Endocyte, Inc.
ENDOCYTE INC (Form: 10-Q, Received: 08/09/2013 14:04:39)

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

Form 10-Q

 

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

 

    For the quarterly period ended June 30, 2013

 

OR

 

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

 

    For the transition period from            to

 

Commission file number 001-35050

 

ENDOCYTE, INC.

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware 35-1969-140
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

 

3000 Kent Avenue, Suite A1-100

West Lafayette, IN 47906

(Address of Registrant’s principal executive offices)

 

Registrant’s telephone number, including area code: (765) 463-7175

 

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 R No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes R 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. (Check one):

 

Large accelerated filer  ¨ Accelerated filer  R Non-accelerated filer ¨ Smaller reporting company ¨
  (Do not check if a  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 R

 

Number of shares of the registrant’s Common Stock, $0.001 par value, outstanding on July 30, 2013: 36,049,636

 

 
 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

ENDOCYTE, INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

    December 31,
2012
    June, 30
2013
 
          (unaudited)  
Assets                
Current assets:                
Cash and cash equivalents   $ 33,996,866     $ 64,216,440  
Short-term investments     141,840,823       46,519,555  
Receivables     5,689,067       8,917,499  
Prepaid expenses     2,799,883       3,173,406  
Other assets     498,203       549,970  
Total current assets     184,824,842       123,376,870  
Long-term investments     25,540,649       59,073,569  
Property and equipment, net     3,166,905       3,370,989  
Other noncurrent assets     546,313       381,394  
Total assets   $ 214,078,709     $ 186,202,822  
Liabilities and Stockholders’ Equity                
Current liabilities:                
Accounts payable   $ 3,647,967     $ 2,996,048  
Accrued wages and benefits     2,426,534       1,494,301  
Accrued clinical trial expenses     2,486,967       5,061,387  
Accrued expenses     1,902,910       1,875,268  
Deferred revenue     51,993,200       56,279,629  
Current portion of other liabilities     12,647       15,580  
Total current liabilities     62,470,225       67,722,213  
Other liabilities, net of current portion     42,065       43,511  
Deferred revenue, net of current portion     51,993,141       28,139,769  
Total liabilities     114,505,431       95,905,493  
Stockholders’ equity:                
Common stock: $0.001 par value, 100,000,000 shares authorized; 35,919,019 and 36,023,086 shares issued and outstanding at December 31, 2012 and June 30, 2013     35,919       36,023  
Additional paid-in capital     255,356,888       258,330,283  
Accumulated other comprehensive income (loss)     72,749       (87,552 )
Retained deficit     (155,892,278 )     (167,981,425 )
Total stockholders’ equity     99,573,278       90,297,329  
Total liabilities and stockholders’ equity   $ 214,078,709     $ 186,202,822  

 

See accompanying notes.

 

2
 

 

ENDOCYTE, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

 

    Three Months
Ended June 30,
    Six Months
Ended June 30,
 
    2012     2013     2012     2013  
    (unaudited)     (unaudited)  
Revenue:                                
Collaboration revenue   $ 7,812,965     $ 16,483,278     $ 7,812,965     $ 30,997,422  
Operating expenses:                                
Research and development     8,805,815       18,607,025       15,222,893       30,865,664  
General and administrative     3,194,639       6,211,429       6,288,701       12,467,431  
Total operating expenses     12,000,454       24,818,454       21,511,594       43,333,095  
Loss from operations     (4,187,489 )     (8,335,176 )     (13,698,629 )     (12,335,673 )
Other income (expense), net:                                
Interest income     27,570       126,616       41,038       266,353  
Interest expense     (280,124 )     (669 )     (627,324 )     (1,443 )
Other income (expense), net     (993,381 )     (18,247 )     (918,883 )     (18,384 )
Net loss     (5,433,424 )     (8,227,476 )     (15,203,798 )     (12,089,147 )
Net loss per share — basic and diluted   $ (0.15 )   $ (0.23 )   $ (0.42 )   $ (0.34 )
Items included in other comprehensive loss:                                
Unrealized gain (loss) on foreign currency translation     (1,165 )     (21,880 )     1,080       (21,250 )
Unrealized loss on available-for-sale securities     (46,197 )     (98,837 )     (44,531 )     (139,051 )
Other comprehensive loss     (47,362 )     (120,717 )     (43,451 )     (160,301 )
Comprehensive loss   $ (5,480,786 )   $ (8,348,193 )   $ (15,247,249 )   $ (12,249,448 )
Weighted-average number of common shares used in net loss per share calculation – basic and diluted     35,843,212       35,991,402       35,820,871       35,961,002  

 

See accompanying notes.

 

3
 

 

ENDOCYTE, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(unaudited)

 

    Common Stock     Additional
Paid-In
    Accumulated
Other
Comprehensive
    Retained        
    Shares     Amount     Capital     Income (Loss)     Deficit     Total  
Balances, December 31, 2012     35,919,019     $ 35,919     $ 255,356,888     $ 72,749     $ (155,892,278 )   $ 99,573,278  
                                                 
Exercise of stock options     104,067       104       302,901                   303,005  
Stock-based compensation                 2,670,494                   2,670,494  
Net loss                             (12,089,147 )     (12,089,147 )
Unrealized loss on foreign currency translation                       (21,250 )           (21,250 )
Unrealized loss on securities                       (139,051 )           (139,051 )
                                                 
Balances June 30, 2013 (unaudited)     36,023,086     $ 36,023     $ 258,330,283     $ (87,552 )   $ (167,981,425 )   $ 90,297,329  

 

See accompanying notes.

 

4
 

 

ENDOCYTE, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

    Six Months
Ended June 30,
 
    2012     2013  
    (unaudited)  
Operating activities                
Net loss   $ (15,203,798 )   $ (12,089,147 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:                
Depreciation     145,315       311,960  
Stock-based compensation expense     1,506,850       2,670,494  
Accretion of bond premium     176,781       539,773  
Non cash interest expense     73,915        
Loss on disposal of equipment           1,778  
Loss on debt extinguishment     992,281        
Change in operating assets and liabilities:                
Accounts receivable     147,346       3,201,212  
Accrued interest receivable     (4,823,169 )     (19,888 )
Prepaid expenses and other assets     (661,575 )     723,374  
Accounts payable     (818,461 )     (808,589 )
Accrued interest, wages, benefits and other liabilities     (910,948 )     766,913  
Deferred revenue     117,010,204       (25,996,587 )
Net cash provided by (used in) operating activities     97,634,741       (30,698,707 )
Investing activities                
Purchases of property and equipment     (685,009 )     (472,998 )
Purchases of investments     (180,881,836 )     (87,436,680 )
Proceeds from sale of investments     102,567,317       148,546,204  
Net cash provided by (used in) investing activities     (78,999,528 )     60,636,526  
Financing activities                
Repayment of long-term borrowings     (13,544,175 )      
Proceeds from the exercise of stock options     208,938       303,005  
Net cash provided by (used in) financing activities     (13,335,237 )     303,005  
Effect of exchange rate     1,080       (21,250 )
                 
Net increase in cash and cash equivalents     5,301,056       30,219,574  
                 
Cash and cash equivalents at beginning of period     61,352,483       33,996,866  
Cash and cash equivalents at end of period   $ 66,653,539     $ 64,216,440  

 

See accompanying notes.

 

5
 

 

ENDOCYTE, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1. Nature of Business and Organization

 

  Endocyte, Inc. (the “Company”) was incorporated on December 6, 1995. The Company is a biopharmaceutical company developing targeted therapies for the treatment of cancer and inflammatory diseases. The Company uses its proprietary technology to create novel small molecule drug conjugates (“SMDCs”), and companion imaging diagnostics. The SMDCs actively target receptors that are over-expressed on diseased cells, relative to healthy cells. This targeted approach is designed to enable the treatment of patients with a highly active drug at greater doses, delivered more frequently, and over longer periods of time than would be possible with the untargeted drug alone. The Company is also developing companion imaging diagnostics for each of its SMDCs that are designed to identify the patients whose disease over-expresses the target of the therapy and who are therefore more likely to benefit from treatment.

 

The Company has two wholly-owned subsidiaries, Endocyte Europe B.V. and Endocyte Europe G.m.b.H, which have been formed to assist with the administration of the pending applications with the European Medicines Agency (“EMA”) and pre-commercial planning activities in Europe.

 

2. Significant Accounting Policies

 

Basis of Presentation

 

The accompanying condensed consolidated financial statements include the accounts of Endocyte, Inc. and its subsidiaries and all intercompany amounts have been eliminated. The condensed consolidated financial statements are prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals and revisions of estimates, considered necessary for a fair presentation of the accompanying condensed consolidated financial statements have been included. Interim results for the three and six months ended June 30, 2013 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2013 or any other future period. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. Subsequent events have been evaluated through the date of issuance, which is the same as the date this Form 10-Q is filed with the Securities and Exchange Commission.

 

Segment Information

 

Operating segments are defined as components of an enterprise engaging in business activities for which discrete financial information is available and regularly reviewed by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company is performing clinical trials globally and has established subsidiaries in The Netherlands and Switzerland to assist in the administration of pending applications with the EMA and pre-commercial planning activities in Europe. All long-lived assets are held in the U.S. The Company views its operations and manages its business in one operating segment.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires the Company’s management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual amounts could differ from those estimates.

 

Cash and Cash Equivalents

 

The Company considers cash and all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash equivalents. Cash equivalents consist primarily of money market instruments that are maintained by an investment manager.

 

Investments

 

Investments consist primarily of investments in U.S. Treasuries, U.S. Government agency obligations and corporate debt securities, including commercial paper, that are maintained by an investment manager. Management determines the appropriate classification of marketable securities at the time of purchase and reevaluates such classification as of each balance sheet date. Available-for-sale securities are carried at fair value, with the unrealized gains and losses reported in other comprehensive income. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in other income. The Company considers and accounts for other-than-temporary impairments according to the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 320, Investments — Debt and Equity Securities (“ASC 320”). The cost of securities sold is based on the specific-identification method. Discounts and premiums on debt securities are amortized to interest income and expense over the term of the security.

 

6
 

 

Revenue Recognition

 

The Company recognizes revenues from license and collaboration agreements when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the fee is fixed or determinable, and there is reasonable assurance that the related amounts are collectible in accordance with ASC Topic 605, Revenue Recognition (“ASC 605”). The Company’s license and collaboration agreements may contain multiple elements, including grants of licenses to intellectual property rights and agreement to provide research and development services. The deliverables under such arrangements are evaluated under ASC Subtopic 605-25, Multiple-Element Arrangements. Effective January 1, 2011, the Company adopted an accounting standard update that amends the guidance on accounting for arrangements with multiple deliverables. Pursuant to the new standard, each required deliverable is evaluated to determine whether it qualifies as a separate unit of accounting based on whether the deliverable has “stand-alone value” to the customer. The arrangement’s consideration that is fixed or determinable, excluding contingent milestone payments, is then allocated to each separate unit of accounting based on the relative selling price of each deliverable. In general, the consideration allocated to each unit of accounting is recognized as the related goods or services are delivered, limited to the consideration that is not contingent upon future deliverables. When evaluating multiple element arrangements, the Company considers whether the components of the arrangement represent separate units of accounting. This evaluation requires subjective determinations and requires management to make judgments about the selling price of the individual elements and whether such elements are separable from the other aspects of the contractual relationship.

 

Upfront payments for licensing the Company's intellectual property are evaluated to determine if the licensee can obtain stand-alone value from the license separate from the value of the research and development services and other deliverables in the arrangement to be provided by the Company. If the Company determines that the license does not have stand-alone value separate from the research and development services, the license and the services are combined as one unit of account and upfront payments are recorded as deferred revenue in the balance sheet and are recognized as revenue over the estimated performance period that is consistent with the term of the research and development obligations contained in the collaboration agreement. When stand-alone value is identified, the related consideration is recorded as revenue in the period in which the license or other intellectual property rights are delivered.

 

In those circumstances where research and development services are combined with the license, and multiple services are being performed such that a common output measure to determine a pattern of performance cannot be discerned, the Company recognizes amounts received on a straight line basis over the performance period. Such amounts are recorded as collaboration revenue. Subsequent reimbursement payments, which are contingent upon the Company’s future research and development expenditures, will be recorded as collaboration revenue and will be recognized on a straight-line basis over the performance period using the cumulative catch up method. The costs associated with these activities are reflected as a component of research and development expense in the statements of operations in the period incurred.

 

Milestone payments under collaborative arrangements are triggered either by the results of the Company’s research and development efforts or by specified sales results by a third-party collaborator. Milestones related to the Company’s development-based activities may include initiation of various phases of clinical trials and applications and acceptance for product approvals by regulatory agencies. Due to the uncertainty involved in meeting these development-based milestones, the determination is made at the inception of the collaboration agreement whether the development-based milestones are considered to be substantive (i.e. not just achieved through passage of time). In addition, the amounts of the payments assigned thereto are considered to be commensurate with the enhancement of the value of the delivered intellectual property as a result of the Company’s performance. Because the Company’s involvement is necessary to the achievement of development-based milestones, the Company would account for development-based milestones as revenue upon achievement of the substantive milestone events. Milestones related to sales-based activities may be triggered upon events such as the first commercial sale of a product or when sales first achieve a defined level. Under the Company’s collaboration agreement with Merck Sharp & Dohme Research GmbH, a subsidiary of Merck & Co, Inc. (“Merck”) for vintafolide, one of the Company’s SMDCs, Merck will take the lead in commercialization activities in certain territories and the Company has retained the right (which the Company can opt out of) to co-promote vintafolide in the U.S. with Merck. Since these sales-based milestones would be achieved after the completion of the Company’s development activities, the Company would account for the sales-based milestones in the same manner as royalties, with revenue recognized upon achievement of the milestone.

 

Royalties based on reported sales of licensed products will be recognized based on contract terms when reported sales are reliably measurable and collectability is reasonably assured. To date, none of the Company's products have been approved and therefore the Company has not earned any royalty revenue from product sales. In territories where the Company and the collaborator will share profit, the revenue will be recorded in the period earned. 

 

7
 

 

Research and Development Expenses

 

Research and development expenses represent costs associated with the ongoing development of SMDCs and companion imaging diagnostics and include salaries, supplies, and expenses for clinical trials. The Company records accruals for clinical trial expenses based on the estimated amount of work completed. The Company monitors patient enrollment levels and related activities to the extent possible through internal reviews, correspondence, and discussions with research organizations.

 

Upfront payments made in connection with business collaborations and research and development arrangements are evaluated under ASC Subtopic 730-20, Research and Development Arrangements . Upfront payments made in connection with business development collaborations are expensed as research and development costs, as the assets acquired do not have alternative future use. Amounts related to future research and development are capitalized as prepaid research and development and are expensed over the service period based upon the level of services provided. As of June 30, 2013, the Company had approximately $2,477,000 of capitalized research and development costs included in prepaid expenses and other noncurrent assets.

 

Stock-Based Compensation

 

The Company accounts for its stock options pursuant to ASC Topic 718, Compensation — Stock Compensation (“ASC 718”), which requires the recognition of the fair value or calculated value for nonpublic entities, of stock-based compensation in net income. Stock-based compensation consists of stock options, which are granted to employees at exercise prices at or above the fair market value of the Company’s common stock on the dates of grant. The Company has issued restricted stock units (“RSUs”) for which stock-based compensation expense will be recognized when the Company determines it is probable that the performance conditions will be achieved. The Company used the calculated value to measure its stock-based compensation prior to its initial public offering. The Company recognizes compensation cost based on the grant-date value estimated in accordance with the provisions of ASC 718.

 

Net Loss Per Share

 

Basic net loss per share is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period, without consideration for common stock equivalents. Diluted net loss per share is computed by dividing the net loss attributable to common stockholders by the weighted-average number of common share equivalents outstanding for the period determined using the treasury-stock method and the if-converted method. For purposes of this calculation, stock options, warrants and RSUs are considered to be common stock equivalents and are only included in the calculation of diluted net loss per share when their effect is dilutive.

 

The following tables and discussion provide a reconciliation of the numerator and denominator of the basic and diluted net loss per share computations. The calculation below provides net loss, weighted-average common shares outstanding, and the resultant net loss per share on both a basic and diluted basis for the three and six months ended June 30, 2012 and 2013.

 

Historical net loss per share

 

    Three Months Ended June 30,     Six Months Ended June 30,  
    2012     2013     2012     2013  
Numerator:                                
Net loss   $ (5,433,424 )   $ (8,227,476 )   $ (15,203,798 )   $ (12,089,147 )
Denominator:                                
Weighted-average common shares outstanding     35,843,212       35,991,402       35,820,871       35,961,002  
Basic and diluted net loss per share   $ (0.15 )   $ (0.23 )   $ (0.42 )   $ (0.34 )

 

Common stock equivalents

 

As of June 30, 2012 and 2013, the following number of potential common stock equivalents were outstanding:

 

    As of June 30,  
    2012     2013  
Outstanding common stock options     3,685,200       5,128,059  
Outstanding warrants     133,968       133,968  
Outstanding RSUs     273,988       272,750  
                 
Total     4,093,156       5,534,777  

 

These common stock equivalents were excluded from the determination of diluted net loss per share due to their anti-dilutive effect on earnings.

 

8
 

 

3. New Accounting Pronouncements

 

Recently Adopted Accounting Standards

 

In January 2013, the FASB issued ASU No. 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities, an update to ASC Topic 210, Balance Sheet. This update clarifies that the scope of Update 2011-11, Disclosures about Offsetting Assets and Liabilities, applies to derivatives accounted for in accordance with ASC Topic 815, Derivatives and Hedging , including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with ASC Section 210-20-45 or ASC Section 815-10-45 or subject to an enforceable master netting arrangement or similar agreement . This update became effective for the Company for the fiscal year beginning on January 1, 2013 and was to be applied retrospectively for all comparative periods presented. The adoption of this guidance had no impact on the Company’s condensed consolidated financial statements.

 

In February 2013, the FASB issued ASU No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, an update to ASC Topic 220, Comprehensive Income. This amendment requires entities to provide information about the amounts reclassified out of accumulated other comprehensive income by component. Entities are required to present, either on the face of the statement where net income is present or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. This update became effective for the Company for the fiscal year beginning January 1, 2013 and was applied prospectively. The adoption did not have a material impact on the Company’s condensed consolidated financial statements.

 

4. Other Comprehensive Income (Loss)

 

The accumulated balances related to each component of other comprehensive income (loss) were as follows:

 

    Foreign Currency
Translation Gains
(Losses)
    Unrealized Net
Gains (Losses)
on
Securities
    Accumulated
Other
Comprehensive
Gains
(Losses)
 
Balance at December 31, 2012   $ (5,011 )   $ 77,760     $ 72,749  
Unrealized loss     (21,250 )     (134,671 )     (155,921 )
Net amount reclassified to net loss           (4,380 )     (4,380 )
Other comprehensive loss     (21,250 )     (139,051 )     (160,301 )
Balance at June 30, 2013   $ (26,261 )   $ (61,291 )   $ (87,552 )

 

The assets and liabilities of foreign operations are translated into U.S. dollars using the current exchange rate. For those operations, changes in exchange rates generally do not affect cash flows, which results in translation adjustments being made in stockholders’ equity rather than to net loss.

 

9
 

 

Reclassifications Out of Accumulated Other Comprehensive Loss

For the Six Months Ended June 30, 2013

 

    Amount
Reclassified from
Accumulated
Other
Comprehensive
Loss
     
Details about Accumulated Other
Comprehensive Loss Components
  Three
Months
Ended June
30, 2013
    Six Months
Ended June
30, 2013
    Affected Line Item in the
Condensed Consolidated
Statements of Operations and
Comprehensive Loss
Unrealized Net Gains on Securities   $ 425     $ 4,380     Other income (expense)
Total Reclassifications for the period   $ 425     $ 4,380      

 

5. Investments

  

The Company applies the fair value measurement and disclosure provisions of ASC 820, which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. Investments consist primarily of investments with original maturities greater than three months, but no longer than 24 months when purchased.

 

ASC 820 establishes a three-level valuation hierarchy for fair value measurements. These valuation techniques are based upon the transparency of inputs (observable and unobservable) to the valuation of an asset or liability as of the measurement date. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. These two types of inputs create the following fair value hierarchy:

 

Level 1 — Valuation is based on quoted prices for identical assets or liabilities in active markets.

 

Level 2 — Valuation is based on quoted prices for similar assets or liabilities in active markets, or other inputs that are observable for the asset or liability, either directly or indirectly, for the full term of the financial instrument.

 

Level 3 — Valuation is based upon other unobservable inputs that are significant to the fair value measurement.

 

The fair value of the Company’s fixed income securities is based on a market approach using quoted market values.

 

The following table summarizes the fair value of cash and cash equivalents and investments as of December 31, 2012:

 

Description   Cost     Level 1     Level 2     Fair Value
(Carrying
Value)
 
Cash                                
Cash   $ 5,227,208     $ 5,227,208     $     $ 5,227,208  
Cash equivalents                                
Money market funds     28,769,658       28,769,658             28,769,658  
Cash and cash equivalents   $ 33,996,866     $ 33,996,866     $     $ 33,996,866  
Short-term investments (due within 1 year)                                
U.S. government treasury obligations   $ 10,049,323     $ 10,053,393     $     $ 10,053,393  
U.S. government agency obligations     89,824,358       89,847,365             89,847,365  
Corporate obligations     41,905,867             41,940,065       41,940,065  
Total Short-term investments   $ 141,779,548     $ 99,900,758     $ 41,940,065     $ 141,840,823  
Long-term investments (due after 1 year through 2 years)                                
U.S. government treasury obligations   $ 5,024,697     $ 5,030,699     $     $ 5,030,699  
U.S. government agency obligations     17,455,606       17,463,067             17,463,067  
Corporate obligations     3,043,860             3,046,883       3,046,883  
Total Long-term investments   $ 25,524,163     $ 22,493,766     $ 3,046,883     $ 25,540,649  

 

 

10
 

 

 

The following table summarizes the fair value of cash and cash equivalents and investments as of June 30, 2013:

 

Description   Cost     Level 1     Level 2     Fair Value
(Carrying Value)
 
Cash                                
Cash   $ 8,112,702     $ 8,112,702     $     $ 8,112,702  
Cash equivalents                                
Money market funds     56,103,738       56,103,738             56,103,738  
Cash and cash equivalents   $ 64,216,440     $ 64,216,440     $     $ 64,216,440  
Short-term investments (due within 1 year)                                
U.S. government treasury obligations   $ 10,023,743     $ 10,029,300     $     $ 10,029,300  
U.S. government agency obligations     3,619,238       3,621,423             3,621,423  
Corporate obligations     32,890,350             32,868,832       32,868,832  
Total Short-term investments   $ 46,533,331     $ 13,650,723     $ 32,868,832     $ 46,519,555  
Long-term investments (due after 1 year through 2 years)                                
U.S. government treasury obligations   $ 5,016,729     $ 5,021,900     $     $ 5,021,900  
U.S. government agency obligations     41,084,311       41,053,000             41,053,000  
Corporate obligations     13,020,043             12,998,668       12,998,668  
Total Long-term investments   $ 59,121,083     $ 46,074,900     $ 12,998,668     $ 59,073,568  

 

All securities held at June 30, 2013, were classified as available-for-sale as defined by ASC 320.

 

Total unrealized gross gains were $1,927 and $20,410 for the six months ended June 30, 2012 and 2013, respectively. Total unrealized gross losses were $47,003 and $81,701 for the six months ended June 30, 2012 and 2013, respectively. The Company does not consider any of the unrealized losses to be other-than-temporary impairments because the Company has the intent and ability to hold investments until they recover in value.

 

6. Merck Collaboration Agreement

 

In April 2012, the Company entered into a worldwide collaboration agreement with Merck regarding the development and commercialization of vintafolide. The agreement grants Merck worldwide rights to develop and commercialize vintafolide and the right to use etarfolatide, the companion imaging diagnostic for vintafolide. The Company received a $120.0 million non-refundable upfront payment and a $5.0 million milestone payment in 2012 and is eligible for additional milestone payments of up to $875.0 million based on the successful achievement of development, regulatory and commercialization goals for vintafolide in a total of six different cancer indications. In addition, in the event there is regulatory approval and launch of vintafolide, the Company will split U.S. earnings under the collaboration arrangement on a 50/50 basis with Merck and will receive a double-digit percentage royalty on sales of the product in the rest of the world. The Company has retained the right (which it can opt out of) to co-promote vintafolide with Merck in the U.S. and Merck has the exclusive right to promote vintafolide in the rest of the world. The Company will be responsible for the majority of funding and completion of the ongoing Phase 3 PROCEED clinical trial of vintafolide for the treatment of patients with platinum resistant ovarian cancer. The Company is responsible for the execution of the Phase 2b TARGET trial of vintafolide for the treatment of second line non-small cell lung cancer. Merck is responsible for the costs of the TARGET trial and for all other development activities and costs and will have all decision rights with respect to the development and commercialization of vintafolide. The Company will remain responsible for the development, manufacture and commercialization worldwide of etarfolatide.

 

For revenue recognition purposes, the Company viewed the collaboration with Merck as a multiple element arrangement. Multiple element arrangements are analyzed to determine whether the various performance obligations, or elements, can be separated or whether they must be accounted for as a single unit of accounting. The Company evaluated whether the delivered elements under the arrangement have value on a stand-alone basis and whether objective and reliable evidence of fair value of the undelivered element exists. Deliverables that do not meet these criteria are not evaluated separately for the purpose of revenue recognition. For a single unit of accounting, payments received are recognized in a manner consistent with the final deliverable. The Company has determined that the deliverables related to the collaboration with Merck, including the licenses granted to Merck, as well as the Company performance obligations to provide various research and development services, will be accounted for as a single unit of account. This determination was made because the successful development of the therapeutic drug, vintafolide, is dependent on the companion diagnostic, etarfolatide, to select patients who are most likely to receive the most benefit from vintafolide. Given the nature of the combined benefit of the companion diagnostic and the therapeutic drug, the ongoing research and development services to be provided by the Company are essential to the overall arrangement as the Company has significant knowledge and technical know-how that is important to realizing the value of the licenses granted. The performance period over which the revenue will be recognized continues from the date of execution of the agreement through the end of 2014, when the Company expects to be completed with the various trials that are specified in the collaboration agreement and the Company’s performance obligations will be completed. The Company will continue to review the timing of when the various trials will be completed in order to assess that the estimated performance period over which the revenue is to be recognized is appropriate. Any significant changes in the timing of the performance period could result in a change in the revenue recognition period.

 

11
 

 

The Company will recognize the non-refundable $120.0 million upfront payment and funding from the research and development services on a straight-line basis over the performance period. The Company recognized approximately $16.5 million and $31.0 million of collaboration revenue during the three and six month periods ended June 30, 2013, respectively, and had deferred revenue related to the collaboration of approximately $84.4 million at June 30, 2013. As future research and development services are performed and become billable, the Company will utilize a cumulative catch-up approach for purposes of recognizing the consideration on a straight-line basis. Though accounted for as a single unit of account for presentation purposes, the Company has made an allocation of revenue recognized as collaboration revenue between the license and the services. This allocation is based upon the relative selling price of each deliverable. For the three and six month periods ended June 30, 2013, license revenue was approximately $13.1 million and $24.6 million, respectively, while research and development services were approximately $3.4 million and $6.4 million, respectively, of the collaboration revenue.

 

The collaboration arrangement with Merck includes milestone payments of approximately $880.0 million. These milestones consist of development milestones of approximately $380.0 million and sales-based milestones of approximately $500.0 million. The development milestones range from $5.0 million to $45.0 million and are based on the commencement of a new phase of clinical trials for specific indications, filing for approval in the U.S. or major countries in Europe for specific indications and approval in the U.S. and other major countries. The Company evaluated each of these milestone payments and believes that all but one of the milestones are substantive as there is substantial performance risk that must occur in order for them to be met as they must complete additional clinical trials which show a positive outcome or receive approval from a regulatory authority and would be commensurate with the enhancement of value of the underlying intellectual property. The non-substantive milestone is $5.0 million and was received in the fourth quarter of 2012. The milestone payment of $5.0 is being combined with the other consideration received in the arrangement, being the license and research and development reimbursements, and under the cumulative catch-up approach will be recognized on a straight-line basis during the performance period. The $500.0 million of sales-based milestones will occur after development milestones are achieved, and the Company will account for these in the same manner as royalties. The sales-based milestones would be achieved if certain sales thresholds are exceeded for worldwide sales of vintafolide and etarfolatide. To date, the products have not been approved and no revenue has been recognized related to the earnings split on U.S sales, development milestones, sales-based milestones or royalties.

 

Merck has the right to terminate the collaboration agreement on 90 days notice. Merck and the Company each have the right to terminate the agreement due to the material breach or insolvency of the other party. The Company has the right to terminate the agreement in the event that Merck challenges an Endocyte patent right relating to vintafolide. Upon termination of the agreement, depending upon the circumstances, the parties have varying rights and obligations with respect to the continued development and commercialization of vintafolide and, in the case of termination for cause by Merck, certain royalty obligations and U.S. profit and loss sharing.

 

7. Stockholders’ Equity

 

Stock-Based Compensation Plans

 

The Company has had stock-based compensation plans since 1997. The awards made under the plans adopted in 1997 and 2007 consisted of stock options. The 2010 Equity Incentive Plan (the “2010 Plan”), which is the only plan under which awards may currently be made, authorizes awards in the form of stock options, stock appreciation rights, restricted stock, RSU, performance units and performance shares. Awards under the 2010 Plan may be made to employees, directors and certain consultants as determined by the compensation committee of the board of directors. There were 5,195,563 and 6,625,563 shares of common stock authorized and reserved at December 31, 2012 and June 30, 2013 under these plans, respectively.

 

Stock Options

 

Under the various plans, employees have been granted incentive stock options, while directors and consultants have been granted non-qualified options. The plans allow the holder of an option to purchase common stock at the exercise price, which was at or above the fair value of the Company’s common stock on the date of grant.

 

12
 

 

Generally, options granted under the 1997 and 2007 plans in connection with an employee’s commencement of employment vest over a four-year period with one-half of the shares subject to the grant vesting after two years of employment and remaining options vesting monthly over the remainder of the four-year period. Options granted under the 1997 and 2007 plans for performance or promotions vest monthly over a four-year period. Generally, options granted under the 2010 Plan vest annually over a four year period. Unexercised stock options terminate on the tenth anniversary date after the date of grant. The Company recognizes the stock-based compensation expense over the requisite service period of the individual grantees, which generally equals the vesting period. The Company utilizes a Black-Scholes option-pricing model to estimate the value of stock options. The Black-Scholes model allows the use of a range of assumptions related to volatility, risk-free interest rate, and employee exercise behavior. Prior to 2013, since the Company did not have sufficient history as a publicly traded company to evaluate volatility, the Company used an average of several peer companies’ volatilities to determine a reasonable estimate of volatility. Beginning in 2013, the Company utilizes a combination of peer volatility and company volatility. For purposes of identifying peer companies, the Company considered characteristics such as industry, length of trading history, market capitalization and similar product pipelines.

 

Due to the lack of available quarterly data for these peer companies and insufficient history as a public company, the Company is using the “simplified” method for “plain vanilla” options to estimate the expected term of the stock options grants. Under this approach, the weighted-average expected life is presumed to be the average of the vesting term and the contractual term of the option. The risk-free interest rate assumption is derived from the weighted-average yield of a Treasury security with the same term as the expected life of the options, and the dividend yield assumption is based on historical experience and the Company’s estimate of future dividend yields.

   

The weighted-average value of the individual options granted during the three and six months ended June 30, 2012 and 2013 were determined using the following assumptions:

 

    Three Months     Six Months  
    Ended     Ended  
    June 30,     June 30,  
    2012     2013     2012     2013  
Weighted-average volatility     88 %     102 %     89 %     101 %
Risk-free interest rate     0.80 %     1.78 %     1.14 %     1.19 %
Weighted-average expected life (in years)     5.7       7.9       6.2       6.6  
Dividend yield     0.00 %     0.00 %     0.00 %     0.00 %

 

The Company’s stock option activity and related information during the six months ended June 30, 2013 are summarized as follows:

 

    Options     Weighted-
Average
Exercise
Price
    Weighted-
Average
Remaining
Contractual
Term
(In Years)
    Aggregate
Intrinsic
Value
 
Outstanding at January 1, 2013     3,879,239     $ 4.96                  
Granted during period     1,140,587       9.85                  
Exercised during period     (52,289 )     2.33                  
Expired during period     -                          
Forfeited during period     (4,650 )     3.49                  
                                 
Outstanding at March 31, 2013     4,962,887     $ 6.12       7.90     $ 31,462,157  
                                 
Exercisable at March 31, 2013     1,966,154     $ 3.87       6.05     $ 16,884,789  
Outstanding at April 1, 2013     4,962,887                          
Granted during period     216,950       12.97                  
Exercised during period     51,778       3.50                  
Expired during period     -                          
Forfeited during period     -                          
Outstanding at June 30, 2013     5,128,059     $ 6.43       7.75     $ 34,369,209  
                                 
Exercisable at June 30, 2013     2,215,185     $ 4.43       6.09     $ 19,277,790  

 

As of June 30, 2013, the total remaining unrecognized compensation cost related to stock options was $15.0 million which is being amortized over the remaining requisite service period. The expense is expected to be recognized over a weighted average period of 2 years.

 

13
 

 

Restricted Stock Units

 

In May 2011, the Company adopted and granted awards under a new performance-based RSU program (the “2011 RSU Program”) under the Company’s 2010 Plan. Each unit represents one share of the Company’s common stock. The RSUs will be earned, in whole or in part, based on performance and service conditions. The performance condition is based upon whether the Company receives regulatory approval to sell a therapeutic product, and the awards include a target number of RSUs that will vest upon a first commercial approval, and a maximum number of RSUs that will vest upon a second commercial approval. The RSUs will vest fifty percent based on the performance condition of commercial approval and fifty percent one year thereafter to fulfill the service condition, which requires the employee to remain employed by the Company.

 

As of June 30, 2013, the Company had 272,750 RSU awards outstanding. The unrecorded stock compensation expense is based on number of units granted, less estimated forfeitures based on the Company’s historical forfeiture rate of 6.49%, and the closing market price of the Company’s common stock at the grant date. As of June 30, 2013, the performance condition of obtaining regulatory approval had not been achieved, therefore, no vesting had occurred. The awards are being accounted for under ASC 718, and compensation expense is to be recorded if the Company determines that it is probable that the performance conditions will be achieved. As of June 30, 2013, it was not probable that the performance conditions will be achieved, therefore, no compensation expense related to the RSUs was recorded for the quarter ended June 30, 2013. Unrecorded compensation expense for the 2011 RSU Program as of June 30, 2013 was $2.7 million.

 

8. Income Taxes

 

The Company accounts for income taxes under the liability method in accordance with the provisions of ASC Topic 740, Income Taxes . The Company recognizes future tax benefits, such as net operating losses, to the extent those benefits are expected to be realized in future periods. Due to uncertainty surrounding the realization of its deferred tax assets, the Company has recorded an equal and offsetting valuation allowance against its net deferred tax assets. The Company experienced a change in ownership as defined under Section 382 of the U.S. Internal Revenue Code in August 2011. As a result, the future use of its net operating losses and credit equivalents is currently limited to approximately $94.2 million for 2013, $39.0 million for each of the years 2014 and 2015, $29.7 million for 2016 and $16.8 million for 2017. Any available but unused amounts will become available for use in all successive years.

 

14
 

 

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

 

This quarterly report on Form 10-Q contains certain statements that are forward-looking statements within the meaning of federal securities laws. When used in this report, the words “may,” “will,” “should,” “could,” “would,” “anticipate,” “estimate,” “expect,” “plan,” “believe,” “predict,” “potential,” “project,” “target,” “forecast,” “intend” and similar expressions are intended to identify forward-looking statements. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include the important risks and uncertainties that may affect our future operations as discussed in Part II — Item 1A of this Quarterly Report on Form 10-Q and any other filings made with the Securities and Exchange Commission. Readers of this report are cautioned not to place undue reliance on these forward-looking statements. While we believe the assumptions on which the forward-looking statements are based are reasonable, there can be no assurance that these forward-looking statements will prove to be accurate. This cautionary statement is applicable to all forward-looking statements contained in this report.

 

Overview

 

We are a biopharmaceutical company developing targeted therapies for the treatment of cancer and inflammatory diseases. We use our proprietary technology to create novel small molecule drug conjugates, or SMDCs, and companion imaging diagnostics. Our SMDCs actively target receptors that are over-expressed on diseased cells, relative to healthy cells. This targeted approach is designed to enable the treatment of patients with highly active drugs at greater doses, delivered more frequently, and over longer periods of time than would be possible with the untargeted drug alone. We are also developing companion imaging diagnostics for each of our SMDCs that are designed to identify the patients whose disease over-expresses the target of the therapy and who are therefore more likely to benefit from treatment. This combination of an SMDC with its companion imaging diagnostic is designed to personalize the treatment of patients by delivering effective therapy, selectively to diseased cells, in the patients most likely to benefit.

 

Our lead SMDC candidate, vintafolide, targets the folate receptor, which is frequently over-expressed on cancer cells. We have chosen platinum-resistant ovarian cancer, or PROC, a highly treatment-resistant disease, as our lead indication for development of vintafolide because of the high unmet need in treating this patient population and the high percentage of ovarian cancer patients whose tumors over-express the targeted folate receptor. We conducted a multicenter, open-label randomized phase 2 clinical trial of vintafolide in 149 women with PROC, referred to as the PRECEDENT trial. Based upon our findings from the PRECEDENT trial, we initiated enrollment of our PROCEED trial, a phase 3 registration trial in women with PROC, in the first half of 2011. PROCEED is a randomized, double-blinded trial of vintafolide in combination with pegylated liposomal doxorubicin, or PLD (marketed in the U.S. under the brand name DOXIL® and in Europe under the brand name CAELYX®), compared to PLD plus placebo. In the first quarter of 2013, we announced our decision to amend the PROCEED trial design. We have incorporated a progression free survival, or PFS, analysis on 250 FR(100%) patients (patients in which 100 percent of their target lesions over-expressed the folate receptor as determined by an etarfolatide scan) to be evaluated by the Data and Safety Monitoring Board, or DSMB. We expect the data for this analysis to be available in the first half of 2014. The DSMB may select one of three alternatives based on that analysis: 1) stop the trial if the PFS endpoint has not been met, 2) stop the trial because the PFS endpoint has been met and it would be unethical to continue because of demonstrated patient benefit or 3) add 100 FR(100%) patients to expand the overall survival, or OS, analysis. If the PFS endpoint is achieved, we believe that it is mostly likely the DSMB will elect to add 100 FR(100%) patients. We expect to enroll a total of 500 patients to reach the goal of 250 FR(100%) patients. Assuming we enroll the additional 100 patients, which we expect could take an additional nine to ten months to enroll, PROCEED will be a 600 patient study. The primary endpoint will be PFS in FR(100%) patients. The secondary endpoint will be OS in this same population. During 2013, we have been increasing and expect to continue to increase the amount of time and resources, both financial and personnel, devoted to our vintafolide program in PROC.

 

We are also developing vintafolide for use in non-small cell lung cancer, or NSCLC. Based on results of our single-arm, single agent phase 2 clinical trial of vintafolide in patients with second line NSCLC, in 2012 we began enrollment in TARGET, a randomized phase 2b trial. The trial is designed to enroll up to 200 patients with adenocarcinoma and squamous cell carcinoma of the lung who have failed one prior line of therapy. Patients are selected based on etarfolatide scan results and only FR(100%) patients are included. The trial design is intended to evaluate the safety and efficacy of vintafolide in second line NSCLC as a single agent and in combination with docetaxel, a commonly used second line chemotherapy approved by the U.S. Food and Drug Administration, or the FDA. The study has three arms: docetaxel alone; vintafolide alone; and vintafolide plus docetaxel. The primary outcome measure will be PFS with secondary measures of OS, tumor response and duration of response. We have completed enrollment in the TARGET trial, and we expect PFS data from the TARGET trial to be available in the first half of 2014.

 

15
 

 

In April 2012, we entered into a worldwide collaboration agreement with Merck Sharp & Dohme Research GmbH, a subsidiary of Merck & Co, Inc., or Merck, regarding the development and commercialization of vintafolide. The agreement grants Merck worldwide rights to develop and commercialize vintafolide. We received a non-refundable $120.0 million upfront payment and a $5.0 million milestone payment in 2012 and are eligible for additional milestone payments of up to $875.0 million based on the successful achievement of development, regulatory and commercialization goals for vintafolide in a total of six different cancer indications. In the event that there is regulatory approval and launch of vintafolide, we will split U.S. earnings under the collaboration arrangement on a 50/50 basis with Merck and will receive a double-digit percentage royalty on sales of the product in the rest of the world. We have retained the right (which we can opt out of) to co-promote vintafolide with Merck in the U.S. and Merck has the exclusive right to promote vintafolide in the rest of the world. We are responsible for the majority of funding and completion of the ongoing PROCEED trial. Merck will pay a portion of PROCEED trial costs and will pay 75 percent of the incremental costs of enrolling an additional 100 FR(100%) patients in the event the DSMB makes that election. We will be responsible for the execution of the TARGET trial of vintafolide for the treatment of second line NSCLC. Merck will be responsible for the costs of the TARGET trial and for all other development activities and costs and will have all decision rights with respect to the development and commercialization of vintafolide. We will remain responsible for the development, manufacture and commercialization worldwide of etarfolatide, the companion imaging diagnostic for vintafolide. Merck has the right to terminate the collaboration agreement on 90 days notice. Each party has the right to terminate the agreement due to the material breach or insolvency of the other party. We have the right to terminate the agreement in the event that Merck challenges an Endocyte patent right relating to vintafolide. Upon termination of the agreement, depending upon the circumstances, the parties have varying rights and obligations with respect to the continued development and commercialization of vintafolide and, in the case of termination for cause by Merck, certain royalty obligations and U.S. profit and loss sharing. In addition to PROC and NSCLC, Merck has announced its intention to initiate a randomized trial for vintafolide in folate-receptor positive, triple negative breast cancer, expected to begin in the fourth quarter of 2013. Merck also will be pursuing clinical trials of vintafolide in other indications and we also plan to advance other SMDCs and companion imaging diagnostics through development as preclinical and clinical trial results merit and funding permits.

 

In November 2012, the European Medicines Agency, or the EMA, accepted our applications for conditional marketing authorization for vintafolide for the treatment of PROC and etarfolatide and folic acid for patient selection. These applications are supported by four clinical studies: a Phase 1 study in solid tumors, two single agent, single-arm Phase 2 studies in ovarian cancer and NSCLC and the results and supplemental analyses of the PRECEDENT trial. We expect to receive a decision from the EMA on our applications in late 2013. The results of the PRECEDENT trial demonstrated a statistically significant delay in disease progression or death in the overall population, with the largest improvement observed in the FR(100%) patient population, those with all tumors positive for the folate receptor. Women with FR(100%) PROC who received vintafolide based therapy experienced a 62 percent decrease in their risk of progression [HR 0.381, p= 0.018] compared to women receiving chemotherapy alone. Median progression free survival (PFS; the time without disease progressing) in the vintafolide-based treatment arm was 5.5 months compared to 1.5 months of women who received chemotherapy alone. Tumor shrinkage (overall response rate) was observed in 17.3 percent of women receiving the vintafolide-based therapy compared to 6.7 percent in patients treated with chemotherapy alone. The PRECEDENT trial was not designed to be sufficiently powered for OS analysis and those results were inconclusive.

 

We have never been profitable and have incurred significant net losses since our inception. As of June 30, 2013, we had a retained deficit of $168.0 million. We expect to continue to incur significant and increasing operating expenses for the next several years as we pursue the advancement of our SMDCs and companion imaging diagnostics through the research, development, regulatory and commercialization processes.

 

We expect that our current cash position of $169.8 million at June 30, 2013, which includes cash equivalents and investments, is sufficient to fund our current operating plan, including completion of the PROCEED trial with or without the enrollment of 100 additional FR(100%) patients and the advancement of our earlier stage pipeline. If we were to receive conditional marketing approval in Europe of vintafolide and etarfolatide prior to the completion of the PROCEED study, this could impact the enrollment timeline as patients to be enrolled in European sites would transition from clinical trials to commercial use. This could delay the availability of final data from the PROCEED trial. If we significantly increase investments in our earlier stage pipeline and commercial capabilities, we may require additional financing through public or private equity or debt financings or other sources, such as other strategic partnerships or licensing arrangements, to fund the additional activities. Such funding may not be available on favorable 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.

   

Critical Accounting Policies

 

While our significant accounting policies are described in more detail in our 2012 Annual Report on Form 10-K, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our condensed consolidated financial statements.

 

Revenue Recognition

 

We recognize revenues from license and collaboration agreements when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the fee is fixed or determinable, and there is reasonable assurance that the related amounts are collectible in accordance with the Financial Accounting Standards Board, or FASB, Accounting Standards Codific ation, or ASC, Topic 605, Revenue Recognition . Our license and collaboration agreements may contain multiple elements, including grants of licenses to intellectual property rights and agreement to provide research and development services. The deliverables under arrangements are evaluated under ASC Subtopic 605-25, Multiple-Element Arrangements. Effective January 1, 2011, we adopted an accounting standard update that amends the guidance on accounting for arrangements with multiple deliverables. Pursuant to the new standard, each required deliverable is evaluated to determine whether it qualifies as a separate unit of accounting based on whether the deliverable has “stand-alone value” to the customer. The arrangement’s consideration that is fixed or determinable is then allocated to each separate unit of accounting based on the relative selling price of each deliverable. In general, the consideration allocated to each unit of accounting is recognized as the related goods or services are delivered, limited to the consideration that is not contingent upon future deliverables. When evaluating multiple element arrangements, we consider whether the components of the arrangement represent separate units of accounting. This evaluation requires subjective determinations and requires management to make judgments about the selling price of the individual elements and whether such elements are separable from the other aspects of the contractual relationship.

 

16
 

 

Upfront payments for licensing our intellectual property are evaluated to determine if the licensee can obtain stand-alone value from the license separate from the value of the research and development services and other deliverables in the arrangement to be provided by us. If we determine that the license does not have stand-alone value separate from the research and development services, the license and the services are combined as one unit of account and upfront payments are recorded as deferred revenue in the balance sheet and are recognized as revenue over the estimated performance period that is consistent with the term of the research and development obligations contained in the collaboration agreement. When stand-alone value is identified, the related consideration is recorded as revenue in the period in which the license or other intellectual property rights are delivered.

 

In those circumstances where research and development services are combined with the license, and multiple services are being performed such that a common output measure to determine a pattern of performance cannot be discerned, we recognize amounts received on a straight line basis over the performance period. Such amounts are recorded as collaboration revenue. Subsequent reimbursement payments, which are contingent upon our future research and development expenditures, will be recorded as collaboration revenue and will be recognized on a straight-line basis over the performance period using the cumulative catch up method. The costs associated with these activities are reflected as a component of research and development expense in the statements of operations in the period incurred.

 

Milestone payments under collaborative arrangements are triggered either by the results of our research and development efforts or by specified sales results by a third-party collaborator. Milestones related to our development-based activities may include initiation of various phases of clinical trials and applications and acceptance for product approvals by regulatory agencies. Due to the uncertainty involved in meeting these development-based milestones, the determination is made at the inception of the collaboration agreement whether the development-based milestones are considered to be substantive (i.e. not just achieved through passage of time). In addition, the amounts of the payments assigned thereto are considered to be commensurate with the enhancement of the value of the delivered intellectual property as a result of our performance. Because our involvement is necessary to the achievement of development-based milestones, we would account for development-based milestones as revenue upon achievement of the substantive milestone events. Milestones related to sales-based activities may be triggered upon events such as the first commercial sale of a product or when sales first achieve a defined level. Under our collaboration agreement with Merck, Merck will take the lead in commercialization activities for vintafolide in certain territories and we have retained the right (which we can opt out of) to co-promote vintafolide in the U.S. with Merck. These sales-based milestones would be achieved after the completion of our development activities. We would account for the sales-based milestones in the same manner as royalties, with revenue recognized upon achievement of the milestone.

 

Royalties based on reported sales of licensed products will be recognized based on contract terms when reported sales are reliably measurable and collectability is reasonably assured. To date, none of the Company's products have been approved and therefore the Company has not earned any royalty revenue from product sales. In territories where the Company and the collaborator will share profit, the revenue will be recorded in the period earned. 

 

We often are required to make estimates regarding drug development and commercialization timelines for compounds being developed pursuant to a collaboration agreement. Because the drug development process is lengthy and our collaboration agreements typically cover activities over several years, this approach often results in the deferral of significant amounts of revenue into future periods. In addition, because of the many risks and uncertainties associated with the development of drug candidates, our estimates regarding the period of performance may change in the future. Any change in our estimates could result in substantial changes to the period over which the revenues are recognized.

 

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Results of Operations

 

Comparison of Three Months Ended June 30, 2012 to Three Months Ended June 30, 2013

 

    Three Months Ended
June 30,
    Increase/
(Decrease)
    %  
    2012     2013              
    (In thousands)  
Statement of operations data:                        
Collaboration Revenue   $ 7,813     $ 16,483     $ 8,670       111 %
Operating expenses:                                
Research and development     8,806       18,607       9,801       111 %
General and administrative     3,195       6,211       3,016       94 %
                                 
Total operating expenses     12,001       24,818       12,817       107 %
                                 
Loss from operations     (4,188 )     (8,335 )     4,147       99 %
Interest income     28       126       98       350 %
Interest expense     (280 )     -       (280 )     100 %
Other income (expense), net     (994 )     (18 )     (976 )     98 %
                                 
Net loss   $ (5,434 )   $ (8,227 )   $ 2,793       51 %

 

Revenue

 

All of our revenue of $16.5 million recorded in the three months ended June 30, 2013 related to the collaboration with Merck. Of this revenue, $13.4 million related to the amortization of the $120.0 million upfront license payment, a milestone payment and reimbursable research and development expenditures incurred prior to the second quarter of 2013. The remaining $3.1 million of revenue related to the amortization of reimbursable research and development expenditures that we incurred during the second quarter of 2013. The amortization for both the upfront license payment and ongoing reimbursable research and development expenditures will be recognized as revenue ratably over the performance period.

 

Research and Development

 

  The increase in research and development expense for the three months ended June 30, 2013 compared to the three months ended June 30, 2012 was attributable to an $8.9 million increase in product development expenses and a $0.9 million increase in compensation expenses, including stock-based compensation expense, salaries expense and increase in bonus accrual. The increase in product development expenses was primarily due to an increase of $8.7 million in clinical trial expenses for the PROCEED and TARGET trials and an increase of $0.5 million in development costs for the earlier stage pipeline, partially offset by lower contract manufacturing costs for vintafolide and etarfolatide. Included in research and development expense for the three months ended June 30, 2013 were $6.6 million of expenses that are reimbursable from Merck under the collaboration agreement for vintafolide.

 

 Included in research and development expense were stock-based compensation charges of $470,000 and $884,000 for the three months ended June 30, 2012 and 2013, respectively.

 

Research and development expense included expense of $220,000 and $206,000 for the three months ended June 30, 2012 and 2013, respectively, for company-funded research at Purdue University, the primary employer of our Chief Science Officer.

 

General and Administrative

 

The increase in general and administrative expense in the three months ended June 30, 2013 compared to the three months ended June 30, 2012 was primarily attributable to an increase in expenses related to establishing commercial capability and an increase in compensation expenses. Included in general and administrative expense for the three months ended June 30, 2013 were $0.4 million of expenses that are reimbursable from Merck under the collaboration agreement for vintafolide relating to patent and trademark costs.

 

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Included in general and administrative expense were stock-based compensation charges of $257,000 and $641,000 for the three months ended June 30, 2012 and 2013, respectively.  

 

Interest Income

 

The increase in interest income in the three months ended June 30, 2013 compared to the three months ended June 30, 2012 resulted from an increase in investments in longer term maturities that earn higher rates of return.

 

Interest Expense

 

The decrease in interest expense in the three months ended June 30, 2013 compared to the three months ended June 30, 2012 was due to the decreased borrowings under our now terminated credit facility. Our average loan balance under the credit facility was $10.2 million for the three months ended June 30, 2012.

 

Other Expense, net

 

Other expense, net decreased in the three months ended June 30, 2013 compared to June 30, 2012 due to a loss on debt extinguishment of $1.0 million that we recognized in the three months ended June 30, 2012 as a result of terminating our credit facility in June 2012. The loss included a 5% prepayment fee on the outstanding balance of approximately $0.6 million and the write off of unamortized deferred financing fees and discounts of approximately $0.4 million.

  

Comparison of Six Months Ended June 30, 2012 to Six Months Ended June 30, 2013

 

    Six Months Ended
June 30,
    Increase/
(Decrease)
    %  
    2012     2013              
    (In thousands)  
Statement of operations data:                        
Collaboration Revenue   $ 7,813     $ 30,997     $ 23,184       297 %
Operating expenses:                                
Research and development     15,223       30,866       15,643       103 %
General and administrative     6,289       12,467       6,178       98 %
                                 
Total operating expenses     21,512       43,333       21,821       101 %
                                 
Loss from operations     (13,699 )     (12,336 )     (1,363 )     10 %
Interest income     41       266       225       549 %
Interest expense     (627 )     (1 )     (626 )     100 %
Other income (expense), net     (919 )     (18 )     (901 )     98 %
                                 
Net loss   $ (15,204 )   $ (12,089 )   $ (3,115 )     20 %

 

Revenue

 

All of our revenue of $31.0 million recorded in the six months ended June 30, 2013 related to the collaboration with Merck. Of this revenue, $26.0 million was related to the amortization of the upfront license payment, a milestone payment, and reimbursable research and development expenditures incurred prior to the six months ended June 30, 2013. The remaining $5.0 million of revenue related to the amortization of reimbursable research and development expenditures that we incurred during the six months ended June 30, 2013. The amortization for both the upfront license payment and ongoing reimbursable research and development expenditures will be recognized as revenue ratably over the performance period.

 

Research and Development

 

The increase in research and development expense for the six months ended June 30, 2013 compared to the six months ended June 30, 2012 was attributable to a $14.3 million increase in product development expenses and a $1.3 million increase in compensation expenses, including stock-based compensation expense, salaries expense and increase in bonus accrual. The increase in product development expenses was primarily due to an increase of $13.5 million in clinical trial expenses for the PROCEED and TARGET trials and an increase of $0.9 million in development costs for the earlier stage pipeline. Included in research and development expense for the six months ended June 30, 2013 were $10.9 million of expenses that are reimbursable from Merck under the collaboration agreement for vintafolide.

 

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Included in research and development expense were stock-based compensation charges of $0.9 million and $1.5 million for the six months ended June 30, 2012 and 2013, respectively.

 

Research and development expense included expenses of $393,000 and $413,000 for the six months ended June 30, 2012 and 2013, respectively, for company-funded research at Purdue University, the primary employer of our Chief Science Officer.

 

General and Administrative

 

The increase in general and administrative expense in the six months ended June 30, 2013 compared to the six months ended June 30, 2012 was primarily attributable to an increase in expenses related to establishing commercial capability and an increase in compensation expenses. Included in general and administrative expense for the six months ended June 30, 2013 were $0.5 million of expenses that are reimbursable from Merck under the collaboration agreement for vintafolide relating to patent and trademark costs.

 

Included in general and administrative expense were stock-based compensation charges of $0.6 million and $1.1 million for the six months ended June 30, 2012 and 2013, respectively.

 

Interest Income

 

The increase in interest income in the six months ended June 30, 2013 compared to the six months ended June 30, 2012 resulted from an increase in investments in longer term maturities that earn higher rates of return.

 

Interest Expense

 

The decrease in interest expense during the six months ended June 30, 2013 compared to the six months ended June 30, 2012 was due to the decreased borrowings under our now terminated credit facility. Our average loan balance under the credit facility was $10.9 million for the six months ended June 30, 2012.

 

Other Expense, Net

 

Other expense, net decreased in the six months ended June 30, 2013 compared to June 30, 2012 due to a loss on debt extinguishment of $1.0 million that we recognized in the six months ended June 30, 2012 as a result of terminating our credit facility in June 2012. The loss included a 5% prepayment fee on the outstanding balance of approximately $0.6 million and the write off of unamortized deferred financing fees and discounts of approximately $0.4 million.

 

Liquidity and Capital Resources

 

We have funded our operations principally through private placements of equity and debt securities, revenue from strategic collaborations, revenue from grants, loans, the two public offerings of common stock we completed in 2011 and the non-refundable $125.0 million payments from Merck during 2012. As of June 30, 2013, we had cash, cash equivalents and investments of $169.8 million.

 

In June 2012, we paid the entire outstanding balance of and terminated our $15.0 million credit facility, and recorded a loss on debt extinguishment of $1.0 million, which included a 5% prepayment fee of $0.6 million and the write off of unamortized deferred financing fees and discounts of $0.4 million.

 

We expect that our cash position at June 30, 2013, which includes cash equivalents and investments, is sufficient to fund our current operating plan, including completion of the PROCEED trial with or without the enrollment of 100 additional FR(100%) patients and the advancement of our earlier stage pipeline.

 

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

 

    Six Months Ended
June 30,
 
    2012     2013  
    (In thousands)  
Net cash provided by (used in) operating activities   $ 97,635     $ (30,699 )
Net cash provided by (used in) investing activities     (79,000 )     60,637  
Net cash provided by (used in) financing activities     (13,335 )     303  
Effect of exchange rate     1       (21 )
                 
Net increase in cash and cash equivalents   $ 5,301     $ 30,220  

 

Operating Activities

 

The cash provided by operating activities for the six months ended June 30, 2012 resulted from deferred revenue related to the upfront payment from Merck and the reimbursable research and development expenditures that will be recognized ratably over the performance period. The use of cash in the six months ended June 30, 2013 primarily resulted from our net loss adjusted for non-cash items and changes in operating assets and liabilities, including a decrease in deferred revenue related to the upfront payment from Merck, a milestone payment, and the reimbursable research and development expenditures that will be recognized ratably over the performance period.

 

Investing Activities

 

The cash provided by and used in investing activities for each of the six month periods was due primarily to the net result of maturities and sales of investments, which were partially offset by capital expenditures for equipment of $685,000 and $473,000 during the 2012 and 2013 periods, respectively.

   

Financing Activities

 

The cash used in financing activities during the six months ended June 30, 2012 primarily consisted of a $13.5 million payment on the credit facility. The cash provided by financing activities during the six month period ended June 30, 2013 consisted of proceeds from the exercise of stock options.

 

Operating Capital Requirements

 

If we obtain conditional marketing approval of vintafolide and etarfolatide in Europe, we anticipate generating revenue from the sale of our first product in late 2013 at the earliest. Therefore, we anticipate we will continue to incur significant losses for the next several years as we bear the majority of the expenses for the PROCEED trial for vintafolide and etarfolatide in PROC, build commercial capabilities in the U.S for vintafolide and internationally for etarfolatide, develop our earlier stage pipeline, and expand our corporate infrastructure.

  

We believe that our current cash position of $169.8 million at June 30, 2013, including cash equivalents and investments, is sufficient to fund our current operating plan, including completion of the PROCEED trial with or without the enrollment of 100 additional FR(100%) patients and the advancement of our earlier stage pipeline. We are responsible for the majority of the costs of the PROCEED trial and Merck is responsible for the costs of the TARGET trial.

 

Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical products, we are unable to estimate the exact amounts of our working capital requirements. Our future funding requirements will depend on many factors, including but not limited to:

 

  the number and characteristics of the SMDCs and companion imaging diagnostics we pursue;

 

  the scope, progress, results and costs of researching and developing our SMDCs and companion imaging diagnostics and conducting preclinical and clinical trials;

 

  the timing of, and the costs involved in, obtaining regulatory approvals for our SMDCs and companion imaging diagnostics;

 

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  the cost of commercialization activities if any of our SMDCs and companion imaging diagnostics are approved for sale, including marketing sales and distribution costs;

 

  the cost of manufacturing any SMDCs and companion imaging diagnostics we successfully commercialize;

 

  the success of our collaboration with Merck for vintafolide, including receiving milestone payments under the collaboration, and our ability to establish and maintain other strategic partnerships, licensing or other arrangements and the financial terms of such agreements;

 

  the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims, including litigation costs and the outcome of such litigation; and

 

  the timing, receipt and amount of sales of, or royalties on, our SMDCs and companion imaging diagnostics, if any.

 

If our available cash, cash equivalents and investments are insufficient to satisfy our liquidity requirements, or if we develop additional opportunities to pursue, we may seek to sell additional equity or debt securities or obtain new loans or credit facilities. The sale of additional equity and debt securities may result in additional dilution to our stockholders. If we raise additional funds through the issuance of debt securities or convertible preferred stock, these securities may have rights senior to those of our common stock and could contain covenants that would restrict our operations. We may require additional capital beyond our currently forecasted amounts. Any such required additional capital may not be available on reasonable terms, if at all. If we were unable to obtain additional financing, we may be required to reduce the scope of, delay or eliminate some or all of our planned research, development and commercialization activities, which could harm our business.

 

Contractual Obligations and Commitments

 

There have been no significant changes during the three and six month periods ended June 30, 2013 to the items that we disclosed as our contractual obligations and commitments in our Form 10-K for the year ended December 31, 2012.

 

Off-Balance Sheet Arrangements

 

None.

 

  Item 3.  Quantitative and Qualitative Disclosures About Market Risk

 

We are exposed to market risk related to changes in interest rates. As of December 31, 2012 and June 30, 2013 we had cash, cash equivalents and investments of $201.4 million and $169.8 million, respectively. The investments consisted of U.S. government money market funds, U.S. Treasuries, U.S. Government agency obligations, U.S. corporate securities and cash equivalents. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because our investments are in marketable securities. Our investments are subject to interest rate risk and will fall in value if market interest rates increase. Due to the short-term duration of our investment portfolio and the low risk profile of our investments, an immediate 10 percent change in interest rates would not have a material effect on the fair market value of our portfolio. We have the ability to hold our investments until maturity, and therefore we do not expect that our results of operations or cash flows would be adversely affected by any change in market interest rates on our investments. The carrying value of our investments is based on publicly available information. We do not currently have any investment securities for which a market is not readily available or active.

 

We do not believe that any credit risk is likely to have a material impact on the value of our assets and liabilities.

 

We contract with contract research organizations and investigational sites globally. We may be subject to fluctuations in foreign currency rates in connection with these agreements. A ten percent fluctuation in foreign currency rates would not have a material impact on our financial statements. We currently do not hedge our foreign currency exchange rate risk, but as our operations in foreign countries expand, we may consider the use of hedges.

 

Item 4.  Controls and Procedures

 

Conclusion Regarding Effectiveness of Disclosure Controls and Procedures

 

Our management, with the participation of our principal executive officer and our principal financial officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and procedures. Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures as of such date are effective at the reasonable assurance level in ensuring that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

22
 

 

Changes in Internal Control over Financial Reporting

 

There has been no change in our internal control over financial reporting during the quarter ended June 30, 2013, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

23
 

 

 PART II – OTHER INFORMATION

 

Item 1A. Risk Factors

 

Risk factors which could cause actual results to differ from our expectations and which could negatively impact our financial condition and results of operations are discussed below and elsewhere in this report. Additional risks and uncertainties not presently known to us or that are currently not believed to be significant to our business may also affect our actual results and could harm our business, financial condition and results of operations. If any of the risks or uncertainties described below or any additional risks and uncertainties actually occur, our business, results of operations and financial condition could be materially and adversely affected.

 

Risks Related to Our Business and Industry

 

We have incurred significant losses since our inception and anticipate that we will continue to incur significant losses for the foreseeable future. We may never achieve or sustain profitability.

 

We are a clinical-stage biopharmaceutical company with a limited operating history. Biopharmaceutical product development is a highly speculative undertaking and involves a substantial degree of risk. We are not profitable and have incurred losses in each year since our inception in December 1995. We have not generated any revenue from product sales to date. We continue to incur significant research and development and other expenses related to our ongoing operations. Our net loss for the three and six month periods ended June 30, 2013 was $8.2 million and $12.1 million, respectively. As of June 30, 2013, we had a retained deficit of $168.0 million. We expect to continue to incur significant expenses for the foreseeable future as we continue our development of, and seek regulatory approvals for, our small molecule drug conjugates, or SMDCs, and companion imaging diagnostics, and begin to commercialize any approved products. As such, we are subject to all the risks incident to the creation of new biopharmaceutical products, and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. If our product candidates fail in clinical trials, or do not gain regulatory approval, or fail to achieve market acceptance, we may never become profitable. Even if we achieve profitability in the future, we may not be able to sustain profitability in subsequent periods.

 

We currently have no approved products, which makes it difficult to assess our future viability.

 

As of June 30, 2013, we have not derived any revenue from the sales of our products. Our operations to date have been limited to organizing and staffing our company, acquiring, developing and securing our technology, undertaking preclinical studies and clinical trials of our product candidates, engaging in research and development under collaboration agreements and filing applications with the European Medicines Agency, or the EMA, for conditional marketing authorization of our lead SMDC, vintafolide (EC145), and its companion imaging diagnostic, etarfolatide (EC20), and folic acid. We have not yet demonstrated an ability to obtain regulatory approval, formulate and manufacture commercial-scale products, or conduct sales and marketing activities necessary for successful product commercialization. Consequently, it is difficult to predict our future success and the viability of any commercial programs that we may choose to take forward.

 

We are highly dependent on the success of vintafolide, and we cannot give any assurance that we will successfully complete its clinical development, or that it will receive regulatory approval or be successfully commercialized.

 

Our lead SMDC, vintafolide, has been evaluated in a randomized phase 2 clinical trial for the treatment of women with platinum-resistant ovarian cancer, or PROC, and is currently being evaluated in the same indication in a randomized phase 3 clinical trial which we refer to as PROCEED. In addition, we are conducting a randomized phase 2b clinical trial, which we refer to as TARGET, of vintafolide for the treatment of second line non-small cell lung cancer, or NSCLC. Our future trials may not be successful, and vintafolide may never receive regulatory approval or be successfully commercialized. We may fail to obtain necessary marketing approvals for vintafolide from the EMA, the U.S. Food and Drug Administration, or the FDA, or other regulatory authorities if our clinical development programs for vintafolide fail to demonstrate that it is safe and effective to the satisfaction of such authorities, or if we have inadequate financial or other resources to advance vintafolide through the necessary development activities. Even if vintafolide receives regulatory approval, we, along with Merck Sharp & Dohme Research GmbH, a subsidiary of Merck & Co, Inc., or Merck (with whom we have entered into a collaboration agreement for vintafolide), may not be successful in marketing it for a number of reasons, including the introduction by our competitors of more clinically-effective or cost-effective alternatives or failure in our sales and marketing efforts. Any failure to obtain approval of vintafolide and successfully commercialize it would have a material and adverse impact on our business.

 

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The results of previous clinical trials may not be predictive of future results, and our current and planned clinical trials may not satisfy the requirements of the EMA, FDA or other regulatory authorities.

 

The clinical trials of our product candidates are, and the manufacturing and marketing of any approved products will be, subject to extensive and rigorous review and regulation by numerous government authorities in the United States, Europe and in other countries where we intend to test and market our product candidates. Before obtaining regulatory approvals for the commercial sale of any product candidate, we must demonstrate through preclinical testing and clinical trials that the product candidate is safe and effective for use in each indication for which we intend to market such product candidate. This process takes many years and requires the expenditure of substantial financial and human resources and may include post-marketing trials and surveillance. To date, we have not completed any randomized phase 3 clinical trials. We have completed two phase 2 single-arm and one phase 2 randomized clinical trials with vintafolide for the treatment of patients with PROC and NSCLC. We are currently evaluating vintafolide for the treatment of PROC in PROCEED, a phase 3 clinical trial, and for the treatment of NSCLC in TARGET, a phase 2b clinical trial. Merck has announced its intention to initiate a randomized trial for vintafolide in folate-receptor positive, triple negative breast cancer, expected to begin in the fourth quarter of 2013. In addition, we have other product candidates in the discovery and preclinical testing stages.

 

Positive results from preclinical studies and early clinical trials should not be relied upon as evidence that later-stage or large-scale clinical trials will succeed. A number of companies in the biopharmaceutical industry have suffered significant setbacks in advanced clinical trials due to lack of efficacy or adverse safety profiles, even after promising results in earlier trials. We will be required to demonstrate with substantial evidence through adequate and well-controlled clinical trials, including PROCEED, that our product candidates are safe and effective for use in the target population before we can seek regulatory approvals for their commercial sale in the United States.

 

In our end of phase 2 meeting with the FDA related to vintafolide, the FDA stated that, because of the difficulty in reliably determining cancer progression based on imaging studies in ovarian cancer, its office policy is to require overall survival, or OS, to be the primary endpoint for an ovarian cancer registration trial. However, the FDA stated that we may choose, at our own risk, to conduct a phase 3 trial in which progression free survival, or PFS, is the primary endpoint; provided that for such a trial to be the basis for approval, the PFS results must be very robust statistically and clinically meaningful, and the trial must be powered to demonstrate a statistically significant OS benefit. In the first quarter of 2013, we announced our decision to amend the PROCEED trial design. We have incorporated a PFS analysis on 250 patients in which 100 percent of their target lesions over-expressed the folate receptor, or FR(100%) patients, to be evaluated by the Data and Safety Monitoring Board, or DSMB. The DSMB may select one of three alternatives based on that analysis: 1) stop the trial if the PFS endpoint has not been met, 2) stop the trial because the PFS endpoint has been met and it would be unethical to continue because of demonstrated patient benefit or because additional patient enrollment is not likely to be helpful, or 3) add 100 FR(100%) patients to expand the OS analysis. Even if the PROCEED trial meets its PFS primary endpoint, a positive trend in OS at the time of filing our new drug application, or NDA, may be required for approval or the FDA may delay consideration of approval until final OS data becomes available, which would result in significant additional costs and delay our ability to market vintafolide in the United States for this indication. The FDA also noted that the final OS analysis from the PROCEED trial would be required as a post-marketing commitment should approval be granted based upon PFS. In addition, if the FDA approves vintafolide based upon meeting our PFS primary endpoint, in certain circumstances the approval could be withdrawn if any required post-marketing trials or analyses do not meet FDA requirements. Furthermore, as is typical for cancer drug approvals, the FDA stated that for the initial approval of vintafolide to be based on a single phase 3 clinical trial, the trial must provide evidence of persuasive and robust statistically significant clinical benefit such that it would be considered unethical to conduct another trial. If we fail to demonstrate a benefit of this magnitude in PROCEED, we would expect that the FDA would require us to conduct a second phase 3 trial in order to receive marketing approval of vintafolide for the treatment of PROC. At a minimum, such a requirement would delay our ability to market vintafolide in the United States for this indication.

 

Patients in PROCEED are being imaged with our companion imaging diagnostic, etarfolatide, prior to treatment with vintafolide. Although etarfolatide is part of our trial design, there can be no assurance that this trial will provide a sufficient basis for approval of an NDA for etarfolatide. Similarly, we can provide no assurance to you that vintafolide will be approved without etarfolatide approval.

 

The FDA and other regulatory authorities may change requirements for the approval of our product candidates even after reviewing and providing non-binding comment on a protocol for a pivotal phase 3 clinical trial that has the potential to result in FDA approval. In addition, regulatory authorities may also approve any of our product candidates for fewer or more limited indications than we request, may grant approval contingent on the performance of costly post-marketing clinical trials, or may approve a product candidate with a label that does not include the labeling claims necessary or desirable for the successful commercialization of that product candidate. Any of the foregoing scenarios could materially harm the commercial prospects for our product candidates.

 

Our efforts to obtain conditional marketing authorization for vintafolide and etarfolatide from the European Medicines Agency may be unsuccessful.

 

In November 2012, the EMA accepted our applications for conditional marketing authorization for vintafolide for the treatment of PROC and for etarfolatide and folic acid for patient selection. These applications are based on the results of our randomized phase 2 clinical trial, which we refer to as the PRECEDENT trial, which investigated vintafolide in combination with standard chemotherapy agent pegylated liposomel doxorobicin, or PLD (marketed in the U.S. under the brand name DOXIL® and in Europe under the brand name CAELYX®), for treatment of women with PROC and which also evaluated the utility of etarfolatide for patient selection. Our filings are supported by four clinical studies: a Phase 1 study in solid tumors, two single-agent, single-arm Phase 2 studies in ovarian cancer and NSCLC, and the PRECEDENT trial.

 

We cannot predict with any certainty whether the EMA will grant the marketing authorizations that we are seeking in these applications.

 

25
 

 

Marketing authorizations based on phase 2 randomized studies are unusual and, if granted, are subject to significant conditions, which likely would include requirements to:

 

  complete the phase 3 study;

  confirm that the patient risk-benefit is positive; and

  complete an annual renewal process.

 

If the EMA were to grant conditional marketing authorization of vintafolide and etarfolatide based on our phase 2 studies, that authorization could be further limited or even withdrawn if our required phase 3 studies fail to demonstrate evidence of persuasive and robust statistically significant clinical benefit or if they result in unexpected safety concerns with the study drugs. We cannot give any assurance that the EMA will approve our applications for conditional marketing authorization or that, if approved, that the labeling restrictions and other approval conditions will enable us and Merck to profitably commercialize these drug candidates in the European Union. Conditional approval by the EMA would not authorize us and Merck to commercialize vintafolide or etarfolatide in any country outside the European Union and would not be expected to have any beneficial effect on our ability to obtain regulatory approval from the FDA or other regulatory agencies.

 

There is a high risk that our development and clinical activities will not result in commercial products, and we may be required to invest significant additional resources in our current development and clinical programs, to the exclusion of others, before it is known whether one or more of our product candidates will receive regulatory approval or be commercially introduced.

 

Our product candidates are in various stages of development and are prone to the risks of failure inherent in biopharmaceutical development. In many cases, even if we ultimately obtain regulatory approval to market a product candidate, we will need to complete significant additional clinical trials before we can demonstrate that the product candidate is safe and effective to the satisfaction of the EMA, the FDA or other regulatory authorities. Clinical trials are expensive and uncertain processes that take years to complete. Failure can occur at any stage of the process. Further, even if a product candidate receives the required regulatory approvals, we cannot assure you that it will be successful commercially. In addition, we have a large number of product candidates in our development pipeline, and while we invest in the technology and indications that we believe are most promising, financial and resource constraints may require us to forego or delay opportunities that may ultimately have greater commercial potential than those programs we are currently actively developing.

 

We may not achieve research, development and commercialization goals in the time frames that we publicly estimate, which could have an adverse impact on our business and could cause our stock price to decline.

 

We set goals, and make public statements regarding our expectations, regarding the timing of certain accomplishments, such as the approval of regulatory applications for our product candidates and other developments and milestones under our research and development programs. The actual timing of these events can vary significantly due to a number of factors, including, without limitation, the amount of time, effort and resources committed to our programs by us and our current and potential future collaborators and the uncertainties inherent in the regulatory approval process. As a result, there can be no assurance that we or our current and potential future collaborators will make regulatory submissions or receive regulatory approvals as planned or that we or our current and potential future collaborators will be able to adhere to our current schedule for the achievement of key milestones under any of our programs. If we or any collaborators fail to achieve one or more of the milestones described above as planned, our business could be materially adversely affected and the price of our common stock could decline.

 

The coverage and reimbursement status of newly approved biopharmaceuticals is uncertain, and failure to obtain adequate coverage and adequate reimbursement of vintafolide or other product candidates could limit our ability to generate revenue.

 

There is significant uncertainty related to the third-party coverage and reimbursement of newly approved drugs. The commercial success of our product candidates, including vintafolide, in both domestic and international markets will depend in part on the availability of coverage and adequate reimbursement from third-party payors, including government payors, such as the Medicare and Medicaid programs, and managed care organizations. Government and other third-party payors are increasingly attempting to contain healthcare costs by limiting both coverage and the level of reimbursement for new drugs and, as a result, they may not cover or provide adequate payment for our product candidates. These payors may conclude that our product candidates are less safe, less effective or less cost-effective than existing or later introduced products, and third-party payors may not approve our product candidates for coverage and reimbursement or may cease providing coverage and reimbursement for these product candidates. Because each country has one or more payment systems, obtaining reimbursement in the United States and internationally may take significant time and cause us to spend significant resources. The failure to obtain coverage and adequate reimbursement for our product candidates or healthcare cost containment initiatives that limit or deny reimbursement for our product candidates may significantly reduce any future product revenue.

 

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In the United States and in other countries, there have been and we expect there will continue to be a number of legislative and regulatory proposals to change the healthcare system in ways that could significantly affect our business. International, federal and state lawmakers regularly propose and, at times, enact legislation that would result in significant changes to the healthcare system, some of which are intended to contain or reduce the costs of medical products and services. The U.S. government and other governments have shown significant interest in pursuing healthcare reform, as evidenced by the Patient Protection and Affordable Care Act and its amendment, the Health Care and Education Reconciliation Act. Such government-adopted reform measures may adversely impact the pricing of healthcare products and services in the United States or internationally and the amount of reimbursement available from governmental agencies or other third-party payors. In addition, in some foreign jurisdictions, there have been a number of legislative and regulatory proposals to change the healthcare system in ways that could affect our ability to sell our products profitably. The continuing efforts of U.S. and other governments, insurance companies, managed care organizations and other payors of healthcare services to contain or reduce healthcare costs may adversely affect our ability to set satisfactory prices for our products, to generate revenues, and to achieve and maintain profitability.

 

In some countries, particularly in the European Union, prescription drug pricing is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a product candidate. To obtain reimbursement or pricing approval in some countries, we may be required to conduct additional clinical trials that compare the cost-effectiveness of our product candidates to other available therapies. If reimbursement of our product candidates is unavailable or limited in scope or amount in a particular country, or if pricing is set at unsatisfactory levels, we may be unable to achieve or sustain profitability of our products in such country.

 

Our development activities could be delayed or stopped for a number of reasons, many of which are outside our control, including failure to recruit and enroll patients for clinical trials.

 

Each of our clinical trials requires the investment of substantial expense and time and the timing of the commencement, continuation and completion of these clinical trials may be subject to significant delays relating to various causes. We do not know whether our current clinical trials will be completed on schedule, or at all, and we cannot guarantee that our future planned clinical trials will begin on time, or at all. Clinical trials must be conducted in accordance with FDA or applicable foreign government guidelines and are subject to oversight by the FDA, foreign governmental agencies and independent institutional review boards, or IRBs, at the medical institutions where the clinical trials are conducted. In addition, clinical trials must be conducted with supplies of our product candidates produced under current Good Manufacturing Practice, or cGMP, and other requirements in foreign countries, and may require large numbers of test patients. Our current and planned clinical trials could be substantially delayed or prevented by several factors, including:

 

  limited number of, and competition for, suitable sites to conduct our clinical trials;
  government or regulatory delays and changes in regulatory requirements, policy and guidelines;
  delay or failure to obtain sufficient supplies of the product candidate for, or other drugs used in, our clinical trials as a result of our suppliers’ non-compliance with cGMP, or for other reasons;
  delay or failure to reach agreement on acceptable clinical trial agreement terms with prospective sites or investigators; and
  delay or failure to obtain IRB approval to conduct a clinical trial at a prospective site.

 

The completion of our clinical trials could also be substantially delayed or prevented by several factors, including:

 

  slower than expected rates of patient recruitment and enrollment;
  unforeseen safety issues;
  lack of efficacy evidenced during clinical trials, which risk may be heightened given the advanced state of disease and lack of response to prior therapies of patients in our clinical trial for vintafolide in PROC;
  termination of our clinical trials by an IRB at one or more clinical trial sites;
  inability or unwillingness of patients or medical investigators to follow our clinical trial protocols; and
  inability to monitor patients adequately during or after treatment or high patient dropout rates.

 

For example, we experienced slower than expected rates of patient recruitment and enrollment with our PRECEDENT trial due to a number of reasons, including slower than expected clinical trial site activations due to prolonged contract negotiations and delays in scheduling or approval by IRBs, lack of qualified patients at a particular site, competition with other clinical trials for patients, and clinical investigator scheduling and availability due to vacations or absences. We temporarily suspended enrollment in the PROCEED trial in late 2011 due to the global shortage of PLD. Janssen Products, LP has since announced full access to DOXIL® in the U.S and we have resumed enrollment in the U.S. The new supply process in Europe has been approved by the Committee for Medicinal Products for Human Use, or CHMP, and we have begun enrolling patients in Europe.

 

Our clinical trials may be suspended or terminated at any time by the FDA, other regulatory authorities or us. For example, a DSMB monitoring PROCEED could recommend closing the trial based on the results of a pre-specified interim futility analysis or any observed unexpected safety concern that may occur during the trial. Failure or significant delay in completing clinical trials for our product candidates could materially harm our financial results and the commercial prospects for our product candidates.

 

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Even if we are able to obtain regulatory approval of vintafolide in Europe based on our pending EMA applications and in the United States based on our initial phase 3 clinical trial, marketing will be limited to our intended indication of PROC and not ovarian cancer generally, or any other type of cancer.

 

Even if we are able to obtain regulatory approval of vintafolide in Europe based on our pending EMA applications and in the United States based on our initial phase 3 clinical trial, PROCEED, and Merck formulates and manufactures a commercial-scale product, the marketing of vintafolide will be limited to the initial intended indication of PROC and not ovarian cancer generally, or any other type of cancer. In 2012, it was estimated that there were approximately 22,280 new cases of ovarian cancer in the United States and over 40,000 new cases in the EU. Overall, approximately 80 percent of patients relapse after first-line platinum-based chemotherapy. Marketing of vintafolide, if approved for our intended indication, will be limited to those women with ovarian cancer who demonstrate a resistance to platinum-based therapies and who are FR(100%). Marketing efforts for vintafolide outside of our approved indication of PROC will require additional regulatory approvals, which we may never pursue or receive.

 

Our product candidates may cause undesirable side effects that could delay or prevent their regulatory approval or commercialization.

 

Common side effects of vintafolide include abdominal pain, vomiting, constipation, nausea, fatigue, loss of appetite and peripheral sensory neuropathy. Because our products have been tested in relatively small patient populations and for limited durations to date, additional side effects may be observed as their development progresses.

 

Undesirable side effects caused by any of our product candidates could cause us or regulatory authorities to interrupt, delay or discontinue clinical trials and could result in the denial of regulatory approval by the EMA, the FDA, or other regulatory authorities for any or all targeted indications. This, in turn, could prevent us from commercializing our product candidates and generating revenues from their sale. In addition, if one of our products receives marketing approval and we or others later identify undesirable side effects caused by this product:

 

  regulatory authorities may withdraw their approval of this product;
  we may be required to recall this product, change the way this product is administered, conduct additional clinical trials or change the labeling of this product;
  this product may be rendered less competitive and sales may decrease; or
  our reputation may suffer generally both among clinicians and patients.

 

Any one or a combination of these events could prevent us from achieving or maintaining market acceptance of the affected product or could substantially increase the costs and expenses of commercializing the product, which in turn could delay or prevent us from generating significant revenues from the sale of the product.

 

We may not obtain government regulatory approval to market our product candidates or negotiate satisfactory pricing for our product candidates which could adversely impact our future profitability.

 

We intend to seek approval to market certain of our product candidates in both the United States and in non-U.S. jurisdictions. Prior to commercialization, each product candidate will be subject to an extensive and lengthy governmental regulatory approval process in the United States and in other countries. In order to market our products in the European Union and many other non-U.S. jurisdictions, we must obtain separate regulatory approvals and comply with numerous and varying regulatory requirements. Although the EMA has accepted our applications seeking conditional marketing authorization for vintafolide, etarfolatide and folic acid based on the results of the PRECEDENT trial and supplemental analyses of that trial’s results, we have not sought marketing approval for any of our product candidates in the U.S. or in any other jurisdictions outside of Europe, and we may not receive the approvals necessary to commercialize our product candidates in any market. We may not be able to obtain regulatory approval for any product candidates, or even if approval is obtained, the labeling for such products may place restrictions on their use that could materially impact the marketability and profitability of the product subject to such restrictions. Satisfaction of these regulatory requirements, which includes satisfying the EMA, the FDA and other regulatory authorities that the product is both safe and effective for its intended uses, typically takes several years or more depending upon the type, complexity, novelty and safety profile of the product and requires the expenditure of substantial resources. Uncertainty with respect to meeting the regulatory requirements governing our product candidates may result in excessive costs or extensive delays in the regulatory approval process, adding to the already lengthy review process.

 

Also, the approval procedure varies among countries and can involve additional testing and data review. The time and safety and efficacy data required to obtain foreign regulatory approval may differ from that required to obtain FDA approval. The foreign regulatory approval process may include all of the risks associated with obtaining FDA approval. We may not obtain foreign regulatory approvals on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory agencies in other countries, and approval by one foreign regulatory authority does not ensure approval by regulatory agencies in other countries or by the FDA. However, a failure or delay in obtaining regulatory approval in one jurisdiction may have a negative effect on the regulatory approval process in other jurisdictions, including approval by the FDA. The failure to obtain regulatory approval in any jurisdiction could materially harm our business.

 

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We may require substantial additional funding which may not be available to us on acceptable terms, or at all.

 

We are advancing multiple product candidates through clinical development. Our future funding requirements will depend on many factors, including but not limited to:

 

  our need to expand our research and development activities;
  the rate of progress and cost of our clinical trials and the need to conduct clinical trials beyond those planned;
  the EMA’s action on our applications for conditional marketing authorization for vintafolide, etarfolatide and folic acid;
  the costs associated with establishing a sales force and commercialization capabilities;
  the costs of acquiring, licensing or investing in businesses, product candidates and technologies;
  the costs and timing of seeking and obtaining approval from the EMA, the FDA and other regulatory authorities;
  our ability to maintain, defend and expand the scope of our intellectual property portfolio;
  our need and ability to hire additional management and scientific and medical personnel;
  the effect of competing technological and market developments; and
  the economic and other terms and timing of collaboration, licensing or other arrangements into which we may enter.

 

Until we can generate a sufficient amount of revenue to finance our cash requirements, which we may never do, and if we would require additional funding, we expect to finance future cash needs primarily through public or private equity or debt financings or other sources, such as our collaboration with Merck for vintafolide, or other licensing arrangements. We do not know whether additional funding will be available on acceptable terms, or at all. If we are not able to secure additional funding when needed, we may have to delay, reduce the scope of or eliminate one or more of our clinical trials or research and development programs, or enter into collaboration or other arrangements with other companies to provide such funding for one or more of such clinical trials or programs in exchange for our affording such partner commercialization or other rights to the product candidates that are the subject of such clinical trials or programs.

 

In addition, our operating plan may change as a result of many factors currently unknown to us, and we may need additional funds sooner than planned. Also, we may seek additional capital due to favorable market conditions or other strategic considerations even if we believe we have sufficient funds for our current or future operating plans.

 

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

 

We may seek the additional capital necessary to fund our operations through public or private equity or debt financings or other sources, such as strategic partnerships or licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of the current stockholders will be diluted and the terms may include liquidation or other preferences that adversely affect their rights as a common stockholder. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions such as incurring additional debt, making capital expenditures, or declaring dividends, or which impose financial covenants on us that limit our operating flexibility to achieve our business objectives. If we raise additional funds through collaboration and licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies or product candidates, or grant licenses on terms that are not favorable to us. In addition, we cannot assure you that additional funds will be available to us on favorable terms or at all.

 

If our competitors develop and market products that are more effective, safer or less expensive than our product candidates, our commercial opportunities will be negatively impacted.

 

The life sciences industry is highly competitive, and we face significant competition from many pharmaceutical, biopharmaceutical and biotechnology companies that are researching and marketing products designed to address various types of cancer and other indications we treat or may treat in the future. We are currently developing cancer therapeutics that will compete with other drugs and therapies that currently exist or are being developed. Also, our lead SMDC, vintafolide, is being clinically developed not as an initial first line therapy but as a therapy for patients whose tumors have developed resistance to first line chemotherapy, which limits its potential addressable market. Products we may develop in the future are also likely to face competition from other drugs and therapies. Many of our competitors have significantly greater financial, manufacturing, marketing and drug development resources than we do. Large biopharmaceutical companies, in particular, have extensive experience in clinical testing and in obtaining regulatory approvals for drugs. Additional mergers and acquisitions in the biopharmaceutical industry may result in even more resources being concentrated by our competition. Competition may increase further as a result of advances in the commercial applicability of technologies currently being developed and a greater availability of capital investment in those fields. These companies also have significantly greater research and marketing capabilities than we do. Some of the companies developing products which may compete with vintafolide include Roche Holdings, Amgen, ImmunoGen, Inc., BioNumerik Pharmaceuticals, Inc., Boehringer Ingelheim, GlaxoSmithKline, AstraZeneca and Eisai. In addition, many universities and U.S. private and public research institutes are active in cancer research, the results of which may result in direct competition with vintafolide or other of our product candidates.

 

In certain instances, the drugs which will compete with our product candidates are widely available or established, existing standards of care. To compete effectively with these drugs, our product candidates will need to demonstrate advantages that lead to improved clinical safety or efficacy compared to these competitive products. We cannot assure you that we will be able to achieve competitive advantages versus alternative drugs or therapies. If our competitors market products that are more effective, safer or less expensive than our product candidates, if any, or that reach the market sooner than our product candidates, if any, we may not achieve commercial success.

 

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

 

  the success of our collaboration with Merck for vintafolide;
  our ability to design and successfully execute appropriate clinical trials;
  our ability to recruit and enroll patients for our clinical trials;
  the results of our clinical trials and the efficacy and safety of our product candidates;
  the speed at which we develop our product candidates;
  achieving and maintaining compliance with regulatory requirements applicable to our business;
  the timing and scope of regulatory approvals, including labeling;
  adequate levels of reimbursement under private and governmental health insurance plans, including Medicare;
  our ability to protect intellectual property rights related to our product candidates;
  our ability to commercialize and market any of our product candidates that may receive regulatory approval;
  our ability to have our partners manufacture and sell commercial quantities of any approved product candidates to the market;
  acceptance of our product candidates by physicians, other healthcare providers and patients; and
  the cost of treatment in relation to alternative therapies.

 

In addition, the biopharmaceutical industry is characterized by rapid technological change. Our future success will depend in large part on our ability to maintain a competitive position with respect to these technologies. Our competitors may render our technologies obsolete by advances in existing technological approaches or the development of new or different approaches, potentially eliminating the advantages in our drug discovery process that we believe we derive from our research approach and proprietary technologies. Also, because our research approach integrates many technologies, it may be difficult for us to stay abreast of the rapid changes in each technology. If we fail to stay at the forefront of technological change, we may be unable to compete effectively.

 

If we fail to attract and retain key management and scientific personnel, we may be unable to successfully develop or commercialize our product candidates.

 

Our success as a specialized scientific business depends on our continued ability to attract, retain and motivate highly qualified management and scientific and clinical personnel. The loss of the services of any of our senior management could delay or prevent the commercialization of our product candidates.

 

We may not be able to attract or retain qualified management and scientific personnel in the future due to the intense competition for a limited number of qualified personnel among biopharmaceutical, biotechnology, pharmaceutical and other businesses. If we are not able to attract and retain the necessary personnel to accomplish our business objectives, we may experience constraints that will impede the achievement of our research and development objectives, our ability to raise additional capital and our ability to implement our business strategy.

 

As we evolve from a company primarily involved in clinical development to a company also involved in commercialization, we may encounter difficulties in managing our growth and expanding our operations successfully.

 

As we advance our product candidates through clinical trials, we will need to expand our development, regulatory, manufacturing, marketing and sales capabilities or contract with third parties to provide these capabilities for us. As our operations expand, we expect that we will need to manage additional relationships with such third parties, as well as additional collaborators and suppliers.

 

Maintaining these relationships and managing our future growth will impose significant added responsibilities on members of our management and other personnel. We must be able to: manage our development efforts effectively; manage our clinical trials effectively; hire, train and integrate additional management, development, administrative and sales and marketing personnel; improve our managerial, development, operational and finance systems; and expand our facilities, all of which may impose a strain on our administrative and operational infrastructure.

 

Even if we are able to obtain regulatory approval of our products, we may be unable to successfully market and sell them unless we establish sales, marketing and distribution capabilities.

 

We currently have limited marketing, sales or distribution capabilities. If vintafolide and etarfolatide receive regulatory approval, we expect to rely in part on Merck’s sales and marketing organization, technical expertise and supporting distribution capabilities. Under our collaboration with Merck, we have retained the right (which we can opt out of) to co-promote vintafolide with Merck in the U.S. and Merck has the exclusive right to promote vintafolide in the rest of the world. We remain responsible for commercializing etarfolatide on a worldwide basis. We will need sales, marketing and distribution capabilities to commercialize vintafolide, etarfolatide and any other of our product candidates. Any failure or delay in the development of these capabilities would adversely impact the commercialization of these products. In addition, any revenue we receive will significantly depend upon the efforts of Merck as it relates to the promotion of vintafolide, which may not be successful and are generally not within our control. If we are not successful in commercializing our other product candidates, either on our own or through collaborations with one or more third parties, our future product revenue will suffer and we may incur significant additional losses. 

 

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If Merck fails to perform its obligations under or terminates our collaboration agreement, the development and commercialization of vintafolide could be delayed or terminated and our business could be substantially harmed.

 

A significant portion of our future revenues from vintafolide will depend upon the success of our collaboration with Merck. Under our collaboration agreement, Merck has substantial development, manufacturing and commercialization responsibilities with respect to vintafolide. If Merck was to terminate our collaboration agreement, fail to meet its obligations or otherwise decrease its level of efforts, allocation of resources or other commitments, the development and commercialization of vintafolide and the development of our pipeline could be delayed or terminated. In addition, if some or any of the development, regulatory and commercial milestones are not achieved or if certain net sales thresholds are not achieved, we will not fully realize the potential economic benefits of the agreement. Further, the achievement of certain of the milestones under this collaboration will depend on factors that are outside of our control and most are not expected to be achieved for several years, if at all.

 

We rely on third parties to conduct clinical trials for our product candidates and plan to rely on third parties to conduct future clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, it may cause delays in commencing and completing clinical trials of our product candidates or we may be unable to obtain regulatory approval for or commercialize our product candidates.

 

Clinical trials must meet applicable FDA and foreign regulatory requirements. We do not have the ability to independently conduct phase 2 or phase 3 clinical trials for any of our product candidates. We rely on third parties, such as contract research organizations, medical institutions, clinical investigators and contract laboratories, to conduct all of our clinical trials of our product candidates; however, we remain responsible for ensuring that each of our clinical trials is conducted in accordance with its investigational plan and protocol. Moreover, the FDA, the EMA and other regulatory authorities require us to comply with regulations and standards, commonly referred to as Good Clinical Practices for conducting, monitoring, recording and reporting the results of clinical trials to ensure that the data and results are scientifically credible and accurate and that the trial subjects are adequately informed of the potential risks of participating in clinical trials. Our reliance on third parties does not relieve us of these responsibilities and requirements.

 

We or the third parties we rely on may encounter problems in clinical trials that may cause us or the FDA or foreign regulatory agencies to delay, suspend or terminate our clinical trials at any phase. These problems could include the possibility that we may not be able to manufacture sufficient quantities of materials for use in our clinical trials, conduct clinical trials at our preferred sites, enroll a sufficient number of patients for our clinical trials at one or more sites, or begin or successfully complete clinical trials in a timely fashion, if at all. Furthermore, we, the FDA or foreign regulatory agencies may suspend clinical trials of our product candidates at any time if we or they believe the subjects participating in the trials are being exposed to unacceptable health risks, whether as a result of adverse events occurring in our trials or otherwise, or if we or they find deficiencies in the clinical trial process or conduct of the investigation.

 

The FDA and foreign regulatory agencies could also require additional clinical trials before or after granting of marketing approval for any products, which would result in increased costs and significant delays in the development and commercialization of such products and could result in the withdrawal of such products from the market after obtaining marketing approval. Our failure to adequately demonstrate the safety and efficacy of a product candidate in clinical development could delay or prevent obtaining marketing approval of the product candidate and, after obtaining marketing approval, data from post-approval studies could result in the product being withdrawn from the market, either of which would likely have a material adverse effect on our business.

 

We rely on third parties to manufacture and supply our product candidates.

 

We do not currently own or operate manufacturing facilities for the clinical or commercial production of our product candidates. We believe that we currently have sufficient supplies of all of the key components of vintafolide in sufficient quantities to conduct and complete our PROCEED and TARGET clinical trials. Under the collaboration agreement with Merck, Merck has assumed responsibility to manufacture vintafolide as part of its development and commercialization activities. We lack the resources and the capability to manufacture any of our other product candidates on a clinical or commercial scale. We do not have any long-term supply arrangements with any third party manufacturers and we obtain our raw materials on a purchase order-basis. We expect to continue to depend on third-party contract manufacturers for the foreseeable future. If for some reason our contract manufacturers cannot perform as agreed, we may be unable to replace them in a timely manner and the production of our product candidates would be interrupted, resulting in delays in clinical trials and additional costs. For example, we are currently obtaining clinical trial quantities of etarfolatide and our other product candidates from our contract manufacturers. We have no experience with managing the manufacturing of commercial quantities of any of our product candidates and scaling-up production to commercial quantities could take us significant time and result in significant costs. Such approval would require new testing and compliance inspections. In addition, a new manufacturer would have to be educated in, or develop substantially equivalent processes for, production of our product candidates after receipt of regulatory approval to manufacture any of our product candidates.

 

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To date, our product candidates have been manufactured in small quantities for preclinical studies and clinical trials by third-party manufacturers. If the EMA, the FDA or other regulatory agencies approve any of our product candidates for commercial sale, we expect that we would continue to rely, at least initially, on third-party manufacturers to produce commercial quantities of any approved product candidates, other than vintafolide. These manufacturers may not be able to successfully increase the manufacturing capacity for any approved product candidates in a timely or economic manner, or at all. Significant scale-up of manufacturing may require additional validation studies, which the regulatory agencies must review and approve. Additionally, any third-party manufacturer we retain to manufacture our product candidates on a commercial scale must pass a pre-approval inspection for conformance to the cGMPs before we can obtain approval of our product candidates. If we are unable to successfully increase the manufacturing capacity for a product candidate in conformance with cGMPs, the regulatory approval or commercial launch of such products may be delayed or there may be a shortage in supply.

  

Our product candidates require precise, high quality manufacturing. Failure by our contract manufacturers to achieve and maintain high manufacturing standards could result in patient injury or death, product recalls or withdrawals, delays or failures in testing or delivery, cost overruns, or other problems that could seriously harm our business. Contract manufacturers may encounter difficulties involving production yields, quality control and quality assurance. These manufacturers are subject to ongoing periodic unannounced inspection by the FDA and corresponding state and non-U.S. authorities to ensure strict compliance with cGMP and other applicable government regulations and corresponding foreign standards; however, we do not have control over third-party manufacturers’ compliance with these regulations and standards.

 

We are subject to risks associated with the availability of key raw materials, such as technetium-99m, as well as drugs used in our clinical trials, such as PLD.

 

Our etarfolatide companion imaging diagnostic requires the use of the radioisotope technetium-99m, or Tc-99m, and there have been historical periods in which supply was not able to satisfy demand. Tc-99m for nuclear medicine purposes is usually extracted from Tc-99m generators, which contain molybdenum-99, or Mo-99, as the usual parent nuclide for Tc-99m. The majority of Mo-99 produced for Tc-99m medical use comes from fission of highly enriched uranium from only five reactors around the world located in Canada, Belgium, South Africa, the Netherlands and France. Although Tc-99m is used in various nuclear medicine diagnostics utilized by healthcare providers, Tc-99m has a very short half-life (6 hours). As a result, healthcare providers extract Tc-99m from generators which use Mo-99. Mo-99 itself has a short half-life (2.75 days) and is sent to the nuclear medicine pharmacy directly from one of the five reactors. Accordingly, Tc-99m diagnostics are made on-site at the clinic, and neither Tc-99m nor Mo-99 can be inventoried. Sources of Tc-99m may be insufficient for our clinical trial site needs due to its limited supply globally. For example, global shortages of Tc-99m emerged in the past few years because aging nuclear reactors in the Netherlands and Canada that provided about two-thirds of the world’s supply of Mo-99 were shut down repeatedly for extended maintenance periods and two replacement Canadian reactors constructed in the 1990s were closed before beginning operation for safety reasons. 

 

We use, and plan to continue to use, etarfolatide or other companion imaging diagnostics that employ Tc-99m in our clinical trials. For example, etarfolatide is a component of PROCEED and, in the future, if our clinical trial sites are not able to obtain sufficient quantities of Tc-99m for use in etarfolatide, we may not be able to gather sufficient data on etarfolatide during PROCEED and as a result, the approval of etarfolatide may be delayed. In addition, to the extent the approval of our product candidates depends on the screening and monitoring of the patient population with a companion imaging diagnostic such as etarfolatide in our clinical trials, we would experience a corresponding delay in approval and commercialization of these SMDCs if we are not able to obtain sufficient Tc-99m.

 

We temporarily suspended enrollment in the PROCEED trial in late 2011 due to the global shortage of PLD. While the availability of PLD has since been restored, additional disruptions in the availability of PLD could delay our PROCEED trial.

 

If a successful product liability claim or series of claims is brought against us for uninsured liabilities or in excess of insured liabilities, we could be forced to pay substantial damage awards.

 

The use of any of our product candidates in clinical trials, and the sale of any approved products, may expose us to product liability claims. We currently maintain product liability insurance coverage in an amount which we believe is adequate for our clinical trials currently in progress and those recently completed. We monitor the amount of coverage we maintain as the size and design of our clinical trials evolve and intend to adjust the amount of coverage we maintain accordingly. However, we cannot assure you that such insurance coverage will fully protect us against some or all of the claims to which we might become subject. We might not be able to maintain adequate insurance coverage at a reasonable cost or in sufficient amounts or scope to protect us against potential losses. In the event a claim is brought against us, we might be required to pay legal and other expenses to defend the claim, as well as uncovered damages awards resulting from a claim brought successfully against us. Furthermore, whether or not we are ultimately successful in defending any such claims, we might be required to direct financial and managerial resources to such defense and adverse publicity could result, all of which could harm our business.

 

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Each of our product candidates will remain subject to ongoing regulatory review even if it receives marketing approval. If we or our contractors fail to comply with continuing regulations, we or they may be subject to enforcement action that could adversely affect us.

 

Even if our product candidates become approved products, we and our contractors will continue to be subject to pervasive regulation by the EMA, the FDA and other regulatory authorities. We and our contractors will continue to be subject to regulatory requirements governing among other things the manufacture, packaging, sale, promotion adverse event reporting, storage and recordkeeping of our approved products. Although we have not received any notice that we are the subject of any regulatory enforcement action, it is possible that we may be in the future and that could have a material adverse effect on our business. We may be slow to adapt, or may never adapt, to changes in existing regulatory requirements or adoption of new regulatory requirements. If we or any of our contractors fail to comply with the requirements of the EMA, the FDA and other applicable governmental or regulatory authorities or previously unknown problems with our products, manufacturers or manufacturing processes are discovered, we or the contractor could be subject to administrative or judicially imposed sanctions, including: fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution.

 

We deal with hazardous materials and must comply with environmental laws and regulations, which can be expensive and restrict how we do business.

 

Our activities involve the controlled storage, use, and disposal of hazardous materials, including corrosive, explosive and flammable chemicals, biologic waste and various radioactive compounds. We are subject to federal, state, and local laws and regulations governing the use, manufacture, storage, handling, and disposal of these hazardous materials. Although we believe that our safety procedures for the handling and disposing of these materials comply with the standards prescribed by these laws and regulations, we cannot eliminate the risk of accidental contamination or injury from these materials.

 

In the event of an accident, state or federal authorities may curtail our use of these materials, and we could be liable for any civil damages, which may exceed our financial resources and may seriously harm our business. We currently maintain insurance covering hazardous waste clean-up costs in an amount we believe to be sufficient for typical risks regarding our handling of these materials, however, this amount of coverage may not be sufficient to cover extraordinary or unanticipated events. Additionally, an accident could damage, or force us to temporarily shut down, our operations.

 

Our ability to use net operating losses to offset future taxable income is subject to certain limitations.

 

Under Section 382 of the U.S. Internal Revenue Code, or Code, a corporation that experiences a more-than 50 percent ownership change over a three-year testing period is subject to limitations on its ability to utilize its pre-change net operating losses to offset future taxable income. We experienced such an ownership change in August 2011. As a result, the future use of our net operating losses, after giving effect to net unrealized built-in gains, is currently limited to approximately $94.2 million for 2013, $39.0 million for each of 2014 and 2015, $29.7 million for 2016 and $16.8 million for 2017. Any available but unused amounts will become available for use in all successive years. At December 31, 2012, we recorded a full valuation allowance against our net operating loss carryforwards of approximately $67.2 million, as we believe it is more likely than not that the net operating loss carryforwards will not be fully realized.

 

Risks Related to Intellectual Property

 

Our proprietary rights may not adequately protect our technologies and product candidates.

 

Our commercial success will depend in part on our ability to obtain additional patents and protect our existing patent position as well as our ability to maintain adequate protection of other intellectual property for our technologies, product candidates, and any future products in the United States and other countries. If we do not adequately protect our intellectual property, competitors may be able to use our technologies and erode or negate any competitive advantage we may have, which could harm our business and ability to achieve profitability. The laws of some foreign countries do not protect our proprietary rights to the same extent or in the same manner as U.S. laws, and we may encounter significant problems in protecting and defending our proprietary rights in these countries. We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary technologies, product candidates and any future products are covered by valid and enforceable patents or are effectively maintained as trade secrets.

 

We apply for patents covering both our technologies and product candidates, as we deem appropriate. However, we may fail to apply for patents on important technologies or product candidates in a timely fashion, or at all. Our existing patents and any future patents we obtain may not be sufficiently broad to prevent others from practicing our technologies or from developing competing products and technologies. We cannot be certain that our patent applications will be approved or that any patents issued will adequately protect our intellectual property. For example, our issued patents do not claim composition of matter protection for the drug payloads connected to the linker system and targeting ligand modules of our SMDCs. In addition, we generally do not control the patent prosecution of subject matter that we license from others, including those licensed from Purdue Research Foundation, a non-profit organization which manages the intellectual property of Purdue University. Accordingly, we are unable to exercise the same degree of control over this intellectual property as we would over our own and would need to involve Purdue Research Foundation in legal proceedings to enforce these intellectual property rights. Moreover, the patent positions of biopharmaceutical companies are highly uncertain and involve complex legal and factual questions for which important legal principles are often evolving and remain unresolved. As a result, the validity and enforceability of patents cannot be predicted with certainty. In addition, we do not know whether:

 

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we or our licensors were the first to make the inventions covered by each of our issued patents and pending patent applications;
we or our licensors were the first to file patent applications for these inventions;
any of our product candidates will be Orange Book eligible;
others will independently develop similar or alternative technologies or duplicate any of our technologies;
any of our or our licensors’ pending patent applications will result in issued patents;
any of our or our licensors’ patents will be valid or enforceable;
any patents issued to us or our licensors and collaboration partners will provide us with any competitive advantages, or will be challenged by third parties;
we will develop additional proprietary technologies that are patentable;
the U.S. government will exercise any of its statutory rights to our intellectual property that was developed with government funding; or
our business may infringe the patents or other proprietary rights of others.

 

The actual protection afforded by a patent varies based on products or processes, from country to country and depends upon many factors, including the type of patent, the scope of its coverage, the availability of regulatory related extensions, the availability of legal remedies in a particular country, the validity and enforceability of the patents and our financial ability to enforce our patents and other intellectual property. Our ability to maintain and solidify our proprietary position for our products will depend on our success in obtaining effective claims and enforcing those claims once granted. Our issued patents and those that may issue in the future, or those licensed to us, may be challenged, narrowed, invalidated or circumvented, and the rights granted under any issued patents may not provide us with proprietary protection or competitive advantages against competitors with similar products. Due to the extensive amount of time required for the development, testing and regulatory review of a potential product, it is possible that, before any of our product candidates can be commercialized, any related patent may expire or remain in force for only a short period following commercialization, thereby reducing any advantage of the patent.

 

We also rely on trade secrets to protect some of our technology, especially where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to maintain. While we use reasonable efforts to protect our trade secrets, our or any of our collaboration partners’ employees, consultants, contractors or scientific and other advisors may unintentionally or willfully disclose our proprietary information to competitors and we may not have adequate remedies in respect of that disclosure. Enforcement of claims that a third party has illegally obtained and is using trade secrets is expensive, time consuming and uncertain. In addition, non-U.S. courts are sometimes less willing than U.S. courts to protect trade secrets. If our competitors independently develop equivalent knowledge, methods and know-how, we would not be able to assert our trade secrets against them and our business could be harmed.

 

The intellectual property protection for our product candidates is dependent on third parties.

 

With respect to patent applications relating to our product candidates that incorporate patents licensed from Purdue Research Foundation, the right and obligation to prosecute and maintain the patents and patent applications covered by these license agreements are retained by Purdue Research Foundation. Generally, we do not have the right to prosecute and maintain such patents in our territories, unless Purdue Research Foundation elects not to file, prosecute or maintain any or all of such patents. We would need to determine, with our other potential partners, who would be responsible for the prosecution of patents relating to any joint inventions. If any of our licensing partners fail to appropriately prosecute and maintain patent protection for any of our product candidates, our ability to develop and commercialize those product candidates may be adversely affected and we may not be able to prevent competitors from making, using and selling competing products.

 

If we breach any of the agreements under which we license commercialization rights to our product candidates or technology from third parties, we could lose license rights that are important to our business.

 

We license the use, development and commercialization rights for some of our product candidates, and we expect to enter into similar licenses in the future. For example, we licensed exclusive worldwide rights from Purdue Research Foundation, pursuant to a license agreement, which enables us to use and administer vintafolide in the treatment of cancer. Under this license we are subject to commercialization and development, diligence obligations, sublicense revenue sharing requirements, royalty payments and other obligations. If we fail to comply with any of these obligations or otherwise breach this license agreement or any other current or future licenses, our licensing partners may have the right to terminate the license in whole or in part or to terminate the exclusive nature of the license. Generally, the loss of any of current or future licenses or the exclusivity rights provided therein could materially harm our financial condition and operating results.

 

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The patent protection for our product candidates may expire before we are able to maximize their commercial value, which may subject us to increased competition and reduce or eliminate our opportunity to generate product revenue.

 

The patents for our product candidates have varying expiration dates and, if these patents expire, we may be subject to increased competition and we may not be able to recover our development costs or market any of our approved products profitably. For example, one of our U.S. patents claims compounds encompassing vintafolide and is due to expire in 2026, and two of our other U.S. patents claim compounds encompassing etarfolatide and are due to expire in 2024. In some of the larger potential market territories, such as the United States and Europe, patent term extension or restoration may be available to compensate for time taken during aspects of the product’s development and regulatory review. However, we cannot be certain that such an extension will be granted, or if granted, what the applicable time period or the scope of patent protection afforded during any extension period will be. In addition, even though some regulatory authorities may provide some other exclusivity for a product under their own laws and regulations, we may not be able to qualify the product or obtain the exclusive time period. If we are unable to obtain patent term extension/restoration or some other exclusivity, we could be subject to increased competition and our opportunity to establish or maintain product revenue could be substantially reduced or eliminated. Furthermore, we may not have sufficient time to recover our development costs prior to the expiration of our U.S. and non-U.S. patents.

 

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

 

Filing, prosecuting and defending patents on all of our product candidates throughout the world would be prohibitively expensive. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and further, may export otherwise infringing products to territories where we have patent protection, but enforcement is not as strong as that in the United States. These products may compete with our products in jurisdictions where we do not have any issued patents and our patent claims or other intellectual property rights may not be effective or sufficient to prevent them from so competing.

 

Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to biopharmaceuticals, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial cost and divert our efforts and attention from other aspects of our business.

 

If we are sued for infringing intellectual property rights of third parties, litigation will be costly and time-consuming and could prevent us from developing or commercializing our product candidates.

 

Our commercial success depends, in part, on our not infringing the patents and proprietary rights of other parties and not breaching any collaboration or other agreements we have entered into with regard to our technologies and product candidates. Numerous third-party U.S. and non-U.S. issued patents and pending applications exist in the areas of targeted therapy and targeted diagnostics, including cytotoxic agents and other active compounds and formulations comprising such compounds.

 

Because patent applications can take several years to issue, if they are issued at all, there may currently be pending applications, unknown to us, that may result in issued patents that cover our technologies or product candidates. It is uncertain whether the issuance of any third-party patent would require us to alter our products or processes, obtain licenses or cease activities related to the development or commercialization of our product candidates. If we wish to use the technology or compound claimed in issued and unexpired patents owned by others, we may need to obtain a license from the owner, enter into litigation to challenge the validity of the patents or incur the risk of litigation in the event that the owner asserts that any of our product candidates infringe its patents. The failure to obtain a license to technology or the failure to challenge an issued patent that we may require to discover, develop or commercialize our products may have a material adverse impact on us.

 

There is a substantial amount of litigation involving intellectual property in the biopharmaceutical industry generally. If a third party asserts that our products or technologies infringe its patents or other proprietary rights, we could face a number of risks that could seriously harm our results of operations, financial condition and competitive position, including:

 

infringement and other intellectual property claims, which would be costly and time-consuming to defend, whether or not the claims have merit, and which could delay the regulatory approval process and divert management’s attention from our business;
substantial damages for past infringement, which we may have to pay if a court determines that our product candidates or technologies infringe a competitor’s patent or other proprietary rights;
a court prohibiting us from selling or licensing our technologies or our product candidates unless the third-party licenses its patents or other proprietary rights to us on commercially reasonable terms, which it is not required to do;
if a license is available from a third party, we may have to pay substantial royalties or lump sum payments or grant cross-licenses to our patents or other proprietary rights to obtain that license; and
redesigning our products so they do not infringe, which may not be possible or may require substantial monetary expenditure and time.

 

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Although we are not currently a party to any legal proceedings relating to our intellectual property, in the future, third parties may file claims asserting that our technologies or products infringe on their intellectual property. We cannot predict whether third parties will assert these claims against us or against the current or future licensors of technology licensed to us, or whether those claims will harm our business. If we are forced to defend against these claims, whether they are with or without any merit, whether they are resolved in favor of or against us or our licensors, we may face costly litigation and diversion of management’s attention and resources. As a result of these disputes, we may have to develop costly non-infringing technology, or enter into licensing agreements. These agreements, if necessary, may be unavailable on terms acceptable to us, if at all, which could seriously harm our business or financial condition.

 

One or more third-party patents or patent applications may conflict with patent applications to which we have rights. Any such conflict may substantially reduce the coverage of any rights that may issue from the patent applications to which we have rights. If third parties file patent applications in technologies that also claim technology to which we have rights, we may have to participate in interference proceedings with the U.S. Patent and Trademark Office, or USPTO, or non-U.S. patent regulatory authorities, as applicable, to determine priority of invention.

 

We may become involved in lawsuits to enforce our patents or other intellectual property rights, which could be expensive, time-consuming and unsuccessful.

 

Competitors may infringe our patents or other intellectual property rights. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time consuming. To the extent such claims relate to patents held by the Purdue Research Foundation, it would have to file such an infringement lawsuit since we do not have the independent right to enforce the Purdue Research Foundation’s intellectual property. In addition, in an infringement proceeding, a court may decide that a patent of ours is not valid or is unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the technology in question. An adverse result in any litigation or defense proceedings could put one or more of our patents at risk of being invalidated or interpreted narrowly and could put our patent applications at risk of not issuing.

 

Interference proceedings brought by the USPTO may be necessary to determine the priority of inventions with respect to our patents and patent applications or those of our current or future collaborators. An unfavorable outcome could require us to cease using the technology or to attempt to license rights to it from the prevailing party. Our business could be harmed if a prevailing party does not offer us a license on terms that are acceptable to us. Litigation or interference proceedings may fail and, even if successful, may result in substantial costs and distraction of our management and other employees. We may not be able to prevent, alone or with our collaborators, misappropriation of our proprietary rights, particularly in countries where the laws may not protect those rights as fully as in the United States.

 

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

 

Risks Related to Ownership of Our Common Stock

 

The price of our common stock has been volatile and our shares may suffer a decline in value.

 

Since becoming a public company in February 2011, we have experienced volatility in the trading price of our common stock. Factors that could cause volatility in the market price of our common stock include, but are not limited to the risk factors identified above as well as:

 

results from, supplemental analyses of and any delays in, our current or planned clinical trials, including PRECEDENT, PROCEED and TARGET;
announcements of non-approval by any regulatory authorities of any of our product candidates, including vintafolide, or delays in any regulatory authority review processes;
other regulatory actions affecting us or our industry;
litigation or public concern about the safety of our product candidates;
failure or discontinuation of any of our research or clinical trial programs;
unfavorable developments relating to our collaboration with Merck for vintafolide;
delays in the commercialization of our product candidates;
our ability to effectively partner with collaborators to develop or sell our products;
market conditions in the pharmaceutical, biopharmaceutical and biotechnology sectors and issuance of new or changed securities analysts’ reports or recommendations;
actual and anticipated fluctuations in our quarterly operating results;
developments or disputes concerning our intellectual property or other proprietary rights;

 

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introduction of technological innovations or new products by us or our competitors;
issues in manufacturing our product candidates;
market acceptance of our product candidates;
deviations in our operating results from the estimates of securities analysts;
coverage and reimbursement policies of governments and other third-party payors;
sales of our common stock by our officers, directors or significant stockholders;
price and volume fluctuations in the overall stock market from time to time;
general economic conditions and trends;
major catastrophic events;
our ability to expand our operations, domestically and internationally, and the amount and timing of expenditures related to this expansion; and
additions or departures of key personnel.

 

In addition, the stock markets in general, and the markets for biopharmaceutical, pharmaceutical and biotechnology stocks in particular, have experienced extreme volatility that has been often unrelated to the operating performance of the issuer. These broad market fluctuations may adversely affect the trading price or liquidity of our common stock. In the past, when the market price of a stock has been volatile, holders of that stock have sometimes instituted securities class action litigation against the issuer. If any of our stockholders were to bring such a lawsuit against us, we could incur substantial costs defending the lawsuit and the attention of our management would be diverted from the operation of our business, which could result in the delays of our clinical trials or commercialization efforts.

 

Sales of substantial amounts of our shares could adversely affect the market price of our common stock.

 

Sales of substantial amounts of our common stock in the public market, or the perception that these sales could occur, could cause the market price of our common stock to decline. These sales could also make it more difficult for us to raise capital by selling equity or equity-related securities in the future at a time and price that we deem appropriate.

 

As of June 30, 2013, we had 36,023,086 shares of our common stock outstanding. All of the outstanding shares are freely transferable without restriction under the Securities Act 1933, as amended, or the Securities Act, unless held by our “affiliates” as that term is used in Rule 144 promulgated under the Securities Act. Shares held by our affiliates may be sold in the public market pursuant to Rule 144 or another exemption from registration.

 

Certain holders of our common stock have contractual registration rights pursuant to which they may require us to register the resale of their shares in a public offering — either a public offering we have initiated for other purposes or a special offering initiated by these holders. These registration rights are subject to a variety of conditions, limitations and exceptions. The market price of our common stock could decline if these holders exercise their registration rights or they are otherwise perceived as intending to sell their shares.

 

Our existing stockholders have substantial control of our management and affairs, which could limit your ability to influence the outcome of key transactions, including a change of control.

 

Our directors, executive officers and each of the two stockholders who own greater than five percent of our outstanding common stock and their affiliates, in the aggregate, beneficially owned approximately 33.7 percent of the outstanding shares of our common stock as of June 30, 2013. As a result, these stockholders, if acting together, could influence or control matters requiring approval by our stockholders, including the election of directors and the approval of mergers, acquisitions or other extraordinary transactions. This concentration of ownership may have the effect of delaying, preventing or deterring a change of control of our company, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company and might affect the market price of our common stock.

 

Provisions in our certificate of incorporation and bylaws and under Delaware law might discourage, delay or prevent a change of control of our company or changes in our management and, therefore, depress the trading price of our common stock.

 

Our certificate of incorporation and bylaws contain provisions that could depress the trading price of our common stock by acting to discourage, delay or prevent a change of control of our company or changes in our management that our stockholders may deem advantageous. These provisions include:

 

establishing a classified board so that not all members of our Board of Directors are elected at one time;
authorizing “blank check” preferred stock that our Board of Directors could issue to increase the number of outstanding shares to discourage a takeover attempt;
eliminating the ability of stockholders to call a special stockholder meeting;
eliminating the ability of stockholders to act by written consent;
being subject to provisions of Section 203 of the Delaware General Corporate Law regulating corporate takeovers;
providing that our Board of Directors is expressly authorized to make, alter or repeal our bylaws; and

 

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establishing advance notice requirements for nominations for elections to our Board of Directors or for proposing other matters that can be acted upon by stockholders at stockholder meetings.

 

If we fail to maintain proper internal controls, our ability to produce accurate financial statements or comply with applicable regulations could be impaired.

 

We are subject to the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act. Section 404(a) requires management to assess and report annually on the effectiveness of internal control over financial reporting and identify any material weaknesses in internal control over financial reporting. Beginning with the year ending December 31, 2012, our independent registered public accounting firm must issue an attestation report as to management’s assessment of the effectiveness of internal control over financial reporting in accordance with Section 404(b) of the Sarbanes-Oxley Act.

 

If we identify one or more material weaknesses in our internal control over financial reporting, or if we are unable to conclude that we have effective internal control over financial reporting or if our independent auditors are unwilling or unable to provide us with an attestation report on the effectiveness of internal control over financial reporting, investors may lose confidence in our operating results, our stock price could decline and we may be subject to litigation or regulatory enforcement actions.

 

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

 

Unregistered Sales of Securities

 

We did not sell any of our securities during the three months ended June 30, 2013 that were not registered under the Securities Act of 1933, as amended, or the Securities Act. On July 23, 2013 and July 29, 2013, we issued 22,550 and 11,244 shares of our common stock, respectively, in connection with the cashless exercise of warrants to purchase stock that we issued in 2010. The issuance of the warrants was exempt from the registration requirements of the Securities Act pursuant to Section 4(a)(2) thereof. The issuance of the shares of common stock in connection with the cashless exercise of the warrants was not required to be registered under the Securities Act pursuant to guidance of the Securities and Exchange Commission.

 

Item 5.    Other Information

 

During the quarter ended June 30, 2013, the Audit Committee of our Board of Directors did not approve any non-audit services to be provided by Ernst & Young LLP, our independent registered public accounting firm. This disclosure is made pursuant to Section 10A(i)(2) of the Securities Exchange Act of 1934, as added by Section 202 of the Sarbanes-Oxley Act of 2002.

 

The scheduled date of our 2014 annual meeting of stockholders has been advanced by more than 30 calendar days from the date of our 2013 annual meeting of stockholders. As a result, the date by which we must receive stockholder proposals for inclusion in the proxy materials relating to the 2014 annual meeting of stockholders is December 6, 2013. Notice of any director nomination or other proposal that a stockholder intends to present at the 2014 annual meeting of stockholders, but does not intend to have included in the proxy materials related to the 2014 annual meeting of stockholders, must be received by us not earlier than the close of business on January 15, 2014 and not later than the close of business on February 14, 2014. Stockholder proposals must comply with all of the applicable requirements set forth in the rules and regulations of the Securities and Exchange Commission, including Rule 14a-8, as well as the advance notification requirements set forth in our By-Laws. A copy of the advance notification requirements may be obtained upon request to Corporate Secretary, Endocyte, Inc., 8910 Purdue Road, Suite 250, Indianapolis, Indiana 46268.

 

Item 6.   Exhibits

 

See the Exhibit Index following the signature page to this Quarterly Report on Form 10-Q.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  ENDOCYTE, INC.
     
Date: August 9, 2013 By: /s/ P. Ron Ellis
    P. Ron Ellis
    President and Chief Executive Officer
    (Principal Executive Officer)
     
Date: August 9, 2013 By: /s/ Michael A. Sherman
    Michael A. Sherman
    Chief Financial Officer
    (Principal Financial Officer)
     
Date: August 9, 2013 By: /s/ Beth A. Taylor
    Beth A. Taylor
    Corporate Controller
    (Principal Accounting Officer)

 

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EXHIBIT INDEX

 

Exhibit    
Number   Description
     
4.1   Warrant to Purchase Shares of Common Stock issued by Endocyte, Inc. to OTA LLC on May 16, 2013.
     
10.1   First Amendment of Lease Agreement dated May 17, 2013 between Endocyte, Inc. and Purdue Research Foundation.
     
31.1   Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934 of the Chief Executive Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2   Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934 of the Chief Financial Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1   Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
101^   The following materials from Endocyte, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013, formatted in Extensible Business Reporting Language (XBRL) includes: (i) Condensed Consolidated Balance Sheets at December 31, 2012 and June 30, 2013, (ii) Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended June 30, 2012 and 2013, (iii) Condensed Consolidated Statements of Stockholders’ Equity (Deficit) for the six months ended June 30, 2013, (iv) Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2013 and (v) Notes to Condensed Consolidated Financial Statements.

 

 

 

^ XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Exchange Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 

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EXHIBIT 4.1

 

NEITHER THIS WARRANT NOR THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. SUBJECT TO SECTION 5 BELOW, NO SALE OR DISPOSITION MAY BE EFFECTED EXCEPT IN COMPLIANCE WITH RULE 144 UNDER SAID ACT OR WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL FOR HOLDER, SATISFACTORY TO COMPANY, THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE ACT OR RECEIPT OF A NO-ACTION LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION.

 

WARRANT TO PURCHASE SHARES

 

OF COMMON STOCK

 

OF ENDOCYTE, INC.

May 16, 2013

 

THIS CERTIFIES THAT, for value received, OTA LLC (“Holder”) is entitled to subscribe for and purchase THIRTY-FOUR THOUSAND, SIX HUNDRED FORTY-SEVEN (34,647) shares of fully paid and nonassessable Common Stock of Endocyte, Inc., a Delaware corporation (the “Company”), at the Warrant Price (as hereinafter defined), subject to the provisions and upon the terms and conditions hereinafter set forth. As used herein, the term “Common Stock” shall mean Company’s presently authorized Common Stock, $0.001 par value per share, and any stock into which such Common Stock may hereafter be converted or exchanged and the term “Warrant Shares” shall mean the shares of Common Stock which Holder may acquire pursuant to this Warrant and any other shares of stock into which such shares of Common Stock may hereafter be converted or exchanged. This Warrant was issued originally to Oxford Finance Corporation (“Oxford”) as of December 31, 2007 (the “Original Issue Date”), in connection with that certain loan transaction entered into as of the Original Issue Date between Company and Oxford. Oxford has assigned this Warrant to Holder pursuant to the Assignment dated May 16, 2013, and in connection with that Assignment, Holder has represented and warranted that, except for transfers to an affiliate of Holder, Holder is acquiring this Warrant and the Warrant Shares issuable upon exercise of this Warrant for investment for its own account and not with a view to, or for resale in connection with, any distribution thereof.

 

1.           Warrant Price. The “Warrant Price” shall initially be $8.1175 per share, subject to adjustment as provided in Section 6 below.

 

2.           Conditions to Exercise. The purchase right represented by this Warrant may be exercised at any time, or from time to time, in whole or in part during the term commencing on the date hereof and ending at 5:00 P.M. Pacific time on the tenth anniversary of the Original Issue Date (the “Expiration Date”).

 

3.           Method of Exercise or Conversion; Payment; Issuance of Shares; Issuance of New Warrant.

 

 
 

 

(a)           Cash Exercise. Subject to Section 2 hereof, the purchase right represented by this Warrant may be exercised by Holder hereof, in whole or in part, by the surrender of the original of this Warrant (together with a duly executed Notice of Exercise in substantially the form attached hereto) at the principal office of Company (as set forth in Section 16 below) and by payment to Company, by certified or bank check, or wire transfer of immediately available funds, of an amount equal to the then applicable Warrant Price per share multiplied by the number of Warrant Shares then being purchased. In the event of any exercise of the rights represented by this Warrant, certificates for the shares of stock so purchased shall be in the name of, and delivered to, Holder hereof, or as such Holder may direct (subject to the terms of transfer contained herein and upon payment by such Holder hereof of any applicable transfer taxes). Such delivery shall be made within 30 days after exercise of this Warrant and at Company’s expense and, unless this Warrant has been fully exercised or expired, a new Warrant having terms and conditions substantially identical to this Warrant and representing the portion of the Warrant Shares, if any, with respect to which this Warrant shall not have been exercised, shall also be issued to Holder hereof within 30 days after exercise of this Warrant.

 

(b)           Conversion. In lieu of exercising this Warrant as specified in Section 3(a), Holder may from time to time convert this Warrant, in whole or in part, into Warrant Shares by surrender of the original of this Warrant (together with a duly executed Notice of Exercise in substantially the form attached hereto) at the principal office of Company, in which event Company shall issue to Holder the number of Warrant Shares computed using the following formula:

 

X = Y (A-B)

A

 

Where:

 

X = the number of Warrant Shares to be issued to Holder.

 

Y = the number of Warrant Shares purchasable under this Warrant (at the date of such calculation).

 

A = the Fair Market Value of one share of Common Stock (at the date of such calculation).

 

B = Warrant Price (as adjusted to the date of such calculation).

 

(c)           Fair Market Value. For purposes of this Section 3, Fair Market Value of one share of Common Stock shall mean:

 

(i)           The average of the closing bid and asked prices of Common Stock quoted in the Over-The-Counter Market Summary, the last reported sale price quoted on the Nasdaq Stock Market or on any other exchange on which the Common Stock is listed, whichever is applicable, as published in the Western Edition of the Wall Street Journal for the three (3) trading days prior to the date of determination of Fair Market Value; or

 

- 2 -
 

 

(ii)          In the event of an exercise in connection with a merger, acquisition or other consolidation in which Company is not the surviving entity, the per share Fair Market Value for the Common Stock shall be the value to be received per share of Common Stock by all holders of the Common Stock in such transaction as determined by Company’s Board of Directors; or

 

(iii)         In any other instance, the per share Fair Market Value for the Common Stock shall be as determined in the reasonable good faith judgment of Company’s Board of Directors.

 

In the event of Sections 3(c)(ii) or 3(c)(iii), above, Company’s Board of Directors shall prepare a certificate, to be signed by an authorized officer of Company, setting forth in reasonable detail the basis for and method of determination of the per share Fair Market Value of the Common Stock. The Board of Directors will also certify to Holder that this per share Fair Market Value will be applicable to all holders of Common Stock. Such certification must be made to Holder at least thirty (30) business days prior to the proposed effective date of the merger, consolidation, sale, or other triggering event as defined in Sections 3(c)(ii) or 3(c)(iii).

 

(d)           Automatic Exercise. To the extent this Warrant is not previously exercised, it shall be deemed to have been automatically exercised in accordance with Sections 3(b) and 3(c) hereof (even if not surrendered) as of immediately before its expiration, involuntary termination or cancellation if the then-Fair Market Value of a Warrant Share exceeds the then-Warrant Price, unless Holder notifies Company in writing to the contrary prior to such automatic exercise.

 

(e)           Treatment of Warrant Upon Acquisition of Company.

 

(i)           Certain Definitions. For the purpose of this Warrant, “Acquisition” means any sale, license, or other disposition of all or substantially all of the assets of Company, or any reorganization, consolidation, or merger of Company, or sale of outstanding Company securities by holders thereof, where the holders of Company’s securities before the transaction beneficially own less than a majority of the outstanding voting securities of the successor or surviving entity after the transaction. For purposes of this Section 3(e), “Affiliate” shall mean any person or entity that owns or controls directly or indirectly ten percent (10%) or more of the voting capital stock of Company, any person or entity that controls or is controlled by or is under common control with such persons or entities, and each of such person’s or entity’s officers, directors, joint venturers or partners, as applicable.

 

- 3 -
 

 

(ii)          Cash Acquisition. In the event of an Acquisition in which the sole consideration is cash, Holder may either (a) exercise its conversion or purchase right under this Warrant and such exercise will be deemed effective immediately prior to the consummation of such Acquisition or (b) permit the Warrant to expire upon the consummation of such Acquisition. Company shall provide Holder with written notice of any proposed Acquisition together with such reasonable information as Holder may request in connection with such contemplated Acquisition giving rise to such notice, which is to be delivered to Holder not less than ten (10) business days prior to the closing of the proposed Acquisition.

 

(iii)         Asset Sale. In the event of an Acquisition that is an arm’s-length sale of all or substantially all of Company’s assets (and only its assets) to a third party that is not an Affiliate of Company (a “True Asset Sale”), Holder may either (a) exercise its conversion or purchase right under this Warrant and such exercise will be deemed effective immediately prior to the consummation of such Acquisition or (b) permit the Warrant to continue until the Expiration Date if Company continues as a going concern following the closing of any such True Asset Sale. Company shall provide Holder with written notice of any proposed asset sale together with such reasonable information as Holder may request in connection with such asset sale giving rise to such notice, which is to be delivered to Holder not less than ten (10) business days prior to the closing of the proposed asset sale.

 

(iv)         Public Acquisition. Except with respect to an Acquisition subject to the terms and conditions of either Section 3(e)(ii) or Section 3(e)(iii) above, Holder agrees that, in the event of an Acquisition of the Company by a publicly traded acquirer if the acquirer in the Acquisition does not agree to assume this Warrant at and as of the closing thereof, the Company may require this Warrant to be deemed automatically exercised and Holder shall participate in the Acquisition as a holder of the Warrant Shares on the same terms as other holders of the same class of securities of the Company.

 

(v)          Assumption of Warrant. Upon the closing of any Acquisition other than those particularly described in subsections (ii) and (iii) above, the successor entity shall assume the obligations of this Warrant, and this Warrant shall be exercisable for the same securities, cash, and property as would be payable for the Warrant Shares issuable upon exercise of the unexercised portion of this Warrant as if such Warrant Shares were outstanding on the record date for the Acquisition and subsequent closing. The Warrant Price and/or number of Warrant Shares shall be adjusted accordingly.

 

4.            Legends.

 

(a)           Legend. Each certificate representing the Warrant Shares shall be endorsed with substantially the following legend:

 

- 4 -
 

 

THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE TRANSFERRED (UNLESS SUCH TRANSFER IS TO AN AFFILIATE OF HOLDER) UNLESS COVERED BY AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT, A “NO ACTION” LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION WITH RESPECT TO SUCH TRANSFER, A TRANSFER MEETING THE REQUIREMENTS OF RULE 144 OF THE SECURITIES AND EXCHANGE COMMISSION, OR (IF REASONABLY REQUIRED BY COMPANY) AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY SUCH TRANSFER IS EXEMPT FROM SUCH REGISTRATION.

 

Company need not enter into its stock records a transfer of Warrant Shares unless the conditions specified in the foregoing legend are satisfied. Company may also instruct its transfer agent not to allow the transfer of any of the Warrant Shares unless the conditions specified in the foregoing legend are satisfied.

 

(b)           Removal of Legend and Transfer Restrictions. The legend relating to the Act endorsed on a certificate pursuant to paragraph 5(a) of this Warrant shall be removed and Company shall issue a certificate without such legend to Holder if (i) the Securities are registered under the Act and a prospectus meeting the requirements of Section 10 of the Act is available or (ii) Holder provides to Company an opinion of counsel for Holder reasonably satisfactory to Company, a no-action letter or interpretive opinion of the staff of the Securities and Exchange Commission (“SEC”) reasonably satisfactory to Company, or other evidence reasonably satisfactory to Company, to the effect that sale, transfer or assignment of the Securities may be made without registration and without compliance with any restriction such as Rule 144.

 

(c)           “Market Stand-Off’ Agreement. Holder (and its affiliates) hereby agrees that it shall bound by the same “Market Standoff Provision” contained in the Third Amended and Restated Investors’ Rights Agreement dated as of March 9, 2007, of Company (the “Registration Rights Agreement”), and that the Warrant Shares shall be similarly bound under the Registration Rights Agreement.

 

5.            Condition of Transfer or Exercise of Warrant. It shall be a condition to any transfer or exercise of this Warrant that at the time of such transfer or exercise, Holder shall provide Company with a representation in writing that Holder or transferee is acquiring this Warrant and the shares of Common Stock to be issued upon exercise for investment purposes only and not with a view to any sale or distribution, or will provide Company with a statement of pertinent facts covering any proposed distribution. As a further condition to any transfer of this Warrant or any or all of the shares of Common Stock issuable upon exercise of this Warrant, other than a transfer registered under the Act, Company may request a legal opinion, in form and substance satisfactory to Company and its counsel, reciting the pertinent circumstances surrounding the proposed transfer and stating that such transfer is exempt from the registration and prospectus delivery requirements of the Act. Company shall not require Holder to provide an opinion of counsel if the transfer is to an affiliate of Holder. Each certificate evidencing the Warrant Shares issued upon exercise of this Warrant or upon any transfer of the Warrant Shares (other than a transfer registered under the Act or any subsequent transfer of shares so registered) shall, at Company’s option, if the Warrant Shares are not freely saleable under Rule 144(k) under the Act, contain a legend in form and substance satisfactory to Company and its counsel, restricting the transfer of the Warrant Shares to sales or other dispositions exempt from the requirements of the Act. As further condition to each transfer, at the request of Company, Holder shall surrender this Warrant to Company and the transferee shall receive and accept a Warrant, of like tenor and date, executed by Company.

 

- 5 -
 

 

6.            Adjustment for Certain Events. The number and kind of securities purchasable upon the exercise of this Warrant and the Warrant Price shall be subject to adjustment from time to time upon the occurrence of certain events, as follows:

 

(a)           Reclassification or Merger. In case of (i) any reclassification or change of securities of the class issuable upon exercise of this Warrant (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), (ii) any merger of Company with or into another corporation (other than a merger with another corporation in which Company is the acquiring and the surviving corporation and which does not result in any reclassification or change of outstanding securities issuable upon exercise of this Warrant), or (iii) any sale of all or substantially all of the assets of Company, Company, or such successor or purchasing corporation, as the case may be, shall duly execute and deliver to Holder a new Warrant (in form and substance satisfactory to Holder of this Warrant), or Company shall make appropriate provision without the issuance of a new Warrant, so that Holder shall have the right to receive, at a total purchase price not to exceed that payable upon the exercise of the unexercised portion of this Warrant, and in lieu of the Warrant Shares theretofore issuable upon exercise or conversion of this Warrant, the kind and amount of shares of stock, other securities, money and property receivable upon such reclassification, change, merger or sale by a holder of the number of shares of Common Stock then purchasable under this Warrant, or in the case of such a merger or sale in which the consideration paid consists all or in part of assets other than securities of the successor or purchasing corporation, at the option of Holder, the securities of the successor or purchasing corporation having a value at the time of the transaction equivalent to the value of the Warrant Shares purchasable upon exercise of this Warrant at the time of the transaction. Any new Warrant shall provide for adjustments that shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 6. The provisions of this subparagraph (a) shall similarly apply to successive reclassifications, changes, mergers and transfers.

 

(b)           Subdivision or Combination of Shares. If Company at any time while this Warrant remains outstanding and unexpired shall subdivide or combine its outstanding shares of Common Stock, the Warrant Price shall be proportionately decreased and the number of Warrant Shares issuable hereunder shall be proportionately increased in the case of a subdivision and the Warrant Price shall be proportionately increased and the number of Warrant Shares issuable hereunder shall be proportionately decreased in the case of a combination.

 

- 6 -
 

 

(c)           Stock Dividends and Other Distributions. If Company at any time while this Warrant is outstanding and unexpired shall (i) pay a dividend with respect to Common Stock payable in Common Stock, then the Warrant Price shall be adjusted, from and after the date of determination of shareholders entitled to receive such dividend or distribution, to that price determined by multiplying the Warrant Price in effect immediately prior to such date of determination by a fraction (A) the numerator of which shall be the total number of shares of Common Stock outstanding immediately prior to such dividend or distribution, and (B) the denominator of which shall be the total number of shares of Common Stock outstanding immediately after such dividend or distribution; or (ii) make any other distribution with respect to Common Stock (except any distribution specifically provided for in Sections 6(a) and 6(b)), then, in each such case, provision shall be made by Company such that Holder shall receive upon exercise of this Warrant a proportionate share of any such dividend or distribution as though it were Holder of the Warrant Shares as of the record date fixed for the determination of the shareholders of Company entitled to receive such dividend or distribution.

 

(d)           Adjustment of Number of Shares. Upon each adjustment in the Warrant Price, the number of Warrant Shares purchasable hereunder shall be adjusted, to the nearest whole share, to the product obtained by multiplying the number of Warrant Shares purchasable immediately prior to such adjustment in the Warrant Price by a fraction, the numerator of which shall be the Warrant Price immediately prior to such adjustment and the denominator of which shall be the Warrant Price immediately thereafter.

 

(e)           Adjustment for Dilutive Issuance. The Warrant Price and the number of Warrant Shares issuable upon exercise of this Warrant shall be subject to adjustment, from time to time in the manner set forth in Company’s Amended and Restated Certificate of Incorporation as if the Warrant Shares were issued and outstanding on and as of the date of any such required adjustment. The provisions set forth for the Warrant Shares in Company’s Amended and Restated Certificate of Incorporation relating to the above in effect as of the date hereof may not be amended, modified or waived, without the prior written consent of Holder unless such amendment, modification or waiver affects the rights associated with the Warrant Shares in the same manner as such amendment, modification or waiver affects the rights associated with all other shares of the same series and class as the Warrant Shares.

 

7.            Notice of Adjustments. Whenever any Warrant Price or the kind or number of securities issuable under this Warrant shall be adjusted pursuant to Section 6 hereof, Company shall prepare a certificate signed by an officer of Company setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated, and the Warrant Price and number or kind of shares issuable upon exercise of this Warrant after giving effect to such adjustment, and shall cause copies of such certificate to be mailed (by certified or registered mail, return receipt required, postage prepaid) within thirty (30) days of such adjustment to Holder as set forth in Section 16 hereof.

 

8.            Transferability of Warrant. This Warrant is transferable on the books of Company at its principal office by the registered Holder hereof upon surrender of this Warrant properly endorsed, subject to compliance with Section 5 and applicable federal and state securities laws. Company shall issue and deliver to the transferee a new Warrant representing the Warrant so transferred. Upon any partial transfer, Company will issue and deliver to Holder a new Warrant with respect to the Warrant not so transferred. Holder shall not have any right to transfer any portion of this Warrant to any direct competitor of Company, as determined by Company’s Board of Directors.

 

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9.            Registration Rights. Company grants registration rights to Holder of this Warrant for any Common Stock of Company obtained by Holder upon exercise or conversion of this Warrant in parity to the registration rights granted to other holders of the Common Stock and agrees that Holder shall be added as a party to the Registration Rights Agreement, and that the Warrant Shares shall be “Registrable Securities” under the Registration Rights Agreement.

 

10.           No Fractional Shares. No fractional share of Common Stock will be issued in connection with any exercise or conversion hereunder, but in lieu of such fractional share Company shall make a cash payment therefor upon the basis of the Warrant Price then in effect.

 

11.           Charges, Taxes and Expenses. Issuance of certificates for shares of Common Stock upon the exercise or conversion of this Warrant shall be made without charge to Holder for any United States or state of the United States documentary stamp tax or other incidental expense with respect to the issuance of such certificate, all of which taxes and expenses shall be paid by Company, and such certificates shall be issued in the name of Holder.

 

12.           No Shareholder Rights Until Exercise. Except as expressly provided herein, this Warrant does not entitle Holder to any voting rights or other rights as a shareholder of Company prior to the exercise hereof.

 

13.           Registry of Warrant. Company shall maintain a registry showing the name and address of the registered Holder of this Warrant. This Warrant may be surrendered for exchange or exercise, in accordance with its terms, at such office or agency of Company, and Company and Holder shall be entitled to rely in all respects, prior to written notice to the contrary, upon such registry.

 

14.           Loss, Theft, Destruction or Mutilation of Warrant. Upon receipt by Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and, in the case of loss, theft, or destruction, of indemnity reasonably satisfactory to it, and, if mutilated, upon surrender and cancellation of this Warrant, Company will execute and deliver a new Warrant, having terms and conditions substantially identical to this Warrant, in lieu hereof.

 

15.          Miscellaneous.

 

(a)           Successors. This Warrant shall be binding upon any successors or assigns of Company.

 

(b)           Headings. The headings used in this Warrant are used for convenience only and are not to be considered in construing or interpreting this Warrant.

 

(c)           Saturdays, Sundays, Holidays. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall be a Saturday or a Sunday or shall be a legal holiday in the State of California, then such action may be taken or such right may be exercised on the next succeeding day not a legal holiday.

 

(d)           Attorney’s Fees. In the event of any dispute between the parties concerning the terms and provisions of this Warrant, the party prevailing in such dispute shall be entitled to collect from the other party all costs incurred in such dispute, including reasonable attorney’s fees.

 

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16.           Addresses. Any notice required or permitted hereunder shall be in writing and shall be mailed by overnight courier, registered or certified mail, return receipt requested, and postage prepaid, or otherwise delivered by hand or by messenger, addressed as set forth below, or at such other address as Company or Holder hereof shall have furnished to the other party in accordance with the delivery instructions set forth in this Section 16.

 

If to Company:   Endocyte, Inc.
    8910 Purdue Road
    Suite 250
    Indianapolis, Indiana  46268
    Attn: Mike Sherman
     
If to Holder:   OTA LLC
    1 Manhattanville Road
    Purchaseville, NY 10577
    Attention: Chief Executive Officer

 

If mailed by registered or certified mail, return receipt requested, and postage prepaid, notice shall be deemed to be given five (5) days after being sent, and if sent by overnight courier, by hand or by messenger, notice shall be deemed to be given when delivered (if on a business day, and if not, on the next business day).

 

17.            No Impairment. Company will not, by amendment of its Amended and Restated Certificate of Incorporation or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of Holder hereof against impairment.

 

18.           WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO HEREBY WAIVES TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS WARRANT OR THE WARRANT SHARES.

 

19.           GOVERNING LAW. THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE.

 

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IN WITNESS WHEREOF , Company has caused this Warrant to be executed by its officer thereunto duly authorized.

 

ENDOCYTE, INC.

 

By: /s/ Mike Sherman  
  Name:  Mike Sherman  
  Title:  Chief Financial Officer  

 

Dated as of May 16, 2013.

 

ENDOCYTE, INC.
WARRANT SIGNATURE PAGE

 

 
 

 

NOTICE OF EXERCISE

To:
Endocyte, Inc.
8910 Purdue Road

Suite 250
Indianapolis, Indiana 46268
Attn: Chief Financial Officer

 

1. The undersigned Warrantholder (“Holder”) elects to acquire shares of the Common Stock (the “Common Stock”) of Endocyte, Inc. (the “Company”), pursuant to the terms of the Stock Purchase Warrant dated May 16, 2013 (the “Warrant”).

 

2. Holder exercises its rights under the Warrant as set forth below:

 

(      ) Holder elects to purchase ______ shares of Common Stock as provided in Section 3(a) and tenders herewith a check in the amount of $______ as payment of the purchase price.

 

(     ) Holder elects to convert the purchase rights into shares of Common Stock as provided in Section 3(b) of the Warrant.

 

3.          Holder surrenders the Warrant with this Notice of Exercise.

 

Holder represents that it is acquiring the aforesaid shares of Common Stock for investment and not with a view to or for resale in connection with distribution and that Holder has no present intention of distributing or reselling the shares.

 

Please issue a certificate representing the shares of the Common Stock in the name of Holder or in such other name as is specified below:

 

Name:  
   
Address:  
   
Taxpayer I.D.:  

 

  [NAME OF HOLDER]  
         
  By:    
    Name:    
    Title:    
         
  Date:  _____________ __, 20__  

 

 

 

EXHIBIT 10.1

 

FIRST AMENDMENT OF

LEASE AGREEMENT

 

THIS AGREEMENT is executed in duplicate this 17th day of May, 2013, by and between PURDUE RESEARCH FOUNDATION, an Indiana corporation, of Tippecanoe County, Indiana, (“Lessor”), and ENDOCYTE (“Tenant”). In consideration of their mutual promises contained in this Amendment, the parties agree as follows:

 

WHEREAS, the parties have heretofore entered into a Lease Agreement dated January 30, 2013 between Lessor and Lessee for certain premises at the Purdue Technology Center, 3000 Kent Avenue, West Lafayette, Indiana 47906, and

 

WHEREAS, the parties wish to amend provisions of the lease at the request of the Lessee:

 

NOW, THEREFORE, IN CONSIDERATION OF the mutual promises and covenants therein, it is agreed between the parties hereto as follows:

 

1. Remove Section 1. DESCRIPTION OF LEASED PROPERTY . Replace as follows:


23,907 square feet in Suites A1-100, A1-200, B1-200, B1-201, B1-203, B1-300, B1-400, B1-500, A2-100, A2-300, B2-300, B2-400, B2-500, B2-603, B2-700, B2-900, C1-201 and C1-202 (the “Leased Property”) located in the PURDUE TECHNOLOGY CENTER at 3000 Kent Avenue, West Lafayette, Indiana (the “Building”) in the Purdue Research Park (the “Park”). This Leased Property is further designated on Exhibit “A”.


2. Remove Section 4. RENT . Replace as follows:

 

a. Base Rent.

 

i. Lessee agrees to pay Lessor as rent (the “Guaranteed Rent”) for the balance of the Initial Term, as defined herein, the annualized amount of Four Hundred Seventy-Two Thousand Nine Hundred Fifty-Seven and 00/100 Dollars ($472,957.00) (the “Rent”). Tenant agrees to pay the Rent in consecutive monthly installments ("Monthly Rent Installment") of Forty-Seven Thousand Four Hundred Forty-Seven and 69/100 Dollars ($47,447.69) per month, in advance of the first day of each month, effective May 1, 2013. The Rent is equal to $17.71 per square foot for the portion of the Leased Property devoted to office uses; and $33.29 per square foot for the portion of the Leased Property used as a laboratory, per year during the Initial Term.

 

During the Initial Term and any subsequent Extension Periods, the Rent shall be adjusted annually and effective January 1 st . Each year during the Lease Term, the Rent shall be equal to the rental rate established for the Building (“Building Rate”) for the subsequent calendar year multiplied by the square feet occupied by Tenant and shall remain in effect until the Building Rate changes. The Building Rate shall be determined by Landlord and provided, by written notice, to Tenant not later than November 1 st of each calendar year. The Building Rate increase shall not exceed five percent (5%) during any given year. In no event shall the Rent be adjusted more frequently than annually. The new Rent as so adjusted shall begin each calendar year on January 1 st and continue at the adjusted rate until the next annual adjustment of the Building Rate. The corresponding Monthly Rent Installment shall also be adjusted to be consistent with the change in the Rent.

 

ii. The Monthly Rent Installment shall be prorated for periods at the beginning and end of the Lease Term, as defined herein, which do not constitute full calendar months.

 

b. Workstations. Landlord agrees to provide workstations for use as shown on Exhibit D. Tenant agrees to pay for the workstations on a monthly basis in the amount of Eight Hundred Eight-Six and 31/100 Dollars ($886.31) per month, which is included in the rental amount above and inclusive of the same terms and conditions of Section 4. Cabinetry, conference room table and chairs are included with this amendment for spaced C1-201 and C1-202. Workstations as described herein are considered a fixture of the space and shall not be removed by Tenant. The rent amount for the workstations/cabinetry/conference room furniture shall remain fixed for the initial term and options described herein.

 

 
 

 

c. Late Fee. If Lessor does not receive any payment of the Monthly Rent Installment or any other amounts to be paid to Lessor when due, a fee of Fifty Dollars ($50) will be charged on the fifth day after such payment is due and owing plus Five Dollars ($5) for each day thereafter (collectively the “Late Charges”) until payment is received. The accrued Late Charges are in addition to the Monthly Rent Installment, and are due with the payment of the outstanding Monthly Rent Installment. Lessor’s receipt of Late Charges does not waive the right of Lessor to evict Lessee for nonpayment of Rent if Lessor so elects.

 

d. Returned Check Fee. If a check is returned from the bank for any reason, a Twenty-Five Dollar ($25.00) fee will be assessed, plus the applicable Late Charges until the outstanding Monthly Rent Installment is paid in full.

 

e. Rent Payments. The Monthly Rent Installment payments and any other sums due Landlord hereunder shall be payable at Landlord’s principal office at 1281 Win Hentschel Boulevard, West Lafayette, IN 47906. All Rent and any other sums owed by Tenant under this Lease shall be payable without notice or demand and without deduction, diminution, abatement, counterclaim, or set off of any amount or for any reason whatsoever, and without relief from valuation or appraisement laws and with attorney’s fees.

 

3. This First Amendment of Lease Agreement shall commence upon signing.

 

4. It is further agreed that all of the terms and conditions of said aforementioned lease Agreement dated January 30, 2013, except as hereby amended, are hereby affirmed and shall remain in full force and effect during the remainder of the term thereof.

 

WITNESS the signatures and seal of the above parties the day and year first above written.

 

LANDLORD:   PURDUE RESEARCH FOUNDATION
    an Indiana corporation (formed and existing under the Indiana Foundation or Holding Companies Act, Acts of 1921, ch. 246)
       
    By: /s/ Gregory W. Deason
      Gregory W. Deason
      Vice President
      Executive Director – Purdue Research Park

 

ATTEST:    
     
By: /s/ Timothy R. Peoples  
  Timothy R. Peoples  
  Director, Purdue Technology Centers  

 

TENANT:   ENDOCYTE
       
    By: /s/ Mike Sherman
      Mike Sherman
       
    By: /s/ P. Ron Ellis
      P. Ron Ellis
      President/CEO

 

 
 

 

EXHIBIT A

LEASED PREMISES 

 

Unit A1-200   Office Space   9,131 square feet  
Unit B1-200   Office Space   168 square feet  
Unit B1-201   Office Space   230 square feet  
Unit B1-203   Office Space   363 square feet  
Unit B1-300   Office Space   906 square feet  
Unit B1-400   Office Space   (included in A1-200)  
Unit A2-101   Office Space   253 square feet  
Unit A2-104   Office Space   216 square feet  
Unit A2-105   Office Space   161 square feet  
Unit A2-108   Office Space   215 square feet  
Unit A2-301   Office Space   325 square feet  
Unit A2-304   Office Space   216 square feet  
Unit A2-305   Office Space   161 square feet  
Unit B2-300   Office Space   149 square feet  
Unit B2-400   Office Space   1,513 square feet  
Unit B2-500   Office Space   148 square feet  
Unit B2-603   Office Space   253 square feet  
Unit B2-700   Office Space   148 square feet  
Unit B2-900   Office Space   149 square feet  
Unit C1-201   Office Space   324 square feet  
Unit C1-202   Office Space   191 square feet  
           
    Total Office Space   15,220 square feet  
           
Unit A1-100   Lab Space   4,069 square feet  
Unit B1-500   Lab Space   690 square feet  
Unit A2-102   Lab Space   367 square feet  
Unit A2-103   Lab Space   325 square feet  
Unit A2-106   Lab Space   495 square feet  
Unit A2-107   Lab Space   477 square feet  
Unit A2-302   Lab Space   339 square feet  
Unit A2-303   Lab Space   409 square feet  
Unit B2-300   Lab Space   379 square feet  
Unit B2-500   Lab Space   380 square feet  
Unit B2-700   Lab Space   378 square feet  
Unit B2-900   Lab Space   379 square feet  
           
    Total Lab Space   8,687 square feet  

 

(See attached map.)

 

 
 

 

 

 

 

Exhibit 31.1

 

CERTIFICATION PURSUANT TO RULE 13a-14(a)/15d-14(a) OF THE SECURITIES

EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE

SARBANES-OXLEY ACT OF 2002

 

I, P. Ron Ellis, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Endocyte, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

  /s/ P. Ron Ellis
  P. Ron Ellis
  President and Chief Executive Officer

Date: August 9, 2013

 

 

 

Exhibit 31.2

 

CERTIFICATION PURSUANT TO RULE 13a-14(a)/15d-14(a) OF THE SECURITIES EXCHANGE ACT

OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Michael A. Sherman, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Endocyte, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

  /s/ Michael A. Sherman
  Michael A. Sherman
  President and Chief Executive Officer

Date: August 9, 2013

 

 

 

Exhibit 32.1

 

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

I, P. Ron Ellis, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Endocyte, Inc. on Form 10-Q for the quarter ended June 30, 2013 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended and that information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of Endocyte, Inc. for the periods covered by such Quarterly Report on Form 10-Q.

 

August 9, 2013  
  /s/ P. Ron Ellis
  Name: P. Ron Ellis
  Title: President and Chief Executive Officer

 

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Michael A. Sherman, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Endocyte, Inc. on Form 10-Q for the quarter ended June 30, 2013 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended and that information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of Endocyte, Inc. for the periods covered by such Quarterly Report on Form 10-Q.

 

August 9, 2013  
  /s/ Michael A. Sherman
  Name: Michael A. Sherman
  Title: Chief Financial Officer