10-Q 1 kbio-20140930x10q.htm 10-Q kbio_Current folio_10Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

(Mark One)

 

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

 

For the quarterly period ended September 30, 2014

 

OR

 

TRANSITION REPORT UNDER SECTION 13 OF 15(d) OF THE EXCHANGE ACT OF 1934

 

From the transition period from               to               .

 

Commission File Number 001-35798

 


 

KALOBIOS PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

 


 

 

 

 

Delaware

 

77-0557236

(State or other jurisdiction of

 

(IRS Employer

incorporation)

 

Identification No.)

 

442 Littlefield Avenue, South San Francisco, CA, 94080

(Address of principal executive offices)

(Zip Code)

 

Registrant’s telephone number, including area code: (650) 243-3100

 


 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes    No  

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

 

 

 

 

Large accelerated filer  

 

Accelerated filer

 

 

 

Non-accelerated filer  
(Do not check if a smaller reporting company)

 

Smaller reporting company  

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes    No  

 

As of November 6, 2014, there were 32,987,817 shares of common stock of the issuer outstanding.

 

 

 


 

TABLE OF CONTENTS

KALOBIOS PHARMACEUTICALS, INC.

FORM 10-Q

 

 

 

 

 

 

 

 

Page

 

 

 

 

PART I. FINANCIAL INFORMATION 

 

 

 

 

 

Item 1.

Financial Statements (unaudited)

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2014 and 2013

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

 

 

 

 

Item 2.

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

15 

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

22 

 

 

 

 

 

Item 4.

Controls and Procedures

23 

 

 

 

 

PART II. OTHER INFORMATION 

24 

 

 

 

 

 

Item 1.

Legal Proceedings

24 

 

 

 

 

 

Item 1A.

Risk Factors

24 

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

52 

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

52 

 

 

 

 

 

Item 4.

Mine Safety Disclosures

52 

 

 

 

 

 

Item 5.

Other Information

52 

 

 

 

 

 

Item 6.

Exhibits

53 

 

 

 

 

SIGNATURES 

 

54 

 

 

2


 

PART I. FINANCIAL INFORMATION

 

Item 1.Financial Statements

 

KaloBios Pharmaceuticals, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

 

 

    

September 30,

    

December 31,

 

 

2014

 

2013

 

 

(Unaudited)

 

(Note 2)

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

11,270 

 

$

54,220 

Marketable securities, current

 

 

37,844 

 

 

22,511 

Prepaid expenses and other current assets

 

 

1,322 

 

 

786 

Restricted cash, current

 

 

 

 

205 

Total current assets

 

 

50,436 

 

 

77,722 

 

 

 

 

 

 

 

Property and equipment, net

 

 

339 

 

 

276 

Restricted cash, non current

 

 

193 

 

 

Other assets

 

 

139 

 

 

706 

Total assets

 

$

51,107 

 

$

78,704 

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

920 

 

$

3,197 

Accrued compensation

 

 

1,380 

 

 

1,091 

Deferred rent, short term

 

 

10 

 

 

160 

Accrued research and clinical liabilities

 

 

1,984 

 

 

3,309 

Notes payable, short term

 

 

5,134 

 

 

3,182 

Other accrued liabilities

 

 

526 

 

 

443 

Total current liabilities

 

 

9,954 

 

 

11,382 

 

 

 

 

 

 

 

Notes payable, long term

 

 

7,042 

 

 

6,786 

Deferred rent, long term

 

 

318 

 

 

Total liabilities

 

 

17,314 

 

 

18,168 

 

 

 

 

 

 

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

Common stock, $0.001 par value: 85,000,000 shares and 47,500,000 shares authorized at September 30, 2014, and December 31, 2013 respectively; 32,981,817 and 32,931,092 shares issued and outstanding at September 30, 2014, and December 31, 2013, respectively

 

 

33 

 

 

33 

Additional paid-in capital

 

 

202,259 

 

 

200,715 

Accumulated other comprehensive income

 

 

 

 

Accumulated deficit

 

 

(168,500)

 

 

(140,215)

Total stockholders’ equity

 

 

33,793 

 

 

60,536 

Total liabilities and stockholders’ equity

 

$

51,107 

 

$

78,704 

 

See accompanying notes

3


 

 

KaloBios Pharmaceuticals, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(in thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

    

2014

    

2013

    

2014

    

2013

 

 

(unaudited)

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract revenue

 

$

 

$

 

$

 

$

40 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

5,085 

 

 

8,995 

 

 

19,496 

 

 

24,961 

General and administrative

 

 

2,624 

 

 

2,101 

 

 

7,907 

 

 

6,060 

Total operating expenses

 

 

7,709 

 

 

11,096 

 

 

27,403 

 

 

31,021 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

 

(7,709)

 

 

(11,087)

 

 

(27,403)

 

 

(30,981)

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(348)

 

 

(278)

 

 

(898)

 

 

(807)

Other (expense) income, net

 

 

(6)

 

 

36 

 

 

16 

 

 

76 

Net loss

 

 

(8,063)

 

 

(11,329)

 

 

(28,285)

 

 

(31,712)

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized (losses) gains on marketable securities

 

 

 

 

(7)

 

 

(2)

 

 

10 

Comprehensive loss

 

$

(8,063)

 

$

(11,336)

 

$

(28,287)

 

$

(31,702)

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per common share

 

$

(0.24)

 

$

(0.47)

 

$

(0.86)

 

$

(1.48)

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding used to calculate basic and diluted net loss per common share

 

 

32,981,725 

 

 

24,263,745 

 

 

32,976,532 

 

 

21,385,478 

 

See accompanying notes

4


 

KaloBios Pharmaceuticals, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

    

2014

    

2013

 

 

 

(unaudited)

 

Operating activities:

 

 

 

 

 

 

 

Net loss

 

$

(28,285)

 

$

(31,712)

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

254 

 

 

190 

 

Noncash interest expense

 

 

160 

 

 

125 

 

Amortization of premium on marketable securities

 

 

377 

 

 

347 

 

Stock based compensation expense

 

 

1,484 

 

 

1,008 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Prepaid expenses and other assets

 

 

(6)

 

 

(906)

 

Accounts payable

 

 

(2,277)

 

 

1,419 

 

Accrued compensation

 

 

289 

 

 

234 

 

Accrued research and clinical liabilities

 

 

(1,324)

 

 

601 

 

Other liabilities

 

 

82 

 

 

(106)

 

Deferred rent

 

 

169 

 

 

77 

 

Net cash used in operating activities

 

 

(29,077)

 

 

(28,723)

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

Purchase of marketable securities

 

 

(49,902)

 

 

(46,351)

 

Proceeds from maturities of marketable securities

 

 

34,190 

 

 

23,721 

 

Purchases of property and equipment

 

 

(317)

 

 

(335)

 

Changes in restricted cash

 

 

12 

 

 

 

Net cash used in investing activities

 

 

(16,017)

 

 

(22,965)

 

 

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

 

Proceeds from initial public offering, net of offering costs

 

 

 

 

63,912 

 

Proceeds from issuances of notes payable

 

 

5,000 

 

 

 

Proceeds from issuance of common stock

 

 

60 

 

 

155 

 

Principal payments under notes payable

 

 

(2,916)

 

 

(29)

 

Net cash provided by financing activities

 

 

2,144 

 

 

64,038 

 

 

 

 

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents

 

 

(42,950)

 

 

12,350 

 

Cash and cash equivalents, beginning of period

 

 

54,220 

 

 

10,947 

 

Cash and cash equivalents, end of period

 

$

11,270 

 

$

23,297 

 

 

 

 

 

 

 

 

 

Supplemental cash flow disclosure:

 

 

 

 

 

 

 

Cash paid for interest

 

$

725 

 

$

663 

 

Supplemental disclosure of noncash financing activities:

 

 

 

 

 

 

 

Conversion of preferred stock to common stock and additional paid-in capital

 

$

 

$

102,023 

 

Reclassification of preferred stock warrants liability to additional paid-in capital

 

$

 

$

157 

 

Issuance of common stock warrants in connection with a loan amendment

 

$

 

$

130 

 

 

See accompanying notes.

5


 

KaloBios Pharmaceuticals, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

1. Nature of Operations

 

KaloBios Pharmaceuticals, Inc. (the Company) is a biopharmaceutical company whose primary business is to develop monoclonal antibody therapeutics for diseases that represent a significant burden to society and to patients and their families. The Company’s primary clinical focus is on respiratory diseases and cancer. The Company was incorporated on March 15, 2000 in California and reincorporated as a Delaware corporation in September 2001. All of the Company’s assets are located in California.

 

The Company has incurred significant losses and had an accumulated deficit of $168.5 million as of September 30, 2014. The Company has financed its operations primarily through the sale of equity securities, grants and the payments received under its agreements with Novartis Pharma AG (Novartis) and Sanofi Pasteur S.A. (Sanofi). The Company completed its initial public offering (IPO) in February 2013 and completed a secondary offering and sale of common stock in October 2013. To date, none of the Company’s product candidates have been approved for sale and therefore the Company has not generated any revenue from product sales. Management expects operating losses to continue for the foreseeable future. As a result, the Company will continue to require additional capital through equity offerings, debt financing and/or payments under new or existing licensing or collaboration agreements. If sufficient funds on acceptable terms are not available when needed, the Company could be required to significantly reduce its operating expenses and delay, reduce the scope of, or eliminate one or more of its development programs.

 

2. Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and on a basis consistent with the annual consolidated financial statements, and in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for a fair statement of the periods presented. The December 31, 2013 Condensed Consolidated Balance Sheet was derived from the audited financial statements but does not include all disclosures required by GAAP. These interim financial results are not necessarily indicative of the results to be expected for the year ending December 31, 2014, or for any other future annual or interim period. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts and disclosures reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates. The Company believes judgment is involved in determining the stock-based compensation and accruals. The Company evaluates estimates and assumptions as facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ from these estimates and assumptions, and those differences could be material to the consolidated financial statements.

 

Concentration of Credit Risk

 

Cash, cash equivalents, and marketable securities consist of financial instruments that potentially subject the Company to a concentration of credit risk in the event of a default by the related financial institution holding the securities, to the extent of the value recorded in the balance sheet. The Company invests cash that is not required for immediate operating needs primarily in highly liquid instruments with lower credit risk. The Company has established

6


 

guidelines relating to the quality, diversification, and maturities of securities to enable the Company to manage its credit risk.

 

Cash, Cash Equivalents, and Marketable Securities

 

The Company considers all highly liquid investments with an original maturity of 90 days or less at the time of purchase to be cash equivalents. Investments in securities with remaining maturities of less than one year, or where our intent is to use the investments to fund current operations or to make them available for current operations, are classified as short-term and available for sale. Investments in securities with remaining maturities greater than one year are classified as noncurrent and available for sale (see Note 3). Securities available for sale are carried at estimated fair value, with unrealized gains and losses reported as part of accumulated other comprehensive income (loss), a separate component of stockholders’ equity. The Company has estimated the fair value amounts by using available market information. The cost of available-for-sale securities sold is based on the specific-identification method.

 

Research and Development Expenses

 

Development costs incurred in the research and development of new products are expensed as incurred, including expenses that may or may not be reimbursed under research and development collaboration agreements. Research and development costs include, but are not limited to, salaries, benefits, stock-based compensation, laboratory supplies, allocated overhead, fees for professional service providers and costs associated with product development efforts, including preclinical studies and clinical trials. Research and development expenses under collaborative agreements approximate or exceed the revenue recognized under such agreements.

 

The Company estimates preclinical study and clinical trial expenses based on the services performed, pursuant to contracts with research institutions and clinical research organizations that conduct and manage preclinical studies and clinical trials on its behalf. In accruing service fees, the Company estimates the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from the estimate, the Company will adjust the accrual accordingly. Payments made to third parties under these arrangements in advance of the receipt of the related services are recorded as prepaid expenses until the services are rendered.

 

Stock-Based Compensation Expense

 

The Company measures employee and director stock-based compensation expense for stock awards at the grant date and employee stock purchase plan, or ESPP, based on the fair value-based measurement of the award, and the expense is recorded over the related service period, generally the vesting period, net of estimated forfeitures. The Company calculates the fair value-based measurement of stock options and ESPP using the Black-Scholes valuation model and the single-option method and recognizes expense using the straight-line attribution approach.

 

The Company accounts for equity instruments issued to nonemployees based on their fair values on the measurement dates using the Black-Scholes option-pricing model. The fair values of the options granted to nonemployees are remeasured as they vest. As a result, the noncash charge to operations for nonemployee options with vesting is affected each reporting period by changes in the fair value of the Company’s common stock.

 

Comprehensive Loss

 

Comprehensive loss represents net loss adjusted for the change during the periods presented in unrealized gains and losses on available-for-sale securities less reclassification adjustments for realized gains or losses included in net loss. The unrealized gains or losses are reported on the Consolidated Statements of Comprehensive Loss.

 

Net Loss Per Common Share

 

Basic net loss per common share is calculated by dividing the net loss by the weighted-average number of common shares outstanding during the period, without consideration of common stock equivalents. Diluted net loss per common

7


 

share is computed by dividing the net loss by the weighted-average number of common shares and common share equivalents outstanding for the period. Common stock equivalents are only included in the calculation of diluted net loss per common share when their effect is dilutive.

 

The Company’s potential dilutive securities which include unvested restricted stock, stock options, and warrants have been excluded from the computation of diluted net loss per share as the effect would be to reduce the net loss per share and be antidilutive. Therefore, the denominator used to calculate both basic and diluted net loss per common share is the same in all periods presented.

 

The following shares of outstanding potentially dilutive securities have been excluded from the computations of diluted net loss per common share as the effect of including such securities would be antidilutive:

 

 

 

 

 

 

 

 

 

As of September 30,

 

    

2014

    

2013

Warrants to purchase common stock

 

88,545 

 

88,545 

Options to purchase common stock

 

2,687,142 

 

1,840,499 

 

 

2,775,687 

 

1,929,044 

 

 

 

 

 

 

 

 

3. Investments

 

At September 30, 2014, the amortized cost and fair value of investments, with gross unrealized gains and losses, were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Gross

    

Gross

    

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

(in thousands)

 

Cost

 

Gains

 

Losses

 

Fair Value

Money market funds

 

$

10,650 

 

$

 

$

 

$

10,650 

Federal agency securities

 

 

15,055 

 

 

 

 

(1)

 

 

15,054 

Commercial paper

 

 

5,747 

 

 

 

 

 

 

5,750 

Corporate debt securities

 

 

17,041 

 

 

 

 

(1)

 

 

17,040 

Total investments

 

$

48,493 

 

$

 

$

(2)

 

$

48,494 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reported as:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

$

10,457 

Marketable securities, current

 

 

 

 

 

 

 

 

 

 

 

37,844 

Restricted cash, non current

 

 

 

 

 

 

 

 

 

 

 

193 

Total investments

 

 

 

 

 

 

 

 

 

 

$

48,494 

 

At December 31, 2013, the amortized cost and fair value of investments, with gross unrealized gains, were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Gross

    

Gross

    

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

(in thousands)

 

Cost

 

Gains

 

Losses

 

Fair Value

Money market funds

 

$

53,511 

 

$

 

$

 

$

53,511 

Federal agency securities

 

 

12,301 

 

 

 

 

 

 

12,301 

Commercial paper

 

 

8,246 

 

 

 

 

 

 

8,249 

Corporate debt securities

 

 

1,961 

 

 

 

 

 

 

1,961 

Total investments

 

$

76,019 

 

$

 

$

 

$

76,022 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reported as:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

$

53,306 

Marketable securities, current

 

 

 

 

 

 

 

 

 

 

 

22,511 

Restricted cash, current

 

 

 

 

 

 

 

 

 

 

 

205 

Total investments

 

 

 

 

 

 

 

 

 

 

$

76,022 

 

8


 

There were no realized gains or losses from the sale of marketable securities for the three and nine months ended September 30, 2014 and 2013.

 

4. Fair Value of Financial Instruments

 

Cash, accounts payable and accrued liabilities are carried at cost, which approximates fair value given their short-term nature. Marketable securities and cash equivalents are carried at fair value.

 

The fair value of financial instruments reflects the amounts that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The fair value hierarchy is based on three levels of inputs that may be used to measure fair value, of which the first two are considered observable, and the third is considered unobservable, as follows:

 

Level 1 — Quoted prices in active markets for identical assets or liabilities.

 

Level 2 — Inputs other than those included in Level 1 that are directly or indirectly observable, such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

The Company measures the fair value of financial assets and liabilities using the highest level of inputs that are reasonably available as of the measurement date. The following tables summarize the fair value of financial assets and liabilities (investments) that are measured at fair value and the classification by level of input within the fair value hierarchy:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements as of

 

 

September 30, 2014

(in thousands)

    

Level 1

    

Level 2

    

Level 3

    

Total

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

10,650 

 

$

 

$

 

$

10,650 

Federal agency securities

 

 

 

 

15,054 

 

 

 

 

15,054 

Commercial paper

 

 

 

 

5,750 

 

 

 

 

5,750 

Corporate debt securities

 

 

 

 

17,040 

 

 

 

 

17,040 

Total investments

 

$

10,650 

 

$

37,844 

 

$

 

$

48,494 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements as of

 

 

December 31, 2013

(in thousands)

    

Level 1

    

Level 2

    

Level 3

    

Total

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

53,511 

 

$

 

$

 

$

53,511 

Federal agency securities

 

 

 

 

12,301 

 

 

 

 

12,301 

Commercial paper

 

 

 

 

8,249 

 

 

 

 

8,249 

Corporate debt securities

 

 

 

 

1,961 

 

 

 

 

1,961 

Total investments

 

$

53,511 

 

$

22,511 

 

$

 

$

76,022 

 

The Company’s Level 2 investments include U.S. government-backed securities, commercial paper and corporate debt securities that are valued based upon observable inputs that may include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data including market research publications. The average remaining maturity of the Company’s Level 2 investments as of September 30, 2014 is less than five months and all of these investments are rated A3/A-/A- or P1/A1/F1, or higher by Moody’s, S&P and Fitch.

 

9


 

The estimated fair value of the notes payable as of September 30, 2014, as measured using Level 3 inputs, approximates the carrying amount as presented on the condensed consolidated balance sheet.

 

5. Notes Payable

 

Loan and Security Agreement

 

In September 2012, the Company entered into the Agreement with MidCap Financial, providing for the borrowing of up to $15 million, of which $10 million was required to be drawn. The remaining $5 million was available to be drawn at the option of the Company. The Agreement provides for the loan to be issued in three tranches: the first tranche of $5 million was issued in September 2012; the second tranche of $5 million was issued in December 2012; and, prior to the amendment described below, the final tranche could have been drawn at the option of the Company no later than June 2013. The loan has a monthly variable interest rate, reset each month, if applicable, as determined by adding to 600 basis points the greater of: (a) one month LIBOR or (b) 3% (the LIBOR floor). Interest on amounts outstanding are payable monthly in arrears. There is an interest only period to December 31, 2013 followed by straight-line principal payments over thirty-six months until December 31, 2016. At the time of final payment, the Company must pay an exit fee of 3% of the drawn amount. Pursuant to the Agreement, the Company provided a first priority security interest in all existing and after-acquired assets, excluding intellectual property. In addition, the terms of the Agreement provided MidCap Financial a warrant to purchase shares of the Company’s Series E convertible preferred stock (Series E Preferred) equal to 4% of the amount drawn down under the facility divided by the Series E Preferred exercise price of $12.11 per share. The warrant expired upon the completion of the Company’s IPO.

 

The Company has the right to prepay all or a portion of the borrowed amounts under the Agreement; however, if the Company exercises this option, the Company must pay a prepayment fee determined by multiplying the outstanding loan amount by 5% if the prepayment occurs on or before December 31, 2014,  2% if the prepayment occurs in 2015 and 1% if the prepayment occurs in the final year. In the event of default, upon which all amounts borrowed become immediately due and payable, the Company will be subject to the prepayment fee. An event of default includes, but is not limited to, an occurrence such as a payment default, a material adverse change, insolvency, or a change of control.

 

In June 2013, the Company entered into the Amendment to extend the draw down date for the final tranche of $5.0 million from June 2013 to May 2014. In addition, the final tranche was changed from an optional draw down to a required draw down. In connection with the Amendment, the Company issued a warrant to purchase up to 49,548 shares of the Company’s common stock with an exercise price of $12.11 per share. The warrant expires in June 2023, on the tenth anniversary of its issuance date. The warrants issued to Midcap Financial had an initial fair value of $130,000, which represent financing fees, and are included in other assets in the accompanying consolidated balance sheet and are being amortized as non-cash interest expense over the remaining term of the Agreement using the effective interest method. The Company estimated the fair values of these warrants using the Black-Scholes option-pricing model, based on the inputs for the estimated fair value of the underlying common stock at the valuation measurement date, the contractual term of the warrant, risk-free interest rates, expected dividend rates and expected volatility of the price of the underlying common stock. Pursuant to this Amendment, the Company drew down the final tranche of $5.0 million in May 2014.

 

Future payments as of September 30, 2014 under the Agreement, assuming no adjustments to the variable rate of interest of 9% as of September 30, 2014, are as follows:

 

 

 

10


 

 

 

 

 

(in thousands)

    

    

Remainder of  2014

 

$

1,560 

2015

 

 

5,946 

2016

 

 

5,910 

Total minimum payments

 

 

13,416 

Less amount representing interest

 

 

(1,332)

Notes payable, gross

 

 

12,084 

Discount on notes payable

 

 

(67)

Accretion of the final exit fee payment

 

 

159 

Carrying value of notes payable

 

$

12,176 

 

 

 

 

 

 

 

 

6. Sanofi

 

In July 2014 the Company and Sanofi executed an agreement (the Termination Agreement) under which the Sanofi agreement was terminated.  As a result of the Termination Agreement, KaloBios regains full global rights to license, develop, manufacture and commercialize KB001-A in all indications, as well as a non-exclusive license to the KB001-A manufacturing process developed by Sanofi.  In consideration for entering into the Termination Agreement, Sanofi will be entitled to royalties on net sales of KB001-A if approved, subject to a $40 million cap on the aggregate royalties to be paid.  In addition, Sanofi will be entitled to receive up to 10% of certain sub-license payments or other milestone payments received in the event KaloBios successfully re-partners KB001-A, subject to a separate $40 million cap on the aggregate amount of sub-license payments to be shared with Sanofi.

 

In January 2010, the Company and Sanofi had entered into an agreement for the development and commercialization of KB001, the precursor to KB001-A, an investigational new biologic for the treatment and prevention of Pseudomonas aeruginosa (Pa) infections (the Sanofi agreement). Under the terms of the Sanofi agreement, the Company received an initial upfront non-refundable payment of $35 million and received an additional non-refundable payment of $5 million that represented a second installment of the upfront fees due to the Company under the agreement upon completion of a sublicense negotiation with a third party in August 2011. Sanofi was solely responsible for conducting, at its cost, the research, development, manufacture, and commercialization of the licensed products for the diagnosis, treatment and/or prevention of all human diseases and conditions caused by Pa, except that the Company retained responsibility, at the Company’s cost, for developing and promoting the products for the diagnosis, treatment and/or prevention of Pa in patients with cystic fibrosis (CF) or bronchiectasis. Under the terms of the Sanofi agreement, the Company received specified research and development funding for services performed in connection with KB001-A research and development efforts and could have also received contingent payments based on the occurrence of development, regulatory or commercial events, and royalties on any product sales. Reimbursements received by the Company for these services were recorded as contract revenue when earned as the related services were provided. 

 

7. Commitments and Contingencies

 

Contractual Obligations and Commitments

 

On May 21, 2013, the Company entered into an agreement with a third party for the manufacturing of KB003 clinical supply for future clinical trials. Despite the termination of the KB003 development program in severe asthma during the first quarter of 2014, the Company is continuing to evaluate other potential indications for KB003. Under that agreement the third party will perform a range of related services, including process development, optimization, validation, formulation development, regulatory assistance, stability testing and related activities. The agreement will remain in effect until services are completed or until either party terminates in accordance with the agreement. Supplies of material shall be according to FDA’s current Good Manufacturing Practice (cGMP) when required. As of September 30, 2014, there was a remaining commitment for services of approximately $1.6 million with the third party which is currently expected to be incurred through 2015.

 

Aside from the contractual commitments pursuant to the Sanofi Termination Agreement, as of September 30, 2014, there were no significant and material changes to our contractual obligations from those set forth in our Annual Report on Form 10-K (File No. 001-35798), filed with the Securities and Exchange Commission (SEC) on March 13, 2014.

11


 

 

Guarantees and Indemnifications

 

The Company, as permitted under Delaware law and in accordance with its bylaws, has agreed to indemnify its officers and directors for certain events or occurrences, subject to certain limits, while the officer or director is or was serving at the Company’s request in such capacity. The term of the indemnification period is equal to the officer’s or director’s lifetime. The maximum amount of potential future indemnification is unlimited; however, the Company currently holds director and officer liability insurance. This insurance limits the Company’s exposure and may enable it to recover a portion of any future amounts paid.

 

The Company has certain agreements with service providers with which it does business that contain indemnification provisions pursuant to which the Company typically agrees to indemnify the party against certain types of third-party claims. The Company accrues for known indemnification issues when a loss is probable and can be reasonably estimated. The Company would also accrue for estimated incurred but unidentified indemnification issues based on historical activity. As the Company has not incurred any indemnification losses to date, there were no accruals for or expenses related to indemnification issues for any period presented.

 

8. Warrants to Purchase Common Stock

 

On June 19, 2013, in connection with the Amendment to its debt agreement with MidCap Financial, the Company issued a warrant to purchase up to 49,548 shares of the Company’s common stock with an exercise price of $12.11 per share. The warrant expires in June 2023. The Company recorded the initial value of the warrants in equity and other assets in the accompanying consolidated balance sheet, with the deferred other asset to be amortized over the remaining term of the debt using the effective interest method.

 

In addition, the Company has outstanding warrants to purchase an aggregate of 38,997 shares of common stock at $5.13 per share which will expire on October 31, 2015.

 

9. Stockholders’ Equity

 

2012 Equity Incentive Plan

 

As of September 30, 2014, under the 2012 Equity Incentive Plan, the Company may grant shares, stock units, stock appreciation rights, performance cash awards and/or options to employees, directors, consultants, and other service providers. For options, the per share exercise price may not be less than the fair market value of a Company common share on the date of grant. Awards generally vest over four years and expire 10 years from the date of grant. Options generally become exercisable as they vest following the date of grant.

 

A summary of stock option activity for the nine months ended September 30, 2014 under all of the Company’s options plans is as follows:

 

 

12


 

 

 

 

 

 

 

 

    

 

    

Weighted

 

 

 

 

Average

 

 

 

 

Exercise

 

 

Options

 

Price

Outstanding at December 31, 2013

 

1,820,784 

 

$

4.46 

Granted

 

876,500 

 

 

5.37 

Exercised

 

(50,304)

 

 

1.18 

Cancelled

 

(98,666)

 

 

6.35 

Outstanding at March 31, 2014

 

2,548,314 

 

$

4.77 

Granted

 

193,000 

 

 

2.08 

Exercised

 

 

 

Cancelled

 

(89,792)

 

 

5.93 

Outstanding at June 30, 2014

 

2,651,522 

 

$

4.53 

Granted

 

160,000 

 

 

1.79 

Exercised

 

(421)

 

 

1.46 

Cancelled

 

(123,959)

 

 

5.46 

Outstanding at September 30, 2014

 

2,687,142 

 

$

4.32 

 

The weighted average fair value of options granted during the three and nine months ended September 30, 2014 were $1.18 per share and $2.83 per share, respectively.

 

2012 Employee Stock Purchase Plan

 

The Employee Stock Purchase Plan, or ESPP provides eligible employees with the opportunity to acquire an ownership interest in the Company through periodic payroll deductions, based on a six-month look-back period, at a price equal to the lesser of 85% of the fair market value of the ordinary shares at either the beginning or ending of the relevant offering period. The ESPP is structured as a qualified employee stock purchase plan under Section 423 of the Internal Revenue Code of 1986. However, the ESPP is not intended to be a qualified pension, profit sharing or stock bonus plan under Section 401(a) of the Internal Revenue Code of 1986 and is not subject to the provisions of the Employee Retirement Income Security Act of 1974. The ESPP will terminate on January 15, 2033 unless sooner terminated. There were 168,469 shares initially authorized for issuance under the plan, and the first offering period commenced June 1, 2014 and will end on October 31, 2014.

 

Stock-Based Compensation

 

The Company recorded stock-based compensation expense in the condensed consolidated statements of comprehensive loss as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months

 

Nine Months

 

 

Ended September 30,

 

Ended September 30,

(in thousands)

    

2014

 

2013

 

2014

 

2013

General and administrative

 

$

282 

 

$

241 

 

$

755 

 

$

500 

Research and development

 

 

184 

 

 

213 

 

 

729 

 

 

508 

 

 

$

466 

 

$

454 

 

$

1,484 

 

$

1,008 

 

At September 30, 2014, the Company had $3.9 million of total unrecognized compensation expense, net of estimated forfeitures, related to outstanding stock options that will be recognized over a weighted-average period of 2.7 years.

13


 

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Forward-Looking Statements

 

The following discussion and analysis should be read in conjunction with our financial statements and accompanying notes included in this Quarterly Report on Form 10-Q and the financial statements and accompanying notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, filed with the Securities and Exchange Commission, or SEC, on March 13, 2014. This discussion contains “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Such forward looking statements involve risks and uncertainties. We use words such as “may,” “will,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “predict,” “potential,” “believe,” “should” and similar expressions to identify forward-looking statements. Although we believe the expectations reflected in these forward- looking statements are reasonable, such statements are inherently subject to risk and we can give no assurances that our expectations will prove to be correct. These statements appearing throughout this Quarterly Report on Form 10-Q are statements regarding our intent, belief, or current expectations, primarily regarding our operations. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q. As a result of many factors, such as those set forth under “Risk Factors” under Item 1A of Part II below, and elsewhere in this Quarterly Report on Form 10-Q, our actual results may differ materially from those anticipated in these forward-looking statements. We undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date of this report or to reflect actual outcomes.

 

Overview

 

We are a biopharmaceutical company focused on monoclonal antibody therapeutics for diseases that are a significant burden to society and patients and their families. We have a portfolio of patient- targeted, first-in-class antibodies using our Humaneered® antibody technology to treat serious medical conditions with a primary clinical focus on respiratory diseases and cancer. Our principal pharmaceutical product candidates that we have advanced to the clinical development stage are:

 

·

KB001-A, a Humaneered®, PEGylated, anti-PcrV modified antibody fragment (Fab’) antibody that is being developed for the prevention of Pseudomonas aeruginosa (Pa) infections in mechanically ventilated patients and for the treatment of cystic fibrosis(CF) patients with chronic Pa lung infections;

 

·

KB004, a Humaneered® anti-EphA3 monoclonal antibody that has the potential to offer a novel approach to treating both hematologic malignancies and solid tumors; and

 

·

KB003, a Humaneered® anti-granulocyte macrophage colony-stimulating factor (anti-GM-CSF) monoclonal antibody that was being developed for the treatment of severe asthma inadequately controlled by corticosteroids. We have discontinued the development of KB003 in severe asthma, and we are currently evaluating other potential indications for this antibody.

 

In January 2010, we entered into an agreement with Sanofi pursuant to which we granted Sanofi an exclusive worldwide license to develop, manufacture, and commercialize antibodies directed against the PcrV protein of Pa (including KB001-A) for all indications, and Sanofi was solely responsible for research, development, manufacturing, and commercialization. As part of this agreement, we retained the right to develop and promote KB001-A for Pa in CF or bronchiectasis patients. Sanofi focused its clinical development on prevention of Pa ventilator associated pneumonia (VAP). Pursuant to the agreement, we received an initial upfront payment of $35 million and an additional $5 million payment in August 2011 that were recognized as revenue through September 30, 2012.

 

As part of the agreement with Sanofi, we retained responsibility for developing and promoting the product for the diagnosis, treatment, and/or prevention of Pa in patients with CF or bronchiectasis, and are conducting a Phase 2 clinical trial in CF patients with chronic Pa infections. Subject to the terms of the agreement, Sanofi had an option to assume primary responsibility for developing and promoting KB001-A for Pa infection in CF or bronchiectasis patients upon the

14


 

completion of our Phase 2 clinical trial. As part of Sanofi’s clinical development plan for Pa VAP, Sanofi conducted a Phase 1 clinical safety study in healthy volunteers to evaluate higher doses than those that we previously tested. That study was successfully completed, dosing patients at levels up to 30 mg/kg with no safety issues noted.  Sanofi had further indicated that they have completed their manufacturing process development and were preparing for GMP manufacturing runs to provide material for a potential Phase 2b intravenous study to begin mid-year 2015 to determine the safety and efficacy of KB001-A in preventing Pa VAP.

 

In July 2014, as a result of our requests for Sanofi to return the rights to KB001-A, we executed an agreement with Sanofi (the Termination Agreement) under which the original Sanofi collaboration agreement was terminated.  As a result of the Termination Agreement, we regained full global rights to license, develop, manufacture and commercialize KB001-A in all indications, as well as a license to the KB001-A manufacturing process developed by Sanofi.  In consideration for entering into the Termination Agreement, Sanofi will be entitled to royalties on net sales of KB001-A if approved, subject to a $40 million cap on the aggregate royalties to be paid.  In addition, Sanofi will be entitled to receive up to 10% of certain sub-license payments or other milestone payments received in the event we successfully re-partner KB001-A, subject to a separate $40 million cap on the aggregate amount of sub-license or other payments to be shared with Sanofi.

 

In July 2014, we announced that we had completed enrollment of our 180-patient, randomized, double-blind, placebo-controlled, intravenous Phase 2 clinical trial of KB001-A in CF patients with chronic Pa infections, and that we expect to report top-line data on this study in January 2015. We also have an ongoing Phase 1 dose escalation study of KB004 in subjects with hematologic cancer and entered the Phase 2 expansion portion of the clinical testing of KB004 in the low-dose AML cohort in February 2014. Finally, we completed our 160-patient, randomized, double-blind, placebo-controlled, intravenous Phase 2 clinical trial of KB003 in patients with severe asthma inadequately controlled by corticosteroids in February 2014.  We have discontinued development of KB003 in severe asthma, and we are evaluating other potential indications for this antibody.

 

In order to maintain adequate capital to fund the continued development of our product candidates, management continues to evaluate a number of alternatives, including but not limited to: (i) seeking additional partner(s) for our programs to provide capital for future development and to share in development costs, (ii) undertaking reductions in operating spending, and (iii) evaluating various means to raise additional capital, such as debt or equity offerings. Regardless of any actions we take to address our cash position in the near term, we will also need to raise additional capital in order to further advance our product candidates towards regulatory approval. If management is unsuccessful in these efforts, based on our current levels of operating spending our current capital may not be sufficient in some scenarios to fund our operations for the next twelve months.

 

We licensed our proprietary Humaneered® antibody technology to Novartis in 2007 on a non-exclusive basis and received a license fee of $30 million at that time. We are not currently actively pursuing the license of our Humaneered® technology to third parties and we are not expecting to receive future revenue from additional licenses to this technology.

 

From the date we commenced our operations through 2006, our efforts focused primarily on research, development, and the advancement of our Humaneered® antibody technology. In 2006, we commenced our first clinical trial. We have incurred significant losses to date and, as of September 30, 2014, we had an accumulated deficit of $168.5 million. We have funded our operations primarily through private and public placements of our equity securities, contract revenue in connection with our collaborations, and grants and borrowings under equipment financing arrangements and our loan and security agreement. On February 5, 2013, we closed our initial public offering (IPO) of 8,750,000 shares of common stock at an offering price of $8.00 per share, resulting in net proceeds of approximately $61.5 million, after deducting underwriting discounts, commissions and offering expenses. On October 1, 2013 we closed a public offering of 8,625,000 shares of common stock at an offering price of $4.00 per share, resulting in net proceeds of approximately $32.0 million, after deducting underwriting discounts, commissions and offering expenses. As of September 30, 2014, we had cash, cash equivalents, and investments of $49.1 million.

 

We expect to continue to incur net losses as we develop our drug candidates, expand clinical trials for our drug candidates currently in clinical development, expand our research and development activities, expand our systems and facilities, seek regulatory approvals, and engage in commercialization preparation activities in anticipation of Food and Drug Administration (FDA) approval of our drug candidates. Specifically, we have incurred substantial expenses in

15


 

connection with our Phase 2 clinical trial for KB003 in severe asthma patients inadequately controlled by corticosteroids, and would expect to continue to incur additional expenses as we evaluate KB003 in other indications. In addition, we have incurred and we expect to continue to incur substantial expenses for our Phase 2 clinical trial of KB001-A in CF patients with chronic Pa infections and our Phase 1 and Phase 2 clinical trials for our KB004 oncology program. Now that we have terminated our development partnership with Sanofi, we are no longer dependent on Sanofi to conduct the Phase 2 and Phase 3 clinical trials for KB001-A for the prevention of Pa VAP, but we are dependent on identifying and successfully entering into a new development partnership for those trials. Significant capital is required to continue to develop and to launch a product and many expenses are incurred before revenue is received, if any. We are unable to predict the extent of any future losses or when we will receive revenue or become profitable, if at all.

 

Critical Accounting Policies and Use of Estimates

 

Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (GAAP). The preparation of our financial statements in conformity with GAAP requires our management to make estimates and assumptions that affect the amounts and disclosures reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates. Our management believes judgment is involved in determining revenue recognition, the fair value-based measurement of stock-based compensation, accruals and warrant valuations. Our management evaluates estimates and assumptions as facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ from these estimates and assumptions, and those differences could be material to the consolidated financial statements. If our assumptions change, we may need to revise our estimates, or take other corrective actions, either of which may also have a material adverse effect on our statements of operations, liquidity and financial condition.

 

We are an emerging growth company under the JOBS Act. Emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to avail ourselves of this exemption from new or revised accounting standards and, therefore, we may not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

 

There have been no significant and material changes in our critical accounting policies and use of estimates during the nine months ended September 30, 2014, as compared to those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Use of Estimates” in our 2013 Annual Report on Form 10-K (File No. 001-35798), filed with the Securities and Exchange Commission (SEC) on March 13, 2014.

 

Results of Operations

 

General

 

We have not generated net income from operations, except for the year ended December 31, 2007 during which we recognized a one-time license payment from Novartis. At September 30, 2014, we had an accumulated deficit of $168.5 million primarily as a result of research and development and general and administrative expenses. While we may in the future generate revenue from a variety of sources, including license fees, milestone payments, and research and development payments in connection with strategic partnerships, our product candidates are at an early stage of development and may never be successfully developed or commercialized. Accordingly, we expect to continue to incur substantial losses from operations for the foreseeable future, and there can be no assurance that we will ever generate significant revenue or profits.

 

Contract Revenue

 

Our recent revenue is comprised primarily of collaboration agreement-related revenue. Collaboration agreement-related revenue includes license fees, payments for research and development services, and milestone and other contingent payments.

 

16


 

Research and Development Expenses

 

Conducting research and development is central to our business model. We expense both internal and external research and development costs as incurred. We currently track external research and development costs incurred by project for each of our clinical programs (KB001-A, KB003, and KB004). We have not tracked our external costs by project since inception. We began tracking our external costs by project beginning January 1, 2008, and we have continued to refine our systems and our methodology in tracking external research and development costs. Our external research and development costs consist primarily of:

 

·

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

 

·

the cost of acquiring and manufacturing clinical trial and other materials; and

 

·

other costs associated with development activities, including additional studies.

 

Other research and development costs consist primarily of internal research and development costs such as salaries and related fringe benefit costs for our employees (such as workers compensation and health insurance premiums), stock-based compensation charges, travel costs, lab supplies, overhead expenses such as rent and utilities, and external costs not allocated to one of our clinical programs. Internal research and development costs generally benefit multiple projects and are not separately tracked per project. The following table shows our total research and development expenses for the three and nine months ended September 30, 2014 and 2013, and for the period from January 1, 2008 to September 30, 2014.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the

 

For the

 

For the Period from

 

 

 

Three Months

 

Nine Months

 

January 1, 2008 to

 

 

 

Ended September 30,

 

Ended September 30,

 

September 30, 2014

 

(in thousands)

 

2014

 

2013

 

2014

 

2013

 

 

 

 

External costs:

    

 

    

    

 

    

    

 

    

    

 

    

    

 

    

 

KB001-A

 

$

1,640 

 

$

2,377 

 

$

4,663 

 

$

5,029 

 

$

30,143 

 

KB003

 

 

290 

 

 

3,334 

 

 

3,494 

 

 

9,466 

 

 

39,308 

 

KB004

 

 

1,063 

 

 

1,290 

 

 

4,522 

 

 

4,142 

 

 

30,424 

 

Internal costs

 

 

2,092 

 

 

1,994 

 

 

6,816 

 

 

6,324 

 

 

61,506 

 

Total research and development

 

$

5,085 

 

$

8,995 

 

$

19,495 

 

$

24,961 

 

$

161,381 

 

 

We expect to continue to incur substantial expenses related to our development activities for the foreseeable future as we continue product development including continuing our Phase 2 clinical trial for our KB001-A CF program, and our Phase 1/ Phase 2 clinical trial for our KB004 oncology program, as well as concluding our Phase 2 clinical trial for our KB003 severe asthma program completed in February 2014 and continuing to evaluate KB003 in other indications. As product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later stage clinical trials, we expect that our research and development expenses will increase in the future. In addition, if our product development efforts are successful, we expect to incur substantial costs to prepare for potential clinical trials and activities beyond the Phase 2 trial for KB001-A, and the ongoing Phase 1/Phase 2 trial for KB004.

 

General and Administrative Expenses

 

General and administrative expenses consist principally of personnel-related costs, professional fees for legal, consulting, audit and tax services, rent and other general operating expenses not otherwise included in research and development. We anticipate general and administrative expenses will increase in future periods, reflecting an expanding infrastructure and increased professional fees associated with being a public reporting company.

 

17


 

Comparison of Three Months Ended September 30, 2014 and 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Increase/ (Decrease)

 

(in thousands)

    

2014

    

2013

    

in thousands

    

%  

 

Contract revenue

 

$

 

$

 

$

(9)

 

(100)

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

5,085 

 

 

8,995 

 

 

(3,910)

 

(43)

 

General and administrative

 

 

2,624 

 

 

2,101 

 

 

523 

 

25 

 

Loss from operations

 

 

(7,709)

 

 

(11,087)

 

 

3,378 

 

(30)

 

Interest expense

 

 

(348)

 

 

(278)

 

 

(70)

 

25 

 

Interest and other income, net

 

 

(6)

 

 

36 

 

 

(42)

 

(117)

 

Net loss

 

$

(8,063)

 

$

(11,329)

 

$

3,266 

 

(29)

 

 

Contract revenue in each period related solely to our arrangement with Sanofi in which we licensed the KB001-A program to Sanofi in 2010. Contract revenue decreased from $9,000 for the three months ended September 30, 2013 to zero for the three months ended September 30, 2014. This decrease was mainly attributable to the completion of our obligations under our agreement with Sanofi in 2013. Given the termination of the Sanofi agreement in July 2014, we do not expect to receive any additional contract revenue or payments of any kind from Sanofi in the future.

 

Research and development expenses decreased $3.9 million, from $9.0 million for the three months ended September 30, 2013 to $5.1 million for the three months ended September 30, 2014. The decrease was primarily attributed to a $3.4 million decrease in clinical trial expenses related to the completion of KB003 in severe asthma and $0.5 million decrease related to contract manufacturing costs related to KB001-A in CF patients with chronic Pa infections. 

 

In addition to ongoing costs on our Phase 2 clinical trial for KB001-A in CF patients with chronic Pa infections for which enrollment was completed in July, we have now commenced enrollment in the Phase 2 expansion portion of our clinical trial for KB004 in hematologic malignancies.

 

General and administrative expenses increased $0.5 million, from $2.1 million for the three months ended September 30, 2013 to $2.6 million for the three months ended September 30, 2014 due primarily to increases of $0.3 million in employee-related expenses and an increase of $0.2 million due to facility related expenses.  We expect a modest increase in general and administrative expenses in 2014 as compared to 2013, driven primarily by increases in facilities and employee-related costs.

 

Interest expense of $0.3 million recognized for the three months ended September 30, 2013 and interest expense of $0.3 million recognized for the three months ended September 30, 2014, was related to our loan and security agreement with MidCap Financial entered into in September 2012 and amended in 2013.

 

Interest and other (loss)/income, net, primarily consists of interest earned on our cash and cash equivalents, foreign currency gains and losses and realized gains and losses on the sale of investments.

 

Comparison of Nine Months Ended September 30, 2014 and 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

Increase/ (Decrease)

 

(in thousands)

    

2014

    

2013

    

in thousands

    

%  

 

Contract revenue

 

$

 

$

40 

 

$

(40)

 

(100)

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

19,496 

 

 

24,961 

 

 

(5,465)

 

(22)

 

General and administrative

 

 

7,907 

 

 

6,060 

 

 

1,847 

 

30 

 

Loss from operations

 

 

(27,403)

 

 

(30,981)

 

 

3,578 

 

(12)

 

Interest expense

 

 

(898)

 

 

(807)

 

 

(91)

 

11 

 

Interest and other income, net

 

 

16 

 

 

76 

 

 

(60)

 

(79)

 

Net loss

 

$

(28,285)

 

$

(31,712)

 

$

3,427 

 

(11)

 

 

18


 

Contract revenue in each period related solely to our arrangement with Sanofi in which we licensed the KB001-A program to Sanofi in 2010. Contract revenue decreased from $40,000 for the nine months ended September 30, 2013 to zero for the nine months ended September 30, 2014. This decrease was mainly attributable to the completion of our obligations under our agreement with Sanofi in 2013. Given the termination of the Sanofi agreement in July 2014, we do not expect to receive any additional contract revenue or payments of any kind from Sanofi in the future.

 

Research and development expenses decreased $5.5 million, from $25.0 million for the nine months ended September 30, 2013 to $19.5 million for the nine months ended September 30, 2014. The decrease was primarily attributed to a $5.0 million decrease in clinical trial expenses related to the KB003 severe asthma trial and $0.5 million decrease in clinical trial expense in KB001-A in CF patients with chronic Pa infections. 

 

In addition to our ongoing Phase 2 clinical trial for KB001-A in CF patients with chronic Pa infections for which enrollment was completed in July, we have now commenced enrollment in the Phase 2 expansion portion of our clinical trial for KB004 in hematologic malignancies. We also incurred significant costs in the first nine months of 2014 on our Phase 2 clinical trial of KB003 in severe asthma and expect we will continue to incur costs in 2014 on that program as we complete the follow up activities, resolve manufacturing commitments, work through other close-out related activities and as we continue to evaluate other potential indications for KB003.

 

General and administrative expenses increased $1.8 million, from $6.1 million for the nine months ended September 30, 2013 to $7.9 million for the nine months ended September 30, 2014 due primarily to increases of $1.1 million in employee-related expenses, $0.3 million in consulting fees and an increase of $0.3 million due to facility related expenses.  We expect a modest increase in general and administrative expenses in 2014 as compared to 2013, driven primarily by increases in facilities and employee-related costs.

 

Interest expense of $0.8 million recognized for the nine months ended September 30, 2013 and $0.9 million recognized for the nine months ended September 30, 2014, was related to our loan and security agreement with MidCap Financial entered into in September 2012 and amended in 2013.

 

Interest and other income, net, primarily consists of interest earned on our cash and cash equivalents, foreign currency gains and losses and realized gains and losses on the sale of investments.

 

Liquidity and Capital Resources

 

Since our inception, we have financed our operations primarily through proceeds from our initial and secondary public equity offerings, private placements of our equity securities, debt financing, interest income earned on cash, and cash equivalents, and marketable securities, borrowings against lines of credit, and payments under agreements with Sanofi and Novartis. At September 30, 2014, we had cash and cash equivalents and investments of  $49.1 million.

 

We expect to incur substantial expenditures in the foreseeable future for the development and potential commercialization of our product candidates. Specifically, we have incurred and we expect to continue to incur substantial expenses in connection with our Phase 2 clinical trial for KB001-A in CF patients with chronic Pa infections, for our ongoing Phase 1/Phase 2 clinical trials for our KB004 development program in hematologic malignancies and as we continue to evaluate other potential KB003 indications while winding down obligations relating to our KB003 asthma development program terminated earlier in 2014.

 

In order to maintain adequate capital to fund the continued development of our product candidates, management continues to evaluate a number of alternatives, including but not limited to: (i) seeking additional partner(s) for our programs to provide capital for future development and to share in development costs, (ii) undertaking reductions in operating spending, and (iii) evaluating various means to raise additional capital, such as debt or equity offerings. Regardless of any actions we take to address our cash position in the near term, we will also need to raise additional capital in order to further advance our product candidates towards regulatory approval. If management is unsuccessful in these efforts, based on our current levels of operating spending our current capital may not be sufficient in some scenarios to fund our operations for the next twelve months.

 

19


 

We will continue to require additional financing to develop our products and fund operations. We will seek funds through equity or debt financings, collaborative or other arrangements with corporate partners, or through other sources of financing. Adequate additional funding may not be available to us on acceptable terms or at all. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategies. We anticipate that we will need to raise substantial additional capital, the requirements of which will depend on many factors, including:

 

·

the type, number, costs, and results of the product candidate development programs which we are pursuing or may choose to pursue in the future;

 

·

the scope, progress, expansion, costs, and results of our clinical trials;

 

·

the timing of and costs involved in obtaining regulatory approvals;

 

·

our ability to establish and maintain development partnering arrangements;

 

·

the timing, receipt and amount of contingent, royalty, and other payments from potential future development partners;

 

·

the emergence of competing products or technologies and other adverse market developments;

 

·

the costs of maintaining, expanding, and protecting our intellectual property portfolio, including potential litigation costs and liabilities;

 

·

the resources we devote to marketing, and, if approved, commercializing our product candidates;

 

·

the scope, progress, expansion, and costs of manufacturing our product candidates;

 

·

the costs associated with being a public company.

 

If we are unable to raise additional funds when needed, we may be required to delay, reduce, or terminate some or all of our development programs and clinical trials. We may also be required to sell or license to others technologies or clinical product candidates or programs that we would prefer to develop and commercialize ourselves.

 

The following table sets forth the primary sources and uses of cash and cash equivalents for each of the periods presented below:

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30,

 

(in thousands)

    

2014

    

2013

 

Net cash used in operating activities

 

$

(29,077)

 

$

(28,723)

 

Net cash used in investing activities

 

 

(16,017)

 

 

(22,965)

 

Net cash provided by financing activities

 

 

2,144 

 

 

64,038 

 

Net (decrease) increase in cash and cash equivalents

 

$

(42,950)

 

$

12,350 

 

 

Net cash used in operating activities was $29.1 million and $28.7 million for the nine months ended September 30, 2014 and 2013, respectively. The primary use of cash in each of the periods was to fund our operations related to the development of our product candidates. Cash used in operating activities of $29.1 million for the nine months ended September 30, 2014 primarily related to our net loss of $28.3 million, adjusted for non-cash items such as $1.5 million of stock-based compensation expense and net cash outflows of $3.1 million related to changes in operating assets and liabilities. Cash used in operating activities of $28.7 million for the nine months ended September 30, 2013 primarily related to our net loss of $31.7 million, adjusted for non-cash items such as $1.0 million of stock-based compensation expense and net cash inflows of $1.3 million related to changes in operating assets and liabilities..

 

20


 

Net cash used in investing activities was $16.0 million for the nine months ended September 30, 2014, primarily related to purchases of investments of $49.9 million partially offset by proceeds from maturities of marketable securities of $34.2 million. Net cash used in investing activities was $23.0 million for the nine months ended September 30, 2013, primarily related to purchases of marketable securities offset by proceeds from maturities of marketable securities.

 

Net cash provided by financing activities was $2.1 million for the nine months ended September 30, 2014, and consisted primarily of proceeds from issuance of debt of $5.0 million partially offset by payments on our borrowings. Net cash provided by financing activities was $64.0 million for the nine months ended September 30, 2013, which consisted primarily of net proceeds from our IPO.

 

We expect to incur substantial expenditures in the foreseeable future for the research, development and potential commercialization of our product candidates. We will continue to require additional financing to develop our products and fund operating losses. We will seek funds through equity or debt financings, collaborative or other arrangements with corporate sources, or through other sources of financing. Adequate additional funding may not be available to us on acceptable terms or at all. Our failure to raise capital as and when needed could have a negative impact on our financial condition and our ability to pursue our business strategies. If adequate funds are not available to us, we may be required to delay, reduce, or eliminate research and development programs or enter into collaborative or other arrangements for technologies that we would otherwise seek to develop ourselves or on terms that are less attractive than they might otherwise be.

 

Contractual Obligations and Commitments

 

On May 21, 2013, we entered into an agreement with a third party for the manufacturing of KB003 clinical supply for future clinical trials. Despite the termination of the KB003 development program in severe asthma during the first quarter of 2014, we are continuing to evaluate other potential indications for KB003. Under that agreement the third party will perform a range of related services, including process development, optimization, validation, formulation development, regulatory assistance, stability testing and related activities. The agreement will remain in effect until services are completed or until either party terminates in accordance with the agreement. Supplies of material shall be according to FDA’s current Good Manufacturing Practice (cGMP) when required. As of September 30, 2014, we had a remaining commitment for services of approximately $1.6 million with the third party which is currently expected to be incurred through 2015.

 

Aside from the contractual commitments pursuant to the Sanofi Termination Agreement, as of September 30, 2014, there were no significant and material changes to our contractual obligations from those set forth in our Annual Report on Form 10-K (File No. 001-35798), filed with the Securities and Exchange Commission (SEC) on March 13, 2014.

 

Off-Balance Sheet Arrangements

 

We currently have no off-balance sheet arrangements, such as structured finance, special purpose entities or variable interest entities.

 

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

 

We are exposed to market risk related to fluctuations in interest rates and market prices. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates. However, since a majority of our investments are in short-term FDIC-insured government securities, and money market funds, we do not believe we are subject to any material market risk exposure. The fair value of our investments included in cash equivalents and marketable securities was $48.5 million and $75.8 million as of September 30, 2014 and December 31, 2013, respectively.

 

We are also exposed to market risk related to fluctuations in interest rates indexed to LIBOR, which determines the variable interest payments made on our notes payable. However, we do not believe we are subject to any material market risk exposure. 

 

21


 

Our investment policy is to limit credit exposure through diversification and investment in highly rated securities. We, along with our investment advisors, actively review current investment ratings, company specific events, and general economic conditions in managing our investments and in determining whether there is a significant decline in fair value that is other-than-temporary. We monitor and evaluate our investment portfolio on a quarterly basis for other-than-temporary impairment charges.

 

We are also exposed to foreign currency exchange rate risk inherent in our contracts with research institutions and contract research organizations as certain services are performed by them outside the United States. While billed in US dollars by our vendors, our estimate of the amount owed may change until the vendor invoices us for the services rendered. We make our estimates for those services using our best estimate of costs incurred including the impact of foreign currency. We have performed sensitivity analyses as of September 30, 2014, using a modeling technique that measures the change in the contract research expenses arising from a hypothetical 10% adverse movement in the levels of foreign currency exchange rates relative to the U.S. dollar, with all other variables held constant. The foreign currency exchange rates we used in performing the sensitivity analysis were based on market rates in effect at September 30, 2014. The sensitivity analyses indicated that a hypothetical 10% adverse movement in foreign currency exchange rates would result in an immaterial increase in contract research expenses.

 

Item 4.Controls and Procedures.

 

Managements Evaluation of our Disclosure Controls and Procedures

 

Management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), as of the end of the period covered by this report. Based upon the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file and submit under the Securities Exchange Act of 1934, as amended, is (i) recorded, processed, summarized and reported as and when required and (ii) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely discussion regarding required disclosure.

 

Changes in Internal Control Over Financial Reporting

 

There have been no changes in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

22


 

PART II. OTHER INFORMATION

 

Item 1.Legal Proceedings

 

We are not currently a party to any material legal proceedings.

 

Item 1A.Risk Factors

 

Risk Related to Our Business and the Development, Regulatory Approval, and Commercialization of Our Product Candidates

 

We will need substantial additional capital to develop and commercialize our product candidates, and we may be unable to raise additional capital when needed, or at all, which would force us to reduce or discontinue operations.

 

As of September 30, 2014, we had $48.5 million in cash, cash equivalents, and investments. We utilized $29.1 million of cash in operating activities during the nine months ended September 30, 2014. We expect our spending levels to increase in connection with our Phase 2 clinical trials for KB001-A and KB004, as well as other corporate activities.

 

Our spending levels vary based on new and ongoing development and corporate activities. As a result, our cash used in operating activities will also fluctuate from period to period. We have not sold and do not expect to sell any product candidates or derive royalty revenue from product candidate sales for the foreseeable future, if ever. In order to develop and bring product candidates through clinical trials, we must commit substantial resources to costly and time-consuming clinical trials. As such, we anticipate that we will need to raise substantial additional capital. In particular, in order to initiate an additional clinical trial for KB001-A following receipt of our Phase 2 clinical results, if successful, we will need to raise additional capital. The amount of capital we will require and the timing of our need for additional capital will depend on many other factors, including:

 

·

the type, number, costs, and results of the product candidate development programs which we are pursuing or may choose to pursue in the future;

 

·

the scope, progress, expansion, costs, and results of, or delays in, our clinical trials;

 

·

the timing of and costs involved in obtaining regulatory approvals;

 

·

our ability to establish and maintain development partnering arrangements and any associated funding;

 

·

the timing, receipt and amount of contingent, royalty, and other payments from any future development partners;

 

·

the emergence of competing products or technologies and other adverse market developments;

 

·

the costs of maintaining, expanding, and protecting our intellectual property portfolio, including potential litigation costs and liabilities;

 

·

the resources we devote to marketing, and, if approved, commercializing our product candidates;

 

·

the sourcing, timing, scope, progress, expansion, and costs of manufacturing our product candidates;

 

·

our ability to draw funds from any future loan and security agreement; and

 

·

the costs associated with being a public company.

 

Since our inception, we have been financing our operations primarily through private placements and our initial and secondary public offerings of our equity securities, interest income earned on cash, cash equivalents, and marketable

23


 

securities, borrowings from lines of credit, and payments under agreements with Sanofi and Novartis International Pharmaceutical Ltd. (together with its affiliates, Novartis), a licensee of our Humaneered® technology. Our future capital requirements are substantial and in order to fund our future needs, we may seek additional funding through equity or debt financings, development partnering arrangements, borrowings from lines of credit, or other sources. In order to maintain adequate capital to fund the continued development of our product candidates, management continues to evaluate a number of alternatives, including but not limited to: (i) seeking additional partner(s) for our programs to provide capital for future development and to share in development costs, (ii) undertaking reductions in operating spending, and (iii) evaluating various means to raise additional capital, such as debt or equity offerings. Regardless of any actions we take to address our cash position in the near term, we will also need to raise additional capital in order to further advance our product candidates towards regulatory approval. If management is unsuccessful in these efforts, based on our current levels of operating spending our current capital may not be sufficient in some scenarios to fund our operations for the next twelve months.

 

Our expectations are based on management’s current assumptions and clinical development plans, which may prove to be wrong, and we could spend our available financial resources much faster than we currently expect. We will require substantial additional capital to support clinical trials, regulatory approvals, and, if approved, the commercialization of our product candidates. Additional funding may not be available to us on a timely basis or at acceptable terms, if at all.

 

If we are unable to raise additional funds when needed, we may be required to delay, reduce, or terminate some or all of our development programs and clinical trials. We may also be required to sell or license to others our technologies, product candidates, or development programs that we would have preferred to develop and commercialize ourselves on less than favorable terms, if at all.

 

We have a history of operating losses, we expect to continue to incur losses, and we may never become profitable.

 

As of September 30, 2014, we had an accumulated deficit of $168.5 million, and for the nine months ended September 30, 2014, we incurred a net loss of $28.3 million. We have incurred net losses each year since our inception except for the year ended December 31, 2007. To date, we have only recognized revenue from payments for funded research and development and for license or collaboration fees. We expect to make substantial expenditures and incur additional operating losses in the future to further develop and commercialize our product candidates. Our accumulated deficit is expected to increase significantly as we expand our development and clinical trial efforts. Our ability to achieve and sustain profitability depends on obtaining regulatory approvals for and successfully commercializing our product candidates, either alone or with third parties. We do not currently have the required approvals to market any of our product candidates and we may never receive them. We may not be profitable even if we or any of our future development partners succeed in commercializing any of our product candidates. Because of the numerous risks and uncertainties associated with developing and commercializing our product candidates, we are unable to predict the extent of any future losses or when we will become profitable, if at all.

 

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

 

We have recently announced our mutual agreement with Sanofi to terminate our prior development partnership for KB001-A. In addition to our prior partnership with Sanofi, a part of our strategy, including but not limited to KB001-A, is to enter into development partnerships 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. Although our decision with Sanofi was mutual, we cannot predict the impact of that decision on the likelihood of our ability to enter into future partnerships for KB001-A or for our other programs. Moreover, we may not be successful in our efforts to establish a development partnership or other alternative arrangements for any of our other existing or future product candidates and programs because, among other reasons, 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 partnerships, the terms that we agree upon may not be favorable to us and we may not be able to maintain such development partnerships 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 partnership

24


 

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 partnerships related to our product candidates:

 

·

the development of our current or future product candidates, including but not limited to KB001-A, may be terminated or delayed;

 

·

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;

 

·

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

 

·

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

 

Because we have a short operating history developing clinical-stage antibodies, there is a limited amount of information about us upon which you can evaluate our product candidates and business prospects.

 

We commenced our first clinical trial in 2006, and we have a limited operating history developing clinical-stage antibodies upon which you can evaluate our business and prospects. In addition, as an early-stage clinical development company, we have limited experience in conducting clinical trials, and we have never conducted clinical trials of a size required for regulatory approvals. Further, we have not yet demonstrated an ability to successfully overcome many of the risks and uncertainties frequently encountered by companies in new and rapidly evolving fields, particularly in the biopharmaceutical area. For example, to execute our business plan we will need to successfully:

 

·

execute our product candidate development activities, including successfully completing our clinical trial programs;

 

·

obtain required regulatory approvals for the development and commercialization of our product candidates;

 

·

manage our spending as costs and expenses increase due to clinical trials, regulatory approvals, manufacturing and commercialization;

 

·

secure substantial additional funding;

 

·

develop and maintain successful strategic relationships;

 

·

build and maintain a strong intellectual property portfolio;

 

·

build and maintain appropriate clinical, sales, distribution, and marketing capabilities on our own or through third parties; and

 

·

gain market acceptance and favorable reimbursement status for our product candidates.

 

If we are unsuccessful in accomplishing these objectives, we may not be able to develop product candidates, raise capital, expand our business, or continue our operations.

 

Our product candidates are at an early stage of development and may not be successfully developed or commercialized.

 

Our product candidates are in the early stage of development and will require substantial clinical development, testing, and regulatory approval prior to commercialization. We currently only have two product candidates in Phase 2

25


 

clinical trials, KB001-A and KB004, and we have recently discontinued development in severe asthma of KB003, our most advanced program at that time. None of our product candidates have advanced into a pivotal study and it may be years before such a study is initiated, if at all. Of the large number of drugs in development, only a small percentage successfully complete the FDA regulatory approval process and are commercialized. Accordingly, even if we are able to obtain the requisite financing to continue to fund our development programs, we cannot assure you that our product candidates will be successfully developed or commercialized. If we or any of our future development partners are unable to develop, or obtain regulatory approval for or, if approved, successfully commercialize, one or more of our product candidates, we may not be able to generate sufficient revenue to continue our business.

 

Although we have decided to focus on the intravenous formulation of KB001-A for CF at this time rather than a subcutaneous formulation, we expect to resume development of a subcutaneous formulation at some point. There can be no assurance that either an intravenous or subcutaneous formulation will be successfully developed or, if it obtains regulatory approval, such formulation will be commercially viable.

 

We have and may continue to experience delays in commencing or conducting our clinical trials, in receiving data from third parties or in the continuation or completion of clinical testing, which could result in increased costs to us and delay our ability to generate product candidate revenue.

 

Before we can initiate clinical trials in the United States for any new product candidates, we are required to submit the results of preclinical testing to the FDA as part of an Investigational New Drug (IND) application, along with other information including information about product candidate chemistry, manufacturing, and controls and our proposed clinical trial protocol. In doing so, we rely in part on preclinical, clinical, and quality data previously generated by other third parties for regulatory submissions for KB001-A. In addition, for our programs already underway, we are required to report or provide information to appropriate regulatory authorities in order to continue with our testing programs. If we are unable to make timely regulatory submissions for any of our programs, it will delay our plans for our clinical trials.  If those third parties do not make the required data available to us, we will likely have to identify and contract with another CMO, and/or develop all necessary preclinical and clinical data on our own, which will lead to significant delays and increase development costs of the product candidate. In addition, the FDA may require us to conduct additional preclinical testing for any product candidate before it allows us to initiate clinical testing under any IND, which may lead to additional delays and increase the costs of our preclinical development. Moreover, despite the presence of an active IND for a product candidate, clinical trials can be delayed for a variety of reasons, including delays in:

 

·

identifying, recruiting, and enrolling qualified subjects to participate in a clinical trial;

 

·

identifying, recruiting, and training suitable clinical investigators;

 

·

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

 

·

obtaining and maintaining sufficient quantities of a product candidate for use in clinical trials, either as a result of transferring the manufacturing of a product candidate to another site or manufacturer, deferring ordering or production of product in order to conserve resources or mitigate risk, having product in inventory become no longer suitable for use in humans, or other reasons that reduce or delay availability of drug supply;

 

·

obtaining and maintaining institutional review board (IRB) or ethics committee approval to conduct a clinical trial at an existing or prospective site;

 

·

retaining or replacing participants who have initiated a clinical trial but may withdraw due to adverse events from the therapy, insufficient efficacy, fatigue with the clinical trial process, or personal issues; readiness of any companion diagnostic necessary to ensure that the study enrolls the target population; or

 

·

undergoing a clinical trial put on clinical hold at any time by the FDA during product candidate development.

 

26


 

Once a clinical trial has begun, recruitment and enrollment of subjects may be slower than we anticipate. Numerous companies and institutions are conducting clinical studies in similar patient populations which can result in competition for qualified patients. In addition, clinical trials will take longer than we anticipate if we are required, or believe it is necessary, to enroll additional subjects. Clinical trials may also be delayed as a result of ambiguous or negative interim results. Further, a clinical trial may be suspended or terminated by us, an Institutional Review Board (IRB), an ethics committee, or a data safety monitoring committee overseeing the clinical trial, any of our clinical trial sites with respect to that site or the FDA or other regulatory authorities due to a number of factors, including:

 

·

failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols;

 

·

inspection of the clinical trial operations or clinical trial site by the FDA or other regulatory authorities;

 

·

unforeseen safety issues, known safety issues that occur at a greater frequency or severity than we anticipate, or any determination that the clinical trial presents unacceptable health risks; or

 

·

lack of adequate funding to continue the clinical trial.

 

Additionally, if any of our future development partners do not develop the licensed product candidates in the time and manner that we expect, or at all, the clinical development efforts related to these licensed product candidates could be delayed or terminated. In addition, our ability to enforce our partners’ obligations under any future collaboration efforts may be limited due to time and resource constraints, competing corporate priorities of our future partners, and other factors.

 

Any delays in the commencement of our clinical trials, including any delays as a result of our transition from Sanofi to a third party contract manufacturing organization (CMO) or other partner for the manufacture of the KB001-A drug substance, may delay or preclude our ability to further develop or pursue regulatory approval for our product candidates. Changes in U.S. and foreign regulatory requirements and guidance also may occur and we may need to amend clinical trial protocols to reflect these changes. Amendments may require us to resubmit our clinical trial protocols to IRBs for re-examination, which may affect the costs, timing, and likelihood of a successful completion of a clinical trial. If we or any of our future development partners experience delays in the completion of, or if we or any of our future development partners must terminate, any clinical trial of any product candidate our ability to obtain regulatory approval for that product candidate will be delayed and the commercial prospects, if any, for the product candidate may suffer as a result. In addition, many of these factors may also ultimately lead to the denial of regulatory approval of a product candidate.

 

Our product candidates are subject to extensive regulation, compliance with which is costly and time consuming, may cause unanticipated delays, or prevent the receipt of the required approvals to commercialize our product candidates.

 

The clinical development, approval, manufacturing, labeling, storage, record-keeping, advertising, promotion, import, export, marketing, and distribution of our product candidates are subject to extensive regulation by the FDA in the United States and by comparable authorities in foreign markets. In the United States, we are not permitted to market our product candidates until we receive regulatory approval from the FDA. The process of obtaining regulatory approval is expensive, often takes many years, and can vary substantially based upon the type, complexity, and novelty of the products involved, as well as the target indications. Approval policies or regulations may change and the FDA has substantial discretion in the drug approval process, including the ability to delay, limit, or deny approval of a product candidate for many reasons. Despite the time and expense invested in clinical development of product candidates, regulatory approval is never guaranteed.

 

The FDA or other comparable foreign regulatory authorities can delay, limit, or deny approval of a product candidate for many reasons, including:

 

·

such authorities may disagree with the design or implementation of our or any of our future development partners’ clinical trials;

 

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·

we or any of our future development partners may be unable to demonstrate to the satisfaction of the FDA or other regulatory authorities that a product candidate is safe and effective for any indication;

 

·

such authorities may not accept clinical data from trials which are conducted at clinical facilities or in countries where the standard of care is potentially different from the United States;

 

·

the results of clinical trials may not demonstrate the safety or efficacy required by such authorities for approval;

 

·

we or any of our future development partners may be unable to demonstrate that a product candidate’s clinical and other benefits outweigh its safety risks;

 

·

such authorities may disagree with our interpretation of data from preclinical studies or clinical trials or the use of results from antibody studies that served as precursors to our current drug candidates;

 

·

such authorities may find deficiencies in the manufacturing processes or facilities of third-party manufacturers with which we or any of our future development partners contract for clinical and commercial supplies;

 

·

we may not be successful in developing any companion diagnostic necessary to demonstrate efficacy in our desired target populations for KB004;

 

·

such authorities may delay approval or clearance of any companion diagnostic for KB004; or

 

·

the approval policies or regulations of such authorities may significantly change in a manner rendering our or any of our future development partners’ clinical data insufficient for approval.

 

With respect to foreign markets, approval procedures vary widely among countries and, in addition to the aforementioned risks, can involve additional product testing, administrative review periods, and agreements with pricing authorities. In addition, events raising questions about the safety of certain marketed pharmaceuticals may result in increased caution by the FDA and comparable foreign regulatory authorities in reviewing new drugs based on safety, efficacy or other regulatory considerations and may result in significant delays in obtaining regulatory approvals. Any delay in obtaining, or inability to obtain, applicable regulatory approvals would prevent us,  or any of our future development partners from commercializing our product candidates.

 

The results of preclinical studies and early clinical trials are not always predictive of future results. Any product candidate we or any of our future development partners advance into clinical trials may not have favorable results in later clinical trials, if any, or receive regulatory approval.

 

Drug development has substantial inherent risk. We or any of our future development partners will be required to demonstrate through adequate and well-controlled clinical trials that our product candidates are effective, with a favorable benefit-risk profile, for use in their target indications before we can seek regulatory approvals for their commercial sale. Drug development is a long, expensive and uncertain process, and delay or failure can occur at any stage of development, including after commencement of any of our clinical trials. In addition, success in early clinical trials does not mean that later clinical trials will be successful because product candidates in later-stage clinical trials may fail to demonstrate sufficient safety or efficacy despite having progressed through initial clinical testing. Furthermore, our future trials will need to demonstrate sufficient safety and efficacy for approval by regulatory authorities in larger patient populations. Companies frequently suffer significant setbacks in advanced clinical trials, even after earlier clinical trials have shown promising results. In addition, only a small percentage of drugs under development result in the submission of a New Drug Application (NDA) or BLA to the FDA and even fewer are approved for commercialization.

 

For example, we recently announced the termination of development in severe asthma of KB003, our most advanced product candidate, because the Phase 2 study we were conducting did not meet its primary or secondary endpoints, despite promising results in prior studies of a precursor molecule, KB002.

 

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Furthermore, the efficacy or safety data demonstrated with KB001, the precursor molecule to KB001-A, may not be reproduced in KB001-A, and our Phase 2 expansion trial for KB004 may not be successful.

 

Any product candidate we or any of our future development partners advance into clinical trials may cause unacceptable adverse events or have other properties that may delay or prevent its regulatory approval or commercialization or limit its commercial potential.

 

Unacceptable adverse events caused by any of our product candidates that we advance into clinical trials could cause us or regulatory authorities to interrupt, delay, or halt clinical trials and could result in the denial of regulatory approval by the FDA or other regulatory authorities for any or all targeted indications and markets. This in turn could prevent us from completing development or commercializing the affected product candidate and generating revenue from its sale. For example, we observed fatal intracranial hemorrhages in two subjects deemed possibly related to the study drug by the study investigator in our KB004 Phase 1 clinical trial and, as a result, we amended our clinical protocol, which caused a delay in our program.

 

We have not yet completed testing of any of our product candidates for the treatment of the indications for which we intend to seek approval in humans, and we currently do not know the extent of adverse events, if any, that will be observed in individuals who receive any of our product candidates. If any of our product candidates cause unacceptable adverse events in clinical trials, we may not be able to obtain regulatory approval or commercialize such product candidate.

 

If we pursue development of a companion diagnostic intended to identify patients who are likely to benefit from treatment with KB004, failure to obtain approval for the diagnostic may prevent or delay approval of KB004.

 

We are in the initial phases of developing an in vitro EphA3 diagnostic, currently in the CLIA validated laboratory format, which is intended to identify patients who are likely to benefit from KB004. We have amended our study protocol prior to initiation of the Phase 2 expansion phase to include EphA3 positive tumor status as an inclusion criterion.

 

The FDA regulates companion diagnostics such as the one we are developing as medical devices. FDA regulations pertaining to medical devices govern, among other things, the research, design, development, pre-clinical and clinical testing, manufacture, safety, efficacy, storage, record-keeping, packaging, labeling, adverse event reporting, advertising, promotion, marketing, distribution, and import and export of medical devices. Pursuant to the Federal Food, Drug, and Cosmetic Act (FDC Act), medical devices are subject to varying degrees of regulatory control and are classified in one of three classes depending on the controls the FDA determines necessary to reasonably ensure their safety and efficacy. In July 2011, the FDA issued a draft guidance that stated that if safe and effective use of a therapeutic depends on an in vitro diagnostic, then the FDA generally will not approve the therapeutic product until it is ready to approve or clear the in vitro companion diagnostic device. While this guidance is still in draft form, we believe that it states the FDA’s current position, and it is possible that KB004 may not be approved until the FDA has sufficient information to also approve or clear our companion device. Moreover, the FDA’s expectations for in vitro companion diagnostics are evolving and some aspects of the FDA’s regulatory approach remain unclear. The FDA’s developing expectations will affect, among other things, the development, testing and review of any in vitro companion diagnostics.

 

Because our companion diagnostic candidate is at an early stage of development, and because we have not yet decided whether to pursue a reference lab-based test or a kit, we have yet to seek a meeting with the FDA to discuss our companion diagnostic test in development. We therefore do not yet know what the FDA will require for this test. We may not be able to develop or obtain approval or clearance for the companion diagnostic, and any delay or failure to obtain regulatory approval or clearance could delay development or prevent approval of KB004.

 

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If our competitors develop treatments for the target indications of our product candidates that are approved more quickly, marketed more successfully or demonstrated to be safer or more effective than our product candidates, our commercial opportunity will be reduced or eliminated.

 

We operate in highly competitive segments of the biotechnology and biopharmaceutical markets. We face competition from many different sources, including commercial pharmaceutical and biotechnology enterprises, academic institutions, government agencies, and private and public research institutions. Our product candidates, if successfully developed and approved, will compete with established therapies as well as with new treatments that may be introduced by our competitors. Many of our competitors have significantly greater financial, product candidate development, manufacturing, and marketing resources than we do. Large pharmaceutical and biotechnology companies have extensive experience in clinical testing and obtaining regulatory approval for drugs. In addition, many universities and private and public research institutes are active in cancer research, some in direct competition with us. We also may compete with these organizations to recruit management, scientists, and clinical development personnel. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. New developments, including the development of other pharmaceutical technologies and methods of treating disease, occur in the pharmaceutical and life sciences industries at a rapid pace. Developments by competitors may render our product candidates obsolete or noncompetitive. We will also face competition from these third parties in recruiting and retaining qualified personnel, establishing clinical trial sites, and registering subjects for clinical trials, and in identifying and in-licensing new product candidates.

 

There are several companies developing treatments for Pa infections using antibiotics or alternative approaches. For example, Insmed is developing an inhaled therapeutic for the treatment of Pa infection in CF patients, Valneva (formerly Intercell) is developing a prophylactic vaccine