including our senior management, were previously employed at universities or at other biotechnology or pharmaceutical companies, including our competitors or potential competitors. Some of these employees executed proprietary rights, non-disclosure and non-competition agreements in connection with such previous employment. Although we try to ensure that our employees do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that we or these employees have used or disclosed confidential information or intellectual property, including trade secrets or other proprietary information, of any such employee’s former employer. Litigation may be necessary to defend against these claims.

If we fail in prosecuting or defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel or sustain damages. Such intellectual property rights could be awarded to a third party, and we could be required to obtain a license from such third party to commercialize our technology or products. Such a license may not be available on commercially reasonable terms or at all. Even if we successfully prosecute or defend against such claims, litigation could result in substantial costs and distract management.

Our inability to protect our confidential information and trade secrets would harm our business and competitive position.

In addition to seeking patents for some of our technology and products, we also rely on trade secrets, including unpatented know-how, technology and other proprietary information, to maintain our competitive position. We seek to protect these trade secrets, in part, by entering into non-disclosure and confidentiality agreements with parties who have access to them, such as our employees, corporate collaborators, outside scientific collaborators, contract manufacturers, consultants, advisors and other third parties. We also enter into confidentiality and invention or patent assignment agreements with our employees and consultants. Despite these efforts, any of these parties may breach the agreements and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, some courts both within and outside the United States may be less willing or unwilling to protect trade secrets. If a competitor lawfully obtained or independently developed any of our trade secrets, we would have no right to prevent such competitor from using that technology or information to compete with us, which could harm our competitive position.

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, no market for shares of our common stock existed and an active trading market for our shares may never develop or be sustained following this offering. We will determine the initial public offering price for our common stock through negotiations with the underwriters, and the negotiated price may not be indicative of the market price of our common stock after this offering. The market value of our common stock may decrease from the initial public offering price. As a result of these and other factors, you may be unable to resell your shares of our

 

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common stock at or above the initial public offering price. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair market value of your shares. Furthermore, 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 collaborations or acquire companies or products by using our shares of common stock as consideration.

The market 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 subject to wide fluctuations in response to various factors, some of which we cannot control. In addition to the factors discussed in this “Risk Factors” section and elsewhere in this prospectus, these factors include:

 

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the success of competitive products or technologies;

 

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regulatory actions with respect to our products or our competitors’ products;

 

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actual or anticipated changes in our growth rate relative to our competitors;

 

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

 

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results of clinical trials of our product candidates or those of our competitors;

 

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regulatory or legal developments in the United States and other countries;

 

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developments or disputes concerning patent applications, issued patents or other proprietary rights;

 

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the recruitment or departure of key personnel;

 

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the level of expenses related to any of our product candidates or clinical development programs;

 

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the results of our efforts to in-license or acquire additional product candidates or products;

 

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actual or anticipated changes in estimates as to financial results, development timelines or recommendations by securities analysts;

 

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variations in our financial results or those of companies that are perceived to be similar to us;

 

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fluctuations in the valuation of companies perceived by investors to be comparable to us;

 

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share price and volume fluctuations attributable to inconsistent trading volume levels of our shares;

 

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announcement or expectation of additional financing efforts;

 

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sales of our common stock by us, our insiders or our other stockholders;

 

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changes in the structure of healthcare payment systems;

 

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market conditions in the pharmaceutical and biotechnology sectors; and

 

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general economic, industry and market conditions.

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. The realization of any of the above risks or any of a broad range of other risks, including those described in this “Risk Factors” section, could have a dramatic and material adverse impact on the market price of our common stock.

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

Our management will have broad discretion in the application of the net proceeds from this offering, and you will be relying on the judgment of our management regarding the application of these proceeds. You will not have the opportunity, as part of your investment decision, to assess whether we are using the proceeds appropriately. Our management might not apply our net proceeds in ways that ultimately increase the value of your investment. If we do not invest or apply the net proceeds from this offering in ways that enhance stockholder value, we may fail to achieve expected financial results, which could cause our stock price to decline.

We may be subject to securities litigation, which is expensive and could divert management attention.

The market price of our common stock may be volatile, and in the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this

 

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type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.

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, holders of 5% or more of our capital stock and their respective affiliates beneficially owned approximately 84.4% of our voting stock and, upon completion of this offering, that same group will hold approximately 63.2% of our outstanding voting stock (assuming no exercise of the underwriters’ over-allotment option, no exercise of outstanding options and no purchases of shares in this offering by any of this group), in each case assuming the conversion of all outstanding shares of our convertible preferred stock into shares of our common stock immediately prior to the completion of this offering. After this offering, this group of stockholders will have the ability to control us through this ownership position even if they do not purchase any additional shares in this offering. 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. The interests of this group of stockholders may not always coincide with your interests or the interests of other stockholders and they may act in a manner that advances their best interests and not necessarily those of other stockholders, including seeking a premium value for their common stock, and might affect the prevailing market price for our common stock.

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and will be able to avail ourselves of reduced disclosure requirements applicable to emerging growth companies, which could make our common stock less attractive to investors and adversely affect the market price of our common stock.

For so long as we remain an “emerging growth company” as defined in the JOBS Act, we may take advantage of certain exemptions from various requirements applicable to public companies that are not “emerging growth companies” including:

 

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the provisions of Section 404(b) of the Sarbanes-Oxley Act of 2002 requiring that our independent registered public accounting firm provide an attestation report on the effectiveness of our internal control over financial reporting;

 

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the “say on pay” provisions (requiring a non-binding shareholder vote to approve compensation of certain executive officers) and the “say on golden parachute” provisions (requiring a non-binding shareholder vote to approve golden parachute arrangements for certain executive officers in connection with mergers and certain other business combinations) of the Dodd-Frank Act and some of the disclosure requirements of the Dodd-Frank Act relating to compensation of our chief executive officer;

 

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the requirement to provide detailed compensation discussion and analysis in proxy statements and reports filed under the Securities Exchange Act of 1934, as amended, or the Exchange Act, and instead provide a reduced level of disclosure concerning executive compensation; and

 

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any rules that the Public Company Accounting Oversight Board may adopt requiring mandatory audit firm rotation or a supplement to the auditor’s report on the financial statements.

We may take advantage of these exemptions until we are no longer an “emerging growth company.” We would cease to be an “emerging growth company” upon the earliest of: (i) the first fiscal year following the fifth anniversary of this offering; (ii) the first fiscal year after our annual gross revenues are $1 billion or more; (iii) the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt securities; or (iv) as of the end of any fiscal year in which the market value of our common stock held by non-affiliates exceeded $700 million as of the end of the second quarter of that fiscal year.

Although we are still evaluating the JOBS Act, we currently intend to take advantage of some, but not all, of the reduced regulatory and reporting requirements that will be available to us so long as we qualify as an “emerging growth company.” For example, we have irrevocably elected not to take advantage of the extension of time to comply with new or revised financial accounting standards available under Section 102(b) of the JOBS Act. Our independent registered public accounting firm will not be required to provide an attestation report on the effectiveness of our internal control over financial reporting so long as we qualify as an “emerging growth company,” which may increase the risk that material weaknesses or significant deficiencies in our internal control over financial

 

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reporting go undetected. Likewise, so long as we qualify as an “emerging growth company,” we may elect not to provide you with certain information, including certain financial information and certain information regarding compensation of our executive officers, that we would otherwise have been required to provide in filings we make with the Securities and Exchange Commission, or SEC, which may make it more difficult for investors and securities analysts to evaluate our company. 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 and may decline.

We will incur increased costs as a result of operating as a public company, and our management will 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, and these expenses may increase even more after we are no longer an “emerging growth company.” We will be subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Protection Act, as well as rules adopted, and to be adopted, by the SEC and the NASDAQ Global Market. Our management and other personnel will need to devote a substantial amount of time to these compliance initiatives. Moreover, we expect these rules and regulations to substantially increase our legal and financial compliance costs and to make some activities more time-consuming and costly. The increased costs will increase our net loss. 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 sufficient 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 in the public market could cause our stock price to fall.

Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. After this offering, we will have outstanding 15,216,807 shares of common stock based on the number of shares outstanding as of June 30, 2013, assuming: (i) no exercise of the underwriters’ over-allotment option; (ii) the conversion of all outstanding shares of our convertible preferred stock into 9,929,159 shares of common stock immediately prior to the completion of this offering; and (iii) the net exercise of the Ekman Warrant and the Stronghold Warrant into an aggregate of 4,376 shares of common stock. This includes the shares that we sell in this offering, which may be resold in the public market immediately without restriction, unless purchased by our affiliates. Of the remaining shares, 11,216,807 shares of our common stock are currently restricted as a result of securities laws or lock-up agreements but will be able to be sold after this offering as described in the “Shares Eligible for Future Sale” section of this prospectus. Moreover, after this offering, holders of an aggregate of 9,931,463 shares of our common stock will have rights, subject to certain conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. We also intend to register all shares of common stock that we may issue under our equity compensation plans. Once we register these shares, they can be freely sold in the public market upon issuance, subject to volume limitations applicable to affiliates and the lock-up agreements described in the “Underwriting” section of this prospectus.

Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud.

Upon completion of this offering, we will become subject to the periodic reporting requirements of the Exchange Act. We designed our disclosure controls and procedures to reasonably assure that information we must disclose in reports we file or submit under the Exchange Act is accumulated and communicated to management, and recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. We believe that any disclosure controls and procedures or internal controls and procedures, no matter how well-conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements due to error or fraud may occur and not be detected.

 

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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 benefit 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 amended and restated bylaws that will become effective immediately prior to the completion of this offering, 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:

 

  n  

authorizing the issuance of “blank check” preferred stock, the terms of which we may establish and shares of which we may issue without stockholder approval;

 

  n  

prohibiting cumulative voting in the election of directors, which would otherwise allow for less than a majority of stockholders to elect director candidates;

 

  n  

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

 

  n  

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

 

  n  

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, who are responsible for appointing the members of our management. Because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, or the DGCL, 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 the DGCL, 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 amended and restated certificate of incorporation or amended and restated bylaws or Delaware law that has the effect of delaying or deterring a change of 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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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

AND INDUSTRY DATA

Some of the statements made under “Prospectus Summary,” “Risk Factors,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and elsewhere in this prospectus constitute forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “intends” or “continue,” or the negative of these terms or other comparable terminology.

Forward-looking statements include, but are not limited to, statements about:

 

  n  

our estimates regarding our expenses, future revenues, anticipated capital requirements and our needs for additional financing;

 

  n  

our or our partners’ ability to advance drug candidates into, and successfully complete, clinical trials alone or in combination with other drugs;

 

  n  

the frequency of FGFR1 gene amplification in various patient populations;

 

 

  n  

the timing of the initiation, progress and results of preclinical studies and research and development programs;

 

 

  n  

our expectations regarding the potential safety, efficacy or clinical utility of our product candidates;

 

  n  

the implementation, timing and likelihood of success of our plans to develop companion diagnostics for our product candidates;

 

  n  

our ability to maintain and establish collaborations;

 

  n  

the implementation of our business model, strategic plans for our business, drug candidates and technology;

 

 

  n  

the scope of protection we establish and maintain for intellectual property rights covering our drug candidates and technology;

 

  n  

the size of patient populations targeted by products we or our partners develop and market adoption of our potential products by physicians and patients;

 

  n  

the timing or likelihood of regulatory filings and approvals;

 

 

  n  

developments relating to our competitors and our industry; and

 

  n  

our expectations regarding licensing, acquisitions and strategic operations.

These statements are only current predictions and are subject to known and unknown risks, uncertainties and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from those anticipated by the forward-looking statements. We discuss many of these risks in this prospectus in greater detail under the heading “Risk Factors” and elsewhere in this prospectus. You should not rely upon forward-looking statements as predictions of future events.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by law, after the date of this prospectus, we are under no duty to update or revise any of the forward-looking statements, whether as a result of new information, future events or otherwise.

We obtained the industry, market and competitive position data in this prospectus from our own internal estimates and research as well as from industry and general publications and research surveys and studies conducted by third parties. While we believe that each of these studies and publications is reliable, we have not independently verified market and industry data from third-party sources. While we believe our internal company research is reliable and the market definitions we use are appropriate, neither such research nor these definitions have been verified by any independent source.

 

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USE OF PROCEEDS

We estimate that our net proceeds from the sale of shares of our common stock in this offering will be approximately $45.8 million, based on an assumed initial public offering price of $13.00 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters exercise their over-allotment option in full, we estimate that our net proceeds will be approximately $53.0 million based on an assumed initial public offering price of $13.00 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, after deducting 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, establish a public market for our common stock and to facilitate our future access to the public capital markets. We currently expect to use the net proceeds from this offering for the following purposes:

 

  n  

$10.0 million to fund a Phase 1 clinical trial of FPA008;

 

  n  

$20.0 million to fund a Phase 1 clinical trial of FPA144; and

 

  n  

the remainder for working capital and general corporate purposes.

The expected use of the net proceeds from this offering represents our intentions based upon our current plans and business conditions, which could change in the future as our plans and business conditions evolve. The amounts and timing of our actual expenditures depend on numerous factors, including the progress of our preclinical development efforts, the ongoing status of and results from our clinical trials and other studies and any unforeseen cash needs. As a result, our management will have broad discretion in applying the net proceeds from this offering. Although we may use a portion of the net proceeds from this offering for the acquisition or licensing, as the case may be, of product candidates, technologies, compounds, other assets or complementary businesses, we have no current understandings, agreements or commitments to do so. Pending these uses, we intend to invest the net proceeds from this offering in interest-bearing, investment-grade securities.

Although it is difficult to predict future liquidity requirements, we believe that the net proceeds from this offering, together with our existing cash, cash equivalents and marketable securities and funding we expect to receive under existing collaboration agreements will fund our operations into the first quarter of 2015.

Each $1.00 increase (decrease) in the assumed initial public offering price of $13.00 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, would increase (decrease) the net proceeds to us from this offering by approximately $3.7 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 underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. An increase of 1.0 million shares in the number of shares offered by us, together with a concurrent $1.00 increase in the assumed initial public offering price of $13.00 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, would increase the net proceeds to us from this offering by approximately $16.7 million after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Conversely, a decrease of 1.0 million shares in the number of shares offered by us together with a concurrent $1.00 decrease in the assumed initial public offering price of $13.00 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, would decrease the net proceeds to us from this offering by approximately $14.9 million after deducting underwriting discounts and commissions and estimated offering expenses payable by us. The as adjusted information discussed above is illustrative only and will adjust based on the actual initial public offering price and other terms of this offering determined at pricing.

 

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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 and do not intend to declare or pay any cash dividends in the foreseeable future. As a result, you will likely need to sell your shares of common stock to realize a return on your investment, and you may not be able to sell your shares at or above the price you paid for them. Payment of cash dividends, if any, in the future will be at the discretion of our board of directors and will depend on then-existing conditions, including our financial condition, operating results, contractual restrictions, capital requirements, business prospects and other factors our board of directors may deem relevant.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and our capitalization as of June 30, 2013, on:

 

  n  

an actual basis;

 

  n  

a pro forma basis giving effect to the (1) conversion of all outstanding shares of our convertible preferred stock into an aggregate of 9,929,159 shares of our common stock upon completion of this offering if it had occurred on June 30, 2013, (2) exercise, on a net issuance basis based on an assumed initial public offering price of $13.00 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, of the Ekman Warrant and the Stronghold Warrant into an aggregate of 4,376 shares of our common stock upon conversion of the Series A convertible preferred stock issuable upon exercise of the Ekman Warrant and the Stronghold Warrant, at an exercise price of $12.30 per share, both of which will expire upon completion of this offering if not exercised, and (3) reclassification of the fair value of the preferred stock warrant liability to common stock and additional paid-in-capital; and

 

  n  

a pro forma as adjusted basis giving additional effect to the sale of 4,000,000 shares of common stock in this offering at an assumed initial public offering price of $13.00 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, as if the sale of the shares in this offering had occurred on June 30, 2013.

The information in this table is illustrative only and our capitalization following the completion 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 in conjunction with the information contained in “Use of Proceeds,” “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as the financial statements and the notes thereto included elsewhere in this prospectus.

 

 

 

     JUNE 30, 2013  
     ACTUAL     PRO FORMA     PRO FORMA
AS ADJUSTED
 
(in thousands, except share amounts)       

Cash, cash equivalents and marketable securities

   $ 28,196      $ 28,196      $ 73,956   
  

 

 

   

 

 

   

 

 

 

Preferred stock warrant liability

     143                 

Convertible preferred stock, par value $0.001: 123,205,808 shares authorized, 9,929,159 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

     136,282                 

Stockholders’ equity (deficit):

      

Common stock, par value $0.001: 193,000,000 shares authorized, 1,283,272 shares issued and outstanding, actual; 100,000,000 shares authorized, 11,216,807 shares issued and outstanding, pro forma; 100,000,000 shares authorized, 15,216,807 shares issued and outstanding, pro forma as adjusted

     1        11        15   

Preferred stock, par value $0.001: No shares authorized, issued and outstanding, actual; 10,000,000 shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted

                     

Additional paid-in capital

     7,939        144,354        190,110   

Accumulated other comprehensive income

     1        1        1   

Accumulated deficit

     (137,023     (137,023     (137,023
  

 

 

   

 

 

   

 

 

 

Total stockholders’ (deficit) equity

     (129,082     7,343        53,103   
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 7,343      $ 7,343      $ 53,103   
  

 

 

   

 

 

   

 

 

 

 

 

 

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The number of shares of our common stock outstanding immediately following this offering set forth above is based on 11,216,807 shares of our common stock outstanding as of June 30, 2013, which gives effect to the conversion of all outstanding shares of our convertible preferred stock into an aggregate of 9,929,159 shares of our common stock upon completion of this offering and the exercise, on a net issuance basis based on an assumed initial public offering price of $13.00 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, of the Ekman Warrant and the Stronghold Warrant into an aggregate of 4,376 shares of our common stock.

The number of shares of our common stock outstanding immediately following this offering set forth above excludes:

 

  n  

2,065,135 shares of our common stock issuable upon the exercise of stock options outstanding as of June 30, 2013, under our 2002 Plan and 2010 Plan at a weighted-average exercise price of $5.29 per share;

 

  n  

2,304 shares of our common stock issuable upon the exercise of the GE Warrant at an exercise price of $12.30 per share, which warrant is expected to remain outstanding upon completion of this offering;

 

  n  

3,500,000 shares of our common stock (which includes 1,320,374 shares reserved for issuance under our 2010 Plan as of June 30, 2013) reserved for further issuance under our 2013 Plan, which will become effective upon completion of this offering, as well as any future increases in the number of shares of our common stock reserved for issuance under the 2013 Plan; and

 

  n  

250,000 shares of our common stock reserved for future issuance under our ESPP, which will become effective upon completion of this offering, as well as any future increases in the number of shares of our common stock reserved for issuance under the ESPP.

Each $1.00 increase (decrease) in the assumed initial public offering price of $13.00 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, would increase (decrease) each of cash and cash equivalents, additional paid-in capital, total stockholders’ (deficit) equity and total capitalization by approximately $3.7 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 underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. Each increase (decrease) of 1.0 million shares in the number of shares offered by us would increase (decrease) each of cash and cash equivalents, additional paid-in capital, total stockholders’ (deficit) equity and total capitalization by approximately $12.1 million, assuming that the assumed initial public offering price of $13.00 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma as adjusted information discussed above is illustrative only and will adjust based on the actual initial public offering price and other terms of this offering determined at pricing.

 

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DILUTION

If you invest in our common stock in this offering, your ownership interest will be immediately diluted to the extent of the difference between the assumed initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering. Net tangible book value per share of our common stock is determined at any date by subtracting our total liabilities and convertible preferred stock from the amount of our total tangible assets (total assets less intangible assets) and dividing the difference by the number of shares of our common stock deemed to be outstanding at that date.

Our historical net tangible book deficit as of June 30, 2013, was approximately $(129.1) million, or $(100.59) per share, based on 1,283,272 shares of common stock outstanding as of June 30, 2013. The pro forma net tangible book value as of June 30, 2013, is approximately $7.3 million, or approximately $0.65 per share. The pro forma net tangible book value per share gives effect to:

 

  (1) the conversion of all outstanding shares of our convertible preferred stock into an aggregate of 9,929,159 shares of our common stock upon completion of this offering;

 

  (2) the exercise, on a net issuance basis based on an assumed initial public offering price of $13.00 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, of the Ekman Warrant and the Stronghold Warrant into an aggregate of 4,376 shares of our common stock upon conversion of the Series A convertible preferred stock issuable upon exercise of the Ekman Warrant and the Stronghold Warrant, at an exercise price of $12.30 per share, both of which will expire upon completion of this offering if not exercised; and

 

  (3) the reclassification of the fair value of the preferred stock warrant liability to common stock and additional paid-in-capital.

Investors participating in this offering will incur immediate and substantial dilution. After giving effect to our receipt of approximately $45.8 million of estimated net proceeds, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, from our sale of common stock in this offering at an assumed initial public offering price of $13.00 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, our pro forma as adjusted net tangible book value as of June 30, 2013, would have been $53.1 million, or $3.49 per share. This amount represents an immediate increase in net tangible book value of $2.84 per share of our common stock to existing stockholders and an immediate dilution in net tangible book value of $9.51 per share of our common stock to new investors purchasing shares of common stock in this offering.

The following table illustrates this dilution on a per share basis to new investors:

 

 

 

Assumed initial public offering price per share

    $ 13.00   
   

Historical net tangible book deficit per share as of June 30, 2013

  $ (100.59  
   

Pro forma increase in net tangible book value per share attributable to pro forma transactions and other adjustments described above

    101.24     
 

 

 

   

Pro forma net tangible book value per share before this offering

    0.65     

Pro forma increase in net tangible book value per share attributable to new investors

    2.84     
 

 

 

   

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

      3.49   
   

 

 

 

Dilution per share to new investors purchasing common stock in this offering

    $ 9.51   
   

 

 

 

 

 

Each $1.00 increase (decrease) in the assumed initial public offering price of $13.00 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, would increase (decrease) our pro forma as adjusted net tangible book value by $3.7 million or by $0.24 per share and the dilution to new investors in this offering by $0.24 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 underwriting discounts and commissions and estimated offering expenses payable by us.

 

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We may also increase or decrease the number of shares we are offering. An increase of 1.0 million shares in the number of shares offered by us would increase our pro forma as adjusted net tangible book value as of June 30, 2013, by approximately $12.1 million or by $0.53 per share and decrease the dilution per share to new investors purchasing common stock in this offering by $0.53, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Conversely, a decrease of 1.0 million shares in the number of shares offered by us would decrease our pro forma as adjusted net tangible book value as of June 30, 2013, by approximately $12.1 million or by $0.61 per share and increase the dilution per share to new investors purchasing common stock in this offering by $0.61, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

If the underwriters exercise their over-allotment option in full, the pro forma as adjusted net tangible book value per share after giving effect to this offering would be $3.82 per share, which amount represents an immediate increase in pro forma net tangible book value of $3.17 per share of our common stock to existing stockholders and an immediate dilution in net tangible book value of $9.18 per share of our common stock to new investors purchasing shares of common stock in this offering.

The following table summarizes, as of June 30, 2013, after giving effect to the pro forma adjustments noted above, the differences between the number of shares purchased from us, the total consideration paid to us, and the average price per share paid to us by existing stockholders and by new investors purchasing shares in this offering, before deducting underwriting discounts and commissions and estimated offering expenses payable by us, at an assumed initial public offering price of $13.00 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus.

 

 

 

     SHARES
PURCHASED
    TOTAL CASH
CONSIDERATION
    AVERAGE PRICE
PER SHARE
 
     NUMBER      PERCENT     AMOUNT      PERCENT    
(in thousands, except per share amounts)                                 

Existing stockholders

     11,217         74   $ 153,857         75   $ 13.72   

New investors

     4,000         26     52,000         25     13.00   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

     15,217         100   $ 205,857         100   $ 13.53   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

 

The number of shares of our common stock outstanding immediately following this offering is based on 11,216,807 shares of our common stock outstanding as of June 30, 2013, and giving effect to the pro forma transactions described above. This number excludes:

 

  n  

2,065,135 shares of our common stock issuable upon the exercise of stock options outstanding as of June 30, 2013, under our 2002 Plan and 2010 Plan at a weighted-average exercise price of $5.29 per share;

 

  n  

2,304 shares of our common stock issuable upon the exercise of the GE Warrant at an exercise price of $12.30 per share, which warrant is expected to remain outstanding upon completion of this offering;

 

  n  

3,500,000 shares of our common stock (which includes 1,320,374 shares reserved for issuance under our 2010 Plan as of June 30, 2013) reserved for further issuance under our 2013 Plan, which will become effective upon completion of this offering, as well as any future increases in the number of shares of our common stock reserved for issuance under this plan; and

 

  n  

250,000 shares of our common stock reserved for future issuance under our ESPP, which will become effective upon completion of this offering, as well as any future increases in the number of shares of our common stock reserved for issuance under the ESPP.

If all our outstanding stock options had been exercised as of June 30, 2013, assuming the treasury stock method, our pro forma net tangible book value as of June 30, 2013 (calculated on the basis of the assumptions set forth above) would have been approximately $7.3 million, or $0.59 per share of our common stock, and the pro forma as

 

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adjusted net tangible book value would have been $3.23 per share, representing dilution in our pro forma as adjusted net tangible book value per share to new investors of $9.77.

In addition, we may choose to raise additional capital 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 we raise additional capital by issuing equity securities or convertible debt, your ownership will be further diluted.

Effective upon completion of this offering, 3,500,000 shares of our common stock will be reserved for future issuance under our 2013 Plan and 250,000 shares of our common stock will be reserved for future issuance under our ESPP, and the number of reserved shares under each such plan will also be subject to automatic annual increases in accordance with the terms of the plans. New awards that we may grant under our 2013 Plan or shares issued under our ESPP will further dilute investors purchasing common stock in this offering.

 

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SELECTED FINANCIAL DATA

You should read the following selected financial data together with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of this prospectus and our financial statements and the accompanying notes appearing at the end of this prospectus. We have derived the statements of operations data for the years ended December 31, 2010, 2011 and 2012 and the balance sheet data as of December 31, 2011 and 2012 from our audited financial statements appearing elsewhere in this prospectus. We have derived the statements of operations data for the years ended December 31, 2008 and 2009 and the balance sheet data as of December 31, 2008, 2009 and 2010 from our audited financial statements not included in this prospectus. The selected statements of operations data for the six months ended June 30, 2012 and 2013 and the selected balance sheet data as of June 30, 2013, are derived from our unaudited financial statements appearing elsewhere in this prospectus. The unaudited financial statements have been prepared on a basis consistent with our audited financial statements included in this prospectus and include, in our opinion, all adjustments, consisting only of normal recurring adjustments, necessary for the fair statement of the financial information in those statements. Our historical results for any prior period are not necessarily indicative of results to be expected for the full year or in any future period.

 

 

 

(in thousands, except per share amounts)   YEARS ENDED DECEMBER 31,     SIX MONTHS ENDED
JUNE 30,
 
    2008     2009     2010     2011     2012     2012     2013  
                                  (unaudited)  

Statements of Operations Data:

             

Collaboration revenue

  $ 15,571      $ 21,864      $ 23,740      $ 64,916      $ 9,983      $ 4,197      $ 6,524   

Operating expenses:

             

Research and development

    22,363        26,070        29,417        34,039        28,778        14,790        16,515   

General and administrative

    4,936        5,652        8,338        11,216        9,009        4,439        4,778   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    27,299        31,722        37,755        45,255        37,787        19,229        21,293   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (11,728     (9,858     (14,015     19,661        (27,804     (15,032     (14,769

Interest income

    857        304        58        114        88        49        28   

Other income (expense), net

    99        (235     491        (65     121        59        420   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before benefit from income taxes

    (10,772     (9,789     (13,466     19,710        (27,595     (14,924     (14,321

Benefit from income taxes

    138        40        5                               
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

  $ (10,634   $ (9,749   $ (13,461   $ 19,710      $ (27,595   $ (14,924   $ (14,321
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to participating securities

                         18,823                        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to common stockholders

  $ (10,634   $ (9,749   $ (13,461   $ 887      $ (27,595   $ (14,924   $ (14,321
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted net (loss) income per share (1)

  $ (10.23   $ (9.15   $ (12.22   $ 0.77      $ (23.05   $ (12.63   $ (11.55
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted net (loss) income per share (1)

  $ (10.23   $ (9.15   $ (12.22   $ 0.72      $ (23.05   $ (12.63   $ (11.55
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares of common stock outstanding used in computing basic net (loss) income per share (1)

    1,040        1,066        1,102        1,152        1,197        1,182        1,240   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares of common stock outstanding used in computing diluted net (loss) income per share (1)

    1,040        1,066        1,102        1,904        1,197        1,182        1,240   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share—basic and diluted (unaudited) (1)

          $ (2.50     $ (1.28
         

 

 

     

 

 

 

Weighted average shares of common stock outstanding used in computing the pro forma net loss per share—basic and diluted (1)

            11,021          11,169   
         

 

 

     

 

 

 

 

 

 

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(1)   

See Note 1 to our financial statements for an explanation of the method used to calculate basic and diluted net (loss) income per share of common stock, the unaudited pro forma basic and diluted net loss per share of common stock and the weighted average number of shares used in computation of the per share amounts.

 

 

 

(in thousands)    AS OF DECEMBER 31,     AS OF
JUNE 30,
2013
 
     2008     2009     2010     2011     2012    

Balance Sheet Data:

            

Cash, cash equivalents and marketable securities

   $ 52,954      $ 35,853      $ 29,282      $ 50,743      $ 38,015      $ 28,196   

Working capital

     43,487        24,920        17,990        39,950        26,017        14,363   

Total assets

     58,199        39,941        36,622        58,579        44,091        35,356   

Preferred stock warrant liability

     430        666        622        682        563        143   

Convertible preferred stock

     125,004        125,004        129,463        129,463        136,282        136,282   

Total stockholders’ deficit

     (91,284     (100,505     (112,792     (90,106     (115,878     (129,082

 

 

 

 

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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 in conjunction with our financial statements and notes thereto included elsewhere in 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, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section of this prospectus, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

We are a clinical-stage biotechnology company focused on discovering and developing novel protein therapeutics. Protein therapeutics are antibodies or drugs developed from extracellular proteins or protein fragments that block disease processes, including cancer and inflammatory diseases. We have developed a library of more than 5,600 human extracellular proteins, which we believe represent substantially all of the body’s medically important targets for protein therapeutics. We screen this comprehensive library with our proprietary high-throughput protein screening technologies to identify new targets for protein therapeutics. This platform has allowed us to develop a pipeline of novel product candidates for cancer and inflammatory diseases and to generate over $220 million under our collaboration arrangements.

We have no products approved for commercial sale and have not generated any revenue from product sales to date, and we continue to incur significant research and development and other expenses related to our ongoing operations. We have incurred losses in each period since our inception in 2002, with the exception of the fiscal year ended 2011 due to collaboration revenues from product candidates under collaboration agreements with third parties. For the year ended December 31, 2012 and six months ended June 30, 2013, we reported a net loss of $27.6 million and $14.3 million, respectively. As of June 30, 2013, we had an accumulated deficit of $137.0 million.

Critical Accounting Policies and Use of Estimates

Our management’s discussion and analysis of financial condition and results of operations is based upon our financial statements, which we have prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the balance sheets and the reported amounts of collaboration revenue and expenses during the reporting periods. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances at the time we make such estimates. Actual results and outcomes may differ materially from our estimates, judgments and assumptions. We periodically review our estimates in light of changes in circumstances, facts and experience. The effects of material revisions in estimates are reflected in the financial statements prospectively from the date of the change in estimate. Our significant accounting policies are more fully described in Note 1 to our financial statements included elsewhere in this prospectus.

We define our critical accounting policies as those accounting principles generally accepted in the United States of America that require us to make subjective estimates and judgments about matters that are uncertain and are likely to have a material impact on our financial condition and results of operations as well as the specific manner in which we apply those principles. We believe the critical accounting policies used in the preparation of our financial statements that require significant estimates and judgments are as follows:

Revenue Recognition

We recognize revenue when all of the following criteria are met: persuasive evidence of an arrangement exists; transfer of technology has been completed or services have been rendered; our price to the customer is fixed or determinable and collectability is reasonably assured.

The terms of our collaborative research and development agreements include nonrefundable upfront and license fees, research funding, milestone and other contingent payments to us for the achievement of defined collaboration objectives and certain preclinical, clinical, regulatory and sales-based events, as well as royalties on sales of any commercialized products.

 

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Multiple-Element Revenue Arrangements. Our collaborations primarily represent multiple-element revenue arrangements. To account for these transactions, we determine the elements, or deliverables, included in the arrangement and determine which deliverables are separable for accounting purposes. We consider delivered items to be separable if the delivered item(s) have stand-alone value to the customer. If the delivered items are separable, we allocate arrangement consideration to the various elements based on each element’s relative selling price. The identification of individual elements in a multiple-element arrangement and the estimation of the selling price of each element involve significant judgment, including consideration as to whether each delivered element has standalone value to the customer. We determine the estimated selling price for deliverables within each arrangement using vendor-specific objective evidence, or VSOE, of selling price, if available, or third party evidence of selling price if VSOE is not available, or our best estimate of selling price, if neither VSOE nor third party evidence is available. Determining the best estimate of selling price for a deliverable requires significant judgment. We use our best estimate of selling price to estimate the selling price for licenses to our proprietary technology, since we do not have VSOE or third party evidence of selling price for these deliverables. We recognize consideration allocated to an individual element when all other revenue recognition criteria are met for that element. Our multiple-element revenue arrangements generally include the following:

 

  n  

Exclusive Licenses. The deliverables under our collaboration agreements generally include exclusive licenses to discover, develop, manufacture and commercialize compounds with respect to one or more specified targets. To account for this element of the arrangement, we evaluate whether the exclusive license has standalone value apart from the undelivered elements to the collaboration partner based on the consideration of the relevant facts and circumstances of each arrangement, including the research and development capabilities of the collaboration partner and other market participants. We recognize arrangement consideration allocated to licenses upon delivery of the license, if facts and circumstances indicate that the license has standalone value apart from the undelivered elements, which generally include research and development services. If facts and circumstances indicate that the delivered license does not have standalone value from the undelivered elements, we recognize the revenue as a combined unit of accounting.

We have determined that some of our exclusive licenses lack standalone value apart from the related research and development services. In those circumstances we recognize collaboration revenue from non-refundable exclusive license fees in the same manner as the undelivered item(s), which is generally the period over which we provide the research and development services.

 

  n  

Research and Development Services. The deliverables under our collaboration and license agreements generally include deliverables related to research and development services we perform on behalf of the collaboration partner. As the provision of research and development services is a part of our central operations and we are principally responsible for the performance of these services under the agreements, we recognize revenue on a gross basis for research and development services as we perform those services. Additionally, we recognize research funding related to collaborative research and development efforts as revenue as we perform or deliver the related services in accordance with contract terms as long as we will receive payment for such services upon standard payment terms.

Milestone Revenue. Our collaboration and license agreements generally include contingent milestone payments related to specified research, development and regulatory milestones and sales-based milestones. Research, development and regulatory milestones are typically payable under our collaborations when our collaborator claims or selects a target, or initiates or advances a covered product candidate in preclinical or clinical development, upon submission for marketing approval of a covered product with regulatory authorities, upon receipt of actual marketing approvals of a covered product or for additional indications, or upon the first commercial sale of a covered product. Sales-based milestones are typically payable when annual sales of covered products reach specified levels.

At the inception of each arrangement that includes milestone payments, we evaluate whether each milestone is substantive and at risk to both parties on the basis of the contingent nature of the milestone. We evaluate factors such as the scientific, regulatory, commercial and other risks that we must overcome to achieve the respective milestone, the level of effort and investment required to achieve the respective milestone and whether the milestone consideration is reasonable relative to all deliverables and payment terms in the arrangement in making this assessment.

 

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We have elected to adopt the Financial Accounting Standards Board Accounting Standards Update 2010-17, Revenue RecognitionMilestone Method, such that we recognize any payment that is contingent upon the achievement of a substantive milestone entirely in the period in which the milestone is achieved. A milestone is defined as an event that can only be achieved based in whole or in part on either our performance or the occurrence of a specific outcome resulting from our performance for which there is substantive uncertainty at the date the arrangement is entered into that the event will be achieved. Therefore, a milestone does not include events for which occurrence is contingent solely on the performance of a collaborative partner. To be substantive, a milestone must meet all the following criteria: the consideration receivable upon the achievement of the milestone is commensurate with either our performance to achieve the milestone or the enhancement of value of delivered items as a result of a specific outcome resulting from our performance to achieve the milestone, the consideration relates solely to past performance, and the consideration is reasonable relative to all of the deliverables and payment terms in the arrangement.

Research and Development Expenses

Research and development expenses consist of costs we incur for our own and for sponsored and collaborative research and development activities. Expenses we incur related to collaborative research and development agreements approximate the revenue recognized under these agreements. Research and development costs are expensed as incurred. Research and development costs consist of salaries and benefits, including associated stock-based compensation, laboratory supplies and facility costs, as well as fees paid to other entities that conduct certain research and development activities on our behalf. We estimate preclinical study and clinical trial expenses based on the services performed pursuant to contracts with research institutions and contract research organizations, or CROs, that conduct and manage preclinical studies and clinical trials on our behalf based on actual time and expenses incurred by them. Further, we accrue expenses related to clinical trials based on the level of patient enrollment and activity according to the related agreement. We monitor patient enrollment levels and related activity to the extent reasonably possible and adjust estimates accordingly. If we do not identify costs that we have begun to incur or if we underestimate or overestimate the level of services performed or the costs of these services, our actual expenses could differ from our estimates. To date, we have not experienced significant changes in our estimates of preclinical studies and clinical trial accruals.

We expense payments for the acquisition and development of technology as research and development costs if, at the time of payment: the technology is under development; is not approved by the U.S. Food and Drug Administration or other regulatory agencies for marketing; has not reached technical feasibility; or otherwise has no foreseeable alternative future use.

Stock-Based Compensation

We issue stock-based compensation awards to employees in the form of stock options. We measure stock-based compensation expense related to these awards based on the fair value of the award on the date of grant and recognize stock-based compensation expense, less estimated forfeitures, on a straight-line basis over the requisite service period of the awards, which generally equals the vesting period. Stock options we grant to employees generally vest over four years. We have selected the Black-Scholes option pricing model to determine the fair value of stock option awards, which model requires the input of various assumptions that require management to apply judgment and make assumptions and estimates, including with respect to:

 

  n  

the expected term of the stock option award, which we calculate using the simplified method, which calculates the expected term as the midpoint of the contractual term of the options and the ordinary vesting period, as we have insufficient historical information regarding our stock options to provide another basis for estimate;

 

  n  

the expected volatility of the underlying common stock, which we estimate based on the historical volatility of a peer group of comparable publicly traded life sciences and biotechnology companies with product candidates in similar stages of clinical development, as we do not have significant trading history for our common stock; and

 

  n  

historically, the fair value of our common stock determined on the date of grant, as described below.

 

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We estimated the fair value of each stock option using the Black-Scholes option-pricing model based on the date of grant of such stock option with the following assumptions:

 

 

 

     YEARS ENDED DECEMBER 31,
     2010   2011   2012

Expected term (years)

   5.2-6.1   5.3-6.1   5.0-6.1

Expected volatility

   80-85%   85%   85%

Risk-free interest rate

   1.3-2.9%   1.3-2.6%   0.6-1.1%

Expected dividend yield

   0%   0%   0%

 

 

The amount of stock-based compensation expense we recognize during a period is based on the value of the portion of the awards that we expect to ultimately vest. We estimate forfeitures for employee grants at the time of grant, and revise the estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Ultimately, the actual expense recognized over the vesting period will only represent those options that vest. Changes in the estimated forfeiture rate can have a significant impact on our stock-based compensation expense as the cumulative effect of adjusting the rate is recognized in the period the forfeiture estimate is changed. For instance, if a revised forfeiture rate is lower than the previously estimated forfeiture rate, we make an adjustment that will result in an increase to the stock-based compensation expense recognized in our financial statements. To date, our forfeitures have been immaterial.

Options granted to individual service providers who are not employees or directors are accounted for at estimated fair value using the Black-Scholes option-pricing method and are subject to periodic remeasurement over the period during which the services are rendered.

The following table summarizes by grant date the number of shares of common stock underlying stock options granted from January 1, 2012 through August 16, 2013, as well as the associated per share exercise price, which was the estimated fair value per share of our common stock on the grant date.

 

 

 

GRANT DATE

   NUMBER OF SHARES
OF COMMON STOCK
UNDERLYING
OPTIONS GRANTED

(#)
     OPTION
EXERCISE
PRICE

($)
     ESTIMATED FAIR
VALUE PER SHARE
OF COMMON STOCK
ON GRANT DATE

($)
 

January 2, 2012

     30,812         8.49         8.49   

January 12, 2012

     5,730         8.49         8.49   

July 11, 2012

     198,359         5.54         5.54   

July 16, 2012

     236,581         5.54         5.54   

July 29, 2012

     8,130         5.54         5.54   

July 31, 2012

     487         5.54         5.54   

October 26, 2012

     46,035         5.54         5.54   

January 10, 2013

     120,473         5.54         5.54   

May 23, 2013

     2,560         5.66         5.66   

July 19, 2013

     424,876         7.26         7.26   

 

 

The intrinsic value of all outstanding options as of June 30, 2013 was $15.9 million based on the estimated fair value of our common stock of $13.00 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, of which approximately $11.1 million related to vested options and approximately $4.8 million related to unvested options.

Determination of the Fair Value of Common Stock on Grant Dates. We are a private company with no active public market for our common stock. Therefore, our board of directors has periodically determined for financial reporting purposes the estimated per share fair value of our common stock at various dates using valuations performed in accordance with the guidance outlined in the American Institute of Certified Public Accountants Practice Guide, Valuation of Privately-Held Company Equity Securities Issued as Compensation, also known as the Practice Guide.

 

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We performed these valuations contemporaneously as of June 15, 2011, May 31, 2012, April 15, 2013, and June 30, 2013.

In conducting the valuations, our board of directors, with input from management and independent third-party valuation specialists, considered objective and subjective factors that we believed to be relevant for each valuation conducted, including our best estimate of our business condition, prospects and operating performance at each valuation date. Within the valuations performed, we used a range of factors, assumptions and methodologies. The significant factors included:

 

  n  

the rights, preferences and privileges of our preferred stock as compared to those of our common stock, including the liquidation preferences of our convertible preferred stock;

 

  n  

our results of operations, financial position and the status of research and development efforts;

 

  n  

the lack of liquidity of our common stock as a private company;

 

  n  

our stage of development and business strategy and the material risks related to our business and industry;

 

  n  

the achievement of enterprise milestones, including entering into collaboration and license agreements, and the likelihood of entering into such agreements;

 

  n  

the valuation of publicly traded companies in the life sciences and biotechnology sectors, as well as recently completed mergers and acquisitions of peer companies;

 

  n  

any external market conditions affecting the life sciences and biotechnology industry sectors;

 

  n  

the likelihood of achieving a liquidity event for the holders of our common stock and stock options, such as an initial public offering or a sale of our company, given prevailing market conditions;

 

  n  

the state of the initial public offering market for similarly situated privately held biotechnology companies;

 

  n  

general U.S. economic conditions; and

 

  n  

our most recent valuations prepared in accordance with methodologies outlined in the Practice Guide.

The dates of our valuations have not always coincided with the dates of our stock-based compensation grants. Our board of directors intended all options granted to be exercisable at a price per share not less than the per share fair value of our common stock underlying those options on the grant date. Accordingly, in determining the exercise prices of the options set forth in the table above, our board of directors considered, among other things, the most recent valuations of our common stock and our assessment of additional objective and subjective factors we believed to be relevant as of the grant date. The additional factors considered when determining any changes in fair value between the most recent valuation and the grant dates included our stage of development, our operating and financial performance and current business conditions. However, there were no events or circumstances existing on any of the grant dates that warranted a finding that the fair value per share of common stock had changed from the most recent valuation.

Methodology for Determining Volatility. We based our volatility assumption on historical volatilities of a peer group of similar companies whose shares are publicly available, using a measurement period commensurate to our expected time to liquidity. We developed the peer group by focusing on publicly traded biotechnology companies having products in either Phase 2 or Phase 3 clinical trials with earlier clinical or preclinical programs. We updated our peer group list of companies for each valuation date to include any newly listed public companies that met our criteria. We calculated a range of price volatilities for each company based on a range of measuring periods and determined the median volatility for the entire peer group.

There are significant judgments and estimates inherent in the determination of fair value of our common stock. These judgments and estimates include assumptions regarding our future operating performance, the time to completing an initial public offering or other liquidity event and the determinations of the appropriate valuation methods. If we had made different assumptions, our stock-based compensation expense, net (loss) income and net (loss) income per share of common stock could have been significantly different.

Common Stock Valuation Methodologies. We prepared the June 15, 2011, May 31, 2012, April 15, 2013, and June 30, 2013 valuations in accordance with the guidelines in the Practice Guide, which prescribes several valuation approaches for setting the value of an enterprise, such as the cost, market and income approaches, and various methodologies for allocating the value of an enterprise to its common stock. As more fully discussed below,

 

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we have used a variety of methodologies to estimate our enterprise value, including market multiple, initial public offering value, sales value and income approaches.

Methods Used to Allocate Our Enterprise Value to Classes of Securities. In accordance with the Practice Guide, we considered the various methods for allocating the enterprise value across our classes and series of capital stock to determine the fair value of our common stock at each valuation date. The methods we utilized consisted of the following:

 

  n  

Option Pricing Method. Under the option pricing method, or OPM, shares are valued by creating a series of call options with exercise prices based on the liquidation preferences and conversion terms of each equity class. The values of the preferred and common stock are inferred by analyzing these options.

 

  n  

Probability-Weighted Expected Return Method. The probability-weighted expected return method, or PWERM, is a scenario-based analysis that estimates the value per share based on the probability-weighted present value of expected future investment returns, considering each of the possible outcomes available to us, as well as the economic and control rights of each share class.

We estimated the per share common stock fair value by allocating the enterprise value using the OPM for the June 15, 2011 and May 31, 2012 valuations, and using a PWERM and OPM for the April 15, 2013 valuation.

June 15, 2011 Valuation. We estimated that a share of our common stock had a value of $8.49 per share at June 15, 2011, an increase of $1.60 from the prior valuation at July 10, 2010. The increase in the common stock valuation reflected our entering into a license and collaboration agreement with Human Genome Sciences, Inc., or HGS, to develop and commercialize our FP-1039 product for multiple cancers, data from the FP-1039 Phase 1 clinical trial indicating that the drug was well tolerated, and entering into a research collaboration agreement with GSK to identify potential drug targets and drug candidates to treat skeletal muscle diseases. HGS was acquired by GlaxoSmithKline, or GSK, in August 2012, and we refer to HGS as GSK-HGS.

We utilized a combination of the market multiple approach, the initial public offering approach, and the sale value approach to determine our enterprise value, and we used the OPM to allocate the enterprise value to our common stock.

The market multiple approach estimates the value of a business by comparing a company to similar publicly traded companies. When we selected the comparable companies to use for our valuation, we focused on companies within the biopharmaceutical industry and in Phase 2 development, or those that were in Phase 3 and also had a variety of preclinical programs. We selected a group of comparable publicly traded companies and we calculated market multiples using each company’s stock price and other financial data. We computed an estimate of value for our company by applying selected market multiples based on forecasted results for both the comparable companies and our company. Given that we were several years away from generating product revenue and we were unable to develop reliable long-term forecasts, our analysis applied the market approach based on our research and development expenses, which we determined to be the most relevant financial measure. We applied a 4.00 to 4.75 market multiple to our forecasted research and development expense. We based the multiple on our analysis of the comparable company data over the prior two- and three-year periods. In addition, we applied a 32% discount to reflect the lack of marketability of our common stock. We determined the discount for lack of marketability based on qualitative factors such as our expectation that a liquidity event was three years in the future, the difficulty in accurately predicting future research and development expenses, our ability to access additional capital and resultant dilution, and the degree of risk in the biotechnology industry to arrive at a 32% discount for lack of marketability to adjust downward the aggregate company value derived based on the market multiple approach. We believe the discount to be appropriate because after applying the discount the estimated value using the market multiple approach did not differ significantly from the estimated value of the initial public offering value approach and the sales value approach.

The initial public offering value approach estimates the value of a business by estimating a future value of initial public offerings of similar companies over approximately the preceding 12-month period, discounted to the present value. In estimating an initial public offering value, we applied a multiple of 7.0 to our projected research and development expense in 2012, to yield a future initial public offering value. We based the multiple utilized on selected cancer focused companies in various clinical stages, the majority of which were in either Phase 1 or Phase 2, at the time of their initial public offering. The pre-money enterprise value to research and development multiple

 

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ranged from 2.34 to 19.47 with a mean and median equal to 7.84 and 6.24, respectively. The future initial public offering value was then converted to present value using a discount rate equal to our estimated weighted average cost of capital of 20% over a three-year period. The sales value approach estimates the present value the business could be sold for based on similar-stage biopharmaceutical companies using a 20% discount rate over a three-year period.

Given that the market multiple approach, the initial public offering value approach, and the sales value approach provide relevant estimates of fair value, which did not differ significantly, we applied equal weighting to each of these approaches to determine an initial enterprise value. We then allocated the initial estimated enterprise value to the common stock using the OPM.

We considered the OPM appropriate to use since the range of possible future outcomes was so difficult to predict that forecasts would be highly speculative. The OPM treats common stock and convertible preferred stock as call options on the enterprise value, with exercise prices based on the liquidation preference of the convertible preferred stock. Therefore, the common stock has value only if the funds available for distribution to the stockholders exceed the value of the liquidation preference at the time of a liquidity event such as a merger, sale or initial public offering, assuming the enterprise has funds available to make a liquidation preference meaningful and collectible by the stockholders. We modeled the common stock to be a call option with a claim on the enterprise at an exercise price equal to the remaining value immediately after the convertible preferred stock is liquidated. The OPM uses the Black-Scholes option-pricing model to price the call option.

Our board of directors determined there were no events or circumstances that warranted a different fair value determination from the June 15, 2011 valuation to the grant dates of stock-based compensation on January 2, 2012 and January 12, 2012.

May 31, 2012 Valuation. We estimated that a share of our common stock had a value of $5.54 per share in May 2012, a decrease of $2.95 per share from the prior June 15, 2011 valuation. In 2012, we changed our market methodology from a research and development multiple approach to be based on the median expected value of comparable companies. We believe this median expected value methodology became more appropriate because we expected research and development expenses would increase as we advance our development programs more significantly than our value and in light of the difficulty in accurately predicting such future costs. As a result, we determined that continuing to use the research and development multiple approach would have resulted in an over-estimation of the fair value of our common stock. This methodology change, along with an increase in the discount to reflect the lack of marketability of our common stock, resulted in the decrease in the estimated fair value of the common stock.

To determine our enterprise value, we averaged the values determined using the publicly traded comparable company approach, the initial public offering approach and the sale value approach and then added to that average the value of the FP-1039 collaboration with GSK-HGS and retained rest of world rights, which we determined using the income approach. We believe it was appropriate to include the value of the FP-1039 collaboration and retained rest-of-world rights in determining our enterprise value because the collaboration included unusual features compared to collaborations generally observed at companies at our stage of development. The key differentiating factors in the GSK-HGS collaboration consist of the following: (1) the clinical trials are funded and executed by GSK-HGS at no cost to us; (2) we are entitled to use clinical data from GSK-HGS at no cost to us for the purpose of seeking marketing approvals in the retained rest-of-world territory; and (3) we have an option to co-promote FP-1039 in the United States. We considered the three elements above as “non-operating assets,” meaning that they required no further investment by us but still had monetizable value. Accordingly, we valued them separately and added them to our operational value to calculate the value of the entire enterprise. We used the OPM to allocate the enterprise value to our common stock.

The publicly traded comparable company approach estimates the value of a business by comparing a company to similar publicly traded companies. When selecting the comparable companies we used for the publicly traded comparable company approach, we focused on companies within the biopharmaceutical industry with revenues below $35 million per year and that were in Phase 2 clinical development. We discounted this value to present value over a period of 2.6 years, which is the amount of time we expected to need to reach Phase 2 clinical development, using a venture capital based rate of return of 37% to account for the time value of money and risks, such as achievement of clinical goals, and taking into account any interim cash flows.

 

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In the sales value approach, we used the median equity value from actual acquisitions of companies in Phase 2 clinical development since January 1, 2005. We then discounted this value to present value using a venture capital based rate of return of 37% to account for the time value of money and risks, such as achievement of clinical goals, over a period of 2.6 years, the amount of time we expected to need to reach Phase 2 clinical development.

The initial public offering value approach analyzed the implied pre-initial public offering valuations from biotechnology companies that had effectuated an initial public offering on a major U.S. exchange after January 1, 2009. We focused on companies that were in Phase 2 clinical development or Phase 3 clinical development with preclinical candidates or additional candidates in Phase 1 or 2 clinical development at the time of their initial public offering. We then discounted the capital valuation from this analysis to present value using a venture capital based rate of return of 37% to account for the time value of money and risks, such as achievement of clinical goals, over a period of 2.6 years, the amount of time we expected to need to reach Phase 2 clinical development.

We then applied the income approach to value the FP-1039 collaboration with GSK-HGS and retained rest of world rights. We estimated the value based upon the present value, discounted at a venture based rate of return of 37%, of the after-tax revenue stream based upon a successful clinical and commercial outcome. We then added this value to the valuation and we applied a 44% discount to reflect the lack of marketability of our common stock. We determined the discount for lack of marketability by using the commonly used method of calculating the cost of purchasing a hypothetical put option that would guarantee the marketable value for the expected holding period. The magnitude of the marketability discount is determined by calculating the cost of purchasing a hypothetical put option that would guarantee the marketable value for the expected holding period. The marketability discount is measured as the amount an investor would pay to protect the cost of an investment. We used the Chaffe put option model to calculate this discount using the assumptions listed below. We changed our methodology for determining the discount for lack of marketability to coincide with our change in valuation methodology as explained above. Volatility was derived from the median two-year and three-year volatility from our peer group of comparable public companies.

 

 

 

Expected term (years)

     2.6      

Expected volatility

     74%   

Risk-free interest rate

     0.33%   

Discount for lack of marketability

     44%   

 

 

This change in methodology resulted in a higher discount for lack of marketability from the June 15, 2011 valuation. We believe that this discount was appropriate due to the lack of an existing market for shares of our common stock, the numerous risks and uncertainties to our ability to implement our business plan, and the likely need to obtain additional funding to continue operations during the expected length of time to a potential liquidity event. We then allocated the estimated enterprise value to the common stock using the OPM. We considered the OPM appropriate to use since the range of possible future outcomes was so difficult to predict that forecasts would be highly speculative.

Our board of directors determined there were no events or circumstances that warranted a different fair value determination from the May 31, 2012 valuation to the grant dates of stock-based compensation on July 11, 2012, July 16, 2012, July 29, 2012, July 31, 2012, October 26, 2012, and January 10, 2013. At the time of the January 10, 2013 grant our board of directors had not made a decision to explore accessing the public markets.

April 15, 2013 Valuation. We estimated that a share of our common stock had a value of $5.66 per share in April 2013, an increase of $0.12 from the prior May 31, 2012 valuation. In this valuation we changed from the OPM to the PWERM approach and the assignment of higher probabilities to future liquidity scenarios that would result in the conversion of our convertible preferred stock to common stock. In 2013, as more certainty developed regarding possible exit event outcomes, including an initial public offering in the following 12 to 18 months, the allocation methodology utilized to allocate our enterprise value to our common stock transitioned from the OPM to a PWERM approach.

PWERM is a scenario-based analysis that estimates the value per share based on the probability-weighted present value of expected future investment returns, considering each of the possible outcomes available to us, as well as the rights of each share class. Our PWERM estimates the common stock value to our stockholders under each of five possible future scenarios: 36% probability of an initial public offering in late-2013; 24% probability of an initial

 

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public offering in late-2014; 5% probability of a sale of the company in late-2013; 10% probability of a sale of the company in late-2014; and 25% probability of remaining a private company.

In the initial public offering scenarios, we analyzed initial public offerings since January 2010 and publicly traded companies. For the initial public offerings peer group data, we reviewed the pre-money initial public offering value of a group of companies that effectuated a recent initial public offering while in Phase 2 clinical development and excluded unusually low pre-money valuation companies. For the publicly traded company peer group data, we reviewed companies in Phase 2 clinical development. For the various initial public offering scenarios, we estimated our initial public offering value based on the comparable company data and added our expected cash at the time of the expected initial public offering in December 2013 or September 2014, as appropriate.

For the sale scenarios, we analyzed merger and acquisition transactions involving certain targets in Phase 2 clinical development, and allocated the exit value to our capital structure according to the distribution waterfall.

In the stay-private scenario, we forecasted our cash flows to the end of 2015 and based the terminal value on the public company, initial public offering and mergers and acquisitions data of comparable companies in Phase 3 clinical development. We allocated the resulting value to our capital structure using the OPM.

We adjusted the valuation indicated by each peer group in each scenario by discounting for the time value of money at risk-adjusted rate of return, as determined using the capital asset pricing model, of 28% to reflect risks associated with achievement of clinical goals and of being a Phase 1b development company.

We then probability weighted the value per share under each scenario and summed the resulting weighted values per share to determine the fair value per share of our common stock. We also probability weighted the aggregate enterprise value indication under each scenario and summed the resulting weighted enterprise value indications to conclude the overall enterprise value.

In the initial public offering scenario, we assumed all outstanding shares of our convertible preferred stock would convert into common stock. In the sale and remain-a-private-company scenarios, we allocated the value per share by taking into account the liquidation preferences and participation rights of our convertible preferred stock consistent with the method outlined in the Practice Aid. We also considered the fact that our stockholders cannot freely trade our common stock in the public markets. Accordingly, we applied discounts to reflect the lack of marketability of our common stock that ranged from 19% to 42% based on the expected time to liquidity in each scenario. We determined the discount for lack of marketability by calculating the cost of purchasing a hypothetical put option that would guarantee the marketable value for the expected holding period. The magnitude of the marketability discount is determined by calculating the cost of purchasing a hypothetical put option that would guarantee the marketable value for the expected holding period. The marketability discount is measured as the amount an investor would pay to protect the cost of an investment. We used the Chaffe put option model to calculate this discount using the assumptions listed below. Volatility was derived from the six-month, one-year, two-year and five-year median volatility of our peer group of comparable public companies for the applicable expected terms. We used trend functions to match the time to liquidity assumption for each scenario to the observed historical volatility of these peer group companies.

 

 

 

     INITIAL PUBLIC
OFFERING
LATE-2013
    INITIAL PUBLIC
OFFERING
LATE-2014
    SALE
LATE-2013
    SALE
LATE-2014
    STAY
PRIVATE
 

Probability

     36     24     5     10     25

Expected term (years)

     0.7        1.5        0.7        1.5        2.7   

Expected volatility

     57     62     57     62     69

Risk-free interest rate

     0.09     0.15     0.09     0.15     0.37

Discount for lack of marketability

     19     29     19     29     42

 

 

The discount for lack of marketability is lower than the prior valuation for the first four scenarios due to a shorter time to a potential liquidity event. We believe that this discount was appropriate due to the lack of an existing market for shares of our common stock, the numerous risks and uncertainties to our ability to implement our

 

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business plan, and the likely need to obtain additional funding to continue operations during the expected length of time to a potential liquidity event.

We then summed the value per share under each scenario to determine the fair value per share of our common stock. In the sale and remain-private scenarios, we allocated the value per share taking into account the liquidation preferences and participation rights of our convertible preferred stock. The initial public offering scenarios assume that all outstanding shares of our convertible preferred stock would convert into common stock.

Our board of directors determined there were no events or circumstances that warranted a different fair value determination from the April 15, 2013 valuation to the grant dates of stock-based compensation on May 23, 2013.

June 30, 2013 Valuation. The June 30, 2013 valuation was performed contemporaneously with our annual mid-July stock option grants. We estimated that a share of our common stock had a value of $7.26 per share in June 2013, an increase of $1.60 from the prior April 15, 2013 valuation. The increase in the common stock valuation reflected the increased likelihood of a 2013 initial public offering resulting from submitting our draft registration statement on Form S-1 with the SEC on June 14, 2013. We used the PWERM approach to estimate the common stock value to our stockholders under each of five possible future scenarios: 70% probability of an initial public offering in September 2013; 10% probability of an initial public offering in September 2014; 5% probability of a sale of the company in December 2013; 5% probability of a sale of the company in September 2014; and 10% probability of remaining a private company.

In the initial public offering scenarios, we reviewed initial public offerings since January 2010 and publicly traded companies. For the initial public offerings peer data, we reviewed the pre-money initial public offering value of a group of companies that effectuated a recent initial public offering while in Phase 2 clinical development and excluded unusually low pre-money valuation companies. For the publicly traded company peer data, we reviewed companies in Phase 2 clinical development. We estimated our initial public offering value based on the comparable company data and added our expected cash at the time of the expected initial public offering as appropriate.

For the sale scenarios, we analyzed merger and acquisition transactions involving certain targets in Phase 2 clinical development, and allocated the exit value to our capital structure according to the distribution waterfall.

In the stay-private scenario, we forecasted our cash flows to the end of 2015 and based the terminal value on the public company, initial public offering and mergers and acquisitions data of comparable companies in or near Phase 3 clinical development. We allocated the resulting value to our capital structure using the OPM.

We adjusted the valuation indicated by each peer group in each scenario by discounting for the time value of money at risk-adjusted rate of return, as determined using the capital asset pricing model, of 29% to reflect risks associated with achievement of clinical goals and of being a Phase 1b development company.

We then probability weighted the value per share under each scenario and summed the resulting weighted values per share to determine the fair value per share of our common stock. We also probability weighted the aggregate enterprise value indication under each scenario and summed the resulting weighted enterprise value indications to conclude the overall enterprise value.

In the initial public offering scenario, we assumed all outstanding shares of our convertible preferred stock would convert into common stock. In the sale and stay-private scenarios, we allocated the value per share by taking into account the liquidation preferences and participation rights of our convertible preferred stock consistent with the method outlined in the Practice Aid. We also considered the fact that our stockholders cannot freely trade our common stock in the public markets. Accordingly, we applied discounts to reflect the lack of marketability of our common stock that ranged from 10% to 45% based on the expected time to liquidity in each scenario. We determined the discount for lack of marketability by calculating the cost of purchasing a hypothetical put option that would guarantee the marketable value for the expected holding period. The magnitude of the marketability discount is commonly determined by calculating the cost of purchasing a hypothetical put option that would guarantee the marketable value for the expected holding period. The marketability discount is measured as the amount an investor would pay to protect the cost of an investment. We used the Chaffe put option model to calculate this discount using the following assumptions. Volatility was derived from the six-month, one-year, two-year and five-year median volatility of the guideline companies for the applicable expected

 

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terms. Trend functions were used to match the time to liquidity assumption for each scenario to the observed historical volatility of the publicly traded comparable companies.

 

 

 

     INITIAL PUBLIC
OFFERING SEPT-

2013
    INITIAL PUBLIC
OFFERING SEPT-
2014
    SALE DEC-
2013
    SALE SEPT-
2014
    STAY
PRIVATE
 

Probability

     70     10     5     5     10

Expected term (years)

     0.25        1.25        0.50        1.25        2.5   

Expected volatility

     48     66     53     66     87

Risk-free interest rate

     0.02     0.29     0.09     0.29     0.63

Discount for lack of marketability

     10     28     15     28     45

 

 

We believe that this discount was appropriate due to the lack of an existing market for shares of our common stock, the numerous risks and uncertainties to our ability to implement our business plan, and the likely need to obtain additional funding to continue operations during the expected length of time to a potential liquidity event. We then summed the value per share under each scenario to determine the fair value per share of our common stock. In the sale and stay-private scenarios, we allocated the value per share taking into account the liquidation preferences and participation rights of our convertible preferred stock. The initial public offering scenarios assume that all outstanding shares of our convertible preferred stock would convert into common stock.

Offering Price. Based on an assumed offering price of $13.00, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, the offering price in this offering is a $5.74, or 79%, increase over our July 19, 2013 determination of the estimated fair value of our common stock of $7.26.

We believe the difference between the assumed offering price and the estimated fair value of our common stock as determined by our board of directors in connection with the grant of stock options on July 19, 2013 is attributable to several factors, including the following:

 

  n  

The assumed initial public offering price reflects a significant improvement, in a short period of time, in the current market environment. We believe the current market conditions reflect a recent and significant increase in investor interest in biotechnology companies with either a platform or that are in an early stage of clinical development, which has resulted in significantly higher pre-money valuations for such companies than observed over the past several years. Since the fair value of a security depends on current market conditions, including the degree of investor interest and their required rate of return for investments, the increase in the fair value of our common stock reflects the changes in the current market. We estimate that approximately $3.77 of the increase in the estimated fair value of our common stock is related to the significant improvement in the relevant market environment.

From January 1, 2013 to June 30, 2013 there were 16 initial public offerings involving development-stage companies, of which only one was in Phase 1 clinical development. Of the remaining 15 companies, 7 were in Phase 2 clinical development and the other 8 companies were in later stages of clinical development. The median pre-money valuation of the eight companies in Phase 2 or earlier clinical development was $128 million. In the June 30, 2013 valuation, we used an enterprise value of $113 million in the near-term initial public offering scenario, only approximately 12% lower than the median of these comparable initial public offerings, reflecting the fact that we were at an earlier stage of clinical development.

By contrast, in the second half of July 2013 there were five initial public offerings involving development-stage companies, three of which were in Phase 1 or earlier clinical development. This represents a significant shift in the market to an acceptance of companies in an earlier stage of clinical development. Moreover, the valuations of these five companies were significantly higher than the 16 initial public offerings that completed their offerings in the first six months of 2013, even though three of the five second half of July 2013 companies were in Phase 1 or earlier clinical development. The median pre-money valuation of companies that completed an initial public offering in the second half of July 2013 was $232 million, an 81% increase from the median pre-money valuation of the Phase 2 or earlier clinical development initial public offerings that occurred from January 1, 2013 to June 30, 2013.

 

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This substantial increase in median pre-money valuation, beginning in the second half of July 2013, was not known or knowable by us at the time of the June 2013 valuation or at the July 2013 grant date. As noted in the Practice Guide, “the actual initial public offering price may be materially influenced by the specific supply and demand characteristics of the market at or near the date of the actual pricing. These factors can include other offerings coming to market, announcements by comparable companies or competitors and the market performance of their shares, or other developments in the company’s industry or region.” We believe that the increase in the estimated fair value of our common stock related to the market environment appropriately takes into consideration the more recent initial public offerings when compared with the initial public offerings completed prior to the second half of July 2013.

 

  n  

The assumed initial public offering price represents a future price for shares of our common stock that are immediately freely tradable in a public market, whereas the estimated fair value of our common stock at earlier dates represents a contemporaneous estimate of the fair value of illiquid shares that are restricted from public sale and for which no public market existed. We estimate that approximately $0.86 per share of the increase in the estimate of the fair value of our common stock is related to the elimination of the discount for lack of marketability.

 

  n  

The assumed initial public offering price represents a future price for shares of our common stock, whereas the estimated fair value of our common stock at earlier dates is discounted for the required rate of return that an investor would demand in order to compensate for the risk of an equity investment. We estimate that approximately $0.62 per share of the increase in the estimate of the fair value of our common stock is related to the elimination of the equity discount rate.

 

  n  

The assumed initial public offering price is based on a single outcome – a successful initial public offering in the near term which is not probability weighted. By contrast, the estimated fair value of our common stock as of June 30, 2013 was determined based on the PWERM methodology, which is a probability-weighted approach that incorporates the potential for alternative liquidity events. This probability-weighted approach inherently decreases the estimated fair value of our common stock due to the combination of other expected equity values that do not reflect the elimination of the liquidation preference. We estimate that approximately $0.49 of the increase in the estimated fair value of our common stock is related to the assumption that a successful initial public offering in the near term is certain and that the other outcomes are no longer weighted under the PWERM methodology.

Preferred Stock Warrant Liability

We classify freestanding warrants for shares that are either putable or redeemable as liabilities on the balance sheet at fair value. Therefore, the freestanding warrants that give the holders the right to purchase our convertible preferred stock are liabilities that we record at estimated fair value. At the end of each reporting period, we record changes in fair value during the period as a component of other income (expense), net.

We will continue to adjust the liability for changes in the estimated fair value of the warrants until the earlier of the exercise or expiration of the warrants to purchase shares of convertible preferred stock or the completion of a liquidation event, including the completion of an initial public offering, at which time the liabilities we would reclassify to stockholders’ deficit.

We use the Black-Scholes option pricing model and the PWERM approach to estimate the fair value of the preferred stock warrant liability. Inputs we used in the Black-Scholes option pricing model to determine estimated fair value include the estimated fair value of the underlying convertible preferred stock at the valuation measurement date, the remaining contractual term of the warrants, risk-free interest rates, expected dividends, and the expected volatility of the price of the underlying convertible preferred stock. Inputs we used in the PWERM approach to determine the estimated fair value included a risk-adjusted discount rate, probability-weighted outcomes and time to liquidity.

In December 2002, pursuant to the terms of an equipment loan and security agreement, we issued a fully exercisable warrant to the lender for the purchase of 3,902 shares of Series A convertible preferred stock at an exercise price of $12.30 per share. The warrant was exercisable through December 2012, subject to certain conditions. The warrant expired unexercised in December 2012.

 

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In June 2004, pursuant to the terms of an equipment loan and security agreement, we issued a fully exercisable warrant to the lender for the purchase of 2,304 shares of Series A convertible preferred stock at an exercise price of $12.30 per share. The warrant is exercisable through January 2014, subject to certain conditions.

In connection with the issuance of Series A convertible preferred stock in January and February 2005, we issued a warrant to purchase 81,300 shares of Series A convertible preferred stock at $12.30 per share to our preferred stock placement agent. During 2007, the warrant was canceled and replaced by the issuance of two warrants for 44,715 and 36,585 shares; all other terms remained unchanged. The warrants will either automatically exercise on a net issuance basis or will expire upon completion of this offering.

All issued and unexpired warrants were unexercised as of June 30, 2013. The following table sets forth a summary of all outstanding warrants and the estimated fair value for each of the warrants as of June 30, 2013, and December 31, 2012:

 

 

 

(in thousands, except per share amounts)  

STOCK                                 

 

EXPIRATION DATE

  EXERCISE
PRICE PER
SHARE
    SHARES AS OF     ESTIMATED FAIR VALUE AS OF  
      DECEMBER 31,
2012
    JUNE 30,
2013
    DECEMBER 31,
2012
    JUNE 30,
2013
 

Series A convertible preferred stock

  January 2014   $ 12.30        2,304        2,304      $ 12      $ 3   

Series A convertible preferred stock

 

 

Earlier of: (i) April 2015 or (ii) the closing of an initial public offering of our common stock

  $ 12.30        81,300        81,300        551        140   
     

 

 

   

 

 

   

 

 

   

 

 

 
        83,604        83,604      $      563      $      143   
     

 

 

   

 

 

   

 

 

   

 

 

 

 

 

The intrinsic value of all outstanding preferred stock warrants as of June 30, 2013, was approximately $59,000 based on the estimate fair value of our common stock of $13.00 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus.

As of December 31, 2012, we determined the fair value of the above warrants using the Black-Scholes valuation model with the following assumptions:

 

 

 

     AS OF DECEMBER 31, 2012

Risk-free interest rate

   0.2%–0.3%

Remaining contractual term (years)

   2.1

Volatility

   85.0%

 

 

 

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As of June 30, 2013, the fair value of the above warrants was determined using the following assumptions:

 

 

PWERM

 

Risk-adjusted discount rate

     28.3

Weighted average estimated time to liquidity (in years)

     0.6   

Outcome Model Assumptions:

  

Probability of an initial public offering

     80.0

Probability of a sale

     10.0

Probability of remaining private

     10.0

 

 

OPM

 

Risk-free interest rate

     0.2

Estimated term (years)

     0.6   

Volatility

     85.0

 

 

Financial Overview

Collaboration Revenue

We have not generated any revenue from product sales. Our revenue to date has been derived from upfront payments, research and development funding and milestone payments under collaboration and license agreements with our collaboration partners, including GSK, GlaxoSmithKline LLC, or GSK US, Glaxo Group Limited, or GSK UK, GSK-HGS, Pfizer Inc., or Pfizer, and UCB Pharma S.A., or UCB.

FP-1039 License and Collaboration with GSK-HGS

In March 2011, we entered into a license and collaboration agreement with GSK-HGS, referred to as the FP-1039 license, pursuant to which we granted GSK-HGS an exclusive license to develop and commercialize FP-1039 and other FGFR1 fusion proteins in the United States, the European Union and Canada. We retain rights to develop and commercialize FP-1039 in territories outside the United States, the European Union and Canada.

We received an upfront payment of $50 million from GSK-HGS in connection with entering into the FP-1039 license. GSK-HGS is obligated to pay us contingent payments of up to $435 million comprising aggregate development-related contingent payments of up to $70 million, aggregate regulatory-related contingent payments of up to $195 million, and aggregate commercial-related contingent payments up to $170 million. Of the development-related contingent payments, we could receive, within the next 24 months, a $5 million contingent payment upon GSK-HGS’s completion of its Phase 1b clinical trial and a $15 million contingent payment if GSK-HGS initiates a Phase 2 clinical trial. We are also eligible to receive tiered royalty payments from the low-double digits to the high-teens on net sales of FP-1039.

GSK-HGS is obligated to pay us for the costs of all FP-1039 related research and development activities we elect to undertake on behalf of GSK-HGS. GSK-HGS has paid us $3.3 million for our conduct of these activities through June 30, 2013.

GSK US Muscle Diseases Collaboration

In July 2010, we entered into a research collaboration and license agreement, referred to as the muscle diseases collaboration, with GSK US to identify potential drug targets and drug candidates to treat skeletal muscle diseases. In May 2011, we amended the muscle diseases collaboration to expand the research plan in scope and duration to include an additional cell-based screen and an in vivo screen using our Rapid In Vivo Protein Production System, or RIPPS®, technology. Under the muscle diseases collaboration, we will conduct a total of three customized cell-based screens and one in vivo screen of our protein library. The three-year research term for the original two cell-based screens will end in July 2013 and the three-year research term for the cell-based and in vivo screens will end in May 2014.

At the inception of the muscle diseases collaboration, GSK US made an upfront payment to us of $7.0 million and purchased shares of our Series A-2 convertible preferred stock for $7.5 million, of which we considered $3.0 million

 

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to be an implied premium. The implied premium was accounted for as revenue in the same manner as the upfront payment and allocated to the deliverables under the research collaboration agreement. Through June 30, 2013, we have also received $9.5 million in research funding, and we are eligible to receive up to an additional $0.4 million in research funding under this agreement through the remainder of the research term, which ends in May 2014. As of June 30, 2013, we had deferred revenue of $3.9 million related to this agreement, of which we expect to recognize $2.4 million in 2013 and $1.5 million in 2014 as we complete our obligation to provide research services.

Under the muscle diseases collaboration, GSK US has the right to evaluate proteins identified in the screens we conduct for limited periods of time and after such evaluation the right to obtain exclusive worldwide licenses to develop and commercialize products that incorporate or target selected proteins. In December 2012, GSK US selected a protein for further evaluation and triggered a $0.3 million selection fee. We are eligible to receive up to $124.3 million in potential option exercise fees and contingent payments with respect to each protein target that GSK US elects to obtain rights. These potential fees and payments are composed of target evaluation and selection fees of up to $1.8 million, preclinical and development-related contingent payments of up to $28.5 million, regulatory-related contingent payments of up to $40.0 million and commercial-related contingent payments of up to $54.0 million. GSK US is also obligated to pay us tiered low- to mid-single digit royalties on global net sales for each product that incorporates or targets the protein.

GSK UK Respiratory Diseases Collaboration

In April 2012, we entered into a research collaboration and license agreement, referred to as the respiratory diseases collaboration, with GSK UK to identify new therapeutic approaches to treat refractory asthma and chronic obstructive pulmonary disease, COPD, function with a particular focus on identifying novel protein therapeutics and antibody targets. We plan to conduct up to six customized screens of our protein library under the respiratory diseases collaboration using both our cell-based and in vivo screening capabilities. The four-year research term will end in April 2016.

At the inception of the respiratory diseases collaboration, GSK UK made an upfront payment to us of $7.5 million and purchased from us shares of our Series A-3 convertible preferred stock for $10.0 million, of which we considered $3.1 million to be an implied premium. The implied premium was accounted for as revenue in the same manner as the upfront payment and allocated to the deliverables under the research collaboration agreement. Through June 30, 2013, we have also received $2.6 million of research funding and we are eligible to receive up to an additional $7.9 million of research funding under this agreement through the remainder of the research term, which ends in April 2016. As of June 30, 2013, we had deferred revenue of $7.4 million related to this agreement, of which we expect to recognize $1.3 million in 2013 and the remainder ratably through the second quarter of 2016 as we complete our obligation to provide research services. We expect to receive $1.3 million of quarterly research payments during the remainder of 2013, $2.6 million in each of 2014 and 2015 and $1.3 million in 2016 as we complete our obligation to provide research services.

In the course of conducting screens of our protein library under the collaboration we expect to discover proteins that may be potential drug targets or drug candidates for treating refractory asthma or COPD. Under the collaboration agreement, GSK UK has the right to evaluate proteins identified in the screens we conduct for limited periods of time and after such evaluation has the right to obtain an exclusive worldwide license to develop and commercialize products that incorporate or selected target proteins.

Prior to the time GSK UK exercises its right to obtain an exclusive worldwide license to a protein target, we and GSK UK will discuss and agree on which protein targets GSK UK will have sole responsibility for the further development and commercialization of products that incorporate or target the protein targets, which we refer to as Track 1 Targets, and which protein targets to which we will develop biologics that incorporate or target the protein targets through to clinical proof of mechanism in either a Phase 1 clinical trial or Phase 2 clinical trial, which we refer to as Track 2 Targets. We and GSK UK will take into consideration each party’s available resources and capabilities at the time in deciding which protein targets will be Track 1 Targets or Track 2 Targets, but subject to each party’s general right to alternate in such selection with GSK UK have the right to first select.

We are eligible to receive up to $124.3 million in potential target evaluation and selection fees and contingent payments with respect to each Track 1 Target. These fees and payments are composed of target evaluation and selection fees of up to $1.8 million, preclinical and development-related contingent payments of up to $28.5

 

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million, regulatory-related contingent payments of up to $40.0 million and commercial-related contingent payments of up to $54.0 million. GSK UK is also obligated to pay us tiered low- to mid-single digit royalties on global net sales for each product that incorporates or targets the Track 1 Target.

We are eligible to receive up to $193.8 million in potential target evaluation and selection fees and contingent payments with respect to each Track 2 Target. These fees and payments are composed of target evaluation and selection fees of up to $1.8 million, a clinical proof of mechanism option exercise fee of up to $23.0 million, preclinical and development-related contingent payments of up to $36.5 million, regulatory-related contingent payments of up to $53.0 million and commercial-related contingent payments of up to $79.5 million. GSK UK is also obligated to pay us tiered high-single to low-double digit royalties on global net sales for each product that incorporates or targets the Track 2 Target.

UCB Fibrosis and CNS Collaboration

In March 2013, we entered into a research collaboration and license agreement, referred to as the fibrosis and CNS collaboration, with UCB to identify innovative biologics targets and therapeutics in the areas of fibrosis-related immunologic diseases and central nervous system, or CNS, disorders. We plan to conduct up to five customized cell-based and in vivo screens of our protein library under the fibrosis and CNS collaboration. We currently expect to complete our initial research activities under the fibrosis and CNS collaboration by March 2016. Upon the completion of those research activities, UCB has up to a two-year evaluation period during which we may be obligated to perform additional services at the request of UCB.

At the inception of the fibrosis and CNS collaboration, UCB made payments to us of $8.2 million. We are eligible to receive up to an additional $6.4 million of technology access fees and research funding under the fibrosis and CNS collaboration starting in March 2014 through January 2016. In addition, we may be eligible to receive up to $1.3 million if UCB elects to have us conduct a third fibrosis screen. As of June 30, 2013, we had deferred revenue of $7.5 million related to this agreement, of which we expect to recognize $1.3 million in 2013. We expect to receive research payments of $3.0 million and $3.2 million in 2014 and 2015, respectively.

We are eligible to receive up to $92.2 million in potential evaluation and selection fees and contingent payments with respect to each protein target for which UCB elects to obtain an exclusive license, comprising aggregate target evaluation and selection fees of up to $0.4 million, preclinical and development-related contingent payments of up to $11.8 million, regulatory-related contingent payments of up to $20.0 million and commercial-related contingent payments of up to $60.0 million. UCB is also obligated to pay us tiered low- to mid-single digit royalties on global net sales for each product that incorporates or targets the protein.

 

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Summary Revenue by Collaboration Partner

The following is a comparison of collaboration revenue for the years ended December 31, 2010, 2011 and 2012, and the six months ended June 30, 2012 and 2013:

 

 

 

     YEARS ENDED DECEMBER 31,      SIX MONTHS ENDED
JUNE 30,
 
(in millions)    2010      2011      2012      2012      2013  

R&D Funding

              

Glaxo Group Limited

   $       $       $ 1.3       $       $ 1.5   

GlaxoSmithKline LLC

     0.5         2.5         3.3         1.7         1.7   

Human Genome Sciences, Inc.

             2.4         0.9         0.7           

Pfizer, Inc.

     10.0         3.8                           

Other

     0.2         0.1         0.1         0.1         0.1   

Ratable Revenue Recognition

              

Glaxo Group Limited

                     1.9         0.5         1.3   

GlaxoSmithKline LLC

     1.4         2.7         2.4         1.2         1.2   

Human Genome Sciences, Inc.

             50.0                           

Pfizer, Inc.

     8.7         3.4                           

UCB Pharma S.A.

                                     0.7   

Other

     0.1                                   

Milestone and Contingent Payments

              

Centocor Research and Development Inc.

     2.8                                   

GlaxoSmithKline LLC

                     0.1                   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $      23.7       $      64.9       $      10.0       $        4.2       $        6.5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

Research and Development

Research and development expenses consist of costs we incur in performing internal and collaborative research and development activities. Expenses incurred related to collaborative research and development agreements approximate the revenue recognized under these agreements. Research and development costs consist of salaries and benefits, including associated stock-based compensation, lab supplies, and facility costs, as well as fees paid to other entities that conduct certain research and development activities, including manufacturing, on our behalf.

As we advance our product pipeline, we are conducting research and development activities on several prioritized oncology and inflammatory disease targets.

Our research and development team is organized such that the design, management and evaluation of results of all of our research and development plans is accomplished internally, while the execution of some phases of our research and development plans, such as toxicology studies in accordance with Good Laboratory Practices and manufacturing in accordance with current Good Manufacturing Practices, or cGMP, is accomplished using CROs and contract manufacturing organizations. We account for research and development costs on a program-by-program basis. In the early phases of research and discovery, costs are often devoted to improving our discovery platform and are not necessarily allocable to a specific target. We assign costs for such activities to a distinct non-program related project code. We allocate research management, overhead, common usage laboratory supplies, and facility costs on a fulltime equivalent basis.

 

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The following is a comparison of research and development expenses for the years ended December 31, 2010, 2011 and 2012, and the six months ended June 30, 2012 and 2013:

 

 

 

     YEARS ENDED DECEMBER 31,      SIX MONTHS ENDED
JUNE 30,
 
(in millions)    2010      2011      2012      2012      2013  

Product programs:

              

FP-1039

   $ 5.5       $ 4.3       $ 1.0       $ 0.7       $ 0.5   

FPA008

     0.9         4.5         4.5         2.4         4.9   

FPA144

             3.0         4.8         1.6         2.6   

Early preclinical programs, collectively

     6.5         8.1         8.3         5.1         2.1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal pipeline

     12.9         19.9         18.6         9.8         10.1   

Product and discovery collaborations

     11.3         7.5         7.0         3.1         4.8   

Early research and discovery

     5.2         6.6         3.2         1.9         1.6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total research and development expenses

   $      29.4       $      34.0       $      28.8       $      14.8       $      16.5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

We expect our research and development expenses to increase as we advance our development programs further, in particular as we increase the number and size of our clinical trials. We plan to begin a Phase 1 clinical trial for FPA008 by the end of 2013 and expect to begin a Phase 1 clinical trial for FPA144 in selected patients in the second half of 2014. The process of conducting preclinical studies and clinical trials necessary to obtain regulatory approval is costly and time-consuming. We or our partners may never succeed in achieving marketing approval for any of our drug candidates. Numerous factors may affect the probability of success for each drug candidate, including preclinical data, clinical data, competition, manufacturing capability and commercial viability.

FP-1039, our most-advanced product candidate, entered Phase 1b clinical development in July 2013 and our other product candidates are in preclinical development; therefore the successful development of our drug candidates is highly uncertain and may not result in approved products. Completion dates and completion costs can vary significantly for each drug candidate and are difficult to predict for each product. Given the uncertainty associated with clinical trial enrollments and the risks inherent in the development process, we are unable to determine the duration and completion costs of the current or future clinical trials of our drug candidates or if, or to what extent, we will generate revenues from the commercialization and sale of any of our drug candidates. We anticipate we will make determinations as to which programs to pursue and how much funding to direct to each program on an ongoing basis in response to the scientific and clinical success of each drug candidate, as well as ongoing assessment as to each drug candidate’s commercial potential. We will need to raise additional capital or may seek additional product collaborations in the future in order to complete the development and commercialization of our drug candidates.

General and Administrative

General and administrative expenses consist primarily of salaries and related benefits, including associated stock-based compensation, related to our executive, finance, legal, intellectual property, contract, business development, human resource and support functions. Other general and administrative expenses include allocated facility-related costs not otherwise included in research and development expenses, travel expenses and professional fees for auditing, tax and legal services, including intellectual property-related legal services.

We expect that general and administrative expenses will increase in the future for legal expenses for the maintenance, expansion and protection of our intellectual property portfolio and additional costs associated with being a publicly traded company, including legal, auditing and filing fees, additional insurance premiums, costs associated with maintaining investor relations services and general compliance and consulting expenses.

Interest Income

Interest income consists of interest income earned on our cash and cash equivalents, and marketable securities.

Other Income (Expense), Net

Other income (expense), net consists primarily of the revaluation of the preferred stock warrant liability and the gain or loss on the disposal of property and equipment, if any.

 

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Results of Operations

Comparison for the Six Months Ended June 30, 2012 and 2013

 

 

 

     SIX MONTHS ENDED JUNE 30,  
(in millions)    2012     2013  

Collaboration revenue

   $ 4.2      $ 6.5   

Operating expenses:

    

Research and development

     14.8        16.5   

General and administrative

     4.4        4.7   
  

 

 

   

 

 

 

Total operating expenses

     19.2        21.2   

Interest income

              

Other income, net

     0.1        0.4   
  

 

 

   

 

 

 

Net loss

   $             (14.9   $             (14.3
  

 

 

   

 

 

 

 

 

Collaboration Revenue

Collaboration revenue increased by $2.3 million, or 54.8%, from $4.2 million for the six months ended June 30, 2012 to $6.5 million for six months ended June 30, 2013. This increase for the six months ended June 30, 2013 was primarily due to the recognition of $2.3 million in revenue recognized under our respiratory diseases collaboration with GSK UK entered into in April 2012, and the recognition of $0.7 million of revenue under our fibrosis and CNS collaboration with UCB entered into in March 2013, offset by a reduction in reimbursed clinical costs of $0.7 million for research and development we conducted under our FP-1039 license with GSK-HGS that we completed in 2012.

Research and Development

Our research and development expenses increased by $1.7 million, or 11.5%, from $14.8 million for the six months ended June 30, 2012 to $16.5 million for the six months ended June 30, 2013. This increase was primarily due to an increase of $3.5 million related to our FPA008 and FPA144 programs and a $1.7 million increase related to our discovery collaborations, offset by a $3.3 million decrease in spending on other early preclinical programs and early research and discovery during the six months ended June 30, 2013 as compared to the same period in 2012.

General and Administrative

Our general and administrative expenses increased by $0.3 million, or 6.8%, from $4.4 million for the six months ended June 30, 2012, to $4.7 million for the six months ended June 30, 2013, primarily due to a $0.3 million increase in stock-based compensation.

Interest Income

For the first six months of 2013, interest income decreased by $21,000 from $49,000 in the first six months of 2012 to $28,000 in the first six months of 2013, primarily due to a lower average investment balances.

Other Income, Net

Other income, net increased from $59,000 for the six months ended June 30, 2012 to $420,000 for the six months ended June 30, 2013. This increase primarily reflects the decrease in estimated fair value of the preferred stock warrant liability.

 

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Comparison of the Years Ended December 31, 2011 and 2012

 

 

 

     YEARS ENDED DECEMBER 31,  
(in millions)    2011     2012  

Collaboration revenue

   $ 64.9      $ 10.0   

Operating expenses:

    

Research and development

     34.0        28.8   

General and administrative

     11.2        9.0   
  

 

 

   

 

 

 

Total operating expenses

     45.2        37.8   

Interest income

     0.1        0.1   

Other (expense) income, net

     (0.1     0.1   
  

 

 

   

 

 

 

Net income (loss) before income taxes

     19.7        (27.6

Income tax expense

              
  

 

 

   

 

 

 

Net income (loss)

   $         19.7      $         (27.6
  

 

 

   

 

 

 

 

 

Collaboration Revenue

Collaboration revenue decreased by $54.9 million, or 84.6%, from $64.9 million in 2011 to $10.0 million in 2012. This decrease was primarily due to the recognition as revenue of the $50.0 million upfront payment in 2011 in connection with our FP-1039 license with GSK-HGS to develop our FP-1039 product candidate as well as a $7.2 million reduction of revenue from our Pfizer discovery research collaboration, which ended in May 2011. This was partially offset by the recognition of $3.2 million of revenue for a technology access fee and research services under our respiratory diseases collaboration with GSK UK entered into in April 2012.

Research and Development

Total research and development expenses decreased by $5.2 million, or 15.3%, from $34.0 million in 2011 to $28.8 million in 2012. This decrease was primarily due to the FP-1039 Phase 1 clinical trial activities nearing completion in 2011 and entering into the FP-1039 license with GSK-HGS to further develop FP-1039, for which GSK is now responsible for development and related costs, and a reduction in early research efforts.

Research and development expenses related to FPA144 increased by $1.8 million, or 60.0%, from $3.0 million in 2011 to $4.8 million in 2012. Expenses in 2011 related primarily to an exclusive license from Galaxy Biotech, LLC, or Galaxy, related to the development, manufacturing and commercialization of a monoclonal antibody while expenses in 2012 related primarily to preclinical studies.

Research and development expenses related to research collaborations decreased by $0.5 million, or 6.7%, from $7.5 million in 2011 to $7.0 million in 2012. The decrease was due to the completion of our Pfizer discovery research collaboration in May 2011, offset by the expansion of our muscle diseases collaboration with GSK US in May 2011 and entering into our respiratory diseases collaboration with GSK UK in April 2012.

Research and development expenses related to early research and discovery programs to expand our product platform decreased by $3.4 million, or 51.5%, from $6.6 million in 2011 to $3.2 million in 2012. This decrease was due to a reduction in the number of programs we were actively pursuing.

General and Administrative

General and administrative expenses decreased by $2.2 million, or 19.6%, from $11.2 million in 2011 to $9.0 million in 2012. This decrease was primarily due to a decrease in stock-based compensation expenses resulting from amending terms of performance based options in 2011 for two employees, and amending vesting terms for a former chief executive officer in 2011.

Interest Income

Interest income decreased from $114,000 in 2011 to $88,000 in 2012 due to a decrease in our marketable securities portfolio, which resulted in lower interest income year-over-year.

 

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Other Income (Expense), Net

Other income, net increased from a $65,000 expense in 2011 to income of $121,000 for 2012. This increase primarily reflects a decrease in the estimated fair value of the preferred stock warrant liability. A warrant to purchase 3,902 shares of Series A convertible preferred stock expired unexercised in December 2012.

Income Tax Expense

Income tax expense for the year ended December 31, 2011, consisted solely of current state tax expense, as we were able to utilize federal net operating loss carryforwards to fully offset federal taxable income for the year. Income tax expense for the year ended December 31, 2012, consisted solely of current state tax expense. For 2012 and all years prior to 2011, we incurred taxable losses and accumulated significant federal and state net operating losses as well as research and development tax credits. Our ability to use our operating loss carryforwards and tax credits to offset future taxable income may become subject to restrictions under Section 382 of the United States Internal Revenue Code of 1986, as amended.

Comparison of the Years Ended December 31, 2010 and 2011

 

 

 

     YEARS ENDED DECEMBER 31,  
(in millions)        2010             2011      

Collaboration revenue

   $ 23.7      $ 64.9   

Operating expenses:

    

Research and development

     29.4        34.0   

General and administrative

     8.4        11.2   
  

 

 

   

 

 

 

Total operating expenses

     37.8        45.2   

Interest income

     0.1        0.1   

Other income (expense), net

     0.5        (0.1
  

 

 

   

 

 

 

Net (loss) income before income taxes

     (13.5     19.7   

Benefit from income taxes

              
  

 

 

   

 

 

 

Net (loss) income

   $         (13.5   $         19.7   
  

 

 

   

 

 

 

 

 

Collaboration Revenue

Collaboration revenue increased by $41.2 million from $23.7 million in 2010 to $64.9 million in 2011. The increase was primarily due to the recognition as revenue of the $50.0 million upfront license fee in April 2011 in connection with our FP-1039 license with GSK-HGS to develop our FP-1039 product, partially offset by an $11.5 million decrease in revenue recognized from our Pfizer discovery research collaboration, which ended in May 2011. In addition, we recognized as revenue $5.2 million in 2011 from our muscle diseases collaboration with GSK US that we entered into in July 2010 as compared to $1.9 million in 2010. Additionally, we recognized as revenue a $2.8 million milestone payment in 2010 from Centocor Research and Development Inc. for the selection of a target we discovered for immunology related indications from a discovery research program that ended in February 2010.

Research and Development

Total research and development expenses increased by $4.6 million, or 15.6%, from $29.4 million in 2010 to $34.0 million in 2011. This increase was primarily due to acquiring an exclusive license from Galaxy in 2011 for the development, manufacturing and commercialization of antibodies to FGFR2 and an increase in spending on FPA008.

Research and development expenses related to FP-1039 decreased by $1.2 million, or 21.8%, from $5.5 million in 2010 to $4.3 million in 2011 as the Phase 1 clinical trial activities neared completion in 2011.

Research and development expenses related to FPA008 increased $3.6 million from $0.9 million in 2010 to $4.5 million in 2011 as we advanced this program into later non-clinical development.

Research and development expenses related to FPA144 increased by $3.0 million from $0 in 2010 to $3.0 million in 2011 due to acquiring an exclusive license from Galaxy related to the development, manufacturing and commercialization of antibodies to FGFR2.

 

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Research and development expenses related to research collaborations decreased by $3.8 million, or 33.6%, from $11.3 million in 2010 to $7.5 million in 2011. The decrease was due to the completion of our Pfizer discovery research collaboration in May 2011, offset by the expansion of the GSK US muscle diseases collaboration in May 2011.

Research and development expenses related to early preclinical programs and early research and discovery to expand our product platform increased by $3.0 million, or 25.6%, from $11.7 million in 2010 to $14.7 million in 2011. The increase was related to identifying and advancing other early preclinical targets to leads for potential future Investigational New Drug Application submissions.

General and Administrative

General and administrative expenses increased by $2.8 million, or 33.3%, from $8.4 million in 2010 to $11.2 million in 2011. This increase was primarily due to stock-based compensation expenses resulting from amending terms of performance based options in 2011 for two employees and amending vesting terms for a former chief executive officer in 2011, and a sublicense fee under our agreement with The Regents of the University of California, under which we were granted an exclusive license under certain patent rights related to our FP-1039 program

Interest Income

Interest income increased from $58,000 in 2010 to $114,000 in 2011 due to an increase in our marketable securities portfolio, which resulted in higher interest income year-over-year.

Other Income (Expense), Net

Other income (expense), net decreased from income of $491,000 in 2010 to an expense of $65,000 in 2011 primarily due to receiving a one-time $489,000 grant from the U.S. Section 48D Qualifying Therapeutics Discovery Project Program in 2010 and an increase in the estimated fair value of the preferred stock warrant liability.

Benefit from Income Taxes

Income tax benefit for the year ended December 31, 2010, consisted of $5,000 related to an adjustment to the refund of research credits as provided by the Housing and Economic Recovery Act of 2009 and current state tax expense. Income tax expense for the year ended December 31, 2011, consisted solely of current state tax expense, as we were able to utilize federal net operating loss carryforwards to fully offset federal taxable income for the year.

Liquidity and Capital Resources

Since our inception and through June 30, 2013, we have raised an aggregate of $310.9 million to fund our operations, including $157.1 million under our collaboration agreements, $63.5 million from the sale of convertible preferred stock to strategic partners, $89.9 million from the sale of convertible preferred stock to parties other than our strategic collaboration partners and $0.4 million from the sale of common stock. As of June 30, 2013, we had $8.9 million in cash and cash equivalents and $19.3 million of marketable securities invested in a U.S. Treasury money market fund, U.S. Treasuries, and U.S. government agencies securities with maturities less than one year.

In addition to our existing cash and cash equivalents, we are eligible to receive research and development funding and to earn milestone and other contingent payments for the achievement of defined collaboration objectives and certain nonclinical, clinical, regulatory and sales-based events, and royalty payments under our collaboration agreements. Our ability to earn these milestone and contingent payments and the timing of achieving these milestones is primarily dependent upon the outcome of our collaborators’ research and development activities and is uncertain at this time. Our rights to payments under our collaboration agreements are our only committed external source of funds.

Funding Requirements

Our primary uses of capital are, and we expect will continue to be, compensation and related expenses, third party clinical and preclinical research and development services, including manufacturing, laboratory and related supplies, legal, patent and other regulatory expenses and general overhead costs. We believe our use of CROs and contract manufacturers provides us with flexibility in managing our spending and limits our cost commitments at any point in time.

Because our product candidates are in various stages of clinical and preclinical development and the outcome of these efforts is uncertain, we cannot estimate the actual amounts necessary to successfully complete the development and commercialization of our product candidates or whether, or when, we may achieve profitability. Until such time, if ever, that we can generate substantial product revenues, we expect to finance our cash needs

 

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through collaboration arrangements and, if necessary, equity or debt financings. Except for any obligations of our collaborators to reimburse us for research and development expenses or to make milestone or royalty payments under our agreements with them, upon completion of this offering, we will not have any committed external source of liquidity. To the extent that we raise additional capital through the future sale of equity or debt, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our existing common stockholders. If we raise additional funds through collaboration arrangements in the future, we may have to relinquish valuable rights to our technologies, future revenue streams or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

Based on our research and development plans and our timing expectations related to the progress of our programs, we expect that our existing cash and cash equivalents and marketable securities as of June 30, 2013, and research funding that we expect to receive under our existing collaborations, will enable us to fund our operating expenses and capital expenditure requirements for at least the next 10 months, without giving effect to any potential contingent payments we may receive under our collaboration agreements or entering into any new collaboration agreements or net proceeds from this offering. We have based this estimate on assumptions that may prove to be wrong, and we could use our capital resources sooner than we expect. Additionally, the process of testing drug candidates in clinical trials is costly, and the timing of progress in these trials is uncertain.

Cash Flows

The following is a summary of cash flows for the years ended December 31, 2010, 2011 and 2012 and the six months ended June 30, 2012 and 2013:

 

 

 

    YEARS ENDED DECEMBER 31,     SIX MONTHS
ENDED JUNE 30,
 
(in millions)       2010             2011             2012             2012             2013      

Net cash provided by (used in) operating activities

  $ (7.8   $ 23.3      $ (18.4   $ (5.6   $ (8.6

Net cash provided by (used in) investing activities

    3.9        (27.0     18.5        9.0        6.6   

Net cash provided by (used in) financing activities

    4.6               6.9        6.9        (0.5

 

 

Net Cash Provided by (Used in) Operating Activities

Net cash used in operating activities was $7.8 million for the year ended December 31, 2010, compared to net cash provided by operating activities of $23.3 million for the year ended December 31, 2011, and net cash used in operating activities of $18.4 million for the year ended December 31, 2012. The increase in cash provided by operating activities between 2010 and 2011 was primarily due to a $34.9 million increase in cash received from collaborations. The increase in cash used in operating activities from 2011 to 2012 was due to a $41.1 million decrease in cash received from our collaborations. In 2011, we received a $50.0 million upfront payment pursuant to the FP-1039 license with GSK-HGS. We received a $7.5 million upfront payment for the respiratory diseases collaboration with GSK UK entered into in 2012.

Net cash used in operating activities was $5.6 million during the six months ended June 30, 2012, compared to $8.6 million during the six months ended June 30, 2013. The increase in cash used in operating activities in the six months ended June 30, 2013 is due to lower proceeds from research collaborations during the first six months of 2013 as compared to the same period in 2012.

Net Cash Provided by (Used in) Investing Activities

Net cash provided by or used in investing activities for the periods presented primarily relates to the purchases and maturities of marketable securities. Purchases of property and equipment were $3.3 million, $1.0 million and $0.7 million during the years ended December 31, 2010, 2011 and 2012, respectively. Property and equipment purchases in 2010 primarily related to improvements to our current facility that we moved into in 2010. The decrease in property and equipment purchases during the years ended December 31, 2011 and 2012 consisted primarily of a reduction in laboratory equipment purchases supporting our research and development activities.

 

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Purchases of property and equipment were $0.2 million and $0.5 million, respectively, during the six months ended June 30, 2012 and 2013. The property and equipment purchases during the six months ended June 30, 2012 and 2013 consisted primarily of purchases of laboratory equipment to support our research and development activities.

Net Cash Provided by Financing Activities

Net cash provided by financing activities during the year ended December 31, 2010, primarily related to the sale of preferred stock. In July 2010, we sold 0.3 million shares of Series A-2 convertible preferred stock to GSK US for proceeds of $7.5 million, of which $3.0 million was considered to be an implied premium and was allocated to the deliverables under the muscle diseases collaboration, resulting in $4.5 million being allocated to the Series A-2 convertible preferred stock. Additionally, we received $0.1 million from employee stock option exercises. Net cash provided by financing activities of less than $0.1 million during the year ended December 31, 2011, reflect cash received from employee stock option exercises. Net cash provided by financing activities during the year ended December 31, 2012, primarily related to the sale of preferred stock. In April 2012, we sold 0.4 million shares of Series A-3 convertible preferred stock to GSK UK for proceeds of $10.0 million, of which $3.1 million was considered to be an implied premium and was allocated to the deliverables under the respiratory diseases collaboration, resulting in $6.8 million being allocated to the Series A-3 convertible preferred stock. Additionally, we received $0.1 million from employee stock option exercises.

Net cash provided by financing activities for the six months ended June 30, 2012, primarily related to the sale of preferred stock. In April 2012, we sold 0.4 million shares of Series A-3 convertible preferred stock to GSK UK for proceeds of $10.0 million, of which $3.1 million was considered to be an implied premium and was allocated to the deliverables under the respiratory diseases collaboration, resulting in $6.8 million being allocated to the Series A-3 convertible preferred stock. Net cash used in financing activities was $0.5 million during the six months ended June 30, 2013 and primarily consisted of direct incremental legal and accounting fees relating to our initial public offering.

Contractual Obligations and Contingent Liabilities

The following summarizes our significant contractual obligations as of December 31, 2012:

 

 

 

(in millions)                                   

CONTRACTUAL OBLIGATIONS

   TOTAL      LESS THAN
1 YEAR
     1 TO 3 YEARS      3 TO 5 YEARS      MORE THAN
5 YEARS
 

Operating leases (1)

   $ 13.3       $ 1.9       $ 5.5       $ 5.9       $  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total obligations

   $           13.3       $           1.9       $           5.5       $           5.9       $             —  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

(1)   

Represents future minimum lease payments under non-cancelable operating leases in effect as of December 31, 2012, for our facilities in South San Francisco, California. The minimum lease payments above do not include common area maintenance charges or real estate taxes.

The contractual obligations table above does not include any potential future milestone payments to third parties as part of certain collaboration and in-licensing agreements, which could total up to $120.1 million, or any potential future royalty payments we may be required to make under our license agreements, including with:

 

  n  

Galaxy, under which we were granted an exclusive worldwide license for the development, manufacturing and commercialization of anti-FGFR2b antibodies; and

 

  n  

The Regents of the University of California, under which we were granted an exclusive license under certain patent rights related to our FP-1039 program.

Payments under these agreements are not included in the above contractual obligations table due to the uncertainty of the occurrence of the events requiring payment under these agreements, including our share of potential future milestone and royalty payments. These payments generally become due and payable only upon achievement of certain clinical development, regulatory or commercial milestones.

 

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Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under SEC rules.

JOBS Act

In April 2012, the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, was enacted. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period, and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies.

Quantitative and Qualitative Disclosures about Market Risk

The market risk inherent in our financial instruments and in our financial position represents the potential loss arising from adverse changes in interest rates and concentration of credit risk. As of June 30, 2013, we had cash and cash equivalents, and marketable securities of $28.2 million consisting of bank deposits, interest-bearing money market accounts, U.S. Treasury and U.S. governmental agencies securities. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates. Due to the short-term maturities of our cash equivalents and marketable securities, and the low risk profile of our marketable securities, an immediate 100 basis point change in interest rates would not have a material effect on the fair market value of our cash equivalents and marketable securities. Additionally, our cash balances deposited in a bank in the United States may be in excess of insured levels.

We contract with CROs and contract manufacturers internationally. Transactions with these providers are predominantly settled in U.S. dollars and, therefore, we believe that we have only minimal exposure to foreign currency exchange risks. We do not hedge against foreign currency risks.

 

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BUSINESS

Overview

We are a clinical-stage biotechnology company focused on discovering and developing novel protein therapeutics. Protein therapeutics are antibodies that block disease processes or drugs developed from extracellular proteins or protein fragments, including cancer and inflammatory diseases. We have developed a library of more than 5,600 human extracellular proteins, which we believe represent substantially all of the body’s medically important targets for protein therapeutics. We screen this comprehensive library with our proprietary high-throughput protein screening technologies to identify new targets for protein therapeutics. This platform has allowed us to develop a pipeline of novel product candidates for cancer and inflammatory diseases and to generate over $220 million under our collaboration arrangements.

Each of our product candidates has an innovative mechanism of action and addresses patient populations for which better therapies are still needed. In addition, we are pursuing companion diagnostics for each of our lead programs to allow us to select patients most likely to benefit from treatment and therefore accelerate clinical development and improve patient care. Our most advanced product candidates are as follows:

 

  n  

FP-1039/GSK3052230, or FP-1039, is a protein therapeutic that “traps” and neutralizes cancer-promoting fibroblast growth factors, or FGFs, involved in cancer cell proliferation and new blood vessel formation. FGFs are a family of related extracellular proteins that normally regulate cell proliferation and survival in humans. They act by binding to and activating FGF receptors, or FGFRs, which are cell surface proteins that transmit growth signals to cells. Certain FGFs promote growth of multiple solid tumors by binding and activating FGFRs. Unlike other therapies that indiscriminately block all FGFs, FP-1039 is designed to only block cancer-promoting FGFs and therefore may be associated with better tolerability than other known drug candidates targeting the FGF pathway. We have completed a Phase 1 clinical trial, and our partner, GlaxoSmithKline, or GSK, commenced a multi-arm Phase 1b clinical trial in July 2013 in patients with abnormally high levels of FGFR1. We expect preliminary data from this trial in the second half of 2014. GSK is responsible for the development and commercialization of FP-1039 in the United States, the European Union and Canada. We have an option to co-promote FP-1039 in the United States.

 

  n  

FPA008 is an antibody that inhibits colony stimulating factor-1 receptor, or CSF1R, and is being developed to treat patients with inflammatory diseases, including rheumatoid arthritis, or RA. CSF1R is a cell surface protein that controls the survival and function of certain inflammatory cells called monocytes and macrophages. By inhibiting CSF1R activation, FPA008 prevents the production of multiple inflammatory factors, such as tumor necrosis factor, interleukin-6 and interleukin-1, that are individually targeted by approved therapeutics such as Humira® (adalimumab), Actemra® (tocilizumab) and Kineret® (anakinra), respectively. As a result, we believe FPA008 has the potential to have better efficacy than each of these approved drugs. In addition, unlike currently marketed RA drugs, FPA008 directly inhibits bone-destroying cells called osteoclasts. We plan to begin a Phase 1 clinical trial for FPA008 by the end of 2013 and expect preliminary data by the end of 2014.

 

  n  

FPA144 is an antibody that inhibits FGF receptor 2b, or FGFR2b, and is being developed to treat patients with gastric cancer and potentially other solid tumors. In preclinical studies, FPA144 was highly effective in blocking the growth of gastric tumors that had abnormally high levels of FGFR2b. We plan to begin a Phase 1 clinical trial for FPA144 in the second half of 2014 in patients with tumors expressing high levels of FGFR2b and expect preliminary data by the end of 2015.

The process of discovering targets for protein therapeutics has historically proven difficult and slow. There are more than 5,600 proteins in the body that represent potential protein therapeutic targets, but only about 30 are targeted by currently marketed protein drugs in cancer and inflammatory diseases. We spent seven years successfully developing a platform to improve and accelerate the protein therapeutic discovery process. Our platform is based on two components:

 

  n  

a proprietary library of more than 5,600 human extracellular proteins that we believe is the most comprehensive collection of fully functional extracellular proteins available and is an abundant source of medically relevant novel targets for protein therapeutics; and

 

  n  

proprietary and new technologies for producing and testing thousands of proteins at a time.

 

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We believe our platform improves and accelerates the discovery of new protein targets and protein therapeutics because it can:

 

  n  

identify novel medically relevant protein targets and protein therapeutics that have little or no previously known biological function or are not in the public domain and cannot easily be discovered by other methods;

  n  

determine the best protein target among many alternatives for a particular disease by screening and comparing nearly all possible medically important targets simultaneously; and

  n  

identify new targets more quickly and efficiently than previously possible because it can produce and test thousands of proteins at a time, rather than one or just a few at a time.

In the past several years we have used this platform to identify dozens of targets validated in rodent models and to build a growing pipeline of drug candidates. We have attracted numerous partnerships with leading biopharmaceutical companies, which have generated over $220 million in funding for our business since 2006. Under the FP-1039 license and collaboration agreement with GSK, we are eligible to receive up to $435 million in contingent payments. We also have discovery collaborations with GSK and UCB Pharma, S.A., or UCB, and are eligible to receive potential option exercise fees and contingent payments up to $124.3 million per target under the GSK muscle diseases collaboration, $193.8 million per target under the GSK respiratory diseases collaboration and $92.2 million per target under the UCB fibrosis and CNS collaboration. We believe our platform will continue to provide opportunities for monetization through product and discovery collaborations.

Our Strategy

Our goal is to use our proprietary platform to maintain our leadership position in the discovery of innovative protein therapeutics and to develop and commercialize protein therapeutics to treat cancer and inflammatory diseases. The key elements of our strategy to achieve this goal are:

 

  n  

Focus on protein therapeutics to treat cancer and inflammatory diseases. Protein therapeutics accounted for over $71 billion in global sales in 2012 for the treatment of cancer and inflammatory diseases. However, there continue to be significant medical needs for novel and effective therapies. We believe that our library includes substantially all medically important extracellular proteins involved in cancer and inflammatory diseases, and, combined with the significant experience and expertise of our scientists in these fields, we believe we are well positioned to identify new targets and to develop effective, novel protein therapeutics.

 

  n  

Continue to advance and expand our internal pipeline. We are currently developing three product candidates, FP-1039, FPA008 and FPA144. We intend to focus our resources on the development of these product candidates and on discovering and developing new product candidates with our platform.

 

  n  

Employ smarter drug development techniques. We will pursue indications and specific patient populations in which activity of our product candidates can be assessed early in clinical development, potentially in Phase 1 clinical trials. We also plan to use companion diagnostics to identify patients most likely to respond to our product candidates. We believe selecting patients using companion diagnostics should increase the probability of success in our clinical trials.

 

  n  

Build a commercial enterprise by retaining rights for products in targeted specialty markets. We plan to eventually build sales and marketing capabilities in selected specialty markets that we can adequately serve with a focused commercial organization. In our collaboration with GSK for FP-1039 we have an option to co-promote the product in the United States. In the event that we out-license other products in our pipeline, we intend to retain rights to market the products ourselves in the United States, where appropriate.

 

  n  

Enter into additional discovery and product collaborations to supplement our internal development capabilities and generate funding. Because our platform is broadly applicable, we plan to pursue discovery collaborations in disease areas other than cancer and inflammation. In addition, we will license certain rights to products within cancer and inflammation to supplement our development and commercialization capabilities. These collaborations provide us with validation of our technology, significant funding to advance our pipeline and access to development, manufacturing and commercial expertise and capabilities.

 

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Product Pipeline

The following table summarizes key information about our three most advanced product candidates:

 

PRODUCT CANDIDATE

  

INDICATION

  

COMMERCIAL RIGHTS

  

STAGE OF DEVELOPMENT AND
ANTICIPATED MILESTONES

FP-1039    FGFR1 gene-amplified tumors, e.g., squamous non-small cell lung cancer   

GSK-HGS: U.S., EU and Canada

 

Five Prime: Co-promote in U.S.; retained rest of world rights

  

n      Completed Phase 1 clinical trial.

 

n      Phase 1b clinical trial commenced in July 2013.

 

n      Preliminary Phase 1b clinical data expected by the second half of 2014.

FPA008   

Rheumatoid arthritis;

other inflammatory diseases

   Five Prime: Global   

n      Phase 1 clinical trial expected to commence by end of 2013.

 

n      Preliminary Phase 1 clinical trial data expected by end of 2014.

FPA144    FGFR2 gene-amplified tumors, e.g., gastric cancer    Five Prime: Global   

n      Phase 1 clinical trial expected to commence in the second half of 2014.

 

n      Preliminary Phase 1 clinical trial data expected by end of 2015.

FP-1039

Overview. FP-1039 is a protein therapeutic we designed to treat multiple types of solid tumors by binding to FGFs that would otherwise bind to and activate FGFR1. We have licensed rights to FP-1039 in the United States, the European Union and Canada to Human Genome Sciences, Inc., or HGS. GSK commenced a multi-arm Phase 1b clinical trial in the United States and Europe in July 2013 in selected patients with tumors expressing high levels of FGFR1. We expect data from this trial in the second half of 2014. HGS was acquired by GSK in August 2012, and we refer to HGS as GSK-HGS.

FGFs and FGFRs regulate tumor cell proliferation and the growth of new blood vessels, called angiogenesis. The FGF family consists of 22 known proteins called ligands that exert their physiological effect on cells by binding to four FGFRs (FGFR1, FGFR2, FGFR3 and FGFR4). Dysregulation of the FGF pathway has been linked to the growth of human tumors and poor patient prognosis.

Certain tumors contain an excessive number of FGFR1 genes, known as gene amplification. This gene amplification results in excess production, or the over-expression, of FGFR1 protein on the surface of the tumor cell. This over-expression of FGFR1 leads to increased binding of FGFs, which stimulate uncontrolled proliferation of some types of tumor cells. These tumors include squamous non-small cell lung cancer, or squamous NSCLC, small cell lung cancer, or SCLC, breast, and head and neck cancers. Patients who have squamous NSCLC or breast cancer with FGFR1 gene amplification have significantly reduced survival relative to comparable patients whose tumors do not have this amplification.

In addition to directly stimulating uncontrolled cancer cell proliferation, some FGFs can promote tumor growth through angiogenesis. By triggering angiogenesis, cancerous cells can fuel their metabolic needs and direct their own uncontrolled cell division. The FGFs that cause angiogenesis are often present in a type of kidney cancer called renal cell carcinoma, or RCC, and in a type of liver cancer called hepatocellular carcinoma, or HCC.

 

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Market Opportunity. We believe there are currently no approved therapies that specifically block FGFs or FGFRs. FP-1039 is designed to treat patients with FGFR1 pathway dysregulation, particularly in patients with metastatic tumors that have spread to other organs. The following table shows our estimates of 2012 incidence and prevalence of advanced or metastatic tumors with FGFR1 gene amplification:

 

 

 

TUMOR TYPE

   FREQUENCY OF
FGFR1 GENE
AMPLIFICATION
BY TUMOR
TYPE
  PREVALENCE
OF PATIENTS
WITH
FGFR1
GENE
AMPLIFICATION
IN THE U.S.
     INCIDENCE OF
PATIENTS WITH
FGFR1 GENE
AMPLIFICATION
IN THE U.S.
     PREVALENCE
OF PATIENTS
WITH
FGFR1
GENE
AMPLIFICATION
IN EUROPE AND
ASIA
     INCIDENCE OF
PATIENTS WITH
FGFR1 GENE
AMPLIFICATION
IN EUROPE AND
ASIA
 

Squamous NSCLC

   22%     11,000         9,000         51,000         50,000   

Head and Neck Cancer

   17%     17,000         5,000         132,000         56,000   

Breast Cancer

   7-15%
(mean 11%)
    32,000         8,000         148,000         40,000   

SCLC

   6%                 2,000                     2,000                   10,000                   10,000   
    

 

 

    

 

 

    

 

 

    

 

 

 

Total

         62,000         24,000         341,000         156,000   
    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

In addition to our and GSK-HGS’s research and development in the area of tumors with FGFR1 gene amplification, we are exploring the potential development of FP-1039 in RCC or HCC. The following table shows the estimated 2012 incidence and prevalence of advanced and metastatic RCC and HCC, cancer types for which we believe FP-1039 may be effective when used in combination with other anti-angiogenic agents.

 

 

 

TUMOR TYPE

   PREVALENCE
IN THE U.S.
     INCIDENCE
IN THE U.S.
     PREVALENCE
IN EUROPE
AND ASIA
     INCIDENCE
IN EUROPE
AND ASIA
 

Kidney (RCC)

     61,000         20,000         172,000         64,000   

Liver (HCC)

     9,000         10,000         250,000         301,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

           70,000               30,000             422,000             365,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

 

 

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Our Program. FP-1039 is a novel protein therapeutic, which includes the extracellular part of FGFR1. FP-1039 acts as an inhibitor of FGFs, because the FGFR1 portion of the molecule binds to FGFs and prevents them from binding to FGFR1 on tumor and blood vessel cells. Because FGF proteins circulating in the blood are called ligands, FP-1039 is called a ligand trap. FP-1039 also includes a portion of an antibody called the Fc region (see Figure 1). Because the Fc region of an antibody is inherently very stable in the bloodstream, we believe adding that fragment to FP-1039 makes our protein therapeutic more stable as well. The Fc region does not bind to FGFs, but instead serves only to improve the stability of FP-1039.

Figure 1: FP-1039 Binds to and Inactivates FGFs That Promote Tumor Cell Growth and New Blood Vessel Growth

 

LOGO

Importantly, FP-1039 inhibits certain FGFs but not others. Because it binds to most FGFs associated with tumor growth and angiogenesis, it has the capability of inhibiting growth of many different kinds of cancers. However, it does not bind to an FGF called FGF23 that regulates phosphate levels in the blood. Therefore, FP-1039 treatment does not change phosphate levels in the blood. This is in contrast to small molecule inhibitors of FGF receptors being developed by Novartis AG and AstraZeneca plc, which block the activity of both cancer-associated FGFs and FGF23, and are reported to cause abnormally high phosphate levels in the blood, known as hyperphosphatemia. High phosphate levels can lead to calcification in tissues, including blood vessels. In our Phase 1 clinical trial, treatment with FP-1039 in patients with solid tumors was not associated with the side effects seen in the clinical trials with small molecule FGFR inhibitors, which included hyperphosphatemia and retinal detachment. We expect FP-1039 to be better tolerated by patients. We also expect that it could be used in dosages high enough to fully block cancer-promoting FGFs, and that it has the potential to be safely combined with standard of care chemotherapy.

FP-1039 Phase 1 Clinical Trial. Our Phase 1 clinical trial of FP-1039 was an open-label, non-randomized, ascending-dose study designed to assess the safety, tolerability and pharmacokinetics of FP-1039 administered weekly to patients with metastatic tumors for whom standard therapy did not exist or was no longer effective. We conducted this Phase 1 clinical trial under an Investigational New Drug, or IND, application that we submitted to the U.S. Food and Drug Administration, or FDA, on May 29, 2008. FP-1039 was administered intravenously by a 30-minute infusion. Patients received these infusions once a week for a total of four infusions, followed by a two-week observation period. Patients without progressive disease were given the option to continue on FP-1039 on a weekly basis.

The 39 patients enrolled in the study had a variety of tumors, including advanced or metastatic breast cancer, lung cancer, colon/rectal cancer, prostate cancer, head and neck cancers, or uterine cancer. Overall, FP-1039 was well tolerated over the dose range studied and no maximum tolerated dose was observed in this study. As a result, we

 

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believe that FP-1039 will be well tolerated in combination with standard of care chemotherapy. In the Phase 1 clinical trial, FP-1039 treatment was not associated with hyperphosphatemia or retinal detachment as have been observed in patients enrolled in trials with the small molecule FGFR inhibitors. We also studied blood levels of FGF2, one of the most important cancer-promoting FGFs, and observed a significant decrease of FGF2 in all patients tested.

Because the primary objectives of the study were to assess safety and pharmacokinetics of FP-1039 infusions, we did not require patients to have tumors with FGFR1 gene amplification. In this unselected patient population, no major tumor shrinkage was observed. Despite not being preselected for FGFR1 gene amplification, 17 patients had stabilization of tumor growth, known as stable disease, for varying periods of time. One of the seventeen patients who had hormone-resistant prostate cancer that progressed during chemotherapy experienced tumor reduction of 20% following treatment with FP-1039, with stable disease duration of approximately seven months.

FP-1039 Preclinical Data. In preclinical testing, we observed inhibition of tumor growth with single-agent FP-1039, particularly in tumors with FGFR1 gene amplification, including squamous NSCLC and SCLC (Figure 2).

Figure 2: Treatment with FP-1039 inhibits growth of squamous NSCLC and SCLC tumors with FGFR1 gene amplification in mouse models

 

LOGO

Furthermore, when combined with standard chemotherapy, FP-1039 treatment improves anti-tumor activity in preclinical models. Figure 3 shows results in a preclinical model of squamous NSCLC and SCLC with FGFR1 gene amplification in which the addition of FP-1039 to chemotherapy resulted in greater tumor growth inhibition than either FP-1039 or chemotherapy alone.

Figure 3: Addition of FP-1039 to standard chemotherapy results in greater inhibition of growth of squamous NSCLC and SCLC tumors with FGFR1 gene amplification in mouse models

 

LOGO

 

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The FGF pathway has also been implicated in the progression of RCC. In some preclinical models of RCC, FGF levels are high and promote tumor growth and angiogenesis. Treatment of these RCC tumors with FP-1039 as a single agent resulted in inhibition of tumor growth (Figure 4).

Figure 4: FP-1039 is active in a mouse model of Caki-1 RCC

 

LOGO

In most cases of human RCC there are abnormally high levels of a protein called VEGF that promotes angiogenesis. There are therapies designed to inhibit VEGF action, such as Votrient® (pazopanib), which are approved for use in patients with RCC. However, despite initial control of tumor growth with anti-VEGF therapy, RCC tumors eventually progress because other factors, including FGFs, replace VEGF in stimulating blood vessel formation. In this setting, anti-FGF therapy with FP-1039 may provide additional clinical benefit. In preclinical models of RCC with abnormally high VEGF, the addition of FP-1039 to Votrient resulted in greater inhibition of tumor growth than Votrient alone (Figure 5).

Figure 5: In a mouse model, FP-1039 in combination with Votrient, an anti-angiogenesis therapeutic approved for RCC, results in greater inhibition of RCC tumor growth than either therapeutic alone

 

LOGO

Current Development Plan. GSK-HGS has commenced a Phase 1b clinical trial of FP-1039 in combination with several chemotherapies in patients with FGFR1 gene-amplified tumors under an IND that GSK-HGS submitted to the FDA on April 30, 2012. In addition, GSK-HGS plans to explore use of FP-1039 as a single agent. The trial is designed as a three-arm, multicenter, non-randomized, parallel-group, uncontrolled, open-label Phase 1b clinical trial designed to evaluate the safety, tolerability, dosage and overall response rate of FP-1039:

 

  n  

in combination with paclitaxel and carboplatin in previously untreated metastatic squamous NSCLC (Arm A);

 

  n  

in combination with docetaxel in metastatic squamous NSCLC that has progressed after 1st-line chemotherapy (Arm B); or

 

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  n  

as monotherapy in metastatic cancers such as squamous NSCLC, RCC, breast or head and neck, with documented FGFR1 gene amplification or FGF over-expression (Arm C).

Clinical development of FP-1039 in patients with FGFR1 gene-amplified tumors will be accompanied by a diagnostic test at all stages of clinical trials designed to identify the selected patient population we believe to be the most likely to benefit from this protein therapeutic and to enable streamlined clinical development. Patients with FGFR1 gene-amplified tumors are identified by staining tests performed on tumor samples. In the current Phase 1b trial of FP-1039, GSK-HGS is using a third party central lab to test tumor samples from prospective subjects to identify those with FGFR1 gene-amplified tumors. Neither we nor GSK-HGS have yet engaged a third party to develop any companion diagnostic that would be used in any future clinical trials of FP-1039 or required for the registration and approval of FP-1039.

Additionally, we are exploring the feasibility of conducting a study in other tumors, possibly RCC or HCC, to assess the benefit of combining FP-1039 with a VEGF inhibitor.

GSK-HGS has the rights to develop and commercialize FP-1039 in the United States, the European Union and Canada. We retain a co-promotion option in the United States and full commercial rights in the rest of world territories.

FPA008

Overview. FPA008 is an antibody that inhibits CSF1R and is being developed to treat patients with RA. FPA008 also has the potential to treat patients with other inflammatory diseases, including lupus nephritis, psoriatic arthritis, ankylosing spondylitis, fibrosis, inflammatory bowel disease and multiple sclerosis. These are chronic, incurable disorders with serious medical complications and disability for which better therapies with novel mechanisms of action are needed. We believe FPA008 has the potential to be more efficacious than current therapies because it targets a group of important inflammatory cell types called monocytes and macrophages, which are key drivers of the inflammation and joint destruction process and are not targeted by currently approved drugs. These cells depend on CSF1R for their activity and survival. We plan to initiate a Phase 1 clinical trial to evaluate safety and early clinical activity of FPA008 in RA by the end of 2013 and we expect preliminary clinical data by the end of 2014.

Monocytes and macrophages are cells of the immune system that, when abnormally activated, cause inflammation in diseases such as RA. These cells secrete a variety of proteins, including tumor necrosis factor alpha, or TNFa, interleukin-6, or IL-6, and interleukin-1 beta, or IL-1ß, that attract and activate inflammatory cells. Derivatives of these inflammatory cells directly destroy bone tissue in joints.

Until now, it has been difficult to block monocytes and macrophages because the protein targets that control these cells were only partially known. Protein therapeutics that are approved to treat RA, such as Humira, Remicade, Enbrel and Actemra, only block single factors released from monocytes and macrophages, and other protein therapeutics such as Orencia® (abatacept) and Rituxan® (rituximab) do not directly inhibit monocytes and macrophages or their factors. Using our library and proprietary platform, we discovered a novel protein target called interleukin-34, or IL-34, that is a key regulator of monocyte and macrophage numbers and activity and that is found in inflamed joints of RA patients. Once we discovered IL-34, we were able to use our protein library and our ligand-receptor matching technology to identify its receptor, CSF1R. This receptor is known to be expressed on the surface of monocytes and macrophages. Before our discovery of IL-34, CSF1R was thought to have only one ligand called CSF1. Both CSF1 and IL-34 bind to and activate CSF1R and therefore promote the survival and activity of monocytes and macrophages. FPA008 blocks the binding of both CSF1 and IL-34 to CSF1R and thereby inhibits the activity and survival of these cells.

Market Opportunity. RA is a systemic inflammatory disease that causes damage to the joints and other organs, affecting approximately 1% of people in the United States. RA is a major cause of disability and is associated with reduced life expectancy, especially if it is not adequately treated. In 2012, the top three RA biologic products by global sales, Humira, Remicade and Enbrel, represented over $25 billion in revenue. Currently available therapies for patients suffering from RA include non-steroidal anti-inflammatory drugs, or NSAIDs, corticosteroids, sulfasalazine, hydroxychloroquine, anti-tumor necrosis factor, or anti-TNFa, injectables and other biologic agents, and small molecule Janus kinase, or JAK, inhibitors.

 

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The following table shows the estimated prevalence of RA in the United States in 2012:

 

 

 

TYPE OF PATIENTS IN THE UNITED STATES

   NUMBER OF PATIENTS IN
2012
 

Diagnosed with RA

     1,900,000   

Patients treated with a pharmacological agent

     1,800,000   

 

 

Many patients are or will become unresponsive to current treatment options and experience significant disease activity with progressive joint and bone destruction, leading to pain and disability.

Our Program. FPA008 is an anti-CSF1R antibody, which we designed to block the ability of IL-34 and CSF1 to bind to and activate CSF1R. FPA008 reduces the numbers and activity of monocytes and macrophages that cause disease, and prevents the production and release of inflammatory factors (Figure 6). The advantage of this approach in comparison to, for example, Humira and Actemra, is that the production of multiple deleterious factors is inhibited simultaneously, potentially resulting in better efficacy (Figure 7). Another advantage of blocking CSF1R is that a special macrophage that breaks down bone, called an osteoclast, is inhibited. Therefore, not only could FPA008 potentially be superior in reducing inflammation, but it may also directly suppress bone destruction in the joints of patients with inflammatory diseases.

Figure 6: FPA008 mechanism of action

 

LOGO

 

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Figure 7: Advantage of FPA008 versus other protein therapeutics

 

LOGO

Preclinical Results. We and others have demonstrated that both IL-34 and CSF1 are present at increased levels in the inflamed joints of patients with RA. Biopsy samples of inflamed joints from patients with RA incubated with FPA008 ex vivo showed reduced levels of the inflammatory proteins TNFa, IL-6 and IL-1ß compared with samples incubated with a control antibody (Figure 8). These studies provide evidence that FPA008 can simultaneously inhibit the production of multiple cytokines that cause inflammation in RA.

Figure 8: Incubation of joint tissue from patients with RA with FPA008 results in decreased TNFa, IL-6 and IL-1ß(1)

 

LOGO

 

(1)   

Each pair of linked dots corresponds to samples from the same patient and treated with either a control that does not bind to CSF1R, or with FPA008.

In other preclinical studies, treatment with FPA008 and a similar antibody called cmFPA008, used for studies in mice, resulted in several expected beneficial effects including:

 

  n  

reduced blood levels of inflammatory monocytes, a specific type of monocyte whose numbers are elevated during chronic inflammation and produces high levels of inflammatory factors such as TNFa;

 

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reduced swelling of the joints (Figure 9); and

 

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reduced inflammation and bone destruction in the joint (Figure 10).

In preclinical studies shown in Figures 9 and 10, FPA008 was dosed to give roughly equivalent drug levels in the blood as Enbrel, an approved protein therapeutic for use in RA that blocks TNFa. In these preclinical studies, FPA008 was better at reducing joint swelling, inflammation and bone destruction compared to Enbrel.

 

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Figure 9: Treatment with cmFPA008, a mouse form of FPA008, prevents development of arthritis in a collagen-induced arthritis model

 

LOGO

Figure 10: Treatment with cmFPA008, a mouse form of FPA008, prevents inflammation and bone damage in a collagen-induced arthritis model

 

LOGO

Clinical Development Plan. Our plan is to initiate a Phase 1 clinical trial by the end of 2013 to assess the safety, tolerability and early efficacy of FPA008. The trial will commence in healthy volunteers and transition to testing in patients with RA and will be conducted outside the U.S. The subsequent Phase 2 clinical trial will be a randomized study in patients with RA. We plan to submit an initial IND for FPA008 in connection with the Phase 2 clinical trial. In our planned Phase 1 clinical trial of FPA008, we will analyze clinical data to assess biomarkers that may identify subsets of RA patients who would benefit from FPA008 treatment more than unselected patients with RA and to determine whether a companion diagnostic should be used in later clinical studies of FPA008. We believe this approach may enable us to streamline clinical development in the patient populations most likely to benefit from FPA008. We have not yet engaged any third parties to develop a companion diagnostic for FPA008. We expect preliminary clinical data from the Phase 1 clinical trial by the end of 2014. Upon completion of the Phase 1 clinical trial, we may explore the clinical development of FPA008 in additional inflammatory diseases.

 

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FPA144

Overview. FPA144 is a monoclonal antibody directed against a form of FGFR2, or FGFR2b. When the FGFR2 gene is amplified by cancer cells, the FGFR2b protein is expressed at abnormally high levels on the tumor’s surface. This occurs in some patients with gastric and lower esophageal cancers. We plan to initiate a Phase 1 clinical trial in the second half of 2014 in patients with gastric cancer that expresses abnormally high levels of FGFR2b as measured by a companion diagnostic test. We will evaluate early clinical activity and safety of FPA144 in this Phase 1 clinical trial. We expect preliminary Phase 1 clinical data from this trial by the end of 2015.

Market Opportunity. Scientific literature reports that approximately 3–9% of patients with gastric cancer have tumors with FGFR2 gene amplification. We believe this results in abnormally high levels of FGFR2b protein on the tumor cell surface. In the United States, where the prevalence was approximately 73,500 patients in 2012, we estimate that approximately 2,200 to 6,600 gastric cancer patients have the FGFR2 gene amplification. Outside of the United States, where the prevalence of gastric cancer was over 1 million patients in 2012, we estimate that approximately 31,000 to 93,000 gastric cancer patients have the FGFR2 gene amplification. For patients in the United States with metastatic gastric cancer, the 5-year survival rate is only 4%. Those patients with FGFR2 gene amplification have significantly reduced survival compared to other patients with gastric cancer.

Given the relatively small patient population and poor survival, we believe that the gastric cancer indication will be an orphan indication in the United States, and that the sub-set of patients with gastric cancer bearing the FGFR2 gene amplification constitutes an ultraorphan indication. By developing FPA144 for an ultraorphan indication with a significant unmet medical need, we may be able to advance FPA144 substantially faster than industry average drug development timelines. We believe that our clinical development organization is well suited to conduct such a focused, capital-efficient clinical development plan for FGFR2 gene-amplified gastric cancer. We plan to develop and commercialize FPA144 ourselves in the United States. We intend to seek a collaborator to develop and commercialize FPA144 outside of the United States.

Our Program. We believe that FPA144 acts on the tumor cell in two ways:

 

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FPA144 prevents binding of certain FGFs to FGFR2b, and inhibits their ability to promote the growth of the tumor cells. The FGFs that bind to FGFR2b are different than the FGFs that bind to FP-1039. Thus, the spectrum of anti-tumor activity for FPA144 is different than FP-1039. Our preclinical studies indicate that FP-1039 is not effective against gastric cancer with abnormally high levels of FGFR2b, whereas FPA144 is effective.

 

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Once FPA144 binds to FGFR2b proteins on the surface of the tumor cell, it engages cells of the immune system to kill the tumor cell in a process called antibody-dependent cell-mediated cytotoxicity, or ADCC.

In preclinical studies, FPA144 is highly effective in blocking the growth of gastric cancers that produce abnormally high levels of FGFR2b. This is demonstrated in Figure 11, where human gastric tumors with FGFR2 gene amplification were treated with increasing doses of FPA144, resulting in significant inhibition of tumor growth and tumor shrinkage when compared to a control antibody.

Figure 11: Increasing doses of FPA144 inhibit growth of human gastric tumors that contain an amplification of the FGFR2 gene in a mouse model

 

LOGO

 

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Clinical Development Plan. The tumor cells that have too much FGFR2b protein on their surface can be identified by special staining tests performed on the tumor. Because FGFR2b is the target for FPA144, patients’ tumors can be screened for this protein, helping to identify the patients most likely to respond to FPA144 treatment. Thus, development of FPA144 in cancer patients will be accompanied by development of a companion diagnostic test to identify those tumors that have too much FGFR2b on their surface, enabling streamlined clinical development in the patient populations most likely to benefit. We plan to use a companion diagnostic test to identify patients with FGFR2 gene-amplified tumors in clinical trials at all stages. We will need to engage a third party to develop any companion diagnostic that would be used in clinical trials of FPA144 or required for the registration and approval of FPA144, however, we have not yet engaged any third party for this purpose.

We plan to submit an IND with the FDA and initiate a Phase 1 clinical trial in the second half of 2014 in the United States and Asia. We expect preliminary Phase 1 clinical data from this trial by the end of 2015. This trial will enroll patients with gastric cancer with abnormally high levels of FGFR2b in order to evaluate early clinical activity and safety of FPA144. If the Phase 1 trial demonstrates acceptable safety and evidence of clinical activity of FPA144, we plan to conduct a multinational Phase 2 clinical trial and consider initiating a Phase 1 clinical trial in Japan for further development in that country. If we see early evidence of a therapeutic effect in these patients, we intend to meet with regulatory authorities to discuss the possibility of an expedited clinical development and regulatory pathway for FPA144. We intend to seek orphan drug designation with the FDA before the end of the Phase 1 clinical trial, and if eligible, expedited review and approval programs, including breakthrough therapy and fast track designations for FPA144.

Earlier Drug Discovery and Development Programs

We are investigating several novel drug targets in the areas of cancer and immunologic disease that were identified using our discovery platform. These programs that are early in the drug development process include steroid-resistant asthma and cancer immunotherapy. We initiated our cancer immunotherapy program over two years ago. We have identified promising potential targets and are actively validating these. These targets are mechanistically similar to proteins called PD-1 and CTLA-4 that have been shown to enable tumors to evade elimination by the immune system.

Our Biologics Discovery Platform

Overview

Targets for protein therapeutics are proteins in the body that when inappropriately produced or altered can result in human diseases. Protein therapeutics can be designed to reverse these disease-causing mechanisms. Traditional ways to discover new targets for protein therapeutics have relied on a slow “trial-and-error” approach studying a single or a small number of proteins at a time. There are more than 5,600 proteins in the body that represent potential protein therapeutic targets, but only about 30 are targeted by currently marketed protein drugs in cancer and inflammatory diseases.

We have successfully developed a platform to improve the traditionally difficult and slow process of discovering new protein therapeutics. The platform is based on two components (Figure 12):

 

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a proprietary library of more than 5,600 human extracellular proteins that we believe is the most comprehensive collection of fully functional extracellular proteins and is an abundant source of medically relevant novel targets for protein therapeutics; and

 

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proprietary and new technologies for producing and testing thousands of proteins at a time.

We believe our platform improves and accelerates the discovery of new protein targets and protein therapeutics because it can:

 

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identify novel medically relevant protein targets and protein therapeutics that have little or no previously known biological function or are not in the public domain and cannot easily be discovered by other methods;

 

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determine the best protein target among many alternatives for a particular disease by screening and comparing nearly all possible medically important targets simultaneously; and

 

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identify new targets more quickly and efficiently than previously possible because it can produce and test thousands of proteins at a time, rather than one or just a few at a time.

 

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In the past several years we have used this platform to identify dozens of targets validated in rodent models and a growing pipeline of drug candidates. We have attracted numerous partnerships with leading biopharmaceutical companies that have generated over $220 million in funding for our business since 2006. We are currently engaged in discovery collaborations with GSK and UCB. We are eligible to receive potential option exercise fees and contingent payments up to $124.3 million per target under the GSK muscle diseases collaboration, $193.8 million per target under the GSK respiratory diseases collaboration and $92.2 million per target under the UCB fibrosis and CNS collaboration.

We spent approximately seven years developing and integrating the components of our discovery platform. The scientific expertise and time required to develop our platform impose significant barriers to entry that would make it difficult for a competitor to reproduce what we have created. We believe that in our discovery platform we control a scarce and valuable set of resources. Given the dearth of new target discovery in the biopharmaceutical industry and the continued need for pharmaceutical companies to restock pipelines and replace aging products facing patent expiry, we believe that the platform will continue to provide opportunities for monetization through product and discovery collaborations as it has done in the past.

Figure 12: Our Protein Therapeutic Discovery Platform

 

LOGO

Protein Library

We have built a library that we believe represents substantially all of the body’s medically important targets for protein therapeutics and an abundant source of potential future protein drugs. Our library is derived from more than 100 distinct human tissues, and comprises more than 5,600 human proteins. This library includes the proteins that form the basis of marketed blockbuster protein drugs, such as Lantus® (insulin glargine), Herceptin® (trastuzumab) and Humira, which we believe validates the utility of the platform. In addition, the library contains thousands of other proteins, including novel protein variants that are not disclosed in the public domain.

Generally, protein collections are generated from gene copies called cDNAs. cDNAs are copies of genes that actively direct the production of protein and can be used to reproduce in the laboratory the same protein that is made in the body. However, if one end of the cDNA, called the 5 prime end, is not present, the protein cannot be made. The 5 prime end is the most difficult part of the expressed gene to copy with traditional technology generally available to scientists. We used proprietary technology specifically developed to solve this problem by capturing more cDNAs

 

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with 5 prime ends intact. Accordingly, we believe our collection of cDNAs is more complete than those collections developed by other companies that were not able to produce the 5 prime end of many genes. We believe we have therefore been able to make a comprehensive collection of full-length, fully functional proteins that is now the basis of our discovery platform.

Novel Technologies to Produce and Screen the Library in High Throughput

We have developed a suite of technologies for producing and screening the proteins in our library that addresses the limitations of traditional drug screening methods when applied to proteins. These technologies are composed of a combination of our own proprietary technology along with other publicly available technologies, including technologies we have in-licensed on a non-exclusive basis from third parties. Generally, we protect these proprietary biologics discovery platform technologies as trade secrets or know-how and do not seek to obtain patents to cover the biologics discovery platform technologies we develop.

High-Throughput Protein Production. The difficulty of producing large numbers of new proteins in a functional form presents a limitation in the discovery of new protein drugs. Our high-throughput protein production system includes proprietary technologies developed over several years that allow us to produce approximately 2,000 proteins per week at therapeutically relevant amounts and with a high level of consistency. We produce the proteins for our cell-based screening system using human cells to best ensure proteins are made in the same correct, functional form in which they are made in the human body. Our technologies enable us to reliably produce our entire protein library in less than three weeks. In contrast, typical methods producing one or a few proteins at a time would take years to produce a library of this size and would have to be repeated for each target discovery screen.

Cell-Based Screens to Identify Protein Therapeutic Targets. We design complex cell-based screens that better model the fundamental biological processes underlying the disease of interest, and adapt them to be compatible with our protein library. In contrast, because traditional small molecule drug screening can involve testing millions of compounds, pharmaceutical companies for practical reasons have often had to resort to using isolated enzymes or simple cultures of cell lines that can fail to mimic important aspects of how cells function in the body. We have undertaken what we believe to be some of the most complex cell-based screens in high throughput with protein libraries, including screens with rare stem cells and combinations of diseased primary human cell types. We execute these screens on automated, state-of-the-art screening systems designed and built in-house and analyzed using software developed by us. To date, we have screened each of the proteins in our protein library in screens using approximately 50 different cell types. Using our cell-based screens, we have discovered the target that forms the basis of our FPA008 program and numerous other novel targets for severe asthma, pulmonary fibrosis, muscle disease, cancer and others.

Rapid In Vivo Protein Production System. Our rapid in vivo protein production system, or RIPPS®, enables us to produce and test the proteins in our library directly in vivo in virtually any rodent model of disease and in high throughput. RIPPS technology identifies new targets that cannot be easily identified in other ways. Further, RIPPS not only identifies novel targets for protein therapeutics—for example, targets for therapeutic antibodies—it can also identify proteins that are new therapeutics themselves because each protein in the library is tested for its ability to affect a disease in a rodent model. RIPPS avoids the costly and time-consuming process required for conventional in vivo testing of efficacy and safety that includes expression, scale up, purification, characterization and formulation of each protein one at a time. Using RIPPS, we have identified and validated dozens of new targets and protein drug candidates in rodent models of cancer, inflammatory disorders, muscle disease and other conditions.

Receptor-Ligand Matching. Some proteins are referred to as ligands and exert their actions by binding to a receptor on a cell surface. In order to optimally treat some diseases, one must know the identity of both the receptor and the ligand. Our comprehensive collection of protein ligands and extracellular domains of cell surface receptors provides us with the ability to identify ligand and receptor pairs. Historically, this information has led to new therapeutic targets by identifying the best target in a disease pathway and has increased the probability of success of drug development by enhancing understanding of the mechanism of action of a therapeutic candidate. Using this technology, we have identified the target for FPA008 and several new ligands, including two new hormones.

Growing Database of Protein Function. Each of the proteins in our library has been tested in numerous screens on different cell types. This provides us with an extensive database of how each protein performs in different screens

 

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and whether it is specific to a given disease process or has a broader set of activities. The cumulative data from all the screens allows us to identify the most appropriate target.

Collaborations

Since 2006, we have entered into six discovery collaborations with Boehringer Ingelheim GmbH, or Boehringer, Centocor Research and Development Inc., or Centocor, GSK, Pfizer Inc., or Pfizer, and UCB, under which we have developed and conducted or plan to develop and conduct cell-based and in vivo screens using our protein discovery platform, library and expertise to identify, validate and characterize target proteins involved in several disease areas. These discovery collaborations have provided us with approximately $104 million in non-equity funding through June 30, 2013. We also sold shares of our convertible preferred stock to Johnson & Johnson Development Corporation, an affiliate of Centocor, Pfizer and GSK, in connection with entering into these discovery collaborations for total equity funding of $63 million from these collaboration partners. Our discovery collaborations with GSK and UCB are ongoing and, as of June 30, 2013, we are eligible to receive up to an additional $14.7 million of research funding and technology access fees through 2016 under these discovery collaborations. The research obligations under each of our discovery collaborations with Boehringer, Centocor and Pfizer have ended. We have no ongoing performance obligations and do not expect to receive any significant additional consideration under these discovery collaborations. We plan to continue to actively seek out discovery collaboration partners and engage in discussions with pharmaceutical and biotech companies regarding potential new discovery collaborations.

In addition to our discovery collaborations, in 2011 we entered into a regional product collaboration with HGS for FP-1039 that has provided us with approximately $53 million in upfront and research and development fees through June 30, 2013. We are also eligible to receive additional research, development, regulatory and sales-based contingent payments, as well as royalties on net product sales under our discovery and product collaborations. Certain terms of our collaboration with GSK-HGS and our active discovery collaborations with GSK and UCB are summarized below.

FP-1039 License and Collaboration with GSK-HGS

In March 2011, we entered into a license and collaboration agreement with GSK-HGS, or the FP-1039 license, pursuant to which we granted to HGS an exclusive license to develop and commercialize FP-1039, and other FGFR1 fusion proteins, in the United States, the European Union and Canada. GSK-HGS controls the development of FP-1039, which GSK-HGS refers to as GSK3052230, in these territories. We retain rights to develop and commercialize FP-1039 in territories outside the United States, the European Union and Canada.

GSK-HGS paid us an upfront license fee of $50 million in connection with entering into the FP-1039 license. GSK-HGS is obligated to pay us contingent payments, which could total up to $435 million based upon the achievement of pre-specified development, regulatory and commercial criteria. These contingent payments are composed of up to $70 million for the pre-specified development criteria, up to $195 million for the pre-specified regulatory criteria, and up to $170 million for the pre-specified commercial criteria. Related to the pre-specified development criteria, we could receive, within the next 24 months, a $5 million contingent payment upon GSK-HGS’s completion of its Phase 1b clinical trial and a $15 million contingent payment if GSK-HGS initiates a Phase 2 clinical trial. If certain manufacturing criteria are not met, these aggregate potential contingent payments could total up to $310 million, instead of $435 million. We are also eligible to receive tiered royalty payments on a country-by-country basis from the low-double digits to the high-teens based on net sales of FP-1039 for the longer of the life of certain patents covering FP-1039 in such country or 12 years after the first commercial sale of FP-1039 in such country. We cannot determine the date on which GSK-HGS’s royalty payment obligations to us would expire because no commercial sales of FP-1039 have occurred and the last-to-expire relevant patent covering FP-1039 in a given country may change in the future. Currently, the last-to-expire issued patents covering FP-1039 will expire in 2031 in the United States and in 2026 in certain European countries. Additional patents that may issue in the United States, Europe and Canada from pending patent applications would expire between 2026 and 2034. These patent expiration dates do not reflect any patent term extensions that may be available, which are not determinable at this time.

We have a minority co-promote option for FP-1039 in the United States. To exercise our right to co-promote FP-1039, we must notify GSK-HGS prior to the later of (i) five days after the filing of the first Biologic License Application, or BLA, with the FDA, for FP-1039 or (ii) six months after GSK-HGS notifies us of the anticipated filing

 

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of the first BLA for FP-1039. If we exercise our right to co-promote FP-1039, we would receive a low single-digit increase in the royalty rate that GSK-HGS would otherwise pay us relating to net sales in the United States.

GSK-HGS is responsible for conducting FP-1039 related research, development and commercialization activities in the United States, the European Union and Canada, at GSK-HGS’s cost and expense. We do not have any obligation to fund any of these activities.

GSK-HGS is obligated to pay us for the costs of all FP-1039 related research and development activities we undertake on behalf of GSK-HGS. At the time we entered into the FP-1039 license, we agreed to perform services for the conduct of the then-concluding FP-1039 Phase 1 clinical trial. We also elected to conduct a Phase 2 clinical trial of FP-1039 in endometrial cancer for which we were reimbursed by GSK-HGS. Additionally, GSK-HGS is obligated to pay us for the costs of other FP-1039 related research and development activities we elect to undertake on behalf of GSK-HGS. GSK-HGS has paid us $3.3 million for our conduct of these activities through June 30, 2013. The Phase 2 clinical trial of FP-1039 in endometrial cancer was terminated in January 2012. We are no longer conducting any activities with respect to this trial and are not currently undertaking any other FP-1039 related research or development activities on behalf of GSK-HGS.

We and HGS agreed to disclose to each other FP-1039 preclinical and clinical data in the form of final study reports, from future trials or studies conducted by either of us. We and HGS also agreed that either party may use, at no cost, any such exchanged preclinical or clinical data in regulatory filings we or GSK-HGS make with respect to FP-1039 in our respective territories. For example, after GSK-HGS completes its Phase 1b clinical trial of FP-1039, we would be able to use the clinical data from that filing in regulatory filings we may file in Japan regarding FP-1039, which is outside of GSK-HGS’s territory.

The FP-1039 license will terminate upon the expiration of the royalty terms of any products that result from the collaboration. In addition, GSK-HGS may terminate this agreement at any time with advance written notice, and either party may terminate this agreement for the other party’s material breach if such party fails to cure the breach or upon certain insolvency events. Either party may also terminate the agreement upon certain patent challenges made against one another. In the event that GSK-HGS terminates the agreement for convenience or if we terminate for certain material breaches or due to a patent challenge, we shall have to pay GSK-HGS royalties on any net sales in the United States, the European Union or Canada for 12 years after the first commercial sale.

GSK US Muscle Diseases Collaboration

In July 2010, we entered into a research collaboration and license agreement, referred to as the muscle diseases collaboration, with GlaxoSmithKline LLC, or GSK US, to identify potential drug targets and drug candidates to treat skeletal muscle diseases. In May 2011, we amended the muscle diseases collaboration to expand the research plan in scope and duration to include an additional cell-based screen and an in vivo screen using our RIPPS technology. We are conducting three customized cell-based screens and one in vivo screen of our protein library under the muscle diseases collaboration. The three-year research term for the original two cell-based screens will end in July 2013 and the three-year research term for the cell-based and in vivo screens added in May 2011 will end in May 2014.

At the inception of the muscle diseases collaboration, GSK US made an upfront payment to us of $7.0 million and purchased from us shares of our preferred stock for $7.5 million. Through June 30, 2013, we have also received $9.5 million of research funding and we are eligible to receive up to an additional $0.4 million of research funding under the muscle diseases collaboration through the remainder of the research term, which ends in May 2014.

In the course of conducting cell-based and in vivo screens of our protein library in the muscle diseases collaboration we have discovered and expect to continue to discover proteins that may be potential drug targets or drug candidates for treating skeletal muscle diseases. Under the muscle diseases collaboration, GSK US has the right to evaluate proteins identified in the screens we conducted for limited periods of time and after such evaluation the right to obtain an exclusive worldwide license to develop and commercialize products that incorporate or target the selected protein. In December 2012, GSK US selected a protein for further evaluation and triggered a $0.3 million target evaluation fee.

If GSK US elects to take an exclusive license to a protein it has evaluated, GSK US would have sole responsibility for the further development and commercialization of products that incorporate or target the protein at GSK US’s cost and expense. We are eligible to receive up to $124.3 million in potential option exercise fees and contingent

 

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payments with respect to each protein target that GSK US elects to obtain rights, comprising aggregate target evaluation and selection fees of up to $1.8 million, preclinical and development-related contingent payments of up to $28.5 million, regulatory-related contingent payments of up to $40.0 million and commercial-related contingent payments of up to $54.0 million. For each product that incorporates or targets a licensed protein target, GSK US is also obligated to pay us tiered low- to mid-single digit royalties on net sales of such product for the longer of the life of certain patents licensed to GSK US covering such product or 12 years after the first commercial sale of such product. We cannot determine the date on which GSK US’s potential royalty payment obligations to us would expire because GSK US has not yet elected to take an exclusive license to evaluate any protein target, and therefore we cannot identify related patents to any such relevant licensed protein target.

The muscle diseases collaboration agreement will terminate upon the expiration of the royalty terms of any products that incorporate or target a protein exclusively licensed under the collaboration. In addition, GSK US may terminate the agreement at any time with advance written notice, and either party may terminate the agreement with written notice for the other party’s material breach if such party fails to cure the breach or upon certain insolvency events.

GSK UK Respiratory Diseases Collaboration

In April 2012, we entered into a research collaboration and license agreement, referred to as the respiratory diseases collaboration, with Glaxo Group Limited, or GSK UK, to identify new therapeutic approaches to treat refractory asthma and chronic obstructive pulmonary disease, or COPD, function with a particular focus on identifying novel protein therapeutics and antibody targets. We plan to conduct up to six customized cell-based screens of our protein library under the respiratory diseases collaboration. The four-year research term will end in April 2016.

At the inception of the respiratory diseases collaboration, GSK UK made an upfront payment to us of $7.5 million and purchased shares of our preferred stock for $10.0 million. Through June 30, 2013, we have also received $2.6 million of research funding and we are eligible to receive up to an additional $7.9 million of research funding under the respiratory diseases collaboration through the remainder of the research term, which ends in April 2016.

In the course of conducting screens of our protein library in the respiratory diseases collaboration, we expect to discover proteins that may be potential drug targets or drug candidates for treating refractory asthma or COPD. Under the respiratory diseases collaboration, GSK UK has the right to evaluate proteins identified in the screens we conduct for limited periods of time and after such evaluation the right to obtain an exclusive worldwide license to develop and commercialize products that incorporate or target the protein.

Prior to the time GSK UK exercises its right to obtain an exclusive worldwide license to a protein target, we and GSK UK will discuss and agree on which protein targets GSK UK will have sole responsibility for the further development and commercialization of products that incorporate or target the protein targets, which we refer to as Track 1 Targets, and which protein targets to which we will develop biologics that incorporate or target the protein targets through to clinical proof of mechanism in either a Phase 1 clinical trial or Phase 2 clinical trial, which we refer to as Track 2 Targets. We and GSK UK will take into consideration each party’s available resources and capabilities at the time in deciding which protein targets will be Track 1 Targets or Track 2 Targets, but subject to each party’s general right to alternate in such selection.

For Track 1 Targets, GSK UK would have sole responsibility for the further development and commercialization of products that incorporate or target the protein, including with respect to preclinical studies, clinical development, manufacturing and commercialization, at GSK UK’s cost and expense. For Track 2 Targets, we would have sole responsibility for the further development of biologic products that incorporate or target the protein, including with respect to preclinical studies, clinical development and manufacturing, at our cost and expense through agreed-upon proof-of-mechanism endpoints in a Phase 1 or Phase 2 clinical trial.

We are eligible to receive up to $124.3 million in potential target evaluation and selection fees and contingent payments with respect to each Track 1 Target. These potential fees and payments are composed of per target evaluation and selection fees of up to $1.8 million, preclinical and development-related contingent payments of up to $28.5 million, regulatory-related contingent payments of up to $40.0 million and commercial-related contingent payments of up to $54.0 million. For each product that incorporates or targets a Track 1 Target, GSK UK is also obligated to pay us tiered low- to mid-single digit royalties on net sales of such product for the longer of the life of certain patents licensed to GSK UK covering such product or 10 years after the first commercial sale of such

 

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product. We cannot determine the date on which GSK UK’s potential royalty payment obligations to us would expire because GSK UK has not yet elected to take an exclusive license to any evaluated protein target, and therefore we cannot identify related patents to any such relevant licensed protein target.

We are eligible to receive up to $193.8 million in potential target evaluation and selection fees and contingent payments with respect to each Track 2 Target. These potential fees and payments are composed of per target evaluation and selection fees of up to $1.8 million, a clinical proof of mechanism option exercise fee of up to $23.0 million, preclinical and development-related contingent payments of up to $36.5 million, regulatory-related contingent payments of up to $53.0 million and commercial-related contingent payments of up to $79.5 million. For each product that incorporates or targets a Track 2 Target, GSK UK is also obligated to pay us tiered high-single to low-double digit royalties on net sales of such product for the longer of the life of certain patents licensed to GSK UK covering such product or 10 years after the first commercial sale of such product.

The respiratory diseases collaboration agreement will terminate upon the expiration of the royalty terms of any products that incorporate or target a protein exclusively licensed under the collaboration. In addition, GSK UK may terminate the agreement at any time with advance written notice, and either party may terminate the agreement with written notice for the other party’s material breach if such party fails to cure the breach or immediately in the case of failure to comply with certain anti-bribery and anti-corruption policies or upon certain insolvency events.

UCB Fibrosis and CNS Collaboration

In March 2013, we entered into a research collaboration and license agreement with UCB, referred to as the fibrosis and CNS collaboration, to identify innovative biologics targets and therapeutics in the areas of fibrosis-related immunologic diseases and central nervous system, or CNS, disorders. We plan to conduct five customized cell-based and in vivo screens of our protein library under the fibrosis and CNS collaboration. We currently expect to complete our initial research activities under the fibrosis and CNS collaboration by March 2016. Upon the completion of those research activities, UCB has up to a two-year evaluation period during which we may be obligated to perform additional services at the request of UCB.

At the inception of the fibrosis and CNS collaboration, UCB made payments to us of $8.2 million. We are eligible to receive up to an additional $6.4 million of technology access fees and research funding under the fibrosis and CNS collaboration starting in March 2014 through March 2016. In addition, we may be eligible to receive up to $1.3 million if UCB elects to have us conduct a third fibrosis screen.

In the course of conducting screens of our protein library in the fibrosis and CNS collaboration we expect to discover proteins that may be potential drug targets or drug candidates for fibrosis-related immunologic diseases and CNS disorders. Under the fibrosis and CNS collaboration, UCB has the right to evaluate proteins identified in the screens we conduct for limited periods of time and after such evaluation the right to obtain an exclusive worldwide license to develop and commercialize products that incorporate or target the protein.

If UCB elects to obtain an exclusive license to a protein it has evaluated, UCB would have sole responsibility for the further development and commercialization of products that incorporate or target the protein at UCB’s cost and expense. We are eligible to receive up to $92.2 million in potential evaluation and selection fees and contingent payments with respect to each protein target that UCB elects to obtain an exclusive license, comprising aggregate target evaluation and selection fees of up to $0.4 million, preclinical and development-related contingent payments of up to $11.8 million, regulatory-related contingent payments of up to $20.0 million and commercial-related contingent payments of up to $60.0 million. For each product that incorporates or targets a licensed protein target, UCB is also obligated to pay us tiered low- to mid-single digit royalties on net sales of such product for the longer of the life of certain patents covering such product or 10 years after the first commercial sale of such product. We cannot determine the date on which UCB’s potential royalty payment obligations to us would expire because UCB has not yet elected to take an exclusive license to any evaluated protein target, and therefore we cannot identify related patents to any such relevant licensed protein target.

The fibrosis and CNS collaboration agreement will terminate upon the e