Endocyte, Inc.
ENDOCYTE INC (Form: 10-Q, Received: 11/08/2013 16:46:58)
 
 
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 September 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 November 4, 2013: 36,143,594
 
 
 
PART I. FINANCIAL INFORMATION
 
Item 1.   Financial Statements
 
ENDOCYTE, INC.
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
 
 
December 31,
2012
 
September 30,
2013
 
 
 
 
 
 
(unaudited)
 
Assets
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
33,996,866
 
$
51,245,919
 
Short-term investments
 
 
141,840,823
 
 
59,908,749
 
Receivables
 
 
5,689,067
 
 
8,332,938
 
Prepaid expenses
 
 
2,799,883
 
 
3,823,499
 
Other assets
 
 
498,203
 
 
603,118
 
Total current assets
 
 
184,824,842
 
 
123,914,223
 
Long-term investments
 
 
25,540,649
 
 
48,037,144
 
Property and equipment, net
 
 
3,166,905
 
 
3,440,872
 
Other noncurrent assets
 
 
546,313
 
 
179,314
 
Total assets
 
$
214,078,709
 
$
175,571,553
 
 
 
 
 
 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
Accounts payable
 
$
3,647,967
 
$
5,001,092
 
Accrued wages and benefits
 
 
2,426,534
 
 
2,263,001
 
Accrued clinical trial expenses
 
 
2,486,967
 
 
3,605,952
 
Accrued expenses
 
 
1,902,910
 
 
1,673,560
 
Deferred revenue
 
 
51,993,200
 
 
58,105,942
 
Current portion of other liabilities
 
 
12,647
 
 
16,870
 
Total current liabilities
 
 
62,470,225
 
 
70,666,417
 
Other liabilities, net of current portion
 
 
42,065
 
 
38,529
 
Deferred revenue, net of current portion
 
 
51,993,141
 
 
15,457,733
 
Total liabilities
 
 
114,505,431
 
 
86,162,679
 
Stockholders’ equity:
 
 
 
 
 
 
 
Common stock: $0.001 par value, 100,000,000 shares authorized; 35,919,019 and 
     36,125,397 shares issued and outstanding at December 31, 2012 and
    September 30, 2013
 
 
35,919
 
 
36,126
 
Additional paid-in capital
 
 
255,356,888
 
 
260,374,376
 
Accumulated other comprehensive income
 
 
72,749
 
 
20,955
 
Retained deficit
 
 
(155,892,278)
 
 
(171,022,583)
 
Total stockholders’ equity
 
 
99,573,278
 
 
89,408,874
 
Total liabilities and stockholders’ equity
 
$
214,078,709
 
$
175,571,553
 
 
See accompanying notes.
 
 
2

 
 
 
ENDOCYTE, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
 
 
 
Three Months
Ended September 30,
 
Nine Months
Ended September 30,
 
 
 
2012
 
2013
 
2012
 
2013
 
 
 
(unaudited)
 
(unaudited)
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
Collaboration revenue
 
$
12,414,684
 
 
16,599,294
 
 
20,227,649
 
 
47,596,716
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Research and development
 
 
9,930,766
 
 
13,500,848
 
 
25,153,659
 
 
44,366,512
 
General and administrative
 
 
3,814,991
 
 
6,142,782
 
 
10,103,692
 
 
18,610,213
 
Total operating expenses
 
 
13,745,757
 
 
19,643,630
 
 
35,257,351
 
 
62,976,725
 
Loss from operations
 
 
(1,331,073)
 
 
(3,044,336)
 
 
(15,029,702)
 
 
(15,380,009)
 
Other income (expense), net:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
 
 
96,459
 
 
111,300
 
 
137,497
 
 
377,653
 
Interest expense
 
 
(891)
 
 
(548)
 
 
(628,215)
 
 
(1,991)
 
Other income (expense), net
 
 
(3,861)
 
 
(107,574)
 
 
(922,744)
 
 
(125,958)
 
Net loss
 
 
(1,239,366)
 
 
(3,041,158)
 
 
(16,443,164)
 
 
(15,130,305)
 
Net loss per share — basic and diluted
 
$
(0.03)
 
 
(0.08)
 
 
(0.46)
 
 
(0.42)
 
Items included in other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized gain (loss) on foreign currency translation
 
 
1,544
 
 
3,419
 
 
2,624
 
 
(17,831)
 
Unrealized gain (loss) on available-for-sale securities
 
 
114,855
 
 
105,088
 
 
70,324
 
 
(33,963)
 
Other comprehensive income (loss)
 
 
116,399
 
 
108,507
 
 
72,948
 
 
(51,794)
 
Comprehensive loss
 
$
(1,122,967)
 
 
(2,932,651)
 
 
(16,370,216)
 
 
(15,182,099)
 
Weighted-average number of common shares used in net
    loss per share calculation – basic and diluted
 
 
35,881,112
 
 
36,077,440
 
 
35,841,116
 
 
36,000,242
 
 
See accompanying notes.  
 
 
3

 
ENDOCYTE, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(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
 
172,584
 
 
173
 
 
611,683
 
 
 
 
 
 
611,856
 
Exercise of warrants
 
33,794
 
 
34
 
 
(34)
 
 
 
 
 
 
 
 
 
Stock-based compensation
 
 
 
 
 
4,405,839
 
 
 
 
 
 
4,405,839
 
Net loss
 
 
 
 
 
 
 
 
 
(15,130,305)
 
 
(15,130,305)
 
Unrealized loss on foreign currency translation
 
 
 
 
 
 
 
(17,831)
 
 
 
 
(17,831)
 
Unrealized loss on securities
 
 
 
 
 
 
 
(33,963)
 
 
 
 
(33,963)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances September 30, 2013 (unaudited)
 
36,125,397
 
$
36,126
 
$
260,374,376
 
$
20,955
 
$
(171,022,583)
 
$
89,408,874
 
 
See accompanying notes.
 
 
4

 
ENDOCYTE, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
 
Nine Months
Ended September 30,
 
 
 
2012
 
2013
 
 
 
(unaudited)
 
Operating activities
 
 
 
 
 
 
 
Net loss
 
$
(16,443,164)
 
$
(15,130,305)
 
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
 
 
 
 
Depreciation
 
 
244,004
 
 
489,045
 
Stock-based compensation expense
 
 
2,248,354
 
 
4,405,839
 
Accretion of bond discount
 
 
564,690
 
 
895,782
 
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:
 
 
 
 
 
 
 
Receivables
 
 
(5,738,330)
 
 
5,795,745
 
Prepaid expenses and other assets
 
 
(313,968)
 
 
1,237,111
 
Accounts payable
 
 
(489,281)
 
 
(390,851)
 
Accrued interest, wages, benefits and other liabilities
 
 
1,549,308
 
 
486,726
 
Deferred revenue
 
 
109,229,320
 
 
(38,994,877)
 
Net cash provided by (used in) operating activities
 
 
91,917,129
 
 
(41,204,007)
 
Investing activities
 
 
 
 
 
 
 
Purchases of property and equipment
 
 
(1,626,280)
 
 
(646,799)
 
Purchases of investments
 
 
(243,336,342)
 
 
(109,123,099)
 
Proceeds from sale of investments
 
 
141,595,642
 
 
167,628,933
 
Net cash provided by (used in) investing activities
 
 
(103,366,980)
 
 
57,859,035
 
Financing activities
 
 
 
 
 
 
 
Repayment of long-term borrowings
 
 
(13,544,175)
 
 
 
Proceeds from the exercise of stock options
 
 
367,596
 
 
611,856
 
Net cash provided by (used in) financing activities
 
 
(13,176,579)
 
 
611,856
 
Effect of exchange rate
 
 
2,624
 
 
(17,831)
 
 
 
 
 
 
 
 
 
Net increase (decrease) in cash and cash equivalents
 
 
(24,623,806)
 
 
17,249,053
 
 
 
 
 
 
 
 
 
Cash and cash equivalents at beginning of period
 
 
61,352,483
 
 
33,996,866
 
Cash and cash equivalents at end of period
 
$
36,728,677
 
$
51,245,919
 
 
See accompanying notes.
 
 
5

 
ENDOCYTE, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
1. Nature of Business and Organization
 
Endocyte, Inc. (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 nine months ended September 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, which could also include 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, agreement to provide research and development services and other deliverables. 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.
 
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 or other deliverables, the license, services and other deliverables are combined as one unit of account and upfront payments are recorded as deferred revenue in the balance sheet and are recognized in a manner consistent with the final deliverable. 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 or other deliverables 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. Any 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, achievement of regulatory goals 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 first commercial sale of a product or when sales first achieve a defined level. 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 September 30, 2013, the Company had approximately $ 3.2 million 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 nine months ended September 30, 2012 and 2013.
 
Historical net loss per share
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
 
2012
 
2013
 
2012
 
2013
 
Numerator:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
 
$
(1,239,366)
 
$
(3,041,158)
 
$
(16,443,164)
 
$
(15,130,305)
 
Denominator:
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding
 
 
35,881,112
 
 
36,077,440
 
 
35,841,116
 
 
36,000,242
 
Basic and diluted net loss per share
 
$
(0.03)
 
$
(0.08)
 
$
(0.46)
 
$
(0.42)
 
 
Common stock equivalents
 
As of September 30, 2012 and 2013, the following number of potential common stock equivalents were outstanding:
 
 
 
As of September 30,
 
 
 
2012
 
2013
 
Outstanding common stock options
 
3,876,968
 
5,157,967
 
Outstanding warrants
 
133,968
 
69,294
 
Outstanding RSUs
 
273,988
 
271,062
 
 
 
 
 
 
 
Total
 
4,284,924
 
5,498,323
 
 
 
8

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

3. New Accounting Pronouncements
 
Recently Adopted Accounting Standards
 
In January 2013, the FASB issued Accounting Standards Update (“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 GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under 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.
 
In July 2013, the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, an update to ASC Topic 740, Income Taxes.   This amendment provides clarification regarding the presentation of an unrecognized tax benefit related to a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. Under this new standard, the liability related to an unrecognized tax benefit, or a portion thereof, should be presented in the financial statements as a reduction to a deferred tax asset if available under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position. Otherwise, the unrecognized tax benefit should be presented in the financial statements as a separate liability. The assessment is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date. The provisions of the new standard are effective on a prospective basis beginning in 2014 for annual and interim reporting periods. Early adoption is permitted. This update will be effective for the Company beginning January 1, 2014. The Company does not expect the adoption of this guidance to have a material impact on its 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
 
 
(17,831)
 
 
(29,047)
 
 
(46,878)
 
Net amount reclassified to net loss
 
 
 
 
(4,916)
 
 
(4,916)
 
Other comprehensive loss
 
 
(17,831)
 
 
(33,963)
 
 
(51,794)
 
Balance at September 30, 2013
 
$
(22,842)
 
$
43,797
 
$
(20,955)
 
 
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 Nine Months Ended September 30, 2013
 
 
 
Amount
Reclassified from
Accumulated
Other
Comprehensive
Loss
 
 
 
Details about Accumulated Other
Comprehensive Loss Components
 
Three
Months
Ended
September
30, 2013
 
Nine Months
Ended
September
30, 2013
 
Affected Line Item in the
Condensed Consolidated
Statements of Operations and
Comprehensive Loss
 
 
 
 
 
 
 
 
 
 
 
Unrealized Net Gains on Securities
 
$
536
 
$
4,916
 
Other income (expense)
 
Total Reclassifications for the period
 
$
536
 
$
4,916
 
 
 

5. Investments
 
The Company applies the fair value measurement and disclosure provisions of ASC Topic 820, Fair Value Measurements (“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.
 
 
10

 
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
 
 
The following table summarizes the fair value of cash and cash equivalents and investments as of September 30, 2013:
 
Description
 
Cost
 
Level 1
 
Level 2
 
Fair Value
(Carrying
Value)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash
 
$
10,416,113
 
$
10,416,113
 
$
 
$
10,416,113
 
Cash equivalents
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
 
 
40,829,806
 
 
40,829,806
 
 
 
 
40,829,806
 
Cash and cash equivalents
 
$
51,245,919
 
$
51,245,919
 
$
 
$
51,245,919
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-term investments (due within 1 year)
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government treasury obligations
 
$
15,023,419
 
 
15,035,200
 
 
 
 
15,035,200
 
U.S. government agency obligations
 
 
16,171,793
 
 
16,184,311
 
 
 
 
16,184,311
 
Corporate obligations
 
 
28,678,553
 
 
 
 
28,689,238
 
 
28,689,238
 
Total Short-term investments
 
$
59,873,765
 
 
31,219,511
 
 
28,689,238
 
 
59,908,749
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Long-term investments (due after 1 year through 2 years)
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government treasury obligations
 
$
 
 
 
 
 
 
 
U.S. government agency obligations
 
 
35,116,060
 
 
35,131,581
 
 
 
 
35,131,581
 
Corporate obligations
 
 
12,912,265
 
 
 
 
12,905,563
 
 
12,905,563
 
Total Long-term investments
 
$
48,028,325
 
 
35,131,581
 
 
12,905,563
 
 
48,037,144
 
 
All securities held at September 30, 2013, were classified as available-for-sale as defined by ASC 320.
 
Total unrealized gross gains were $ 71,936 and $ 72,526 for the nine months ended September 30, 2012 and 2013, respectively. Total unrealized gross losses were $ 2,158 and $ 28,729 for the nine months ended September 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. 
 
 
11

 
6. Collaborations
 
Merck Collaboration Agreement
 
In April 2012, the Company entered into a worldwide collaboration agreement with Merck Sharp & Dohme Research GmbH, a Subsidiary of Merck & Co, Inc. (“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.
 
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 $ 16.6 million and $ 47.6 million of collaboration revenue during the three and nine month periods ended September 30, 2013, respectively, and had deferred revenue related to the collaboration of approximately $ 73.6 million at September 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 nine month periods ended September 30, 2013, license revenue was approximately $ 13.1 million and $ 37.7 million, respectively, while research and development services were approximately $ 3.4 million and $ 9.8 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.
 
 
12

 
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.

NMP License and Commercialization Agreement
 
In August 2013, the Company entered into a license and commercialization agreement with Nihon Medi-Physics Co., Ltd., (“NMP”) that grants NMP the right to develop and commercialize etarfolatide in Japan for use in connection with vintafolide in Japan. The Company received a $ 1.0 million non-refundable upfront payment, is eligible for up to $ 4.5 million based on the successful achievement of regulatory goals for etarfolatide in five different cancer indications and is eligible to receive double-digit percentage royalties  on sales of etarfolatide in Japan.
 
For revenue recognition purposes, the Company viewed the agreement with NMP 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 has identified the deliverables related to the collaboration with NMP, which include the license granted to NMP, as well as the Company’s obligations to provide preclinical and clinical supply of etarfolatide to NMP, to provide rights to NMP if a product is developed that replaces etarfolatide, to provide clinical data to NMP during the contract period and to coordinate development efforts between Merck for vintafolide and NMP for etarfolatide in Japan.   The Company’s deliverables will be accounted for as a single unit of account, therefore the non-refundable upfront payment will be recognized on a straight-line basis over the performance period. This determination was made because the successful development of etarfolatide in Japan requires the ongoing participation by the Company, including coordination with Merck and the development of the related therapeutic drug, vintafolide. The performance period over which the revenue will be recognized continues from the date of execution of the agreement through the end of 2033, the estimated termination date of the contract which is when the Company’s performance obligations will be completed.   Any significant changes in the timing of the performance period could result in a change in the revenue recognition period. The Company had deferred revenue related to the agreement with NMP of approximately $ 1.0 million at September 30, 2013.  
 
The arrangement with NMP includes milestone payments of up to approximately $4.5 million and the milestones are based on the commencement of clinical trials in Japan for specific and non-specific indications and filing for regulatory approval in Japan for specific and non-specific indications. The Company evaluated each of these milestone payments and believes that all 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. To date, the products have not been approved in Japan and no revenue has been recognized related to the regulatory milestones or royalties.
 
NMP has the right to terminate the collaboration agreement on 90 days notice prior to first commercial sale in Japan and six months notice after the first commercial sale in Japan. NMP also has the right to terminate the agreement on six months notice if the Company and or Merck fail to launch vintafolide after receiving regulatory approval in Japan.   NMP and the Company each have the right to terminate the agreement due to the material breach or insolvency of the other party. Upon termination of the agreement depending on the circumstances, the parties have varying rights and obligations with respect to licensing and related regulatory materials and data.

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, RSUs, 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 September 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.
 
 
13

 
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 nine months ended September 30, 2012 and 2013 were determined using the following assumptions:  
 
 
 
Three Months
Ended
September 30,
 
 
Nine Months
Ended
September 30,
 
 
 
 
2012
 
 
2013
 
 
2012
 
 
2013
 
 
Weighted-average volatility
 
 
90
%
 
 
101
%
 
 
89.1
%
 
 
101
%
 
Risk-free interest rate
 
 
0.91
%
 
 
1.96
%
 
 
1.10
%
 
 
1.24
%
 
Weighted-average expected life (in years)
 
 
6.2
 
 
 
6.3
 
 
 
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 nine months ended September 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
 
Outstanding at July 1, 2013
 
 
5,128,059
 
 
 
 
 
 
 
 
 
 
Granted during period
 
 
98,425
 
 
16.78
 
 
 
 
 
 
 
Exercised during period
 
 
(68,517)
 
 
4.51
 
 
 
 
 
 
 
Expired during period
 
 
-
 
 
 
 
 
 
 
 
 
 
Forfeited during period
 
 
-
 
 
 
 
 
 
 
 
 
 
Outstanding at September 30, 2013
 
 
5,157,967
 
 
6.66
 
 
7.57
 
 
34,783,085
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Exercisable at September 30, 2013
 
 
2,248,686
 
$
4.56
 
 
5.94
 
$
19,720,718
 
 
 
14

 
As of September 30, 2013, the total remaining unrecognized compensation cost related to stock options was $ 15.9 million which is being amortized over the remaining requisite service period. The expense is expected to be recognized over a weighted average period of 1.9 years.
 
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 September 30, 2013, the Company had 271,062 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 September 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 September 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 September 30, 2013. Unrecorded compensation expense for the 2011 RSU Program as of September 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.
 
 
15

 
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 interim analysis to be available in the second quarter 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 because additional patient enrollment is not likely to be helpful, or 3) add 100 FR(100%) patients to expand the overall survival, or OS, analysis. Janssen Products, LP, or Janssen, recently announced a U.S. supply shortage of PLD. Despite the shortage, we hold a sufficient supply of PLD to support patients currently enrolled in the PROCEED trial and new enrollment for the next nine to ten months. It was also announced that the third-party supplier of DOXIL® intends to cease production by the end of 2013. This issue does not apply to CAELYX®, and a new supplier of CAELYX® has been approved by the Committee for Medicinal Products for Human Use, or CHMP, to support both clinical and commercial supply in Europe. Janssen has indicated that it continues to explore alternatives for U.S. supply of PLD, including seeking approval for a new supplier. We expect to enroll up to 500 patients to reach the goal of 250 FR(100%) patients in the PROCEED trial. Assuming we enroll the additional 100 patients, which we expect could take an additional nine to ten months to enroll, we expect enrollment to be up to 600 patients in PROCEED depending on the mix of FR(100%) patients versus partially positive patients. 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 and enrollment was completed in July 2013. Patients were 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. In October 2013, we announced the outcomes of the planned DSMB review of the interim futility analysis for the TARGET trial. The DSMB recommended the continuation of the vintafolide plus docetaxel arm and docetaxel alone arm of the trial. The DSMB also recommended investigators and patients be advised that the vintafolide alone arm is not likely to be declared superior to docetaxel in PFS at the end of the study, and patients currently on the vintafolide alone arm may continue treatment based on guidance from their investigator.   We expect PFS data from the TARGET trial to be available in the first quarter of 2014.
 
 
16

   
In September 2013, the FDA accepted the investigational new drug application, or IND, filed for EC1456, a folate-targeted Tubulysin therapeutic. We are currently screening patients for enrollment in a Phase 1 trial.
 
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 first half of 2014.   Merck also will be pursuing and funding 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 or early 2014. 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.
 
In August 2013, we entered into a license and commercialization agreement with Nihon Medi-Physics Co., Ltd., or NMP, that grants NMP the right to develop and commercialize etarfolatide in Japan for use in connection with vintafolide in Japan.   We received a $1.0 million non-refundable upfront payment and are eligible to receive double-digit percentage royalties on sales of etarfolatide in Japan. The upfront payment will be recognized on a straight-line basis over the performance period, which is from the execution of the agreement through the end of 2033, the estimated termination date of the agreement. The agreement with NMP also includes milestone payments of up to approximately $4.5 million and the milestones are based on the commencement of clinical trials in Japan for specific and non-specific indications and filing for regulatory approval in Japan for specific and non-specific indications. We evaluated each of these milestone payments and believe that all 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. To date, the products have not been approved in Japan and no revenue has been recognized related to the regulatory milestones or royalties.   NMP has the right to terminate the collaboration agreement on 90 days notice prior to first commercial sale in Japan and six months notice after the first commercial sale in Japan. NMP also has the right to terminate the agreement on six months notice if the Company and/or Merck fail to launch vintafolide after receiving regulatory approval in Japan.   NMP and the Company each have the right to terminate the agreement due to the material breach or insolvency of the other party.   Upon termination of the agreement depending on the circumstances, the parties have varying rights and obligations with respect to licensing and related regulatory materials and data.
 
 
 
17

 
We have never been profitable and have incurred significant net losses since our inception. As of September 30, 2013, we had a retained deficit of $171.0 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 $159.2 million at September 30, 2013, which includes cash equivalents and investments, is sufficient to fund our current operating plan, including completion of the PROCEED trial through the availability of PFS data from that study which is expected to be in the first half of 2015, including a potential 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 revenue 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 Codification, or ASC, Topic 605, Revenue Recognition (“ASC 605”). Our license and collaboration agreements may contain multiple elements, including grants of licenses to intellectual property rights, agreement to provide research and development services and other deliverables. The deliverables under such 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, 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. 
 
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 that we are to provide under the arrangement. If we determine that the license does not have stand-alone value separate from the research and development services or other deliverables, the license, services and other deliverables are combined as one unit of account and upfront payments are recorded as deferred revenue in the balance sheet and are recognized in a manner consistent with the final deliverable. 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 or other deliverables 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. Any 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, achievement of regulatory goals 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 first commercial sale of a product or when sales first achieve a defined level. Since 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.
 
 
18

     
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 our products have been approved and therefore we have not earned any royalty revenue from product sales. In territories where profits are shared, 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.
 
Results of Operations
 
Comparison of Three Months Ended September 30, 2012 to Three Months Ended September 30, 2013
 
 
 
Three Months Ended
September 30,
 
Increase/
(Decrease)
 
%
 
 
 
2012
 
2013
 
 
 
 
 
 
 
 
(In thousands)
 
Statement of operations data:
 
 
 
 
 
 
 
 
 
 
 
 
Collaboration Revenue
 
$
12,415
 
$
16,600
 
$
4,185
 
34
%
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
Research and development
 
 
9,930
 
 
13,500
 
 
3,570
 
36
%
General and administrative
 
 
3,815
 
 
6,143
 
 
2,328
 
61
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Total operating expenses
 
 
13,745
 
 
19,643
 
 
5,898
 
43
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss from operations
 
 
(1,330)
 
 
(3,043)
 
 
1,713
 
129
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
 
 
96
 
 
111
 
 
15
 
16
%
Interest expense
 
 
(1)
 
 
(1)
 
 
-
 
0
%
Other income (expense), net
 
 
(4)
 
 
(108)
 
 
104
 
2600
%
Net loss
 
$
(1,239)
 
$
(3,041)
 
$
1,802
 
145
%
 
Revenue
 
Our revenue of $16.6 million recorded in the three months ended September 30, 2013 related primarily to the collaboration with Merck. Of this revenue, $14.1 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 third quarter of 2013 under the collaboration agreement with Merck. The remaining $2.5 million of revenue related to the amortization of reimbursable research and development expenditures that we incurred during the third quarter of 2013 under the collaboration agreement with Merck. The amortization for both the upfront license payment and ongoing reimbursable research and development expenditures are being recognized as revenue ratably over the performance period. NMP revenue for the upfront payment will be recorded ratably over the contract period.
 
Research and Development
 
  The increase in research and development expense for the three months ended September 30, 2013 compared to the three months ended September 30, 2012 was primarily attributable to a $2.5 million increase in product development expenses and a $0.8 million increase in compensation expenses due to increases in headcount and stock-based compensation expense. The increase in product development expenses was primarily due to an increase of $2.8 million in clinical trial expenses for the PROCEED and TARGET trials and an increase of $0.8 million in development costs for the earlier stage pipeline, partially offset by lower contract manufacturing costs for vintafolide of $1.1 million due to Merck assuming responsibility for manufacturing of vintafolide. Included in research and development expense for the three months ended September 30, 2013 were $4.5 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 $0.5 million and $0.9 million for the three months ended September 30, 2012 and 2013, respectively.
        
Research and development expense included expense of $189,000 and $275,000 for the three months ended September 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 September 30, 2013 compared to the three months ended September 30, 2012 was primarily attributable to an increase in expenses related to establishing commercial capability and an increase in compensation expenses due to increases in headcount and stock-based compensation expense.   Included in general and administrative expense for the three months ended September 30, 2013 were $0.2 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 $0.3 million and $0.9 million for the three months ended September 30, 2012 and 2013, respectively.  
 
Interest Income
 
The increase in interest income in the three months ended September 30, 2013 compared to the three months ended September 30, 2012 resulted from an increase in investments in longer term maturities that earn higher rates of return.
   
Other Income (Expense), net
 
Other expense, net increased in the three months ended September 30, 2013 compared to the three months ended September 30, 2012 due to increases in foreign exchange losses and state franchise and excise taxes.
  
Comparison of Nine Months Ended September 30, 2012 to Nine Months Ended September 30, 2013
 
 
 
Nine Months Ended
September 30,
 
Increase/
(Decrease)
 
%
 
 
 
2012
 
2013
 
 
 
 
 
 
 
 
(In thousands)
 
Statement of operations data:
 
 
 
 
 
 
 
 
 
 
 
 
Collaboration revenue
 
$
20,228
 
$
47,597
 
$
27,369
 
135
%
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
Research and development
 
 
25,153
 
 
44,366
 
 
19,213
 
76
%
General and administrative
 
 
10,104
 
 
18,610
 
 
8,506
 
84
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Total operating expenses
 
 
35,257
 
 
62,976
 
 
27,719
 
79
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss from operations
 
 
(15,029)
 
 
(15,379)
 
 
(350)
 
2
%
Interest income
 
 
137
 
 
377
 
 
240
 
175
%
Interest expense
 
 
(628)
 
 
(2)
 
 
626
 
100
%
Other income (expense), net
 
 
(923)
 
 
(126)
 
 
797
 
86
%
Net loss
 
$
(16,443)
 
$
(15,130)
 
$
1,313
 
8
%
 
Revenue
 
Our revenue of $47.6 million recorded in the nine months ended September 30, 2013 related primarily to the collaboration with Merck. Of this revenue, $39.0 million was related to the amortization of the upfront license payment, a milestone payment, and reimbursable research and development expenditures incurred prior to the nine months ended September 30, 2013 under the collaboration agreement with Merck. The remaining $8.6 million of revenue related to the amortization of reimbursable research and development expenditures that we incurred during the nine months ended September 30, 2013 under the collaboration agreement with Merck.   The amortization for both the upfront license payment and ongoing reimbursable research and development expenditures are being recognized as revenue ratably over the performance period. NMP revenue for the upfront payment will be recorded ratably over the contract period.
 
 
20

 
Research and Development
 
The increase in research and development expense for the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012 was attributable to a $16.3 million increase in product development expenses, a $0.7 million increase in general development costs, and a $2.2 million increase in compensation expenses due to increases in headcount and   stock-based compensation expense. The increase in product development expenses was primarily due to increases of $16 million in clinical trial expenses for the PROCEED and TARGET trials and $1.5 million in development costs for the earlier stage pipeline, partially offset by lower contract manufacturing costs for vintafolide of $1.8 million due to Merck assuming responsibility for manufacturing of vintafolide. Included in research and development expense for the nine months ended September 30, 2013 were $15.4 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 $1.4 million and $2.4 million for the nine months ended September 30, 2012 and 2013, respectively.
 
Research and development expense included expenses of $582,000 and $688,000 for the nine months ended September 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 nine months ended September 30, 2013 compared to the nine months ended September 30, 2012 was primarily attributable to increased expenses related to establishing commercial capability, increased legal fees associated with obtaining patent and trademark rights, and increased compensation expenses due to increases in headcount and stock-based compensation expense. Included in general and administrative expense for the nine months ended September 30, 2013 were $0.7 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 $0.9 million and $2.0 million for the nine months ended September 30, 2012 and 2013, respectively.
 
Interest Income
 
The increase in interest income in the nine months ended September, 30 2013 compared to the nine months ended September 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 nine months ended September 30, 2013 compared to the nine months ended September 30, 2012 was due to the decreased borrowings under our now terminated credit facility. Our average loan balance under the credit facility was $7.5 million for the nine months ended September 30, 2012.
 
Other Income (Expense), Net
 
Other expense, net decreased in the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012 due to a loss on debt extinguishment of $1.0 million that we recognized in the nine months ended September 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 sales of equity and debt securities, revenue from strategic collaborations, grants, and loans.   As of September 30, 2013, we had cash, cash equivalents and investments of $159.2 million.
 
We terminated our $15.0 million credit facility in June 2012, 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.
 
   
21

 
The following table sets forth the primary sources and uses of cash for each of the periods set forth below:
 
 
 
Nine Months Ended
September 30,
 
 
 
2012
 
2013
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
Net cash provided by (used in) operating activities
 
$
91,917
 
 
(41,204)
 
Net cash provided by (used in) investing activities
 
 
(103,367)
 
 
57,859
 
Net cash provided by (used in) financing activities
 
 
(13,177)
 
 
612
 
Effect of exchange rate
 
 
3
 
 
(18)
 
 
 
 
 
 
 
 
 
Net increase (decrease) in cash and cash equivalents
 
$
(24,624)
 
 
17,249
 
 
Operating Activities
 
The cash provided by operating activities for the nine months ended September 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 nine months ended September 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 used in and provided by investing activities for each of the nine 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 $1.6 million and $0.6 million during the 2012 and 2013 periods, respectively.
 
Financing Activities
 
The cash used in financing activities during the nine months ended September 30, 2012 primarily consisted of a $13.5 million payment on the now terminated credit facility. The cash provided by financing activities during the nine month period ended September 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 the first half of 2014. 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 $159.2 million at September 30, 2013, including cash equivalents and investments, is sufficient to fund our current operating plan,  and advance our earlier stage pipeline. Our current operating plan includes completion of the PROCEED trial through the availability of PFS data from that study which is anticipated to be in the second quarter of 2014, including a potential 100 additional FR(100%) patients which we expect could take an additional nine to ten months to enroll. We are responsible for the majority of the costs of the PROCEED trial and Merck is responsible for the costs of the TARGET trial. Merck will be financially responsible for the development of vintafolide in new indications.
 
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;
 
 
22

 
 
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 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 nine month periods ended September 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 September 30, 2013 we had cash, cash equivalents and investments of $159.2 million. 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.
  
 
23

    
Changes in Internal Control over Financial Reporting
 
There has been no change in our internal control over financial reporting during the quarter ended September 30, 2013, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
 
24

 
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 nine month periods ended September 30, 2013 was $3.0 million and $15.1 million, respectively. As of September 30, 2013, we had a retained deficit of $171.0 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 September 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 first half of 2014.   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.
 
 
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We cannot predict with any certainty whether the EMA will grant the marketing authorizations that we are seeking in these applications.
 
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, and Janssen Products, LP, or Janssen, recently announced a U.S. supply shortage of PLD.
 
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 and AstraZeneca. 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.
 
 
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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.
 
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, and have entered into a license and commercialization agreement with Nihon Medi-Physics Co., Ltd., or NMP, giving NMP the right to develop and commercialize etarfolatide in Japan for use in connection with vintafolide in Japan. 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 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. Janssen recently announced a U.S. supply shortage of PLD.   It was also announced that the third-party supplier of DOXIL® intends to cease production by the end of 2013.   If Janssen is unable to secure a new supplier of DOXIL®, it could have a material adverse effect on our business.
 
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 govern