ITEM 1. BUSINESS
Overview
We are a biopharmaceutical company focused on discovering, developing and commercializing novel small-molecule therapeutics derived from our boron chemistry platform. We have demonstrated that our organization, utilizing our boron chemistry platform, is highly productive and efficient at creating novel clinical product candidates. We have discovered, synthesized and developed eight molecules that are currently in development, and we believe that our organization and boron chemistry platform have the potential to continue to yield clinical candidates at a similar pace and efficiency in the future. While drug development is often uncertain and occasionally uneven, our current portfolio of product candidates and our ability to efficiently fill our own pipeline provide us with a unique opportunity to create a valuable and sustainable biopharmaceutical company.
We believe that our expertise in boron chemistry enables us to identify compounds that interact with known drug targets in novel ways and also inhibit drug targets that have been historically difficult to inhibit with traditional chemistry. We have applied this expertise across a range of fungal, inflammatory, bacterial and parasitic diseases that represent significant unmet medical needs. We have discovered and advanced into clinical development multiple differentiated product candidates that we believe have significant disease-modifying potential and attractive pharmaceutical properties. We believe that our product candidates may offer significant improvements over the standard of care for diseases that represent large, well-defined commercial opportunities.
The productivity of our internal discovery capability has enabled us to generate a pipeline of both topical and systemic boron-based compounds. We have discovered eight product candidates that have reached development. Our lead product candidates include two topically administered dermatologic compounds-tavaborole (formerly referred to as AN2690), an antifungal for the treatment of onychomycosis, and AN2728, an anti-inflammatory for the treatment of atopic dermatitis and psoriasis. In addition, we have three other wholly-owned clinical product candidates-AN2718 and AN2898, which are backup compounds to tavaborole and AN2728, respectively, and AN3365 (formerly referred to as GSK2251052, or GSK '052), an antibiotic for the treatment of infections caused by Gram-negative bacteria, which previously was licensed to GlaxoSmithKline LLC, or GSK. In October 2012, GSK advised us that it had discontinued further development of AN3365 and all rights to this compound reverted to us. We are considering our options for further development, if any, of this compound. We have also discovered three other compounds that we have out-licensed for further development-two are licensed to Eli Lilly and Company, or Lilly, for the treatment of animal health indications, and the third compound, AN5568, also referred to as SCYX-7158, is licensed to Drugs for Neglected Diseases initiative, or DNDi, for human African trypanosomiasis (HAT, or sleeping sickness). We also have a pipeline of other internally discovered topical and systemic boron-based compounds in development.
We have entered into and are seeking partnerships to expand the therapeutic application and commercial value of our boron chemistry platform. In October 2007, we entered into a research and development collaboration, option and license agreement with GSK for the discovery, development and worldwide commercialization of boron-based systemic anti-infectives. In July 2010, GSK exercised its option to license AN3365 and developed it until October 2012 when GSK discontinued its development and returned all rights to the compound back to Anacor. We are actively conducting research to discover additional systemic anti-infectives with GSK. In September 2011, we amended and expanded our research and development collaboration with GSK to provide GSK the option to extend its rights around the bacterial enzyme target leucyl-tRNA synthetase (LeuRS), as well as to add new programs for tuberculosis (TB) and malaria using Anacor's boron chemistry platform. In August 2010, we entered into a collaboration with Lilly, under which we are collaborating to discover products for a variety of animal health applications. We have achieved two animal health development candidates under this
collaboration-the first in August 2011, and the second in December 2012. In addition, we are applying our boron chemistry platform to the development of treatments for various neglected diseases in collaboration with leading not-for-profit organizations, including DNDi, Medicines for Malaria Ventures, or MMV, and the Sandler Center for Basic Research in Parasitic Diseases. In March 2012, DNDi commenced the first human clinical trial for AN5568, the first oral drug candidate for sleeping sickness.
Our Clinical Pipeline
The following table summarizes the current status and the anticipated next steps in the development plans for our clinical-stage product candidates:
Tavaborole is our lead topical antifungal product candidate for the treatment of onychomycosis, a fungal infection of the nail and nail bed. Onychomycosis affects approximately 35 million people in the United States, and new prescriptions to treat this disease continue to grow. Lamisil (terbinafine), a systemic drug approved for onychomycosis, had worldwide peak sales of $1.2 billion in 2004, before generic entry. According to IMS Health, for the 12-month period ending December 31, 2010, 1.4 million new prescriptions were filled in the United States for both branded and generic versions of
terbinafine. Despite its high labeled efficacy (38%), we believe the usage of branded and generic terbinafine has been limited due to safety concerns related to liver toxicity. The leading topical drug for onychomycosis, Penlac Nail Lacquer (ciclopirox), had U.S. sales of $125.0 million in 2002, before generic entry. According to IMS Health, for the 12-month period ending December 31, 2010, over 375,000 new prescriptions were filled in the United States for branded or generic ciclopirox. While ciclopirox has been shown to be safe due in part to its topical administration, we believe the usage of branded and generic ciclopirox has been limited due to its low labeled efficacy (5.5% - 8.5%).
We believe tavaborole can potentially offer significant improvements over the standards of care for onychomycosis by combining the safety of a topical drug with significant efficacy. Due to its unique boron chemistry, tavaborole has demonstrated enhanced nail penetration properties, a novel mechanism of action with potent antifungal activity and, due in part to its topical administration, no observed systemic side effects in human dosing. Tavaborole inhibits an essential fungal enzyme, leucyl-transfer RNA synthetase, or LeuRS, required for protein synthesis. The inhibition of protein synthesis leads to termination of cell growth and cell death, eliminating the fungal infection. In the first quarter of 2013, we reported positive results from two Phase 3 studies conducted under a Special Protocol Assessment, or SPA, with the United States Food and Drug Administration, or FDA. In both Phase 3 studies, tavaborole achieved a high degree of statistical significance on all primary and secondary endpoints.
In the first study (known as Study 301), 6.5% of patients treated with tavaborole met the primary endpoint of "complete cure" vs. 0.5% of patients treated with vehicle (p=0.001) at week 52. "Complete cure" is a composite endpoint that requires both a mycological cure and a completely clear nail and is consistent with the FDA endpoint requirement for Lamisil. Among the secondary endpoints at week 52, 26.1% of patients treated with tavaborole achieved a "completely clear" or "almost clear" (£10% clinical involvement) nail vs. 9.3% in the vehicle-treated arm (p<0.001); 31.1% of patients treated with tavaborole achieved mycologic cure vs. 7.2% in the vehicle-treated arm (p<0.001)); and 15.3% of patients treated with tavaborole achieved "completely clear" or "almost clear" nail with mycological cure vs. 1.5% in the vehicle-treated arm (p<0.001). In addition to the primary and secondary endpoints noted above, 87.0% of patients treated with tavaborole had a negative fungal culture vs. 47.9% in the vehicle-treated arm (p<0.001) at week 52, and 24.6% of patients treated with tavaborole achieved "completely clear" or "almost clear" nail and negative culture vs. 5.7% in the vehicle-treated arm (p<0.001) at week 52.
In the second study (known as Study 302), 9.1% of patients treated with tavaborole met the primary endpoint of "complete cure" vs. 1.5% of patients treated with vehicle (p<0.001) at week 52. Among the secondary endpoints at week 52, 27.5% of patients treated with tavaborole achieved a "completely clear" or "almost clear" nail vs. 14.6% in the vehicle-treated arm (p<0.001); 35.9% of patients treated with tavaborole achieved mycologic cure vs. 12.2% in the vehicle-treated arm (p<0.001)); and 17.9% of patients treated with tavaborole achieved "completely clear" or "almost clear" nail with mycological cure vs. 3.9% in the vehicle-treated arm (p<0.001). In addition to the primary and secondary endpoints noted above, 85.4% of patients treated with tavaborole had a negative fungal culture vs. 51.2% in the vehicle-treated arm (p<0.001) at week 52, and 25.3% of patients treated with tavaborole achieved "completely clear" or "almost clear" nail and negative culture vs. 9.3% in the vehicle-treated arm (p<0.001) at week 52.
In both studies, tavaborole was safe and well-tolerated across study subjects, and there were no serious adverse events related to study drug. We plan to file an NDA in mid-2013.
AN2728 is our lead topical anti-inflammatory product candidate for the treatment of atopic dermatitis and psoriasis. Atopic dermatitis is a chronic rash characterized by inflammation and itching. In 2007, Datamonitor reported that atopic dermatitis affected approximately 40 million people across the seven major pharmaceutical markets. The condition most commonly appears in childhood, with up to 20% of children in the United States affected, and it can persist into adulthood. Skin affected by
atopic dermatitis can often be broken and chafed from scratching, which allows bacterial or viral access that can lead to secondary infections. Current atopic dermatitis treatments attempt to reduce inflammation and itching to maintain the protective integrity of the skin. Antibiotics, antihistamines, topical corticosteroids and topical immunomodulators, either as monotherapy or in combination, are the current standard of care for atopic dermatitis. However, these can be limited in utility due to insufficient efficacy or unwanted side effects. Psoriasis is a chronic inflammatory skin disease that affects approximately 7.5 million people in the United States and over 100 million people worldwide. Approximately 80% of psoriasis patients have mild-to-moderate disease, which is mainly treated with topical corticosteroids and vitamin D analogs. However, topical corticosteroids and vitamin D analogs are limited in their use by patients due to their long-term safety and/or their tolerability profile. In spite of these limitations, according to IMS Health, approximately 3.9 million prescriptions were filled for these topical therapies to treat psoriasis in the United States in 2009.
We believe that AN2728 has the potential to be an effective treatment for atopic dermatitis and psoriasis with an attractive safety profile in a topical application, and thus provide an alternative to treatment with topical corticosteroids and topical immunomodulators for atopic dermatitis and topical corticosteroids and vitamin D analogs for psoriasis. Due to its boron-based structure, AN2728 binds with the active site of the enzyme phosphodiesterase-4 (PDE-4) in a novel manner, inhibits its activity and reduces the production of a range of pro-inflammatory cytokines that are thought to be associated with atopic dermatitis and psoriasis.
In December 2012, we reported the results of a Phase 2 safety, pharmacokinetics (PK) and efficacy trial of AN2728, in adolescents (ages 12 - 17) with mild-to-moderate atopic dermatitis, the first study in which we have evaluated the effect of treating all of a patient's atopic dermatitis and measured the improvement using the ISGA scale, the same scale used by the FDA to evaluate the most recently approved topical treatments for atopic dermatitis. 35% of patients achieved an ISGA score of 'clear' or 'almost clear' with a minimum 2-grade improvement, and AN2728 demonstrated a promising safety profile in a younger patient population, which is essential given that this disease primarily affects children.
In June 2011, we successfully completed a final Phase 2b trial for AN2728 in psoriasis in which patients were randomized to receive either AN2728 or vehicle, a design that matched the anticipated conduct of our future Phase 3 trials. In October 2011, we held an End-of-Phase 2 meeting with the FDA to discuss the design of Phase 3 trials of AN2728 in psoriasis and, in November 2011, we filed an SPA and reached agreement with the FDA on the major parameters associated with the design and conduct of the Phase 3 trials of AN2728 in psoriasis.
AN3365 is our lead antibiotic for the treatment of infections caused by Gram-negative bacteria. Preclinical studies suggest that AN3365 could be a novel approach for the treatment of infections caused by a broad range of Gram-negative bacteria, including E. coli, Klebsiella pneumoniae, Citrobacter spp., S. marcescens, P. vulgaris, Providentia spp., Pseudomonas aeruginosa and Enterobacter spp.
Due to its unique boron-based chemical structure, AN3365 specifically targets the bacterial enzyme LeuRS which is required for protein synthesis. The inhibition of protein synthesis leads to termination of cell growth and cell death. In preclinical safety, pharmacology and toxicology studies, AN3365 showed robust activity against multi-resistant Gram-negative bacteria with no cross resistance to existing classes of antibiotics. In a Phase 1 proof-of-concept trial, AN3365 demonstrated a promising safety profile and linear dose-proportional pharmacokinetic properties, reaching blood levels that were many times higher than the anticipated efficacious dose. In June 2011, GSK initiated two Phase 2b trials for cUTI and cIAI. In March 2012, GSK voluntarily discontinued certain of its current clinical trials of AN3365 due to a microbiological finding in a small number of patients in the Phase 2b trial for the treatment of cUTI. In October 2012, GSK advised us that it had discontinued further development of AN3365 and all rights to this compound reverted to us. We are currently considering our options for further development, if any, of this compound.
In August 2010, we entered into a research agreement with Eli Lilly and Company, or Lilly, under which we are collaborating to discover products for a variety of animal health applications, and Lilly is responsible for worldwide development and commercialization of compounds advancing from these efforts. In August 2011, Lilly selected the first development candidate in animal health under this collaboration, and in December 2012, Lilly selected the second development candidate in animal health under this collaboration. We received a $1.0 million milestone payment for each candidate selection. In addition, we will be eligible to receive payments upon the achievement of development and regulatory milestones, as well as tiered royalties, escalating from high single digits to in-the-tens, on sales depending in part upon the mix of products sold. Such royalties continue through the later of expiration of our patent rights or six years from the first commercial sale on a product-by-product and country-by-country basis.
In December 2007, we established a partnership with DNDi to develop new therapeutics for sleeping sickness, visceral leishmaniasis and Chagas disease. In March 2012, DNDi commenced Phase 1 human clinical trials of AN5568 for sleeping sickness. AN5568 is a product of Anacor's boron chemistry and the first oral drug candidate for sleeping sickness.
Our clinical pipeline also includes two additional product candidates that may extend and expand the market opportunity of our dermatology portfolio. AN2718, our second topical antifungal product candidate, has the potential to treat onychomycosis and fungal infections of the skin. AN2898, our second topical anti-inflammatory product candidate, has the potential to treat atopic dermatitis and psoriasis. In December 2011, AN2898 successfully met the primary endpoint in the Phase 2a trial in atopic dermatitis.
Boron Chemistry Platform
All of our current research and development programs, including our eight development-stage product candidates, are based on compounds that have been internally discovered using our boron chemistry platform. Boron is a naturally occurring element that is ingested frequently through consumption of fruits, vegetables, milk and coffee. Boron has two attributes that we believe confer compounds with drug-like properties. First, boron-based compounds have a unique geometry that allows them to have two distinct shapes, giving boron-based drugs the ability to interact with biological targets in novel ways and to address targets not amenable to intervention by traditional carbon-based compounds. Second, boron's enhanced reactivity as compared to carbon allows us to design molecules that can hit targets that are difficult to inhibit with carbon chemistry.
Despite the ubiquity of boron in the environment, researchers have faced challenges in evaluating boron-based compounds as product candidates due to previously limited understanding of the physical properties necessary to provide boron-based compounds with the chemical and biological attributes required of pharmaceutical therapies as well as difficulty in chemical synthesis.
We have developed expertise and an understanding of the interactions of boron-based compounds with key biological targets relevant to treating disease. This know-how is primarily related to methods for modulating boron's reactivity to optimize reactions with the target and minimize unwanted chemical reactivity. Our advances have enabled the efficient optimization of disease-modifying properties for our lead compounds and their rapid progression from the research stage into clinical trials.
Additionally, we have discovered new methods of synthesis of boron compounds, allowing for the creation of new compound families with broad chemical diversity and retention of drug-like properties. These new compound families expand the universe of biological targets that can be addressed by small-molecule, boron-based compounds. We have been in operation since 2002 and began generating clinical candidates in our second year of operations. Since that time, we have discovered and synthesized thousands of boron-containing molecules and, of these, eight have reached development stage. The rate of discovery of molecules and promotion to clinical development has occurred at a relatively constant rate.
We believe our focus on boron-based chemistry provides us with multiple advantages in the small-molecule drug discovery process. These advantages include:
•Novel access to biological targets. Due to the unique geometry and reactivity of boron-based molecules, our boron-based compounds are able to modulate existing biological targets and can address targets not amenable to intervention by traditional carbon-based compounds. This may enable us to treat diseases that have not been effectively addressed by carbon-based compounds, for example, by developing antibiotic or antifungal therapies that kill pathogens that have become resistant to existing drugs.
•Broad utility across multiple disease areas. Our compounds have exhibited extensive preclinical activity in multiple disease areas, including fungal, inflammatory and bacterial diseases, which are our core areas of focus, as well as in parasitic, cancer and ophthalmic indications and for applications in animal health.
•Rapid and efficient synthesis of drug-like compounds. Our proprietary technological advances in the synthesis of boron-based compounds, coupled with our rational drug design capabilities, have enabled us to rapidly create large families of boron-based compounds with drug-like properties. We believe that these advances have made manufacturing of boron-based compounds economical on a commercial scale.
•Unencumbered intellectual property landscape. We believe the intellectual property landscape for boron-based pharmaceutical products is relatively unencumbered compared to that of carbon-based products, providing an attractive opportunity for us to build our intellectual property portfolio.
Our Strategy
Our objective is to discover, develop and commercialize proprietary boron-based drug compounds with superior efficacy, safety and convenience for the treatment of a variety of diseases. The key elements of our strategy to achieve this objective are to:
•Drive rapid, efficient discovery of novel boron-based compounds. We believe the unique characteristics of boron and the expertise we have developed allow us to design novel product candidates that target a broad range of diseases and drive a rapid and efficient drug development process. During our first ten years of operations, we discovered and advanced eight compounds that are currently in development and, in addition, have other active research and development programs ongoing.
•Focus development activities in our core therapeutic areas. We intend to focus our development activities in our core therapeutic areas of fungal, inflammatory and bacterial diseases. To fully leverage our boron chemistry platform, we have established and will continue to pursue development partnerships in these therapeutic areas.
•Commercialize our products ourselves or through partnerships in specialty markets in the United States. We intend to build a sales force and/or form one or more partnerships to focus on domestic specialty markets, such as dermatology and podiatry. We have entered into and will continue to seek commercialization partners for products in non-specialty and international markets.
•Leverage partnerships for non-core therapeutic areas. We believe boron chemistry has utility in a broad range of diseases outside of our core therapeutic areas. To maximize the value of our boron chemistry platform and to provide non-dilutive capital to support development in our core therapeutic areas, we have entered into and will continue to seek partnerships early in development for compounds in non-core areas, such as parasitic, cancer and ophthalmic indications and for applications in animal health.
•Expand and protect our intellectual property. We intend to expand and aggressively prosecute our intellectual property in the area of boron chemistry and boron-based compounds. Since a relatively limited amount of research has been done in the area of boron-based drug development, we believe that we can establish a defensible and valuable intellectual property portfolio.
Our Product Candidates
Our Topical Antifungal Programs
Tavaborole for Onychomycosis
Our most advanced product candidate is tavaborole, a topical treatment for onychomycosis, which is a fungal infection of the nail and nail bed. We have reported positive results with a high degree of statistical significance from two Phase 3 studies. We intend to file an NDA in mid-2013.
Onychomycosis Market
Onychomycosis is primarily caused by dermatophytes, which are fungi that infect the skin, hair or nails. The infection involves the nail plate, the nail bed and, in some cases, the skin surrounding the nail plate. Onychomycosis causes nails to deform, discolor, thicken, become brittle and split and separate from the nail bed. Toenails affected by onychomycosis can become so thick that routine trimming of the nails becomes difficult. The condition can also cause pain when individuals wear shoes, leading to difficulties walking. Onychomycosis can also lead to social embarrassment due to the unsightly appearance of the infected nails and because it may be perceived to be an active infection and contagious.
According to Podiatry Today, 35 to 36 million people in the United States have onychomycosis. Over 95% of onychomycosis infections are infections of the toenail, according to a report in U.S. Dermatology Review. According to the manufacturer of Lamisil, 47% of those affected by onychomycosis are not receiving treatment. For those who do seek treatment, options include debridement, oral or topical drugs or a combination of debridement and drug therapies. Debridement consists of scraping, cutting away or removal of the affected nail. Onychomycosis may persist or worsen if not treated. Onychomycosis often recurs in susceptible individuals because the fungi that cause onychomycosis are present in many common locations such as floors, the soil, socks and shoes. Consequently, the nail can be reinfected, and additional courses of treatment are frequently required even after successful treatment.
Lamisil (terbinafine), a systemic drug approved for onychomycosis, had worldwide peak sales of $1.2 billion in 2004, before generic entry. According to IMS Health, for the 12-month period ending December 31, 2010, 1.4 million new prescriptions were filled in the United States for both branded and generic versions of terbinafine. Despite its high labeled efficacy (38%), we believe the usage of branded and generic terbinafine has been limited due to safety concerns related to liver toxicity. Penlac Nail Lacquer (ciclopirox), the only U.S. approved topical agent for onychomycosis, had U.S. sales of $125.0 million in 2002, before generic entry. According to IMS Health, for the 12-month period ending December 31, 2010, over 375,000 new prescriptions were filled in the United States for branded or generic ciclopirox. While ciclopirox has been shown to be safe due in part to its topical administration, we believe the usage of branded and generic ciclopirox has been limited due to its low labeled efficacy (5.5% - 8.5%).
Limitations of Current Onychomycosis Therapies
Current therapies for onychomycosis include debridement and drug therapies. Debridement is time consuming and only marginally effective in eliminating the fungal infection. Drug therapies are
available in two types, either oral therapies such as Lamisil, or topical therapies such as Penlac. According to the Lamisil product label, 38% of patients treated in clinical trials with a 12-week course of therapy achieved 100% clear nail and mycological cure. However, Lamisil has been associated with rare cases of liver failure, some leading to death or liver transplant. We believe this risk of liver failure limits acceptance of this therapy by both physicians and patients. Patients are recommended to undergo liver function tests prior to initiating Lamisil treatment and those patients with pre-existing liver disease cannot be treated with it.
Penlac is approved for use in onychomycosis in conjunction with frequent debridement. In the two clinical trials cited on Penlac's product label, even with frequent debridement, only 5.5% and 8.5%, respectively, of patients treated with Penlac achieved 100% clear nail and mycological cure. We believe that a significant barrier to effective treatment by current topical therapies is the difficulty of formulating the drug product to penetrate through the nail plate and reach the site of infection.
Our Solution: Tavaborole
By addressing the limitations of current therapies, we believe tavaborole has a potential safety and efficacy profile that can make it a best-in-class therapy for the treatment of onychomycosis. We have completed two Phase 3 clinical trials in which tavaborole demonstrated statistically significant efficacy relative to vehicle. In both studies, tavaborole was safe and well-tolerated across study subjects. There were no serious adverse events related to study drug and the most common treatment-related adverse events were application site reactions. We believe that the clinical data that we have generated to date demonstrate potential advantages of tavaborole relative to Lamisil and Penlac.
We have designed tavaborole, our topical antifungal, with three distinguishing characteristics:
•Enhanced nail penetration properties. We utilized our expertise in medicinal chemistry to design tavaborole with enhanced nail penetration properties, allowing for improved delivery of the compound through the nail plate to the nail bed, the site of onychomycosis infection. Preclinical studies utilizing human nails indicate that tavaborole is able to penetrate the nail plate 250 times more effectively than Penlac.
•Novel mechanism of action with potent antifungal activity. We have utilized our expertise in boron-based chemistry to design tavaborole with potent antifungal activity. Tavaborole inhibits an essential fungal enzyme, leucyl-transfer RNA synthetase, or LeuRS, required for protein synthesis. The inhibition of protein synthesis leads to termination of cell growth and cell death, eliminating the fungal infection. We have shown that this inhibitory activity requires the presence of boron within the compound, as the replacement of the boron atom with a carbon atom in tavaborole inactivated the molecule. The unique boron-based mechanism of action underlying tavaborole was detailed in the June 22, 2007 issue of the journal Science.
•No detected systemic side effects after topical dosing. We have conducted clinical trials to assess systemic absorption of tavaborole. The results of these trials found that topical treatment with tavaborole resulted in low or no detectable levels of drug in the blood or urine. No treatment-related systemic side effects have been observed in any of our clinical trials, and we believe it is unlikely that treatment of onychomycosis with tavaborole will result in significant systemic side effects.
Tavaborole Phase 3 Clinical Development Program
In the first quarter of 2013, we announced the results from both Phase 3 clinical trials in which tavaborole met all primary and secondary endpoints with a high degree of statistical significance. Each Phase 3 program consisted of two double-blind, vehicle-controlled trials of approximately 600 patients each. Vehicle refers to the topical solution without the active ingredient. In each study, two-thirds of
the patients were randomized to receive tavaborole at the 5.0% concentration, or dose, compared to one-third who received vehicle once daily for 48 weeks. The primary efficacy endpoint was a composite endpoint measuring complete cure of the great toenail at week 52, which was consistent with the FDA endpoint requirement for Lamisil. Complete cure required both a mycologic cure and a completely clear nail. Mycologic cure was the absence of fungus as determined by a negative potassium hydroxide ("KOH") examination and a negative fungal culture. Achieving a clear nail required a complete elimination of the diseased portion of the nail by replacement with a new healthy growing nail and nail bed. Given the slow rate of nail growth, which is approximately one to two millimeters per month, the industry standard for conducting Phase 3 clinical trials of onychomycosis is to evaluate the nails over a 12-month period, in order to allow sufficient time for patients to grow a new nail.
In the first Phase 3 study (known as Study 301), 6.5% of patients treated with tavaborole met the primary endpoint of "complete cure" vs. 0.5% of patients treated with vehicle (p=0.001) at week 52. Among the secondary endpoints at week 52, 26.1% of patients treated with tavaborole achieved a "completely clear" or "almost clear" (£10% clinical involvement) nail vs. 9.3% in the vehicle-treated arm (p<0.001); 31.1% of patients treated with tavaborole achieved mycologic cure vs. 7.2% in the vehicle-treated arm (p<0.001)); and 15.3% of patients treated with tavaborole achieved "completely clear" or "almost clear" nail with mycological cure vs. 1.5% in the vehicle-treated arm (p<0.001). In addition to the primary and secondary endpoints noted above, 87.0% of patients treated with tavaborole had a negative fungal culture vs. 47.9% in the vehicle-treated arm (p<0.001) at week 52, and 24.6% of patients treated with tavaborole achieved "completely clear" or "almost clear" nail and negative culture vs. 5.7% in the vehicle-treated arm (p<0.001) at week 52.
In the second Phase 3 study (known as Study 302), 9.1% of patients treated with tavaborole met the primary endpoint of "complete cure" vs. 1.5% of patients treated with vehicle (p<0.001) at week 52. Among the secondary endpoints at week 52, 27.5% of patients treated with tavaborole achieved a "completely clear" or "almost clear" nail vs. 14.6% in the vehicle-treated arm (p<0.001); 35.9% of patients treated with tavaborole achieved mycologic cure vs. 12.2% in the vehicle-treated arm (p<0.001)); and 17.9% of patients treated with tavaborole achieved "completely clear" or "almost clear" nail with mycological cure vs. 3.9% in the vehicle-treated arm (p<0.001). In addition to the primary and secondary endpoints noted above, 85.4% of patients treated with tavaborole had a negative fungal culture vs. 51.2% in the vehicle-treated arm (p<0.001) at week 52, and 25.3% of patients treated with tavaborole achieved "completely clear" or "almost clear" nail and negative culture vs. 9.3% in the vehicle-treated arm (p<0.001) at week 52. In both studies, tavaborole was safe and well-tolerated across study subjects. There were no serious adverse events related to study drug and the most common treatment-related adverse events were application site reactions.
The Phase 3 trials were conducted under an SPA with the FDA and were conducted at clinical sites in the United States, Canada and Mexico. Guidance meetings have also been completed with the European Medicines Agency and regulatory authorities in Japan. Based upon these discussions, we anticipate that our Phase 3 development program will help support approval in these regions, although an additional comparator trial will likely be required in these regions.
Tavaborole Phase 2 Clinical Development Program
Our Phase 2 clinical trials of tavaborole enabled us to define multiple well-tolerated, efficacious doses and a dose-response relationship. We have also demonstrated that topical application to the toenails has led to little or no detectable systemic drug exposure in blood or urine. Results from these trials supported the selection of the 5.0% dose of tavaborole for the Phase 3 clinical trials and enabled appropriate statistical calculations for the design of those trials.
The following chart summarizes our Phase 2 clinical trials:
Tavaborole Preclinical Development Program
We believe we have completed all of the preclinical toxicology studies required for marketing approval, including a chronic (nine-month) dermal minipig study, two-year mouse and rat carcinogenicity studies and definitive characterization of ADME (absorption, distribution, metabolism, and excretion) in animals.
Former Collaboration with Schering
In February 2007, we entered into an exclusive license, development and commercialization agreement with Schering-Plough Corporation, or Schering, for the development and worldwide commercialization of tavaborole. Under the agreement, Schering paid us a $40.0 million upfront fee and $9.5 million for our development-related transition activities and assumed sole responsibility for development and commercialization of tavaborole. In addition, Schering invested $10.0 million in a preferred stock financing completed in December 2008. In October 2009, the end-of-Phase 2 meeting with the FDA was completed. In November 2009, Schering merged with Merck & Co., Inc., or Merck, and in May 2010, pursuant to a mutual termination and release agreement, we regained the exclusive worldwide rights to tavaborole. Merck did not retain any rights to this compound. Upon returning rights to tavaborole in May 2010, Merck transferred back to us all materials and documents relating to tavaborole and paid us $5.8 million. The sponsorship of the U.S. Investigational New Drug, or IND, from Schering to Anacor was completed in May 2010.
AN2718 for Topical Fungal Infections
AN2718 is our second topical antifungal in clinical development for onychomycosis and fungal infections of the skin and utilizes the same mechanism as tavaborole. AN2718 appears to be well-suited to target organisms that cause common skin and topical fungal infections, including Trichophyton and Candida fungi. Based on preclinical studies and in comparison to tavaborole, we believe that AN2718 has greater potency against the dermatophytes T. mentagrophytes and T. rubrum and results in similar nail penetration. These studies suggest that, like tavaborole, AN2718 also has significantly greater nail penetration than Penlac.
Our Phase 1 data for AN2718 has also indicated that AN2718 has a low skin irritation profile across multiple doses and that it would thus be suitable for the treatment of skin fungal infection. This Phase 1 data, which we announced in March 2009, was from a 21-day skin irritation trial. In the trial, we compared AN2718 gel at 1.5%, 2.5%, 5.0% and 7.5%, and AN2718 cream at 0.3% and 1.0% to their respective vehicles. All doses of AN2718 gel, cream and vehicle were applied to the skin of normal volunteers for 21 days using semi-occlusive, or semi-air and water-tight, adhesive patches. Application sites were then evaluated daily for signs of irritation. The irritation indices for all AN2718 doses were very low and comparable to vehicle.
Our Topical Anti-Inflammatory Programs
AN2728 for Atopic Dermatitis and Psoriasis
AN2728 is our lead topical anti-inflammatory product candidate for the treatment of atopic dermatitis and psoriasis, chronic inflammatory skin diseases that affect millions of people worldwide. To date, AN2728 has demonstrated initial tolerability and activity against atopic dermatitis in two Phase 2 studies and against psoriatic lesions in three Phase 1b, one Phase 2a, one Phase 2 and two Phase 2b clinical trials. In October 2011, we held an End-of-Phase 2 meeting with the FDA to discuss the design of Phase 3 trials of AN2728 in psoriasis and in November 2011, we filed a SPA, and reached agreement with the FDA on the major parameters associated with the design and conduct of the Phase 3 trials of AN2728 in psoriasis.
Given the safety profile exhibited by AN2728, the positive outcome from the Phase 2 atopic dermatitis trials and the large unmet medical need in atopic dermatitis relative to psoriasis, we are focusing AN2728 development activities on atopic dermatitis and will defer the start of Phase 3 trials in psoriasis.
Atopic Dermatitis Market
Atopic dermatitis is a chronic rash characterized by inflammation and itching and usually occurs in people who have a personal or family history of asthma or seasonal or perennial allergic rhinitis. In 2007, Datamonitor reported that atopic dermatitis affected approximately 40 million people across the seven major pharmaceutical markets. The condition most commonly appears in childhood, with up to 20% of children in the United States affected, and it can persist into adulthood. Atopic dermatitis is the eighth most common disease in persons under 25 years of age and is a common cause for pediatric healthcare visits, nonetheless, it continues to be frequently misdiagnosed, misunderstood and ineffectively treated. While the exact cause of atopic dermatitis is not known, patients have a number of characteristics, including: a family tendency towards atopy, i.e., asthma, hay fever and atopic dermatitis; an impaired skin barrier function; dry skin; a lower than normal threshold for itching; increased susceptibility to bacterial as well as viral, fungal and yeast skin infections and abnormal immune and/or inflammatory responses. The secondary infections and/or greater than normal levels of bacterial colonization may be due to deficiencies in these patients' innate immunity. At least some of the inflammatory responses are driven by host responses to the super antigens of Staphylococcus aureus. Lesions of atopic dermatitis are commonly red, elevated, scaly, excoriated and oozing patches and are often accompanied by intense, unrelenting pruritus. The lesions lichenification, a thickening of the skin with exaggerated skin lines, is considered to be atrophic response to chronic rubbing.
Limitations of Current Atopic Dermatitis Therapies
Current atopic dermatitis treatments attempt to reduce inflammation and itching to maintain the protective integrity of the skin. Antibiotics, antihistamines, topical corticosteroids and topical immunomodulators, either as monotherapy or in combination, are the current standard of care for atopic dermatitis. However, these can be limited in utility due to insufficient efficacy or unwanted side effects. The most recently approved non-steroidal topical therapies for atopic dermatitis were Protopic and Elidel, topical immunomodulators, which received Black Box warnings from the FDA in 2005.
Psoriasis Market
Psoriasis is a chronic inflammatory skin disease that affects approximately 7.5 million people in the U.S. and over 100 million people worldwide. Patients can be categorized as mild, moderate or severe, with approximately 80% of patients having mild to moderate forms of the disease. Psoriasis is characterized by thickened patches of inflamed, red skin covered with thick, silvery scales typically found at the elbows, knees, scalp and genital area. The disorder ranges from a single, small, localized
lesion in some patients to a severe generalized eruption. Patients with mild-to-moderate psoriasis are typically treated with a combination of topical therapies, while patients with moderate-to-severe psoriasis are typically treated with a combination of topical and systemic therapies. The recent introductions of new systemic biologic therapies have provided new treatment options for patients with moderate to severe disease and have greatly expanded amounts spent on drugs to treat psoriasis. According to LeadDiscovery, sales of psoriasis drugs in the seven major pharmaceutical markets (United States, Japan, France, Germany, Italy, Spain and the United Kingdom) were $2.5 billion in 2008. In 2009, over 4.5 million prescriptions were written for patients with psoriasis in the United States, with approximately 3.9 million of these prescriptions written for topical therapies.
Limitations of Current Psoriasis Therapies
Most psoriasis patients use more than one type of treatment at any given time and may rotate treatments over time as their disease severity changes or they develop complications. Although current treatments attempt to decrease the severity of the disease, none of them cures the disease. Currently available treatments can be classified as topical, oral, injectable or phototherapy. According to IMS Health, 84% of all prescriptions for psoriasis within the United States in 2009 were for topical treatments. The most common topical treatments are corticosteroids, vitamin D derivatives, such as Dovonex (calcipotriene), topical retinoids, such as Tazorac (tazarotene), and crude coal tar preparations. Taclonex is also a treatment for psoriasis and is a combination of calcipotriene and the high potency corticosteroid betamethasone dipropionate. The most common oral treatments are the immunosuppressive drug methotrexate and the oral retinoid acitretin. A number of injectable biologic drugs in the market include Amevive, Enbrel, Humira, Remicade, Stelara and Simponi. The majority of these drugs are monoclonal antibodies, complex protein molecules, some of which act by the inhibition of TNF-alpha. In addition to topicals, orals and injectables, psoriasis is also treated with ultraviolet light exposure. Typically, physicians initiate treatment by prescribing topical therapies to treat mild or moderate forms of psoriasis, followed by light therapy or oral treatments if the patient's disease does not improve. For patients who do not respond to oral treatments or light therapy, or for those who have moderate-to-severe psoriasis, physicians will prescribe injectable biologic treatments.
Current topical therapies have demonstrated varying levels of efficacy. However, their use has been limited due to issues of safety and tolerability. Long-term use of topical corticosteroids is associated with atrophy, or thinning, of the skin and has the potential to suppress the body's ability to make normal amounts of endogenous corticosteroids, which limit the duration of safe treatment with these therapies. Vitamin D derivatives can cause skin irritation, and some patients report burning sensations associated with their use. Topical retinoids can also cause skin irritation and have been shown to cause birth defects. Thus, their use must be avoided during pregnancy. Oral and injectable drugs have greater activity than topical therapies, but also have well-documented and significant systemic side effects, such as liver toxicity, increase in blood fats and suppression of the immune system. In addition, injectable biologic drugs are very expensive, costing tens of thousands of dollars annually. Ultraviolet light treatments can be effective, but require multiple visits to the doctor's office each week and may increase patients' risk of developing skin cancer.
Our Solution: AN2728 for Atopic Dermatitis and Psoriasis
We believe that AN2728 will have comparable efficacy to that of topical immunomodulators in treating atopic dermatitis and comparable efficacy to that of topical mid-potency corticosteroids and vitamin D analogs in treating psoriasis, but with a better safety and tolerability profile. AN2728 is a novel boron-containing small molecule that inhibits PDE-4 and reduces the production of pro-inflammatory cytokines thought to be associated with atopic dermatitis and psoriasis. If approved, AN2728 would be the first topical non-steroidal treatment that inhibits TNF-alpha release. Because AN2728 has a novel mechanism of action, it can potentially be combined with topical corticosteroids
and vitamin D analogs for patients with mild-to-moderate psoriasis. In addition, patients with severe psoriasis who combine topical and systemic therapies may use AN2728.
AN2728 Clinical Development Program
AN2728 has demonstrated tolerability and activity against atopic dermatitis in two Phase 2 studies, and against psoriatic lesions in three Phase 1b, one Phase 2a, one Phase 2 and two Phase 2b clinical trials. In October 2011 we held an End-of-Phase 2 meeting with the FDA to discuss the design of Phase 3 trials of AN2728 in psoriasis and, in November 2011, we filed a SPA and reached agreement with the FDA on the major parameters associated with the design and conduct of the Phase 3 trials of AN2728 in psoriasis. Given the safety profile exhibited by AN2728 in 15 clinical studies, the positive outcome from the two Phase 2 atopic dermatitis trials and the large unmet medical need in atopic dermatitis relative to psoriasis, we are focusing AN2728 development activities on atopic dermatitis and will defer the start of Phase 3 trials in psoriasis.
The following chart summarizes our AN2728 clinical trials to date for atopic dermatitis and psoriasis:
Phase 2 Clinical Development Program in Atopic Dermatitis
In December 2011, we announced the results of our first Phase 2 trial of AN2728 for the treatment of atopic dermatitis. The primary endpoint was successfully achieved after 28 days of twice-daily treatment. In the final analysis, 68% of AN2728-treated lesions showed greater improvement in the Atopic Dermatitis Severity Index (ADSI) versus 20% for vehicle (p = 0.02). There were no severe adverse events reported that were considered related to AN2728 and the most common treatment-related adverse events were application site reactions.
In December 2012, we announced results from our second Phase 2 study of AN2728 for the treatment of atopic dermatitis. It was our first study in adolescents with atopic dermatitis, and the first study in which we have evaluated the effect of treating all of a patient's atopic dermatitis and measured the improvement using the Investigator Static Global Assessment (ISGA), the same scale used by the FDA to evaluate the most recently approved topical treatments for atopic dermatitis. The ISGA is a 5-point scale from 0 ("clear") to 4 ("severe"). 35% of patients achieved an ISGA score of 'clear' or 'almost clear' with a minimum 2-grade improvement. In addition, AN2728 demonstrated a promising safety profile when treating adolescents. The Phase 2 open-label study enrolled 23 adolescent patients, with mild-to-moderate atopic dermatitis involving 10-35% of treatable body surface area (BSA). Mild-to-moderate atopic dermatitis was defined as an ISGA score of 2 ("mild") or 3 ("moderate"). Patients were instructed to apply AN2728 ointment, 2% twice daily for 28 days. The primary endpoints were an assessment of safety and tolerability based on the frequency and severity of systemic and local adverse events (AEs) as well as the pharmacokinetic profile. Secondary endpoints included assessment of change in ISGA score as well as individual signs and symptoms of atopic dermatitis.
We are currently conducting a Phase 2 dose-ranging study in 60-80 adolescents with atopic dermatitis at sites in the U.S. and Australia, in order to establish dosing parameters for planned Phase 3 studies. The Phase 2 study is a bilateral study in which patients apply AN2728 ointment, 2% to one lesion and AN2728 ointment, 0.5% to a similar lesion either once or twice daily. We expect results from this study in March 2013, and future development plans will be finalized following the results of this study.
Phase 2 Clinical Development Program in Psoriasis
Psoriasis is often bilateral and symmetrical, meaning that patients with psoriasis commonly have similar areas of psoriasis on opposing sides of their body. Three of our Phase 2 studies of AN2728 for the treatment of psoriasis were designed as bilateral studies in which patients treat one of their plaques with one treatment and a similar plaque or the other side of the body with a comparison treatment. This allowed patients to serve as their own control.
In March 2008, we completed a Phase 2a bilateral trial of AN2728 to characterize the safety profile and to assess efficacy. In this trial, patients, in a double-blinded fashion, treated one of their areas of psoriasis with AN2728 5.0% ointment and a matching area on the opposite side of the body with the vehicle alone. The trial treated 35 patients with mild-to-moderate psoriasis. The primary endpoint was the proportion of patients in whom the AN2728-treated area improved more than the vehicle-treated area based on the overall target plaque severity score, or OTPSS. The OTPSS is a scoring system used by investigators that characterizes severity of disease, which ranges from zero (no evidence of disease) to eight (very severe). Based on the OTPSS after four weeks, the trial achieved its primary endpoint, with 69% of the AN2728 treated plaques demonstrating a lower score than the vehicle treated plaques as compared to 6% of the vehicle treated plaques (p-value less than 0.001). Significant differences were also noted after two weeks and three weeks and in all secondary endpoints, including scaling, erythema and plaque elevation. In addition to no serious adverse events, there were no treatment-related adverse reactions or application site reactions.
In December 2008, we completed a Phase 2 double-blind bilateral trial comparing 5.0% AN2728 ointment and vehicle using a design similar to our Phase 2a study but using a longer treatment duration. In this Phase 2 study, patients with mild-to-moderate psoriasis applied AN2728 and vehicle twice daily for 12 weeks in order to define the optimal duration of therapy. Results showed statistically significant reductions in the OTPSS, as well as in the individual signs of psoriasis, such as erythema, scale and plaque thickness at several time points. Compared to those treated with vehicle, psoriasis plaques treated with AN2728 achieved a lower OTPSS in a significantly greater proportion of patients after as few as two weeks of treatment, with optimal responses seen at six and eight weeks (p-value less than 0.001 and 0.01, respectively). Thirteen percent of the treated plaques cleared completely and 43% of the plaques achieved clear or almost clear with a two-grade improvement from baseline. Treatments were generally well-tolerated with the most common side effect being irritation at the application site. During the course of the trial, one serious adverse event was reported in a patient who developed a rash after receiving an injection of penicillin outside of the trial for a sore throat and needed to be hospitalized for this non-life threatening reaction.
In June 2010, we completed a 145-patient randomized, double-blind, vehicle-controlled, multicenter, Phase 2b bilateral dose-ranging trial to evaluate the safety and efficacy of 0.5% and 2.0% AN2728 ointment, applied either once or twice daily for 12 weeks for the treatment of mild-to-moderate psoriasis. Compared to those treated with vehicle, psoriasis plaques treated with AN2728 achieved greater improvement in the OTPSS in a significantly higher proportion of patients after six weeks in the 2.0% AN2728 twice daily dosing group (p-value less than 0.001), which was the primary endpoint of the trial. A dose response was also observed across the four dosing groups for this outcome. Additionally, of those plaques treated for 12 weeks with 2.0% AN2728 twice daily, 54% achieved complete or near complete clearance with at least a two-grade improvement from their baseline severity score.
In June 2011, we completed the final Phase 2b trial to evaluate the safety and efficacy of AN2728 in patients with mild-to-moderate psoriasis under the anticipated conditions of expected Phase 3 trials to provide preliminary indications of efficacy and local tolerability and systemic safety when treating all or nearly all of the plaques on each subject. 68 subjects were randomized in a 2:1 ratio, AN2728 to vehicle. Subjects treated with AN2728 showed improvement over vehicle at each of the recorded timepoints during the 12-week study period with peak efficacy (defined by proportion of subjects achieving complete or near complete clearance of treated psoriasis plaques) of 26% occurring after six weeks of treatment with AN2728.
Phase 1 Clinical Trials in Psoriasis
We have completed three Phase 1b clinical trials of AN2728. These trials utilized a microplaque design in which each patient had small areas of a large psoriatic lesion treated with various medications for 12 days. Each of the treatment areas was evaluated at days one, eight and twelve. The primary endpoint for each of these trials was the change in thickness of the psoriatic lesion as measured by sonography, and the secondary endpoint was improvement based on clinical score as evaluated by a physician. No treatment-related adverse events were observed in these trials.
In March 2007, we completed our first Phase 1b microplaque clinical trial of AN2728 in patients with psoriasis. The study enrolled 12 patients for a 12-day treatment and compared AN2728 5.0% ointment, AN2728 5.0% cream, Betnesol-V cream (betamethasone valerate, a mid-potency corticosteroid) and Protopic ointment (tacrolimus, an immunomodulator), vehicle cream and vehicle ointment. This study demonstrated that AN2728 caused a significant reduction in the thickness of psoriatic lesions compared to both vehicles, at a p-value of 0.025. The mean percent reduction in infiltrate thickness for AN2728 was 54%, as compared to 48% for Protopic and 72% for Betnesol-V. The results of the secondary endpoint paralleled the results of the primary endpoint.
In December 2007, we completed our second Phase 1b microplaque clinical trial of AN2728 in patients with psoriasis. This study was a dose-ranging study designed to compare 0.5%, 2.0% and 5.0% AN2728 ointment, Betnesol-V cream, Protopic, and the ointment vehicle. Based on the primary endpoint, which was the change in the thickness of the inflammatory infiltrate, all three concentrations were significantly better than the ointment vehicle (p-values less than 0.003). The mean percent reductions for 5.0%, 2.0% and 0.5% AN2728 ointment were 36%, 35%, and 26%, respectively. The percent reductions for Betnesol-V and Protopic were 59% and 34%, respectively.
In March 2008, we completed our third Phase 1b microplaque trial in patients with psoriasis. This was a study designed to compare 0.3%, 1% and 2% AN2728, Betnesol-V and vehicle. The study enrolled 12 patients for a 12-day treatment. In the study, 1% and 2% AN2728 demonstrated significant improvement over vehicle and 0.3% AN2728 demonstrated a strong trend in superiority over vehicle.
In February 2012, we announced results for a Maximal Use Systemic Exposure (MUSE) study in psoriatic patients and a local tolerability study in healthy volunteers. The MUSE study was designed to obtain a full pharmacokinetic profile in psoriatic patients under Phase 3 maximal use conditions. The multi-center, open label study enrolled 33 patients with extensive psoriasis with a mean involvement of 38% of total body surface area. Patients applied AN2728 Ointment, 2% twice daily for eight days. No serious adverse events were reported and no subjects discontinued early from the study. Application of AN2728 Ointment, 2% on larger body surface areas resulted in higher plasma exposure levels but did not correlate with greater adverse events. The local tolerability study was designed to examine the potential irritancy of AN2728 Ointment, 2% when applied to sensitive skin areas such as the face, skin folds (groin, armpits), genitals, etc. This single-center, double-blind, vehicle-controlled study randomized 32 adult healthy volunteers (3:1) to receive AN2728 Ointment, 2% or Ointment vehicle. Subjects applied study drug as instructed twice daily for 21 days to sensitive skin areas. At each of seven visits, each tolerability parameter was graded on a scale of 0 (none) to 3 (severe) in intervals of 0.5. Overall, almost 99% of the nearly 8,700 tolerability measurements were scored as 0 (none). None of the treated anatomic areas appeared to be particularly sensitive to irritation by the study drug or vehicle. No serious adverse events were observed in the trial. Adverse events occurred at a low rate and were generally mild.
AN2898 for Atopic Dermatitis and Psoriasis
AN2898 is our second anti-inflammatory product candidate for atopic dermatitis and psoriasis. Like AN2728, AN2898 is a novel boron-containing small molecule that inhibits PDE-4 and reduces the production of pro-inflammatory cytokines believed to be associated with atopic dermatitis and psoriasis.
In February 2009, we initiated a Phase 1b study evaluating AN2898 in 12 patients with plaque-type psoriasis for 12 days. This was a microplaque study conducted in a similar fashion as the AN2728 microplaque trials. Achieving its primary endpoint, this study demonstrated that AN2898 caused a significant reduction in the thickness of psoriatic lesions compared to vehicle, at a p-value less than 0.0001. The mean percent reduction in infiltrate thickness on day 12 for AN2898 was 39%, as compared to 60% for Betnesol-V, the positive control. The results relative to the secondary endpoint (clinical response) paralleled those of the primary endpoint.
In a cumulative irritation trial completed in the first quarter of 2009, AN2898 ointment at 5.0% and its vehicle were applied daily to the skin of normal volunteers under occlusive, adhesive patches for four consecutive days. Application sites were evaluated daily for signs of irritation. No irritation potential was seen for 5.0% AN2898 ointment or the vehicle.
In December 2011, we completed a Phase 2a study of AN2898 in atopic dermatitis. In this multicenter, randomized, double-blind, vehicle-controlled, bilateral comparison study, 46 patients with mild-to-moderate dermatitis were randomized (1:1) to receive either AN2728 Ointment, 2% vs. Ointment vehicle or AN2898 Ointment, 1% vs. Ointment vehicle, applied twice daily to two similar
target lesions on the trunk or extremities for six weeks. The primary endpoint for both compounds was successfully achieved after 28 days of twice-daily treatment.
Our Gram-Negative Antibiotic Program
AN3365 for Gram-Negative Infections
AN3365 is our lead antibiotic product candidate for the treatment of infections caused by Gram-negative bacteria. In July 2010, GSK exercised its option to obtain an exclusive license to develop and commercialize AN3365 and assumed responsibility for further development of the product candidate and any resulting commercialization. In June 2011, GSK initiated two Phase 2b trials for cUTI and cIAI. In March 2012, GSK voluntarily discontinued certain of its current clinical trials of AN3365 due to a microbiological finding in a small number of patients in the Phase 2b trial for the treatment of cUTI. In October 2012, GSK advised us that it had discontinued further development of AN3365 and all rights to this compound reverted to us. We are considering our options for further development, if any, of this compound.
Limitations of Current Gram-Negative Antibiotics
Traditionally, Gram-negative infections have been treated with antibiotics, particularly beta-lactams, including penicillins, cephalosporins and carbapenems, and quinolones, including flouroquinolones. However, the effectiveness of existing antibiotics has been declining due to increasingly prevalent drug resistance. Bacteria develop resistance to drugs through genetic mutations or by acquiring genes from other bacteria that have become resistant. For example, in a recent survey of resistance rates of Gram-negative bacteria to current therapies in the United States, the resistance of E. coli to fluoroquinolones has been dramatically increasing. For example, resistance of E. coli to ciprofloxacin increased from 4% in 1999 to 30% in 2008 and resistance of E. coli to levofloxacin increased from 10% in 2003 to 30% in 2008. Over the same period, resistance of another Gram-negative bacteria, Klebsiella pneumoniae, to third generation cephalosporins, such as ceftriaxone and ceftazidime, increased from virtually no resistance to 15%. The same survey also showed that by 2008, 17%-19% of Pseudomonas aeruginosa were resistant to fluoroquinolones, 10%-70% were resistant to third generation cephalosporins and 7%-15% were resistant to carbapenems, such as meropenem and imipenem. Therefore, there is an ongoing need for novel antibiotics to combat the widespread proliferation of antibiotic resistance, particularly for Gram-negative bacteria. Additionally, currently marketed products have side effect profiles that can include nausea, diarrhea, vomiting, rash, insomnia, and potential liver toxicity. Also, currently approved antibiotics specifically targeting infections caused by Gram-negative bacteria are only available in either IV or oral formulations, but not both, so patients cannot continue on the same antibiotic therapy they received in the hospital once they are discharged.
Our Solution: AN3365
AN3365 is a novel boron-based, small molecule product candidate that targets the bacterial enzyme leucyl tRNA synthetase. The inhibition of protein synthesis leads to termination of cell growth and cell death, eliminating the bacterial infection. Preclinical studies suggest that AN3365 could be a novel approach for the treatment of infections caused by Gram-negative bacteria, including E. coli, Klebsiella pneumoniae, Citrobacter spp., S. marcescens, P. vulgaris, Providentia spp., Pseudomonas aeruginosa and Enterobacter spp. AN3365 has demonstrated a favorable profile in preclinical safety and toxicology studies. Results from a Phase 1 proof-of-concept trial showed that AN3365 demonstrated a promising safety profile and linear dose-proportional pharmacokinetic properties, reaching blood levels that were multiple times higher than the anticipated efficacious dose.
AN3365 Development Program
In November 2009, we initiated a Phase 1 dose-escalating clinical study for AN3365, to evaluate the safety, tolerability and pharmacokinetics of AN3365 in healthy volunteers. The randomized, double-blind, placebo-controlled, dose-escalation study enrolled 72 subjects. Participants in this study received AN3365 in single or multiple doses for treatment durations of up to 14 days and included doses that achieve blood levels that are approximately four times the expected efficacious blood levels based on our preclinical studies. In June 2010, we reported Phase 1 results showing that AN3365 appeared to be safe and well-tolerated. In July 2010, GSK exercised its option to obtain an exclusive license to develop and commercialize AN3365. Upon exercise of the option, we received a fee of $15.0 million. In June 2011, GSK initiated two Phase 2b trials for cUTI and cIAI.
In March 2012, GSK voluntarily discontinued its current clinical trials of AN3365 due to a microbiological finding in a small number of patients in the Phase 2b trial of AN3365 for the treatment of cUTI. In October 2012, GSK advised us that it had discontinued further development of AN3365 and all rights to this compound reverted to us. We are considering our options for further development, if any, of this compound.
Our Animal Health Program
Animal Health
In August 2010, we established a research and development agreement with Lilly to create and develop new therapeutics for animal health. In August, 2011, Lilly selected its first development candidate and, in December 2012, Lilly selected a second development candidate, each for undisclosed indications in animal health. We received a $1 million milestone payment for each candidate selection.
Animal Health Market
The animal health market is focused on providing a quality life to animals that are generally categorized as companion animals or food animals. The market is driven primarily by two main factors: pet owners in the United States and Europe demanding more advanced and expensive treatments for companion animals, and the growing world population has increased the demand for food animals requiring improvements in livestock health care and feeding in food animal production. Pharmaceutical products in animal health include vaccines, antibiotics, antifungals, anti-parasitics and medical feed additives. The market for animal health products is approximately $20 billion a year with an annual growth rate averaging over 6% in the last 10 years. The top-selling animal health products are anti-parasitics for companion animals and generate annual sales of almost a $1 billion a year.
Our Animal Health Development Candidates
Our boron chemistry platform has demonstrated the potential to treat a number of diseases caused by bacteria, fungi and parasites, some of the leading causes of diseases in animals. As a result of some of our work in human neglected diseases, we identified the opportunity to address unmet medical needs in animals as well. Lilly funded the research that resulted in the discovery of the two selected development candidates and will be responsible for their future development and commercialization. Anacor is eligible to receive additional development and regulatory milestones as well as tiered royalties from the high single digits to in-the-tens on future sales.
Our Neglected Diseases Initiatives
AN5568 for Sleeping Sickness
AN5568 is a boron-based compound currently in Phase 1 clinical trials for sleeping sickness. In December 2007, we established a partnership with DNDi to develop new therapeutics for sleeping
sickness, visceral leishmaniasis and Chagas disease. In March 2012, DNDi commenced Phase 1 human clinical trials of AN5568 in sleeping sickness. AN5568 is a product of Anacor's boron chemistry and the first oral drug candidate for this indication.
Sleeping Sickness
Sleeping sickness threatens millions in 36 countries in sub-Saharan Africa and is fatal if left untreated. The disease is caused by parasites transmitted by the bite of a tsetse fly and is often asymptomatic for years until the infection reaches "stage 2" where it crosses into the central nervous system and brain. Without effective treatment, sleeping sickness is fatal.
Limitations of Current Sleeping Sickness Treatments
Currently available treatments are limited to drugs developed decades ago that are either highly toxic, difficult to administer in resource-limited settings or only effective in one stage of the disease. In addition, prior to being treated, the stage of the disease must be determined using a diagnostic spinal tap to extract cerebrospinal fluid from the patient. Two-thirds of all reported sleeping sickness cases are found in the Democratic Republic of the Congo (DRC), where healthcare is often inaccessible to large parts of the population due to violent conflict, great distances patients must travel to health facilities and extreme poverty.
Our Solution: AN5568
In pre-clinical studies, AN5568 demonstrated safety and the ability to cross the blood-brain barrier making it efficacious against stage 1 and stage 2 of the disease. In addition, its oral formulation, short duration of therapy and excellent pre-clinical safety profile suggest that it could change the way sleeping sickness is treated, reduce its incidence in humans, and contribute to elimination of the disease.
Research Activities
Internal Research Activities
Our internal research activities include follow-on research to our existing compounds as well as investigation of novel activity of our boron chemistry platform in multiple therapeutic applications. Key efforts currently include the further development of topical and systemic PDE-4 inhibitors for the treatment of inflammatory diseases, the development of novel anti-infectives against targets not covered in our existing GSK collaboration, and work on novel kinase inhibitors.
Neglected Diseases Initiatives
Neglected diseases are defined as diseases that disproportionately affect the world's poorest people, including tuberculosis, or TB, malaria, visceral leishmaniasis, Chagas disease, sleeping sickness, and filarial worms. Despite the fact that these diseases cause significant morbidity and mortality worldwide, and that the current standards of care are difficult to administer, have significant toxicities and are increasingly becoming less effective due to resistance, there has been little investment in developing new therapies for these diseases due to the absence of a reasonable expectation of a financial return.
Our boron chemistry platform appears to be particularly well suited for the treatment of these types of infectious diseases, and we feel a responsibility to apply our technology to the development of new treatments. Until such time as we are profitable, however, we are committed to doing that research only when we can use grants and other non-dilutive sources of funding in a cash-neutral manner.
In recent years, a number of foundations and governments have created public- private partnerships to address this gap by funding promising technologies that may result in new drugs. In December 2007, we established a partnership with the DNDi to develop new therapeutics for sleeping sickness, visceral leishmaniasis and Chagas disease. In March 2012, DNDi initiated the first Phase 1 clinical trial of AN5568 in humans for sleeping sickness. In May 2009, we established a collaboration with the Global Alliance for TB Drug Development. In April 2010, we entered into a research collaboration with the MMV to identify lead compounds for the treatment of prophylaxis of malaria and in March 2011 we also entered into a development agreement with MMV to develop compounds for the treatment of malaria. In December 2010, we entered into a collaboration with the Sandler Center for Drug Discovery at the University of California at San Francisco to discover new drug therapies for the treatment of river blindness, a parasitic disease that is the second leading cause of infectious blindness worldwide.
Our work in this area also allows us the potential benefits of expanding the chemical diversity of our boron compounds, understanding new properties of our boron compounds, receiving future incentives, such as the potential grant of a priority review voucher by the FDA, and, ultimately if a drug is approved, potential revenue in some regions.
Collaboration with GSK
In October 2007, we entered into a research and development collaboration, option and license agreement with GSK for the discovery, development and worldwide commercialization of boron-based systemic anti-infectives. Under the agreement, we are currently working to identify and develop product candidates in three target-based project areas. The collaborative research term of the agreement is six years, subject to an extension of up to two years if agreed to by both parties.
Pursuant to the agreement, GSK paid us a $12.0 million non-refundable, non-creditable upfront fee in October 2007. In addition, GSK invested $30.0 million in a preferred stock financing completed in December 2008. Subsequently, in November 2010, GSK invested an additional $5.0 million in our common stock in connection with our initial public offering.
In July 2010, GSK exercised its option to obtain an exclusive license to develop and commercialize AN3365 for the treatment of infections caused by Gram-negative bacteria. Upon exercise of the option, we received a licensing fee of $15.0 million. GSK assumed responsibility for further development of the product candidate and any resulting commercialization. In June 2011, GSK initiated two Phase 2b trials for complicated urinary tract infections and complicated intra-abdominal infections. In March 2012, GSK voluntarily discontinued certain of its current clinical trials of AN3365 due to a microbiological finding in a small number of patients in the Phase 2b trial of AN3365 for the treatment of cUTI. In October 2012, GSK advised us that it had discontinued further development of AN3365 and all rights to this compound reverted to us. We are considering our options for further development, if any, of this compound.
In September 2011, we amended and expanded our agreement with GSK and received a $5.0 million upfront payment. The amended agreement provides an option for GSK to expand its rights around the bacterial enzyme target LeuRS in return for a milestone payment ranging from $5.5 million to $6.5 million, depending upon the timing of such payment. Any future work under the collaboration directed towards LeuRS will be funded by GSK through a collaborative research program under which Anacor and GSK would pursue additional drug candidates to candidate selection, following which, GSK would have the right to undertake further development and commercialization. Anacor would be eligible for additional milestones, which range from up to $189.4 million to $264.0 million in the aggregate per product candidate, and royalties in the high single digits on sales of resulting products. In addition, the amendment to the collaboration adds a new program for TB, under which GSK will fund Anacor's TB research activities through to candidate selection. Upon meeting candidate selection
criteria, GSK will have the option to license TB compounds and would be responsible for all further development and commercialization. Anacor would be eligible for additional milestones and royalties on sales of resulting products. The amendment also includes the option for GSK to acquire rights to Anacor's malaria program, currently being developed through a collaboration with MMV. Anacor and MMV will continue to conduct preclinical, Phase 1 and Phase 2 proof of concept studies, and GSK will have the option to license the program on an exclusive worldwide basis upon achieving Phase 2 proof of concept. Upon exercise of this option, Anacor would receive $5 million, less $1.7 million that will be paid to MMV as reimbursement for previously received funding and that will be reinvested in future anti-malarial research. Anacor would also be eligible for additional milestones and royalties on sales of resulting products. GSK is obligated to pay us tiered royalties with on annual net sales of products containing licensed compounds in jurisdictions where there is a valid patent claim covering composition of matter or method of use of the product and lesser royalties for sales in jurisdictions where there is no such valid patent claim. Such royalties shall continue until the later of expiration of such valid patent claims or ten years from the first commercial sale on a product-by-product and country-by-country basis.
To date, in addition to the $17.0 million upfront payments and $15.0 million option exercise fee, we have received $10.1 million for achievement of performance milestones, including milestones for lead declaration, candidate selection and first patient dosing in a Phase 1 clinical trial of AN3365. We have also received milestone payments for lead declarations in two other GSK programs.
The agreement provides for a joint research committee to oversee the research collaboration, and a joint patent subcommittee responsible for coordination of intellectual property developed by the collaboration, including patent application filing. We and GSK have appointed an equal number of members to each such committee and decisions are made on a consensus basis, except that ultimate decision-making authority with respect to determining whether candidate selection criteria have been met, is vested in GSK. Unless earlier terminated, the agreement will continue in effect until expiration of all payment obligations under the agreement. GSK retains the unilateral right to terminate the agreement in its entirety upon six months prior written notice to us and immediately with respect to any project. Either party may also terminate the agreement, on a project-by-project basis or in its entirety, for any uncured material breach of the agreement by the other party. Either party may also terminate the agreement upon specified actions relating to insolvency of the other party. In the event of unilateral termination by GSK, all rights granted by us to GSK with respect to the project to which such termination applies would terminate and we would retain the rights to any compounds relating to such project. In the event of termination by GSK for cause, GSK would have a perpetual exclusive license under our intellectual property to develop and commercialize any project compounds to which such termination applies, subject to GSK's payment to us of specified royalties on sales of such compounds. In the event of termination by us for cause, we would have a perpetual exclusive license under GSK's intellectual property to develop and commercialize any project compound to which such termination applies, subject to payment by us to GSK of specified royalties on sales of such compounds.
For a specified period following the effective date of the agreement, subject to certain exceptions, we may not research, optimize, develop or commercialize outside of the collaboration any compounds that we progressed through the project, or any other compounds directed against the same target, unless GSK's option to such compound terminated without being exercised or GSK later terminates its license to such compound after exercising such option. If we choose to develop such compounds after expiration of GSK's option or termination of GSK's license, we may be required under certain circumstances to make certain regulatory milestone and royalty payments to GSK for such compounds.
Upon a change of control of either party, the agreement would remain in effect. Upon a change of control of Anacor, GSK has the right to elect to exercise any remaining options to license and commercialize compounds then under development pursuant to the research collaboration.
Collaboration with Eli Lilly and Company
In August 2010, we entered into a research agreement with Eli Lilly and Company, or Lilly, under which we will collaborate to discover products for a variety of animal health applications and Lilly will be responsible for worldwide development and commercialization of compounds advancing from these efforts. The collaboration combines our boron-based technology platform and drug research capabilities with Lilly's expertise in the area of animal health. We received an upfront payment of $3.5 million and, through December 31, 2012, we have received $7.1 million in research funding with the potential to receive up to a total of $12.0 million in research funding, if neither party cancels our existing contract prior to the completion of the research term. In both 2012 and 2011, we received milestone payments of $1.0 million each from Lilly for the selection of development compounds in animal health under this collaboration. In addition, we will be eligible to receive payments upon the achievement of development and regulatory milestones, as well as tiered royalties, escalating from high single digits to in-the-tens, on sales depending in part upon the mix of products sold. Such royalties continue through the later of expiration of our patent rights or six years from the first commercial sale on a product-by-product and country-by-country basis.
Unless earlier terminated, the agreement continues in effect until the termination of royalty payment obligations. The agreement allows for termination by Lilly upon written notice, with certain additional payments to us and a notice period that has a duration dependent on whether the notice is delivered prior to the first regulatory approval of a product under the agreement or thereafter. In addition, either party may terminate for the other party's uncured material breach of the agreement. In the event of termination by us for material breach by Lilly or termination upon written notice by Lilly, Lilly would assign to us certain trademarks and regulatory materials used in connection with the products under the agreement and grant to us an exclusive license under Lilly's patent rights covering such products, and we would pay to Lilly a reasonable royalty on sales of such products should we desire an exclusive license. In the event of termination for material breach by us, Lilly will be entitled to a return of all research funding payments for expenses we have not incurred or irrevocably committed.
Collaboration with Medicis
In February 2011, we entered into a research and development option and license agreement with Medicis Pharmaceutical Corporation, or Medicis, to discover and develop boron-based small molecule compounds directed against a target for the potential treatment of acne.
Under the terms of the agreement, we received a $7.0 million upfront payment from Medicis and will be primarily responsible, during a defined research collaboration term, for discovering and conducting early development of product candidates which utilize our proprietary boron chemistry platform. Medicis will have an option to obtain an exclusive license for products covered by the agreement. We will be eligible for future research, development, regulatory and sales milestones of up to $153.0 million, as well as high single-digit to in-the-tens royalties on sales of products that Medicis licenses pursuant to its option. Following option exercise, Medicis will be responsible for further development and commercialization of the licensed products on a worldwide basis.
If Medicis exercises its option for a product candidate, the agreement will continue in effect until the expiration of royalty payment obligations, which obligations will run through the later of patent or regulatory exclusivity and 7 years from first commercial sale, on a product-by-product basis. Upon the expiration of such payment obligations for a product under the agreement, Medicis will retain an exclusive, fully paid and royalty-free right and license in such product. The agreement allows for at-will termination by Medicis upon written notice, and either party may terminate for the other party's uncured material breach of the agreement or specified activities related to insolvency. In the event of at-will termination by Medicis or termination by us for material breach or insolvency activities by
Medicis, all rights granted by us to Medicis would revert to us, and Medicis would be required to grant to us a non-exclusive license under its patent rights covering products under the agreement. If we materially breach the agreement prior to the completion of the research collaboration term and exercise of the option, Medicis would be entitled to either terminate the agreement or continue with the agreement and terminate the research collaboration term, in which case Medicis would have a right to reduce its financial obligations to us or recover its costs to mitigate the damages resulting from such breach.
We have agreed not to research or develop, with respect to the target that is the subject of the agreement, any small molecule products in a specified field for use in humans for a period of 11 years. Medicis has agreed not to research or develop with respect to the target that is the subject of the agreement any boron-containing compound for 9 years from the date of the agreement or, if a certain milestone is not met, for 4 years from the date of the agreement.
On November 28, 2012, we filed for arbitration with JAMS for breach of contract by Medicis seeking damages related to payment for the achievement of certain preclinical milestones under the agreement. On December 11, 2012, apparently in reaction to our filing the arbitration demand, Medicis filed a complaint for breach of the agreement and a motion for preliminary injunction in the Delaware Court of Chancery seeking to enjoin us from prosecuting our claims through arbitration and to require us to continue to use diligent efforts to conduct research and development under the agreement. On January 16, 2013, we filed a motion requesting that the Delaware Court of Chancery dismiss the Medicis suit and send the dispute back to arbitration. On February 15, 2013, Medicis filed a brief in opposition to our motion to dismiss in favor of arbitration. On March 4, 2013, we filed a reply brief in support of our motion to dismiss. We intend to vigorously enforce our rights under the agreement and believe we have meritorious defenses against Medicis' filed complaint and motion. Medicis was acquired by Valeant in December 2012.
Sales and Marketing
Our strategy is to develop, or enter into a partnership to develop, a sales force targeting podiatrists, dermatologists and other specialty markets in the United States and to collaborate with other companies for sales into primary care markets. In addition, we plan to enter into agreements with third parties to commercialize our products outside of the United States.
We expect that if tavaborole and AN2718 are approved, primary care physicians will write a significant portion of prescriptions for these compounds in the United States, and we expect half of overall sales will be within the United States. Accordingly, we plan to enter into a partnership to target primary care physicians in the United States. We also anticipate that, if tavaborole, AN2718, AN2728 and AN2898 are approved, dermatologists and podiatrists will write a significant number of tavaborole and AN2718 prescriptions, and dermatologists will write a majority of prescriptions for AN2728 and AN2898, which we expect to address with our own sales force in the United States. If AN2728 and AN2898 are approved, we intend to sell these products for atopic dermatitis and psoriasis to dermatologists in the United States, and license commercialization rights to these product candidates to third parties for sales outside of the United States.
Intellectual Property
Previous efforts to produce boron-based drugs have been centered largely on boronic acids as serine protease inhibitors, such as the oncology treatment Velcade. Our research concentrates on different biological targets and uses novel boron-based compounds where we believe there is little existing intellectual property held by others. Some of our intellectual property related to our product candidates was initially developed by us or our subcontractors. In the course of our development and
commercialization collaborations, intellectual property relating to our product candidates may be developed by us and/or our collaborators, such as GSK, Lilly or Medicis.
As of February 1, 2013, we were the owner of record of 14 issued U.S. patents (U.S. Pat. No. 7,390,806; U.S. Pat. No. 7,888,356; U.S. Pat. No. 7,652,000; U.S. Pat. No. 7,465,836; U.S. Pat. No. 7,968,752; U.S. Pat. No. 8,106,031; U.S. Pat. No. 7,582,621; U.S. Pat. No. 7,767,657; U.S. Pat. No. 8,115,026; U.S. Pat. No. 8,039,451; U.S. Pat. No. 8,168,614; U.S. Pat. No. 7,816,344; U.S. Pat. No. 8,039,450; and U.S. Pat. No. 8,343,944) and 15 non-U.S. patents (4 New Zealand patents, 3 South African patents, 2 Australian patents, 1 Japanese patent, 1 Israeli patent, 1 Russian patent, 1 Singaporean patent, 1 Moroccan patent and 1 Algerian patent). We are actively pursuing, either solely or with a collaborator, 24 U.S. patent applications (2 provisional and 22 non-provisional), 4 international (PCT) patent applications and 135 non-U.S. patent applications in at least 39 jurisdictions, including Australia, Brazil, Canada, China, Europe, Hong Kong, India, Israel, Japan, Mexico, New Zealand, Russia, South Africa and South Korea. Of these actively pursued applications, 1 non-provisional U.S. patent application and 16 non-U.S. patent applications are solely owned by a collaborator as of February 1, 2013.
Our patent filings seek to protect innovations created by us and/or our collaborators, such as composition of matter (compound or pharmaceutical formulation), method of use and method of making. As of February 1, 2013, claims have issued in the United States (U.S. Pat. No. 7,582,621 and U.S. Pat. No. 7,767,657), Australia, Israel, Japan, New Zealand, South Africa and Russia that cover the use of tavaborole to treat onychomycosis and/or pharmaceutical formulations containing tavaborole. As of February 1, 2013, claims have issued in the United States (U.S. Pat. No. 8,115,026), which cover a method of making tavaborole. As of February 1, 2013, claims have issued in Australia, Israel, New Zealand, South Africa and Russia that cover the use of AN2718 to treat onychomycosis and/or pharmaceutical formulations containing AN2718. Due to the existence of an expired U.S. patent relating to a non-pharmaceutical use of the compounds, we are not pursuing a claim solely covering tavaborole or AN2718 as a compound. As of February 1, 2013, claims have issued in the United States (U.S. Pat. No. 8,039,451) and Australia that cover AN2728 as a compound as well as pharmaceutical formulations containing AN2728. As of February 1, 2013, claims have issued in the United States (U.S. Pat. No. 8,168,614) and New Zealand that cover the use of AN2728 to treat psoriasis and/or atopic dermatitis. As of February 1, 2013, claims have issued in Australia that cover AN2898 as a compound as well as pharmaceutical formulations containing AN2898. As of February 1, 2013, claims have issued in the United States (U.S. Pat. No. 8,168,614) and New Zealand that cover the use of AN2898 to treat psoriasis and/or atopic dermatitis. U.S. Pat. No. 7,816,344 claims AN3365 as a compound as well as part of a pharmaceutical formulation. U.S. Pat. No. 7,390,806, U.S. Pat. No. 7,465,836, U.S. Pat. No. 7,968,752, U.S. Pat. No. 8,106,031, U.S. Pat. No. 8,039,450, and U.S. Pat. No. 8,343,944 claim compounds that do not relate to our current product candidates. U.S. Pat. No. 7,465,836, U.S. Pat. No. 7,888,356, U.S. Pat. No. 8,039,450 and U.S. Pat. No. 8,343,944 claim pharmaceutical formulations that do not relate to our current product candidates. U.S. Pat. No. 7,465,836, U.S. Pat. No. 7,652,000, U.S. Pat. No. 7,888,356, U.S. Pat. No. 7,968,752 and U.S. Pat. No. 8,343,944 claim methods of using compounds that do not relate to our current product candidates.
Our agreement with GSK provides that we will retain all of our right, title and interest in intellectual property for which we possess the right to license or sublicense as of the effective date of the agreement and throughout the term of the agreement. Each party will remain the sole owner of intellectual property developed by its personnel under the research collaboration. Intellectual property that is jointly developed by GSK and us under the collaboration will be jointly owned by GSK and us, subject to exclusive licenses that may be granted to GSK or us pursuant to the terms of the agreement.
Our agreement with Lilly provides that we will retain all of our right, title and interest in intellectual property for which we possess the right to license or sublicense as of the effective date of the agreement and throughout the term of the agreement. Each party will remain the sole owner of
intellectual property developed by its personnel under the research collaboration. Intellectual property that is jointly developed by Lilly and us under the collaboration will be jointly owned by Lilly and us, subject to exclusive licenses that may be granted to Lilly or us pursuant to the terms of the agreement.
Our agreement with Medicis provides that we will retain all of our right, title and interest in intellectual property for which we possess the right to license or sublicense as of the effective date of the agreement and throughout the term of the agreement. Each party will remain the sole owner of intellectual property developed by its personnel under the research collaboration. Intellectual property that is jointly developed by Medicis and us under the collaboration will, under certain circumstances, be jointly owned by Medicis and us, subject to exclusive licenses that may be granted to Medicis or us pursuant to the terms of the agreement.
Our commercial success will depend in part on obtaining and maintaining patent protection and trade secret protection of our current and future product candidates and the methods used to manufacture them, as well as successfully defending these patents against third-party challenges. Our ability to stop third parties from making, using, selling, offering to sell or importing our products depends on the extent to which we have rights under valid and enforceable patents or trade secrets that cover these activities. There can be no assurance that our pending patent applications will result in issued patents.
Manufacturing and Supply
Our current product candidates are low molecular weight molecules that are synthesized chemically and, therefore, we believe they are easier to manufacture at relatively lower cost than biologic drugs from cell-based sources. All of our current clinical drug product manufacturing activities are in compliance with current Good Manufacturing Practices, or cGMP, and are outsourced to qualified third parties with oversight by our employees. We have limited in-house, non-GMP manufacturing capacity for research activities. We rely on third-party cGMP manufacturers for scale-up of the active ingredient, process development work and to produce sufficient quantities of product candidates for use in clinical trials. We intend to continue to rely on third-party cGMP manufacturers for any future clinical trials and large-scale commercialization of all of our compounds for which we have manufacturing responsibility. We have established multiple sources of supply for the reagents necessary for the manufacture of our compounds. We believe this manufacturing strategy will enable us to direct financial resources to the development and commercialization of products rather than diverting resources to establishing a manufacturing infrastructure.
We have transferred tavaborole drug product manufacturing to a third party that operates in compliance with cGMP regulations and will manufacture additional active ingredient in order to complete our NDA submission. We outsource global process development work and product manufacturing to third parties for AN2728 and our other product candidates.
Competition
Onychomycosis
If approved for the treatment of onychomycosis, we anticipate tavaborole and AN2718 would compete with other approved onychomycosis therapeutics including:
•Systemic treatments: Lamisil, also known by its generic name, terbinafine, is marketed by Novartis. Terbinafine is available from several generic manufacturers. Sporanox, also known by its generic name, itraconazole, is marketed by Johnson & Johnson and is available as a generic as well.
•Topical treatments: Penlac, also known by its generic name, ciclopirox, is marketed by sanofi-aventis. Several versions of ciclopirox are available as generics.
In addition to approved onychomycosis therapeutics, the marketing of several over-the-counter products is directed toward persons suffering from onychomycosis, even though none of these products is FDA-approved for onychomycosis treatment.
There are also several pharmaceutical product candidates under development that could potentially be used to treat onychomycosis and compete with tavaborole. The latest-stage development candidate is efinaconazole (also known as IDP-108) a novel topical triazole that completed Phase 3 development in December 2011 and was developed by Dow Pharmaceutical Sciences, Inc., or DPS, a wholly-owned subsidiary of Valeant Pharmaceuticals International, Inc., or Valeant. DPS licensed the triazole (also known as KP-103) from Kaken Pharmaceuticals in 2006. Valeant reported the results of its Phase 3 studies in November 2012. In its first study, 17.8% of patients treated with efinaconazole reached the endpoint of "complete cure," compared to 3.3% of patients treated with vehicle. In the second study, 15.2% of patients treated with efinaconazole reached the endpoint of "complete cure," compared to 5.5% of patients treated with vehicle. Valeant filed an NDA with the FDA in July 2012 and has a Prescription Drug User Fee Act, or PDUFA, date of May 24, 2013, the target date for an FDA decision on IDP-108. On October 24, 2012, we filed a demand for arbitration with JAMS regarding a breach of contract dispute between Valeant and us, arising out of a master services agreement entered into by Anacor and DPS in March 2004 related to certain development services provided by DPS in connection with our efforts to develop our topical antifungal product candidate for the treatment of onychomycosis. We have asserted claims for breach of contract, breach of fiduciary duty, intentional interference with prospective business advantage and unfair competition. We are seeking injunctive relief and damages of at least $215.0 million. The hearing for the preliminary injunction has been set for May 6 - 8, 2013. We currently expect the resolution of the arbitration to occur in the second half of 2013. We have carefully reviewed our position and believe that we have meritorious claims; however, we will need to prove such claims in the arbitration hearings.
Other late-stage development candidates include an undisclosed topical product candidate in Phase 3 development by Promius Pharma, LLC, a wholly-owned subsidiary of Dr. Reddy's Laboratories, and a topical reformulation of terbinafine in Phase 3 development by Celtic Pharma Management L.P. There are also several companies pursuing various devices for onychomycosis, including laser technology. At least four lasers have received FDA clearance for the treatment of onychomycosis-Nuvolase's PinPointe FootLaser, Cutera's GenesisPlus, CoolTouch's VARIA and Light Age's Q-Clear. In addition, there are a number of earlier stage therapeutics and devices in various stages of development for the treatment of onychomycosis.
Atopic Dermatitis
If approved for the treatment of atopic dermatitis, we anticipate AN2728 would compete with other marketed atopic dermatitis therapeutics. Current atopic dermatitis treatments attempt to reduce inflammation and itchiness to maintain the protective integrity of the skin. Combinations of antibiotics, antihistamines, topical corticosteroids and topical immunomodulators, such as Elidel (pimecrolimus) and Protopic (tacrolimus), are the current standard of care. In addition, while the use of ultraviolet light is not approved by the FDA, it has been applied to the treatment of atopic dermatitis.
Psoriasis
If approved for the treatment of psoriasis, we anticipate AN2728 would compete with other marketed psoriasis therapeutics including:
•Prescription topical treatments: Several branded products exist for the topical treatment of mild-to-moderate psoriasis. Taclonex, a combination of calcipotriene and the high potency corticosteroid betamethasone dipropionate, and Dovonex, also known by its generic name, calcipotriene, are currently marketed by LEO Pharma. Tazorac, also known by its generic name,
tazarotene, is currently marketed by Allergan. Vectical, also known by its generic name, calcitriol, is currently marketed by Galderma. Generic products for the treatment of mild-to-moderate psoriasis include corticosteroids, such as triamcinolone and betamethasone, as well as the natural product derivative anthralin.
•Systemic treatments: Among the product prescribed for the treatment of moderate-to-severe psoriasis are the following: oral products, such as methotrexate, cyclosporine and acitretin; injected biologic products, such as Enbrel, marketed by Amgen, Remicade, Stelara and Simponi, marketed by Janssen Biotech, Amevive, marketed by Astellas, and Humira, marketed by Abbott.
•Other treatments: Various light-based treatments are also used to treat psoriasis, including the 380 nanometer excimer laser and pulsed dye lasers. In addition, there are several non-prescription or over-the-counter topical treatments utilized to treat psoriasis, including salicylic acid and coal tar, as well as bath solutions and moisturizers.
In addition to the marketed psoriasis therapeutics, there are product candidates in Phase 3 development that could potentially be used to treat psoriasis and compete with AN2728, including an injectable therapy from Abbott, and oral therapies from Pfizer, Celgene and Isotechnika. In addition to these, a number of topical, oral and injectable product candidates are in various stages of development for the treatment of psoriasis.
Gram-Negative Infections
Any product approved for the treatment of infections caused by Gram-negative bacteria would compete with other marketed broad spectrum and Gram-negative antibiotics.
•Marketed antibiotics: There are a variety of marketed broad spectrum as well as Gram-negative antibiotics targeting Gram-negative infections. Current marketed products for Gram-negative infections include piperacillin/tazobactam (Pfizer's Zosyn/Tazocin), imipenem/cilastatin (Merck's Primaxin/Tienam), meropenem (Cubist Pharmaceuticals/AstraZeneca's Merrem/Meronem), levofloxacin (Johnson & Johnson's Levaquin, sanofi-aventis's Tavanic and Daiichi Sankyo's Cravit) and ciprofloxacin, or cipro, marketed under multiple brand names. Next-generation cephalosporins, carbapenems, quinolones and beta-lactam/beta-lactamase inhibitors, such as Johnson & Johnson's Doribax and Pfizer's Tygacil, are expected to capture significant market share.
•Antibiotics in development: The need for new antibiotics will continue to grow due to evolving resistance to existing antibiotics. There are several earlier stage compounds in clinical development including Forest and AstraZeneca's ceftazidime/NXL-104, which is in Phase 3 development, and Cubist's CXA-201, which is also in Phase 3 development.
Government Regulation
Federal Food, Drug and Cosmetic Act
Prescription drug products are subject to extensive pre- and post-market regulation by the FDA, including regulations that govern the testing, manufacturing, safety, efficacy, labeling, storage, record keeping, advertising and promotion of such products under the Federal Food, Drug and Cosmetic Act, or FFDCA, and its implementing regulations. The process of obtaining FDA approval and achieving and maintaining compliance with applicable laws and regulations requires the expenditure of substantial time and financial resources. Failure to comply with applicable FDA or other requirements may result in refusal to approve pending applications, a clinical hold, warning letters, civil or criminal penalties, recall or seizure of products, partial or total suspension of production or withdrawal of the product from the market. FDA approval is required before any new drug or dosage form, including a new use of a previously approved drug, can be marketed in the United States. All applications for FDA
approval must contain, among other things, information relating to safety and efficacy, pharmaceutical formulation, stability, manufacturing, processing, packaging, labeling and quality control.
New Drug Applications (NDAs)
The FDA's new drug approval process generally involves:
•completion of preclinical laboratory and animal safety testing in compliance with the FDA's Good Laboratory Practice, or GLP, regulations and the International Conference on Harmonisation, or ICH, guidelines;
•submission to the FDA of an IND for human clinical testing, which must become effective before human clinical trials may begin in the United States;
•performance of adequate and well-controlled human clinical trials to establish the safety and efficacy of the proposed drug product for each intended use;
•satisfactory completion of an FDA pre-approval inspection of the facility or facilities at which the product is manufactured to assess compliance with the FDA's cGMP regulations; and
•submission to and approval by the FDA of an NDA.
The preclinical and clinical testing and approval process requires substantial time, effort and financial resources, and we cannot guarantee that any approvals for our product candidates will be granted on a timely basis, if at all. Preclinical tests include laboratory evaluation of product chemistry, formulation and stability, as well as studies to evaluate toxicity in animals. The results of preclinical tests, together with manufacturing information and analytical data, are submitted as part of an IND application to the FDA. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA raises concerns or questions about the submission, including concerns that human research subjects will be exposed to unreasonable health risks. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before clinical trials can begin. Our submission of an IND may not result in FDA authorization to commence clinical trials. A separate submission to an existing IND must also be made for each successive clinical trial conducted during product development. Further, an independent institutional review board, or IRB, covering each medical center proposing to conduct clinical trials must review and approve the plan for any clinical trial before it commences at that center and it must monitor the study until completed. The FDA, the IRB or the Sponsor may suspend a clinical trial at any time on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk. As a separate amendment to an IND, a sponsor may submit a request for a Special Protocol Assessment, or SPA, from the FDA. Under the SPA procedure, a sponsor may seek the FDA's agreement on the design and size of a clinical trial intended to form the primary basis of an effectiveness and safety claim. If the FDA agrees in writing, the study design may not be changed after the trial begins, except in limited circumstances, such as when a substantial scientific issue essential to determining the safety and effectiveness of a product candidate is identified. If the outcome of the trial is successful, the sponsor will ordinarily be able to rely on it as the primary basis for approval with respect to effectiveness and safety. Clinical testing also must satisfy extensive Good Clinical Practice, or GCP, regulations, which include requirements that all research subjects provide informed consent and that all clinical studies be conducted under the supervision of one or more qualified investigators.
For purposes of an NDA submission and approval, human clinical trials are typically conducted in the following sequential phases, which may overlap:
•Phase 1: Trials are initially conducted in a limited population to test the product candidate for safety, dose tolerance, absorption, metabolism, distribution and excretion, generally in healthy humans.
•Phase 2: Trials are generally conducted in a limited patient population to identify possible adverse effects and safety risks, to determine the initial efficacy of the product for specific targeted indications and to determine dose tolerance and optimal dosage. Multiple Phase 2 clinical trials may be conducted by the sponsor to obtain information prior to beginning larger and more extensive Phase 3 clinical trials. In some cases, a sponsor may decide to run what is referred to as a "Phase 2b" evaluation, which is a second, confirmatory Phase 2 clinical trial that could, if positive and accepted by the FDA, serve as a pivotal trial in the approval of a product candidate.
•Phase 3: These are commonly referred to as pivotal studies. When Phase 2 evaluations demonstrate that a dose range of the product is effective and has an acceptable safety profile, Phase 3 clinical trials are undertaken in large patient populations to further evaluate dosage, to provide substantial evidence of clinical efficacy and to further test for safety in an expanded and diverse patient population at multiple, geographically-dispersed clinical trial sites. Generally, replicate evidence of safety and effectiveness needs to be demonstrated in two adequate and well-controlled Phase 3 clinical trials of a product candidate for a specific indication. These studies are intended to establish the overall risk/benefit ratio of the product and provide an adequate basis for product labeling.
•Phase 4: In some cases, the FDA may condition approval of an NDA for a product candidate on the sponsor's agreement to conduct additional clinical trials to further assess the drug's safety and/or efficacy after NDA approval. Such post-approval trials are typically referred to as Phase 4 clinical trials.
Progress reports detailing the results of the clinical studies must be submitted at least annually to the FDA and safety reports must be submitted to the FDA and the investigators for serious and unexpected adverse events. Concurrent with clinical studies, sponsors usually complete additional animal safety studies and must also develop additional information about the chemistry and physical characteristics of the product and finalize a process for manufacturing the product in commercial quantities in accordance with cGMP requirements. The manufacturing process must be capable of consistently producing quality batches of the product candidate and, among other things, the manufacturer must develop methods for testing the identity, strength, quality and purity of the final product. Moreover, appropriate packaging must be selected and tested and stability studies must be conducted to demonstrate that the product candidate does not undergo unacceptable deterioration over its shelf life.
The results of product development, preclinical studies and clinical trials, along with the aforementioned manufacturing information, are submitted to the FDA as part of an NDA. NDAs must also contain extensive manufacturing information. Under the Prescription Drug User Fee Act, or PDUFA, the FDA agrees to specific goals for NDA review time through a two-tiered classification system, Standard Review and Priority Review. Standard Review is applied to a drug that offers at most, only minor improvement over existing marketed therapies. Standard Review NDAs have a goal of being completed within a ten-month timeframe, although a review can take a significantly longer amount of time. A Priority Review designation is given to drugs that offer major advances in treatment, or provide a treatment where no adequate therapy exists. A Priority Review means that the time it takes the FDA to review an NDA is reduced such that the goal for completing a Priority Review initial review cycle is six months. It is likely that our product candidates will be granted Standard Reviews. The review process is often significantly extended by FDA requests for additional information or clarification. The FDA may refer the application to an advisory committee for review, evaluation and recommendation as to whether the application should be approved. The FDA is not bound by the recommendation of an advisory committee, but it generally follows such recommendations.
The FDA may deny approval of an NDA if the applicable regulatory criteria are not satisfied, or it may require additional clinical data or additional pivotal Phase 3 clinical trials. Even if such data are submitted, the FDA may ultimately decide that the NDA does not satisfy the criteria for approval. Data from clinical trials are not always conclusive and the FDA may interpret data differently than we do. Once issued, product approval may be withdrawn by the FDA if ongoing regulatory requirements are not met or if safety problems occur after the product reaches the market. In addition, the FDA may require testing, including Phase 4 clinical trials, Risk Evaluation and Mitigation Strategies (REMS) and surveillance programs to monitor the effect of approved products that have been commercialized, and the FDA has the power to prevent or limit further marketing of a product based on the results of these post-marketing programs. Drugs may be marketed only for the approved indications and in accordance with the provisions of the approved label. Further, if there are any modifications to the drug, including changes in indications, labeling or manufacturing processes or facilities, approval of a new or supplemental NDA may be required, which may involve conducting additional preclinical studies and clinical trials.
Drug Price Competition and Patent Term Restoration Act of 1984
Under the Drug Price Competition and Patent Term Restoration Act of 1984, known as the Hatch-Waxman Amendments, a portion of a product's patent term that was lost during clinical development and application review by the FDA may be restored. The Hatch-Waxman Amendments also provide for a statutory protection, known as nonpatent market exclusivity, against the FDA's acceptance or approval of certain competitor applications.
Patent term restoration can compensate for time lost during product development and the regulatory review process by returning up to five years of patent life for a patent that covers a new product or its use. This period is generally one-half the time between the effective date of an IND (falling after issuance of the patent) and the submission date of an NDA, plus the time between the submission date of an NDA and the approval of that application. Patent term restorations, however, cannot extend the remaining term of a patent beyond a total of 14 years. The application for patent term extension is subject to approval by the United States Patent and Trademark Office in conjunction with the FDA. It takes at least six months to obtain approval of the application for patent term extension. Up to five years of interim one year extensions are available if a product is still undergoing development or FDA review at the time of its expiration.
The Hatch-Waxman Amendments also provide for a period of statutory protection for new drugs that receive NDA approval from the FDA. If a new drug receives NDA approval as a new chemical entity, meaning that the FDA has not previously approved any other new drug containing the same active moiety, then the Hatch-Waxman Amendments prohibit submission of an Abbreviated New Drug Application, or ANDA, or a 505(b)(2) NDA (each as described below) by another company for a generic version of such drug, or modification to the previously approved version, with some exceptions, for a period of five years from the date of approval of the NDA. The statutory protection provided pursuant to the Hatch-Waxman Amendments will not prevent the filing or approval of a full NDA. In order to gain approval of a full NDA, however, a competitor would be required to conduct its own preclinical investigations and clinical trials. If NDA approval is received for a new drug containing an active ingredient that was previously approved by the FDA but the NDA is for a drug that includes an innovation over the previously approved drug and if such NDA approval was dependent upon the submission to the FDA of new clinical investigations, other than bioavailability studies, then the Hatch-Waxman Amendments prohibit the FDA from making effective the approval of an ANDA or a 505(b)(2) NDA for a generic version of such drug or modification of the previously approved version for a period of three years from the date of the NDA approval. This three year exclusivity, however, only covers the innovation associated with the NDA to which it attaches. Thus, the three year
exclusivity does not prohibit the FDA, with limited exceptions, from approving ANDAs or 505(b)(2) NDAs for drugs containing the same active ingredient but without the new innovation.
While the Hatch-Waxman Amendments provide certain patent term restoration and exclusivity protections to innovator drug manufacturers, it also permits the FDA to approve ANDAs for generic versions of their drugs. The ANDA process permits competitor companies to obtain marketing approval for a drug with the same active ingredient for the same uses but does not require the conduct and submission of clinical trials demonstrating safety and effectiveness for that product. Instead of safety and effectiveness data, an ANDA applicant needs only to submit data demonstrating that its product is bioequivalent to the innovator product as well as relevant chemistry, manufacturing and product data. The Hatch-Waxman Amendments also instituted a third type of drug application that requires the same information as an NDA including full reports of clinical and preclinical studies except that some of the information from the reports required for marketing approval comes from studies that the applicant does not own or for which the applicant does not have a legal right of reference. This type of application, a "505(b)(2) NDA," permits a manufacturer to obtain marketing approval for a drug without needing to conduct or obtain a right of reference for all of the required studies.
Finally, the Hatch-Waxman Amendments require, in some circumstances, an ANDA or a 505(b)(2) NDA applicant to notify the patent owner and the holder of the approved NDA of the factual and legal basis of the applicant's opinion that the patent listed by the holder of the approved NDA in FDA's Approved Drug Products with Therapeutic Equivalence Evaluations manual is not valid or will not be infringed (the patent certification process). Upon receipt of this notice, the patent owner and the NDA holder have 45 days to bring a patent infringement suit in federal district court and obtain a 30-month stay against the company seeking to reference the NDA. The NDA or patent holder could still file a patent suit after the 45 days, but if they did, they would not have the benefit of a 30-month stay. Alternatively, after this 45-day period, the applicant may file a declaratory judgment action, seeking a determination that the patent is invalid or will not be infringed. The discovery, trial and appeals process in such suits can take several years. If such a suit is timely commenced, the Hatch-Waxman Amendments provide a 30-month stay on the approval of the competitor's ANDA or 505(b)(2) NDA. If the litigation is resolved in favor of the competitor or the challenged patent expires during a 30-month stay period, unless otherwise extended by court order, the stay is lifted and the FDA may approve the application. The patent owner and the NDA holder have the opportunity to trigger only a single 30-month stay per ANDA or 505(b)(2) NDA. Once the ANDA or 505(b)(2) NDA applicant has notified the patent owner and the NDA holder of the infringement, the applicant cannot be subjected to another 30-month stay, even if the applicant becomes aware of additional patents that may be infringed by its product.
International Regulation
In addition to regulations in the United States, we will be subject to a variety of foreign regulations governing clinical trials and commercial sales and distribution of our future products. Whether or not we obtain FDA approval for a product, we must obtain approval of a product by the comparable regulatory authorities of foreign countries before we can commence clinical trials or marketing of the product in those countries. The approval process varies from country to country, and the time may be longer or shorter than that required for FDA approval. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary greatly from country to country.
Under European Union regulatory systems, marketing authorizations may be submitted either under a centralized or a mutual recognition procedure. The centralized procedure provides for the grant of a single marketing authorization that is valid for all European Union member states. The mutual recognition procedure provides for mutual recognition of national approval decisions. Under this procedure, the holder of a national marketing authorization may submit an application to the
remaining member states. Within 90 days of receiving the applications and assessment report, each member state must decide whether to recognize approval.
Third-Party Payor Coverage and Reimbursement
Although none of our product candidates has been commercialized for any indication, if they are approved for marketing, commercial success of our product candidates will depend, in part, upon the availability of coverage and reimbursement from third-party payors at the federal, state and private levels. Government payor programs, including Medicare and Medicaid, private health care insurance companies and managed-care plans have attempted to control costs by limiting coverage and the amount of reimbursement for particular drug treatments. The U.S. Congress and state legislatures from time to time propose and adopt initiatives aimed at cost-containment. Ongoing federal and state government initiatives directed at lowering the total cost of health care will likely continue to focus on health care reform, the cost of prescription pharmaceuticals and on the reform of the Medicare and Medicaid payment systems. Examples of how limits on drug coverage and reimbursement in the United States may cause reduced payments for drugs in the future include:
•changing Medicare reimbursement methodologies;
•fluctuating decisions on which drugs to include in formularies;
•revising drug rebate calculations under the Medicaid program; and
•reforming drug importation laws.
Indeed, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, or collectively, the Healthcare Reform Act, which was signed into law in March of 2010, substantially changes the way health care is financed by both governmental and private insurers, and significantly impacts pharmaceutical manufacturers. The Healthcare Reform Act includes, among other things, the following measures:
•Annual, non-deductible fees on any entity that manufactures or imports certain prescription drugs;
•Increases in Medicaid rebates owed by manufacturers under the Medicaid Drug Rebate Program for both branded and generic drugs;
•A new Patient-Centered Outcomes Research Institute to oversee, identify priorities in and conduct comparative clinical effectiveness research;
•New requirements for manufacturers to discount drug prices to eligible patients by 50 percent at the pharmacy level and for mail order services in order for their outpatient drugs to be covered under Medicare Part D; and
•An increase in the number of entities eligible for discounts under the Public Health Service pharmaceutical pricing program.
Additionally, some third-party payors also require pre-approval of coverage for new or innovative drug therapies before they will reimburse health care providers who use such therapies. While we cannot predict whether any proposed cost-containment measures will be adopted or otherwise implemented in the future, the announcement or adoption of these proposals could have a material adverse effect on our ability to obtain adequate prices for our product candidates and operate profitably.
Manufacturing Requirements
We rely, and expect to continue to rely, on third parties for the production of clinical and eventually, commercial, quantities of our products. We and our third-party manufacturers must comply with applicable FDA regulations relating to FDA's cGMP regulations. The cGMP regulations include requirements relating to organization of personnel, buildings and facilities, equipment, control of components and drug product containers and closures, production and process controls, packaging and labeling controls, holding and distribution, laboratory controls, records and reports and returned or salvaged products. The manufacturing facilities for our products must meet cGMP requirements to the satisfaction of the FDA pursuant to a pre-approval inspection before we can use them to manufacture our products. We and our third-party manufacturers are also subject to periodic inspections of facilities by the FDA and other authorities, including procedures and operations used in the testing and manufacture of our products to assess our compliance with applicable regulations. Failure to comply with statutory and regulatory requirements subjects a manufacturer to possible legal or regulatory action, including warning letters, the seizure or recall of products, injunctions, consent decrees placing significant restrictions on or suspending manufacturing operations and civil and criminal penalties. Adverse experiences with the product must be reported to the FDA and could result in the imposition of market restriction through labeling changes or in product removal. Product approvals may be withdrawn if compliance with regulatory requirements is not maintained or if problems concerning safety or efficacy of the product occur following approval.
Other Regulatory Requirements
With respect to post-market product advertising and promotion, the FDA imposes a number of complex regulations on entities that advertise and promote pharmaceuticals, which include, among others, standards for direct-to-consumer advertising, off-label promotion, industry-sponsored scientific and educational activities and promotional activities involving the internet. The FDA has very broad enforcement authority under the FFDCA, and failure to abide by these regulations can result in penalties, including the issuance of a warning letter directing entities to correct deviations from FDA standards, a requirement that future advertising and promotional materials be pre-cleared by the FDA and state and federal civil and criminal investigations and prosecutions.
We are also subject to various laws and regulations regarding laboratory practices, the experimental use of animals and the use and disposal of hazardous or potentially hazardous substances in connection with our research. In each of these areas, as above, the FDA has broad regulatory and enforcement powers, including the ability to levy fines and civil penalties, suspend or delay issuance of approvals, seize or recall products and withdraw approvals, any one or more of which could have a material adverse effect on us.
Legal Proceedings
On October 24, 2012, we provided notice to Valeant Pharmaceuticals International, Inc., or Valeant, successor in interest to Dow Pharmaceutical Sciences, Inc., or DPS, seeking to commence arbitration with JAMS of a breach of contract dispute under a master services agreement dated March 26, 2004 between DPS and us related to certain development services provided by DPS in connection with our efforts to develop our topical antifungal product candidate for the treatment of onychomycosis. We have asserted claims for breach of contract, breach of fiduciary duty, intentional interference with prospective business advantage and unfair competition. We are seeking injunctive relief and damages of at least $215.0 million. The hearing for the preliminary injunction has been set for May 6 - 8, 2013. We currently expect the resolution of the arbitration to occur in the second half of 2013. We have carefully reviewed our position and believe that we have meritorious claims; however, we will need to prove such claims in the arbitration hearings.
On November 28, 2012, we filed for arbitration with JAMS for breach of contract by Medicis Pharmaceutical Corporation, or Medicis, seeking damages related to payment for the achievement of certain preclinical milestones under the research and development option and license agreement with Medicis dated February 9, 2011. On December 11, 2012, apparently in reaction to our filing the arbitration demand, Medicis filed a complaint for breach of the agreement and a motion for preliminary injunction in the Delaware Court of Chancery seeking to enjoin us from prosecuting our claims through arbitration and to require us to continue to use diligent efforts to conduct research and development under the agreement. On January 16, 2013, we filed a motion requesting that the Delaware Court of Chancery dismiss the Medicis suit and send the dispute back to arbitration. On February 15, 2013, Medicis filed a brief in opposition to our motion to dismiss in favor of arbitration. On March 4, 2013, we filed a reply brief in support of our motion to dismiss. We intend to vigorously enforce our rights under the agreement and believe we have meritorious defenses against Medicis' filed complaint and motion. Medicis was acquired by Valeant in December 2012.
Employees
As of December 31, 2012, we had 85 employees, 30 of whom held Ph.D. or M.D. degrees and 73 of whom were engaged in research and development activities. We plan to continue to expand our product development programs. To support this growth and to support public company requirements, we will need to expand our managerial, development, finance and other functions. None of our employees are represented by a labor union and we consider our employee relations to be good.
Facilities
Our corporate headquarters are located in Palo Alto, California, where we lease a 36,960 square-foot building with laboratory and office space. The lease will terminate in March 2018.
We also lease approximately 15,300 square feet of laboratory and office space in another building in Palo Alto, California under a lease agreement that terminates in December 2013. In addition, we have two (2) one-year options to extend the lease through each of 2014 and 2015. We may terminate the lease by providing four months' written notice.
Corporate and Available Information
Our principal corporate offices are located at 1020 East Meadow Circle, Palo Alto, California 94303-4230 and our telephone number is (650) 543-7500. We were incorporated in Delaware in December 2000 and began business operations in March 2002. Our internet address is www.anacor.com. We make available on our website, free of charge, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission, or the SEC. Our SEC reports can be accessed through the Investors section of our internet website. Further, a copy of this Annual Report on Form 10-K is located at the SEC's Public Reference Rooms at 100 F Street, N.E., Washington, D. C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy and information statements and other information regarding our filings at http://www.sec.gov. The information found on our internet website is not incorporated by reference into this Annual Report on Form 10-K or any other report we file with or furnish to the SEC.
ITEM 1A.
ITEM 1A. RISK FACTORS
Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as the other information in this Annual Report on Form 10-K, before deciding whether to invest in shares of our common stock. The occurrence of any of the following adverse developments described in the following risk factors could harm our business, financial condition, results of operations or prospects. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.
Risks Relating to Our Financial Position and Need for Additional Capital
We have never been profitable. Currently, we have no products approved for commercial sale, and to date we have not generated any revenue from product sales. As a result, our ability to curtail our losses and reach profitability is unproven, and we may never achieve or sustain profitability.
We are not profitable and do not expect to be profitable in the foreseeable future. We have incurred net losses in each year since our inception, including net losses of approximately $56.1 million, $47.9 million and $10.1 million for 2012, 2011 and 2010, respectively, and as of December 31, 2012, we had an accumulated deficit of approximately $215.2 million. We have devoted most of our financial resources to research and development, including our preclinical development activities and clinical trials. We have not completed development of any product candidate and we have therefore not generated any revenues from product sales. We expect that research and development expenses will remain comparable in the future as we progress our product candidates through clinical development, conduct our research and development activities under our various current and potential collaborations, including those related to our neglected diseases initiatives, advance our discovery research projects into the preclinical stage and continue our early-stage research. As a result of the foregoing, we expect to continue to experience net losses and negative cash flows for the foreseeable future. These losses and negative cash flows have had, and will continue to have, an adverse effect on our stockholders' equity and working capital.
Because of the numerous risks and uncertainties associated with pharmaceutical product development, we are unable to accurately predict the timing or amount of our expenses or when, or if, we will be able to achieve or maintain profitability. In addition, our expenses could increase if we are required by the United States Food and Drug Administration, or FDA, to perform studies in addition to, or that are larger than, those that we currently expect. To date, we have financed our operations primarily through the sale of equity securities, debt arrangements, government contracts and grants and payments under our agreements with GlaxoSmithKline LLC, or GSK, Schering Corporation, or Schering, Eli Lilly and Company, or Lilly, and Medicis Pharmaceutical Corporation, or Medicis. The size of our future net losses will depend, in part, on our future expenses and our ability to generate revenues. We will no longer receive revenues from our collaboration with GSK from the development of AN3365 (formerly known as GSK '052), and future milestones and revenues under our agreement with GSK may not be achieved as the other molecules under the collaboration are at a much earlier stage of development such that GSK may not exercise its option to license additional product candidates that may be identified pursuant to our agreement, these product candidates may not receive regulatory approval or, if they are approved, such product candidates may not be accepted in the market. Revenues from our collaborations with Lilly and Medicis are uncertain because milestones under our agreements with them may not be achieved. In addition, we may not be able to enter into other collaborations that will generate significant cash. If we are unable to develop and commercialize one or more of our product candidates, or if revenues from any product candidate that receives marketing approval are insufficient, we will not achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability.
Our independent registered public accounting firm has indicated that our financial condition raises substantial doubt as to our ability to continue as a going concern.
Based on our cash, cash equivalents and short-term investments balances as of December 31, 2012, the net proceeds of approximately $1.3 million from the sale of 401,500 shares of the Company's common stock in January and February 2013 and our projected spending in 2013, our independent registered public accounting firm has included in their audit opinion for the year ended December 31, 2012 a statement with respect to our ability to continue as a going concern. However, our financial statements have been prepared assuming we will continue to operate as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. If we become unable to continue as a going concern, we may have to liquidate our assets and the values we receive for our assets in liquidation or dissolution could be significantly lower than the values reflected in our financial statements. The reaction of investors to the inclusion of a going concern statement by our auditors, our current lack of cash resources and our potential inability to continue as a going concern may materially adversely affect our share price and our ability to raise new capital, enter into strategic alliances and/or make our scheduled debt payments on a timely basis or at all.
We believe that our existing cash, cash equivalents and short-term investments totaling approximately $45.5 million as of December 31, 2012 and the net proceeds of approximately $1.3 million from the sale of 401,500 shares of the Company's common stock in January and February 2013 will be sufficient to meet our anticipated operating requirements until we file our NDA for tavaborole in onychomycosis, which we expect to occur in mid-2013. If necessary, we would make appropriate adjustments to our spending plan in order to ensure sufficient capital resources to complete this filing. While we believe that we currently have sufficient resources to fund our operations until the filing of such NDA, we will need to obtain additional capital to complete the development and potential commercialization of tavaborole, fund our other research and development activities and meet our operating requirements through 2013 and beyond.
We have a limited operating history and we expect a number of factors to cause our operating results to fluctuate on a quarterly and annual basis, which may make it difficult to predict our future performance.
Our operations to date have been primarily limited to developing our technology and undertaking preclinical studies and clinical trials of our product candidates and we are reliant on collaborators for certain of our other products. We have not yet obtained regulatory approvals for any of our product candidates. Consequently, any predictions you make about our future success or viability may not be as accurate as they could be if we had a longer operating history and/or approved products on the market. Our financial condition and operating results have varied significantly in the past and will continue to fluctuate from quarter-to-quarter or year-to-year due to a variety of factors, many of which are beyond our control. Factors relating to our business that may contribute to these fluctuations include the following risk factors, as well as other factors described elsewhere in this Annual Report on Form 10-K:
•our ability to obtain additional funding to develop our product candidates;
•the need to obtain and maintain regulatory approval for tavaborole, AN2728, or any of our other product candidates;
•delays in the timing of filing of an NDA as well as commencement, enrollment and the timing of clinical testing;
•the success of our clinical trials through all phases of clinical development, including our recently-completed Phase 3 clinical trials of tavaborole and current and planned trials of AN2728;
•any delays in regulatory review and approval of product candidates in clinical development;
•potential side effects of our product candidates that could delay or prevent commercialization or cause an approved drug to be taken off the market;
•our ability to develop systemic product candidates;
•market acceptance of our product candidates;
•our ability to establish an effective sales and marketing infrastructure;
•competition from existing products or new products that may emerge;
•the ability of patients or healthcare providers to obtain coverage of or sufficient reimbursement for our products;
•our ability to receive approval and commercialize our product candidates outside of the United States;
•our dependency on third-party manufacturers to supply or manufacture our products;
•our ability to establish or maintain collaborations, licensing or other arrangements;
•our ability and third parties' abilities to protect intellectual property rights;
•costs related to and outcomes of current and potential litigation;
•our ability to adequately support future growth;
•our ability to attract and retain key personnel to manage our business effectively;
•our ability to maintain our accounting systems and controls;
•potential product liability claims;
•potential liabilities associated with hazardous materials; and
•our ability to maintain adequate insurance policies.
Due to the various factors mentioned above, and others, the results of any quarterly or annual periods should not be relied upon as indications of future operating performance.
We may continue to require substantial additional capital and if we are unable to raise capital when needed, we would be forced to delay, reduce or eliminate our product development programs.
Developing pharmaceutical products, including conducting preclinical studies and clinical trials, is expensive. If the FDA requires that we perform additional studies beyond those that we currently expect, our expenses could increase beyond what we currently anticipate and the timing of any potential product approval may be delayed. We raised $21.5 million and $24.0 million in February and October 2012, respectively, through public offerings of our common stock. The net proceeds from these offerings were approximately $19.9 million and $22.6 million, respectively, after deducting the underwriting discounts and other offering costs. Under our January 2013 "at the market" stock offering, through March 14, 2013, we sold shares of our common stock for net proceeds of approximately $1.3 million and we currently have approximately $23.6 million potentially remaining available for sale under this offering. We have no other commitments or arrangements for any additional financing to fund our research and development programs other than through research funding under our collaboration with Lilly; reimbursements from our various collaborations related to our neglected diseases initiatives; and contingent milestone or royalty payments from GSK, Lilly or Medicis, which we may not receive. We believe that our existing capital resources will be sufficient to meet our anticipated operating requirements until we file our NDA for tavaborole in onychomycosis, which we expect to occur in mid-2013, and, if necessary, we would make appropriate adjustments to our spending plan in order to ensure sufficient capital resources to complete this filing. While we
believe that we currently have sufficient resources to fund our operations until the filing of such NDA, we will need to raise additional capital to complete the development and potential commercialization of tavaborole, fund our other research and development activities and meet our operating requirements through 2013 and beyond. However, our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results, including the costs to maintain our currently planned operations, could vary materially.
Until we can generate a sufficient amount of revenue from our products, if ever, we expect to finance future cash needs through public or private equity offerings, debt financings or corporate collaborations and licensing arrangements. Additional funds may not be available when we need them on terms that are acceptable to us, or at all. If adequate funds are not available, we may be required to delay, reduce the scope of or eliminate some of our research or development programs or our commercialization efforts and may not be able to make scheduled debt payments on a timely basis or at all. To the extent that we raise additional funds by issuing equity securities, our stockholders may experience additional dilution, and debt financing, if available, may involve restrictive covenants. To the extent that we raise additional funds through collaborations and licensing arrangements, it may be necessary to relinquish some rights to our technologies or our product candidates or grant licenses on terms that may not be favorable to us. We may seek to access the public or private capital markets whenever conditions are favorable, even if we do not have an immediate need for additional capital at that time.
Our forecasts regarding the period of time that our existing capital resources will be sufficient to meet our operating requirements, the timing of our NDA filing and our future capital resource requirements, both near and long-term, will depend on many factors, including, but not limited to:
•the initiation, progress, timing, costs and results of preclinical studies and clinical trials for our product candidates and potential product candidates, including the recently-completed Phase 3 clinical trials for tavaborole and additional clinical trials for AN2728;
•the success of our collaborations with GSK, Lilly and Medicis and the attainment of milestones and royalty payments, if any, under those agreements;
•the number and characteristics of product candidates that we pursue;
•the terms and timing of any future collaboration, licensing or other arrangements that we may establish;
•the outcome, timing and cost of regulatory approvals;
•the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;
•the effects of competing technological and market developments;
•the cost and timing of completion of commercial-scale outsourced manufacturing activities;
•the cost of establishing sales, marketing and distribution capabilities for any product candidates for which we may receive regulatory approval; and
•the extent to which we acquire or invest in businesses, products or technologies.
Raising funds through lending arrangements may restrict our operations or produce other adverse results.
Our current loan and security agreement with Oxford Finance LLC and Horizon Technology Finance Corporation, or Oxford and Horizon, which we entered into in March 2011 and amended in December 2011, contains a variety of affirmative and negative covenants, including required financial
reporting, limitations on certain dispositions of assets, limitations on the incurrence of additional debt and other requirements. To secure our performance of our obligations under this loan and security agreement, we granted a security interest in substantially all of our assets, other than intellectual property assets, to the lenders. Our failure to comply with the covenants in the loan and security agreement, the occurrence of a material impairment in our prospect of repayment or in the perfection or priority of the lenders' lien on our assets, as determined by the lenders, or the occurrence of certain other specified events could result in an event of default that, if not cured or waived, could result in the acceleration of all or a substantial portion of our debt, potential foreclosure on our assets and other adverse results.
Risks Relating to the Development, Regulatory Approval and Commercialization of Our Product Candidates
We cannot be certain that tavaborole, AN2728 or any of our other wholly-owned or partnered product candidates will receive regulatory approval, and without regulatory approval our product candidates will not be able to be marketed.
We have invested a significant portion of our efforts and financial resources in the development of our most advanced product candidates, especially tavaborole. Our ability to generate significant revenue related to product sales will depend on the successful development and regulatory approval of our product candidates.
In August 2010, we filed a Special Protocol Assessment request with the FDA and reached agreement on what we believe are the major parameters associated with the design and conduct of the current Phase 3 trials for tavaborole. We commenced Phase 3 clinical trials of tavaborole in the fourth quarter of 2010, and completed enrollment in December 2011. In the first quarter of 2013, we announced the results from two clinical trials in which tavaborole met all primary and secondary endpoints with a high degree of statistical significance. We intend to file an NDA in mid-2013. We may conduct lengthy and expensive Phase 3 clinical trials of AN2728 only to learn that this drug candidate is not a safe or effective treatment, in which case these clinical trials may not lead to regulatory approval. Similarly, Lilly's development program for our two partnered animal health product candidates may not lead to regulatory approval from the FDA and similar foreign regulatory agencies. Such failure to obtain regulatory approvals would prevent our product candidates from being marketed and would have a material and adverse effect on our business.
We currently have no products approved for sale and we cannot guarantee that we will ever have marketable products. The development of a product candidate, including preclinical and clinical testing, manufacturing, quality systems, labeling, approval, record-keeping, selling, promotion, marketing and distribution of products, is subject to extensive regulation by the FDA in the United States and regulatory authorities in other countries, with regulations differing from country to country. We are not permitted to market our product candidates in the United States until we receive approval of an NDA from the FDA. We have not submitted an NDA for any of our product candidates. Obtaining approval of an NDA is a lengthy, expensive and uncertain process. An NDA must include extensive preclinical and clinical data and supporting information to establish the product candidate's safety and effectiveness for each indication. The approval application must also include significant information regarding the chemistry, manufacturing and controls for the product. The regulatory development and review process typically takes years to complete and approval is never guaranteed. If a product is approved, the FDA may limit the indications for which the product may be used, include extensive warnings on the product labeling or require costly ongoing requirements for post-marketing clinical studies and surveillance or other risk management measures to monitor the safety or efficacy of the product candidate. Markets outside of the United States also have requirements for approval of drug candidates with which we must comply prior to marketing. Obtaining regulatory approval for marketing of a product candidate in one country does not ensure we will be able to obtain regulatory approval in
other countries but a failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory process in other countries. Also, any regulatory approval of any of our products or product candidates, once obtained, may be withdrawn. If tavaborole, AN2728 or any of our other wholly-owned or partnered product candidates do not receive regulatory approval, we may not be able to generate sufficient revenue to become profitable or to continue our operations. Moreover, the filing of our NDA or the receipt of regulatory approval does not assure commercial success of any approved product.
Delays in the commencement, enrollment and completion of clinical trials could result in increased costs to us and delay or limit our ability to obtain regulatory approval for our product candidates.
Delays in the commencement, enrollment and completion of clinical trials could increase our product development costs or limit the regulatory approval of our product candidates. We do not know whether clinical trials of AN2728 or other product candidates will begin on time or, if commenced, will be completed on schedule or at all. The commencement, enrollment and completion of clinical trials can be delayed for a variety of reasons, including:
•inability to reach agreements on acceptable terms with prospective clinical research organizations, or CROs, and trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;
•regulatory objections to commencing a clinical trial;
•inability to identify and maintain a sufficient number of trial sites, many of which may already be engaged in other clinical trial programs, including some that may be for the same indication as our product candidates;
•withdrawal of clinical trial sites from our clinical trials as a result of changing standards of care or the ineligibility of a site to participate in our clinical trials;
•inability to obtain institutional review board, or IRB, approval to conduct a clinical trial at prospective sites;
•difficulty recruiting and enrolling patients to participate in clinical trials for a variety of reasons, including meeting the enrollment criteria for our study and competition from other clinical trial programs for the same indication as our product candidates; and
•inability to retain patients in clinical trials due to the treatment protocol, personal issues, side effects from the therapy or lack of efficacy, particularly for those patients receiving either a vehicle without the active ingredient or a placebo.
In addition, a clinical trial may be suspended or terminated by us, our current or any future partners, the FDA or other regulatory authorities due to a number of factors, including:
•failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols;
•failed inspection of the clinical trial operations or trial sites by the FDA or other regulatory authorities;
•unforeseen safety or efficacy issues or any determination that a clinical trial presents unacceptable health risks; or
•lack of adequate funding to continue the clinical trial due to unforeseen costs resulting from enrollment delays, requirements to conduct additional trials and studies, increased expenses associated with the services of our CROs and other third parties or other reasons.
If we are required to conduct additional clinical trials or other testing of our product candidates beyond those currently contemplated, we may be delayed in obtaining, or may not be able to obtain, marketing approval for these product candidates.
In addition, if our current or any future partners assume development of our product candidates, they may suspend or terminate their development and commercialization efforts, including clinical trials for our product candidates, at any time. For example, GSK discontinued clinical development of AN3365 in early October 2012 and, as all rights to AN3365 have reverted to us, we have not yet determined if we will proceed with any further development of this molecule.
Changes in regulatory requirements and guidance may occur and we or any partners may be required by appropriate regulatory authorities to amend clinical trial protocols to reflect these changes. Amendments may require us or any partners to resubmit clinical trial protocols to IRBs for re-examination, which may impact the costs, timing or successful completion of a clinical trial. If we or any of our partners experience delays in the completion of, or if we or our partners terminate, clinical trials, the commercial prospects for our product candidates will be harmed, and our ability to generate revenue from sales of our products will be prevented or delayed. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of a product candidate.
Clinical failure can occur at any stage of clinical development. Because the results of earlier clinical trials are not necessarily predictive of future results, any product candidate we, GSK, Drugs for Neglected Diseases initiative, or DNDi, Medicis or our potential future partners advance through clinical trials may not have favorable results in later clinical trials or receive regulatory approval.
Clinical failure can occur at any stage of our clinical development. Clinical trials may produce negative or inconclusive results, and we or our partners may decide, or regulators may require us, to conduct additional clinical or preclinical testing. In addition, data obtained from tests are susceptible to varying interpretations, and regulators may not interpret our data as favorably as we do, which may delay, limit or prevent regulatory approval. Success in preclinical testing and early clinical trials does not ensure that later clinical trials will generate the same results or otherwise provide adequate data to demonstrate the efficacy and safety of a product candidate. Frequently, product candidates that have shown promising results in early clinical trials have subsequently suffered significant setbacks in later clinical trials. In addition, the design of a clinical trial can determine whether its results will support approval of a product and flaws in the design of a clinical trial may not become apparent until the clinical trial is well advanced. We have limited experience in designing clinical trials and may be unable to design and execute a clinical trial to support regulatory approval. Further, clinical trials of potential products often reveal that it is not practical or feasible to continue development efforts. If tavaborole, AN2728, AN5568, also referred to as SCYX-7158 for human African trypanosomiasis (HAT, or sleeping sickness), or our other product candidates are found to be unsafe or lack efficacy, we or our collaborators will not be able to obtain regulatory approval for them and our business would be harmed. For example, if the results of ongoing Phase 2 and planned Phase 3 clinical trials of AN2728 do not achieve the primary efficacy endpoints and demonstrate an acceptable safety level, the prospects for approval of AN2728 would be materially and adversely affected. A number of companies in the pharmaceutical industry, including those with greater resources and experience than us, have suffered significant setbacks in Phase 3 clinical trials, even after seeing promising results in earlier clinical trials.
In some instances, there can be significant variability in safety and/or efficacy results between different trials of the same product candidate due to numerous factors, including changes in trial protocols, differences in size and type of the patient populations, adherence to the dosing regimen, particularly for self-administered topical drugs, and the rate of dropout among clinical trial participants. We do not know whether any Phase 2, Phase 3 or other clinical trials we or any partners may conduct will demonstrate consistent and/or adequate efficacy and safety to obtain regulatory approval to market our product candidates.
We have limited experience in conducting Phase 3 clinical trials and have never submitted an NDA before, and we may be unable to do so for tavaborole, AN2728 and other product candidates we are developing.
We have recently completed our first Phase 3 clinical trials of tavaborole and are planning to conduct additional clinical trials of AN2728 subject to positive data from our dose ranging studies of AN2728 in atopic dermatitis. The conduct of successful Phase 3 clinical trials is essential in obtaining regulatory approval and the submission of a successful NDA is a complicated process. We have limited experience in preparing, submitting and prosecuting regulatory filings and have not submitted an NDA before. Consequently, we may be unable to successfully and efficiently execute and complete these planned clinical trials in a way that leads to an NDA submission, acceptance and approval of tavaborole, AN2728 or other product candidates we are developing. We may require more time and incur greater costs than our competitors and may not succeed in obtaining regulatory approvals of products that we develop. In addition, failure to commence or complete, or delays in, our planned clinical trials would prevent us from or delay us in commercializing AN2728 and other product candidates we are developing.
Our product candidates may have undesirable side effects that may delay or prevent marketing approval, or, if approval is received, require them to be taken off the market or otherwise limit their sales.
Unforeseen side effects from any of our product candidates could arise either during clinical development or, if approved, after the approved product has been marketed. For example, a small number of patients who received tavaborole treatment experienced some skin irritation around their toenails during clinical trials of tavaborole for onychomycosis. In addition, a small number of patients who received AN2728 treatment experienced some skin irritation during clinical trials of AN2728. The range and potential severity of possible side effects from systemic therapies is greater than for topically administered drugs. The results of future clinical trials may show that our product candidates cause undesirable or unacceptable side effects, which could interrupt, delay or halt clinical trials, resulting in delay of, or failure to obtain, marketing approval from the FDA and other regulatory authorities.
•If any of our product candidates receives marketing approval and we or others later identify undesirable or unacceptable side effects caused by such products:
•regulatory authorities may require the addition of labeling statements, specific warnings, a contraindication or field alerts to physicians and pharmacies;
•we may be required to change the way the product is administered, conduct additional clinical trials or change the labeling of the product;
•we may have limitations on how we promote the product;
•sales of the product may decrease significantly;
•regulatory authorities may require us to take our approved product off the market;
•we may be subject to litigation or product liability claims; and
•our reputation may suffer.
Any of these events could prevent us, GSK, Lilly, Medicis or our potential future partners from achieving or maintaining market acceptance of the affected product or could substantially increase commercialization costs and expenses, which in turn could delay or prevent us from generating significant revenues from the sale of our products.
All of our product candidates require regulatory review and approval prior to commercialization. Any delay in the regulatory review or approval of any of our product candidates will harm our business.
All of our product candidates require regulatory review and approval prior to commercialization. Any delays in the regulatory review or approval of our product candidates would delay market launch, increase our cash requirements and result in additional operating losses.
The process of obtaining FDA and other required regulatory approvals, including foreign approvals, often takes many years and can vary substantially based upon the type, complexity and novelty of the products involved. Furthermore, this approval process is extremely complex, expensive and uncertain. We, GSK, Lilly, Medicis or our potential future partners may be unable to submit any NDA in the United States or any marketing approval application or other foreign applications for any of our products. If we or our partners submit any NDA, including any amended NDA or supplemental NDA, to the FDA seeking marketing approval for any of our product candidates, the FDA must decide whether to either accept or reject the submission for filing. We cannot be certain that any of these submissions will be accepted for filing and review by the FDA, or that the marketing approval application submissions to any other regulatory authorities will be accepted for filing and review by those authorities. We cannot be certain that we or our partners will be able to respond to any regulatory requests during the review period in a timely manner without delaying potential regulatory action. We also cannot be certain that any of our product candidates will receive favorable recommendations from any FDA advisory committee or foreign regulatory bodies or be approved for marketing by the FDA or foreign regulatory authorities. In addition, delays in approvals or rejections of marketing applications may be based upon many factors, including regulatory requests for additional analyses, reports, data and studies, regulatory questions regarding data and results, changes in regulatory policy during the period of product development and the emergence of new information regarding our product candidates or other products.
Data obtained from preclinical studies and clinical trials are subject to different interpretations, which could delay, limit or prevent regulatory review or approval of any of our product candidates. In addition, as a routine part of the evaluation of any potential drug, clinical trials are generally conducted to assess the potential for drug-to-drug interactions that could impact potential product safety. To date, we have not been requested to perform drug-to-drug interaction studies on our topical product candidates, but any such request, which would be more typical with a systemic product candidate, may delay any potential product approval and may increase the expenses associated with clinical programs. Furthermore, regulatory attitudes towards the data and results required to demonstrate safety and efficacy can change over time and can be affected by many factors, such as the emergence of new information, including on other products, policy changes and agency funding, staffing and leadership. We do not know whether future changes to the regulatory environment will be favorable or unfavorable to our business prospects.
In addition, the environment in which our regulatory submissions may be reviewed changes over time. For example, average review times at the FDA for NDAs have fluctuated over the last ten years, and we cannot predict the review time for any of our submissions with any regulatory authorities. Review times can be affected by a variety of factors, including budget and funding levels and statutory, regulatory and policy changes. Moreover, in light of widely publicized events concerning the safety risk of certain drug products, regulatory authorities, members of Congress, the Government Accounting Office, medical professionals and the general public have raised concerns about potential drug safety issues. These events have resulted in the withdrawal of drug products, revisions to drug labeling that
further limit use of the drug products and establishment of risk evaluation and mitigation strategies, or REMS, that may, for instance, restrict distribution of drug products. The increased attention to drug safety issues may result in a more cautious approach by the FDA to clinical trials. Data from clinical trials may receive greater scrutiny with respect to safety, which may make the FDA or other regulatory authorities more likely to terminate clinical trials before completion, or require longer or additional clinical trials that may result in substantial additional expense, a delay or failure in obtaining approval or approval for a more limited indication than originally sought.
Our use of boron chemistry to develop pharmaceutical product candidates is novel and may not prove successful in producing approved products. Undesirable side effects of any of our product candidates, or of boron-based drugs developed by others, may extend the time period required to obtain regulatory approval or harm market acceptance of our product candidates, if approved.
All of our product development activities are centered around compounds containing boron. The use of boron chemistry to develop new drugs is largely unproven. If boron-based compounds developed by us or others have significant adverse side effects, regulatory authorities could require additional studies of our boron-based compounds, which could delay the timing of and increase the cost for regulatory approvals of our product candidates. Additionally, adverse side effects for other boron-based compounds could affect the willingness of third-party payors and medical providers to provide reimbursement for or use our boron-based drugs and could impact market acceptance of our products.
Additionally, there can be no assurance that boron-based products will be free of significant adverse side effects. During clinical trials, a small number of our patients who received tavaborole experienced some skin irritation around their toenails and a few patients who received AN2728 experienced some skin irritation in the treated areas. If boron-based drug treatments result in significant adverse side effects, they may not be useful as therapeutic agents. If we are unable to develop products that are safe and effective using our boron chemistry platform, our business will be materially and adversely affected.
If any of our product candidates for which we receive regulatory approval do not achieve broad market acceptance, the revenues that are generated from their sales will be limited.
The commercial success of tavaborole, AN2728, or our other product candidates will depend upon the acceptance of these products among physicians, patients and the medical community. The degree of market acceptance of our product candidates will depend on a number of factors, including:
•limitations or warnings contained in the FDA-approved labeling for our products;
•changes in the standard of care for the targeted indications for any of our product candidates;
•limitations in the approved indications for our product candidates;
•lower demonstrated clinical safety or efficacy compared to other products;
•occurrence of significant adverse side effects;
•ineffective sales, marketing and distribution support;
•lack of availability of reimbursement from managed care plans and other third-party payors;
•timing of market introduction and perceived effectiveness of competitive products, including information provided in competitor products' package inserts;
•lack of cost-effectiveness;
•availability of alternative therapies with potentially advantageous results, or other products with similar results at similar or lower cost, including generics and over-the-counter products;
•adverse publicity about our product candidates or favorable publicity about competitive products;
•lack of convenience and ease of administration of our products; and
•potential product liability claims.
If our product candidates for human use are approved, but do not achieve an adequate level of acceptance by physicians, healthcare payors and patients, sufficient revenue may not be generated from these products, and we may not become or remain profitable. In addition, efforts to educate the medical community and third-party payors on the benefits of our product candidates may require significant resources and may never be successful. For example, Valeant Pharmaceuticals International, Inc., or Valeant, filed its NDA for IDP-108 in July 2012, and stated that IDP-108 has a Prescription Drug User Fee Act, or PDUFA date of May 24, 2013, the target date for FDA action on the IDP-108 NDA. If approved, IDP-108 may be the first to market with data that may be competitive with our data from tavaborole's Phase 3 studies. If IDP-108 reaches the market prior to tavaborole, the competitive position of tavaborole may be harmed significantly and the diminished value of tavaborole in such event could have a significant adverse effect on our commercial opportunity with tavaborole. Additionally, our product candidates intended for use against neglected diseases, such as AN5568, are not expected to generate significant revenues, if any.
We have never marketed a drug before, and if we are unable to establish an effective sales force and marketing infrastructure or enter into acceptable third-party sales and marketing or licensing arrangements, we may not be able to commercialize our product candidates successfully.
We may develop a sales and marketing infrastructure to market and sell our products in certain U.S. specialty markets. We currently do not have any sales, distribution and marketing capabilities, the development of which will require substantial resources and will be time consuming. We are currently evaluating the establishment of these capabilities, either internally or through a third-party contract sales organization, and these costs are expected to be incurred in advance of any approval of our product candidates. In addition, we may not be able to hire a sales force in the United States that is sufficient in size or has adequate expertise in the medical markets that we intend to target. If we are unable to establish our sales force and marketing capability, our operating results may be adversely affected. In addition, we plan to enter into sales and marketing or licensing arrangements with third parties for non-specialty markets in the United States and for international sales of any approved products. If we are unable to enter into any such arrangements on acceptable terms, or at all, we may be unable to market and sell our products in these markets.
We expect that our existing and future product candidates will face competition and most of our competitors have significantly greater resources than we do.
The pharmaceutical industry is highly competitive, with a number of established, large pharmaceutical companies, as well as many smaller companies. Most of these companies have significant financial resources, marketing capabilities and experience in obtaining regulatory approvals for product candidates. There are many pharmaceutical companies, biotechnology companies, public and private universities, government agencies and research organizations actively engaged in research and development of products that may target the same markets as our product candidates. We expect any future products we develop to compete on the basis of, among other things, product efficacy, price, lack of significant adverse side effects and convenience and ease of treatment. For example, tavaborole faces potential competition from Valeant's IDP-108, which is not only ahead of tavaborole in the regulatory approval process, but also would be marketed by a pharmaceutical company with significantly greater resources and commercial experience than we currently possess.
Compared to us, many of our potential competitors have substantially greater:
•resources, including capital, personnel and technology;
•research and development capability;
•clinical trial expertise;
•regulatory expertise;
•intellectual property portfolios;
•expertise in prosecution of intellectual property rights;
•manufacturing and distribution expertise; and
•sales and marketing expertise.
As a result of these factors, our competitors may obtain regulatory approval of their products more rapidly than we are able to or may obtain patent protection or other intellectual property rights that limit our ability to develop or commercialize our product candidates. Our competitors may also develop drugs that are more effective, more widely used and less costly than ours and may also be more successful than us in manufacturing and marketing their products.
The dermatology and podiatry markets are competitive, which may adversely affect our ability to commercialize our dermatological product candidates.
If tavaborole is approved for the treatment of onychomycosis, we anticipate that it would compete with other marketed nail fungal therapeutics including Lamisil, Sporanox, Penlac and generic versions of those compounds as well as lasers, which have received clearance from the FDA for the treatment of onychomycosis. Tavaborole will also compete against over-the-counter products and possibly various other devices under development for onychomycosis. If approved for the treatment of atopic dermatitis and/or psoriasis, AN2728 will compete against a number of approved topical treatments. For atopic dermatitis, competing treatments would include: combinations of antibiotics, antihistamines, topical corticosteroids and topical immunomodulators, such as Elidel (pimecrolimus) and Protopic (tacrolimus); and, for psoriasis, Taclonex (a combination of calcipotriene and the high potency corticosteroid, betamethasone dipropionate), Dovonex (calcipotriene), Tazorac (tazarotene) and generic versions, where available. AN2728 would also compete against systemic treatments for psoriasis, which include oral products such as Soriatane (acitretin), methotrexate and cyclosporine and injected biologic products such as Enbrel (etanercept), Remicade (infliximab), Stelara (ustekinumab), Simponi (golimumab), Amevive (alefacept) and Humira (adalimumab). A number of other treatments are used for psoriasis, including light-based treatments and non-prescription topical treatments.
There are also several pharmaceutical product candidates under development that could potentially be used to treat onychomycosis and compete with tavaborole. The latest-stage development candidate is efinaconazole (also known as IDP-108), a novel topical triazole that completed Phase 3 development in December 2011 and was developed by Dow Pharmaceutical Sciences, Inc., or DPS, a wholly-owned subsidiary of Valeant. DPS licensed the triazole (also known as KP-103) from Kaken Pharmaceuticals in 2006. Valeant reported the results of its Phase 3 studies in November 2012. In its first study, 17.8% of patients treated with efinaconazole reached the endpoint of "complete cure," compared to 3.3% of patients treated with vehicle. In the second study, 15.2% of patients treated with efinaconazole reached the endpoint of "complete cure," compared to 5.5% of patients treated with vehicle. Valeant filed an NDA with the FDA in July 2012 and has a PDUFA date of May 24, 2013. On October 24, 2012, we filed a demand for arbitration with JAMS regarding a breach of contract dispute between Valeant and us, arising out of a master services agreement entered into by Anacor and DPS in March 2004 related to certain development services provided by DPS in connection with our efforts to develop our topical
antifungal product candidate for the treatment of onychomycosis. We have asserted claims for breach of contract, breach of fiduciary duty, intentional interference with prospective business advantage and unfair competition. We are seeking injunctive relief and damages of at least $215.0 million. The hearing for the preliminary injunction has been set for May 6 - 8, 2013. We currently expect the resolution of the arbitration to occur in the second half of 2013. We have carefully reviewed our position and believe that we have meritorious claims; however, we will need to prove such claims in the arbitration hearings.
Other late-stage development candidates include an undisclosed topical product candidate in Phase 3 development by Promius Pharma, LLC, a wholly-owned subsidiary of Dr. Reddy's Laboratories, and a topical reformulation of terbinafine in Phase 3 development by Celtic Pharma Management L.P. There are also several companies pursuing various devices for onychomycosis, including laser technology. For example, at least four lasers have received FDA clearance for the treatment of onychomycosis. In addition, there are a number of earlier stage therapeutics and devices in various stages of development for the treatment of onychomycosis. For example, in July 2012, Topica Pharmaceuticals began enrolling a 300-patient Phase 2b/3 safety and efficacy study with topical luliconazole.
Even if a generic product or an over-the-counter product is less effective than our product candidates, a less effective generic or over-the-counter product may be more quickly adopted by health insurers and patients than our competing product candidates based upon cost or convenience. In addition, each of our product candidates may compete against product candidates currently under development by other companies.
Reimbursement decisions by third-party payors may have an adverse effect on pricing and market acceptance. If there is not sufficient reimbursement for our products, it is less likely that our products will be widely used.
Successful commercialization of pharmaceutical products usually depends on the availability of adequate coverage and reimbursement from third-party payors. Patients or healthcare providers who purchase drugs generally rely on third-party payors to reimburse all or part of the costs associated with such products. Adequate coverage and reimbursement from governmental payors, such as Medicare and Medicaid, and commercial payors, such as HMOs and insurance companies, can be essential to new product acceptance.
Current treatments for onychomycosis are often not reimbursed by third-party payors. We do not know the extent to which tavaborole will be reimbursed if it is approved. Reimbursement decisions by third-party payors may have an effect on pricing and market acceptance. Our other product candidates, such as AN2728, will also be subject to uncertain reimbursement decisions by third-party payors. Our products are less likely to be used if they do not receive adequate reimbursement.
The market for our product candidates may depend on access to third-party payors' drug formularies, or lists of medications for which third-party payors provide coverage and reimbursement. Industry competition to be included in such formularies results in downward pricing pressures on pharmaceutical companies. Third-party payors may refuse to include a particular branded drug in their formularies when a competing generic product is available.
All third-party payors, whether governmental or commercial, are developing increasingly sophisticated methods of controlling healthcare costs. In addition, in the United States, no uniform policy of coverage and reimbursement for medicines exists among all these payors. Therefore, coverage of and reimbursement for drugs can differ significantly from payor to payor and can be difficult and costly to obtain.
Virtually all countries regulate or set the prices of pharmaceutical products, which is a separate determination from whether a particular product will be subject to reimbursement under that
government's health plans. There are systems for reimbursement and pricing approval in each country and moving a product through those systems is time consuming and expensive.
Healthcare policy changes, including the Healthcare Reform Act, may have a material adverse effect on us.
Healthcare costs have risen significantly over the past decade. The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, or collectively, the Healthcare Reform Act, substantially changes the way healthcare is financed by both governmental and private insurers and significantly impacts the pharmaceutical industry. The Healthcare Reform Act contains a number of provisions, including those governing enrollment in federal healthcare programs, reimbursement changes and fraud and abuse, which will impact existing government healthcare programs and will result in the development of new programs, including Medicare payment for performance initiatives and improvements to the physician quality reporting system and feedback program. We anticipate that if we obtain approval for our products, some of our revenue may be derived from U.S. government healthcare programs, including Medicare. In addition, the Healthcare Reform Act imposes a non-deductible excise tax on pharmaceutical manufacturers or importers who sell "branded prescription drugs," which includes innovator drugs and biologics (excluding orphan drugs or generics) to U.S. government programs. We expect that the Healthcare Reform Act and other healthcare reform measures that may be adopted in the future could have a material adverse effect on our industry generally and our ability to successfully commercialize our products or could limit or eliminate our spending on development projects.
In addition to the Healthcare Reform Act, there will continue to be proposals by legislators at both the federal and state levels, regulators and third-party payors to keep these costs down while expanding individual healthcare benefits. Certain of these changes could impose limitations on the prices we will be able to charge for any products that are approved or the amounts of reimbursement available for these products from governmental agencies or third-party payors or may increase the tax requirements for life sciences companies such as ours. While it is too early to predict what effect the recently enacted Healthcare Reform Act or any future legislation or regulation will have on us, such laws could have a material adverse effect on our business, financial position and results of operations.
We expect that a portion of the market for our products will be outside the United States. Our product candidates may never receive approval or be commercialized outside of the United States.
We plan to enter into sales and marketing arrangements with third parties for international sales of any approved products. To market and commercialize any product candidates outside of the United States, we or any third parties that are marketing or selling our products must establish and comply with numerous and varying regulatory requirements of other countries regarding safety and efficacy. Approval procedures vary among countries and can involve additional product testing and additional administrative review periods. The regulatory approval process in other countries may include all of the risks detailed above regarding failure to obtain FDA approval in the United States as well as other risks. Regulatory approval in one country does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory process in others. Failure to obtain regulatory approval in other countries or any delay or setback in obtaining such approval could have the same adverse effects detailed above regarding FDA approval in the United States. As described above, such effects include the risks that our product candidates may not be approved for all indications requested, or at all, which could limit the uses of our product candidates and have an adverse effect on product sales and potential royalties, and that such approval may be subject to limitations on the indicated uses for which the product may be marketed or require costly post-marketing follow-up studies.
Even if our product candidates receive regulatory approval, we may still face future development and regulatory difficulties.
Even if regulatory approval is obtained for any of our product candidates, regulatory authorities may still impose significant restrictions on a product's indicated uses or marketing or impose ongoing requirements for potentially costly post-approval studies. Given the number of high profile adverse safety events with certain drug products, regulatory authorities may require, as a condition of approval, costly risk evaluation and mitigation strategies, which may include safety surveillance, restricted distribution and use, patient education, enhanced labeling, expedited reporting of certain adverse events, pre-approval of promotional materials and restrictions on direct-to-consumer advertising. For example, any labeling approved for any of our product candidates may include a restriction on the term of its use, or it may not include one or more of our intended indications. Furthermore, any new legislation addressing drug safety issues could result in delays or increased costs during the period of product development, clinical trials and regulatory review and approval, as well as increased costs to assure compliance with any new post-approval regulatory requirements. Any of these restrictions or requirements could force us or our partners to conduct costly studies.
Our product candidates will also be subject to ongoing regulatory requirements for the labeling, packaging, storage, advertising, promotion, record-keeping and submission of safety and other post-market information on the drug. In addition, approved products, manufacturers and manufacturers' facilities are required to comply with extensive FDA requirements, including ensuring that quality control and manufacturing procedures conform to current Good Manufacturing Practices, or cGMP. As such, we and our contract manufacturers are subject to continual review and periodic inspections to assess compliance with cGMP. Accordingly, we and others with whom we work must continue to expend time, money and effort in all areas of regulatory compliance, including manufacturing, production and quality control. We will also be required to report certain adverse reactions and production problems, if any, to the FDA and to comply with certain requirements concerning advertising and promotion for our products. Promotional communications with respect to prescription drugs are subject to a variety of legal and regulatory restrictions and must be consistent with the information in the product's approved label. As such, we may not promote our products for indications or uses for which they do not have approval.
If a regulatory agency discovers previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured or disagrees with the promotion, marketing or labeling of a product, a regulatory agency may impose restrictions on that product or us, including requiring withdrawal of the product from the market. If our product candidates fail to comply with applicable regulatory requirements, a regulatory agency may:
•issue warning letters;
•mandate modifications to promotional materials or require us to provide corrective information to healthcare practitioners;
•require us or our partners to enter into a consent decree, which can include imposition of various fines, reimbursements for inspection costs, required due dates for specific actions and penalties for noncompliance;
•impose other civil or criminal penalties;
•suspend regulatory approval;
•suspend any ongoing clinical trials;
•refuse to approve pending applications or supplements to approved applications filed by us, our partners or our potential future partners;
•impose restrictions on operations, including costly new manufacturing requirements; or
•seize or detain products or require a product recall.
Guidelines and recommendations published by various organizations may affect the use of our products.
Government agencies may issue regulations and guidelines directly applicable to us, our partners or our potential future partners and our product candidates. In addition, professional societies, practice management groups, private health/science foundations and organizations involved in various diseases from time to time publish guidelines or recommendations to the healthcare and patient communities. These various sorts of recommendations may relate to such matters as product usage, dosage, route of administration and use of related or competing therapies. Changes to these recommendations or other guidelines advocating alternative therapies could result in decreased use of our products, which may adversely affect our results of operations.
Risks Related to Our Dependence on Third Parties
We are dependent on our existing third party collaborations to fund additional development opportunities and expect to continue to expend resources in our current collaborations with GSK, Lilly and Medicis. These research collaborations may fail to successfully identify product candidates, or our collaboration partners may elect not to license, develop or commercialize any of the resulting compounds, including, in the case of GSK, compounds in development by us with respect to which GSK has option rights. In the event our collaborator does not elect to exercise its option or elects not to develop or commercialize our collaboration product candidates, our operating results and financial condition could be materially and adversely affected.
We currently have three significant ongoing collaboration agreements: an October 2007 research and development collaboration, option and license agreement with GSK for the discovery, development, manufacture and worldwide commercialization of novel systemic anti-infectives for bacterial diseases utilizing our boron-based chemistry; an August 2010 collaborative research, license and commercialization agreement with Lilly for the discovery, development, and worldwide commercialization of animal health products for specific applications; and a February 2011 research and development option and license agreement with Medicis, or the Medicis Agreement, for the discovery, development, and worldwide commercialization of novel boron-based compounds directed against a specific target for the treatment of acne.
During the research terms of the collaborations, we and, in some cases, our partner are committed to use our diligent efforts to discover and develop compounds and to provide specified resources, on a project-by-project basis. We are either reimbursed for our research costs, or each party is responsible for its own research costs, but in all cases we expect to continue to expend resources on the collaborations. If we fail to successfully identify product candidates or, in some cases, demonstrate proof-of-concept for those product candidates we identify, our operating results and financial condition could be materially and adversely affected. In addition, we may mutually agree with our collaboration partner not to pursue all of the research activities contemplated under the applicable agreement. Our collaboration partners have the option, but are not required, to exclusively license or select for further development certain product candidates under the agreement once the product candidate meets specified criteria, subject to continuing obligations to make milestone payments and royalty payments on commercial sales, if any, of such licensed compounds. Typically, the collaboration partner is obligated to make payments to us upon the achievement of certain initial discovery and developmental milestones, but further, more significant milestone payments are payable only on compounds that the partner chooses to license or develop. If we devote significant resources to a research project and our collaboration partner elects not to exercise its option with respect to any resulting product candidates or elects not to develop such candidates, our financial condition could be materially and adversely affected. In certain cases, if our partner does not exercise a given option or terminates development,
we may request a license to develop and commercialize products containing the relevant compounds. If we make such a request, we will be obligated to make certain milestone and royalty payments to the partner upon development and commercialization of such products.
If our collaboration partner elects to license or develop a compound, like Lilly has with our two compounds, the partner assumes sole responsibility for further development, regulatory approval and commercialization of such compound. Thus, with respect to compounds that our partner chooses to develop, the timing of development and future payments to us, including milestone and royalty payments, will depend on the extent to which such licensed compounds advance through development, regulatory approval and commercialization by our partner. Additionally, our partner can choose to terminate the agreement with a specified notice period or its license to any compounds at any time with no further obligation to develop and commercialize such compounds. In such event, we would not be eligible to receive further payments for the affected compounds. We would retain rights to develop and market any such product candidates. However, we would be required to fund further development and commercialization ourselves or with other partners if we continue to pursue these product candidates and, in some cases, would owe our previous partner royalties if we succeeded in commercializing any such product candidates. For example, in October 2012, GSK discontinued clinical development of AN3365. All rights to AN3365 have reverted to us and, if we elect to further develop this compound, we would be solely responsible for all development and commercialization efforts and would owe GSK royalties if we succeeded in commercializing this product candidate.
If our partner does not devote sufficient resources to the research, development and commercialization of compounds identified through our research collaboration, or is ineffective in doing so, our operating results could be materially and adversely affected. In particular, if our partner independently develops products that compete with our compounds, it could elect to advance such products and not develop or commercialize our product candidates, even while complying with applicable exclusivity provisions. We cannot assure you that our collaboration partners will fulfill their obligations under the agreements or develop and commercialize compounds identified by the research collaborations. If our partners fail to fulfill their obligations under the agreements or terminate the agreements, we would need to obtain the capital necessary to fund the development and commercialization of the returned compounds, enter into alternative arrangements with a third party or halt our development efforts in these areas. We could also become involved in disputes with our partners, which could lead to delays in or termination of the research collaborations or the development and commercialization of identified product candidates and time-consuming and expensive litigation or arbitration. If our partners terminate or breach their agreements with us or otherwise do not advance the compounds identified by our research collaborations, our chances of successfully developing or commercializing such compounds could be materially and adversely affected. For example, on November 28, 2012, we filed an arbitration demand alleging breach of contract by Medicis under the Medicis Agreement and seeking damages related to payment for the achievement of certain preclinical milestones under that agreement. On December 11, 2012, apparently in reaction to our filing the arbitration demand, Medicis filed a complaint for breach of the Medicis Agreement and a motion for preliminary injunction in the Delaware Court of Chancery seeking to enjoin us from prosecuting our claims through arbitration and to require us to continue to use diligent efforts to conduct research and development under the Medicis Agreement. On January 16, 2013, we filed a motion requesting that the Delaware Court of Chancery dismiss the Medicis suit and send the dispute back to arbitration. On February 15, 2013, Medicis filed a brief in opposition to our motion to dismiss in favor of arbitration. On March 4, 2013, we filed a reply brief in support of our motion to dismiss. We intend to vigorously enforce our rights under the Medicis Agreement and believe we have meritorious defenses against Medicis' filed complaint and motion. Medicis was acquired by Valeant in December 2012.
We may not be successful in establishing and maintaining development and commercialization collaborations, which could adversely affect our ability to develop certain of our product candidates and our financial condition and operating results.
Developing pharmaceutical products, conducting clinical trials, obtaining regulatory approval, establishing manufacturing capabilities and marketing approved products is expensive. Consequently, we plan to establish collaborations for development and commercialization of product candidates and research programs. For example, if tavaborole, AN2728 or any of our other product candidates receives marketing approval, we intend to enter into sales and marketing arrangements with third parties for non-specialty markets in the United States and for international sales, and to develop our own sales force targeting podiatrists, dermatologists and other specialty markets in the United States. If we are unable to enter into any such arrangements on acceptable terms, or at all, we may be unable to market and sell our products in these markets. We expect to face competition in seeking appropriate collaborators. Moreover, collaboration arrangements are complex and time consuming to negotiate, document and implement and they may require substantial resources to maintain. We may not be successful in our efforts to establish and implement collaborations or other alternative arrangements for the development of our product candidates. When we partner with a third party for development and commercialization of a product candidate, we can expect to relinquish to the third party some or all of the control over the future success of that product candidate. Our collaboration partner may not devote sufficient resources to the commercialization of our product candidates or may otherwise fail in their commercialization. The terms of any collaboration or other arrangement that we establish may not be favorable to us. In addition, any collaboration that we enter into may be unsuccessful in the development and commercialization of our product candidates. In some cases, we may be responsible for continuing preclinical and initial clinical development of a partnered product candidate or research program, and the payment we receive from our collaboration partner may be insufficient to cover the cost of this development. If we are unable to reach agreements with suitable collaborators for our product candidates, we could face increased costs, we may be forced to limit the number of our product candidates we can commercially develop or the territories in which we commercialize them and we might fail to commercialize products or programs for which a suitable collaborator cannot be found. If we fail to achieve successful collaborations, our operating results and financial condition will be materially and adversely affected.
We depend on third-party contractors for a substantial portion of our operations and may not be able to control their work as effectively as if we performed these functions ourselves.
We outsource substantial portions of our operations to third-party service providers, including chemical synthesis, biological screening and manufacturing and the conduct of our clinical trials and various preclinical studies. Our agreements with third-party service providers and clinical research organizations are on a study-by-study basis and are typically short-term. In all cases, we may terminate the agreements with notice and are responsible for the supplier's previously incurred costs.
Because we have relied on third parties, our internal capacity to perform these functions is limited. Outsourcing these functions involves risk that third parties may not perform to our standards, may not produce results in a timely manner or may fail to perform at all. In addition, the use of third-party service providers requires us to disclose our proprietary information to these parties, which could increase the risk that this information will be misappropriated. There is a limited number of third-party service providers that have the expertise required to achieve our business objectives. Identifying, qualifying and managing performance of third-party service providers can be difficult and time consuming and could cause delays in our development programs. We currently have a small number of employees, which limits the internal resources we have available to identify and monitor our third-party providers. To the extent we are unable to identify, retain and successfully manage the performance of third-party service providers in the future, our business may be adversely affected.
We have no experience manufacturing our product candidates on a large clinical or commercial scale and have no manufacturing facility. As a result, we are dependent on third parties for the manufacture of our product candidates and our supply chain, and if we experience problems with any of these suppliers, the manufacturing of our product candidates or products could be delayed.
We do not own or operate facilities for the manufacture of our product candidates. We have a small number of personnel with experience in drug product manufacturing. We currently outsource all manufacturing and packaging of our preclinical and clinical product candidates to third parties and intend to continue to do so. We will need to manufacture additional active ingredient at a third-party manufacturing site in order to complete our NDA submission for tavaborole. If tavaborole is approved, the inability to manufacture sufficient supplies of the drug product could adversely affect product commercialization. We also outsource to third parties the active ingredient process development work and product manufacturing for AN2728 and our other product candidates. We do not currently have any agreements with third-party manufacturers for the long-term commercial supply of our product candidates, including tavaborole. We may encounter technical difficulties or delays in the transfer of tavaborole manufacturing on a commercial scale to a third-party manufacturer. We may be unable to enter into agreements for commercial supply with third party manufacturers, or may be unable to do so on acceptable terms. We may not be able to establish additional sources of supply for our products. Such suppliers are subject to regulatory requirements, covering manufacturing, testing, quality control and record keeping relating to our product candidates and are also subject to ongoing inspections by the regulatory agencies. Failure by any of our suppliers to comply with applicable regulations may result in long delays and interruptions to our product candidate supply while we seek to secure another supplier that meets all regulatory requirements.
Reliance on third-party manufacturers entails risks to which we would not be subject if we manufactured the product candidates ourselves, including:
•the possible breach of the manufacturing agreements by the third parties because of factors beyond our control; and
•the possibility of termination or nonrenewal of the agreements by the third parties because of our breach of the manufacturing agreement or based on their own business priorities.
Any of these factors could result in delays or higher costs in connection with our clinical trials, regulatory submissions, required approvals or commercialization of our products.
If we lose our relationships with contract research organizations, our drug development efforts could be delayed.
We are substantially dependent on third-party vendors and contract research organizations for preclinical studies and clinical trials related to our drug discovery and development efforts. If we lose our relationship with any one or more of these providers, we could experience a significant delay in both identifying another comparable provider and then contracting for its services, which could adversely affect our development efforts. We may be unable to retain an alternative provider on reasonable terms, or at all. Even if we locate an alternative provider, it is likely that this provider will need additional time to respond to our needs and may not provide the same type or level of services as the original provider. In addition, any contract research organization that we retain will be subject to the FDA's regulatory requirements and similar foreign standards and we do not have control over compliance with these regulations by these providers. Consequently, if these practices and standards are not adhered to by these providers, the development and commercialization of our product candidates could be delayed, which could severely harm our business and financial condition.
Risks Relating to Our Intellectual Property
It is difficult and costly to protect our proprietary rights, and we may not be able to ensure their protection.
Our commercial success will depend in part on obtaining and maintaining patent protection and trade secret protection of our current and future product candidates and the methods used to manufacture them, as well as successfully defending these patents against third-party challenges. Our ability to stop third parties from making, using, selling, offering to sell or importing our products is dependent upon the extent to which we have rights under valid and enforceable patents or trade secrets that cover these activities.
The patent positions of pharmaceutical companies can be highly uncertain and involve complex legal and factual questions for which important legal principles remain unresolved. No consistent policy regarding the breadth of claims allowed in pharmaceutical patents has emerged to date in the United States or in many foreign jurisdictions. Changes in either the patent laws or in interpretations of patent laws in the United States and foreign jurisdictions may diminish the value of our intellectual property. Accordingly, we cannot predict the breadth of claims that may be enforced in the patents that we currently own or that may be issued from the applications we have filed or may file in the future or that we may license from third parties. Further, if any patents we obtain or license are deemed invalid and unenforceable, it could impact our ability to commercialize or license our technology.
The degree of future protection for our proprietary rights is uncertain because legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep our competitive advantage. For example:
•others may be able to make compounds that are similar to our product candidates but that are not covered by the claims of our patents;
•we might not have been the first to make the inventions covered by our pending patent applications;
•we might not have been the first to file patent applications for these inventions;
•others may independently develop similar or alternative technologies or duplicate any of our technologies;
•any patents that we obtain may not provide us with any competitive advantages;
•we may not develop additional proprietary technologies that are patentable; or
•the patents of others may have an adverse effect on our business.
As of February 1, 2013, we are the owner of record of 14 issued U.S. patents and 15 non-U.S. patents with claims to boron-containing compounds, methods of making these compounds or methods of using these compounds in various indications. We are actively pursuing, either solely or with a collaborator, 24 U.S. patent applications (2 provisional and 22 non-provisional), 4 international (PCT) patent applications and 135 non-U.S. patent applications in at least 39 jurisdictions. Of these actively pursued applications, 1 non-provisional U.S. patent application and 16 non-U.S. patent applications are solely owned by a collaborator.
Due to the patent laws of a country, or the decisions of a patent examiner in a country, or our own filing strategies, we may not obtain patent coverage for all of the product candidates or methods involving these candidates in the parent patent application. We plan to pursue divisional patent applications and/or continuation patent applications in the United States and many other countries to obtain claim coverage for inventions that were disclosed but not claimed in the parent patent application.
There have been numerous changes to the patent laws and proposed changes to the rules of the U.S. Patent and Trademark Office, or USPTO, which may have a significant impact on our ability to protect our technology and enforce our intellectual property rights. For example, in September 2011, President Obama signed the America Invents Act that codifies several significant changes to the U.S. patent laws, including, among other things, changing from a "first to invent" to a "first inventor to file" system, limiting where a patent holder may file a patent suit, requiring the apportionment of patent damages, replacing interference proceedings with derivation actions and creating a post-grant opposition process to challenge patents after they have been issued. The effects of these changes are currently unclear as the USPTO must still implement various regulations, the courts have yet to address any of these provisions and the applicability of the act and new regulations on specific patents discussed herein have not been determined and would need to be reviewed.
We also may rely on trade secrets to protect our technology, especially where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. Although we use reasonable efforts to protect our trade secrets, our employees, consultants, contractors, outside scientific collaborators and other advisors may unintentionally or willfully disclose our information to competitors. Enforcing a claim that a third party illegally obtained and is using any of our trade secrets is expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the United States are sometimes less willing to protect trade secrets. Moreover, our competitors may independently develop equivalent knowledge, methods and know-how. Our patent applications would not prevent others from taking advantage of the chemical properties of boron to discover and develop new therapies, including therapies for the indications we are targeting. If others seek to develop boron-based therapies, their research and development efforts may inhibit our ability to conduct research in certain areas and to expand our intellectual property portfolio.
We may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property rights and we may be unable to enforce or protect our rights to, or use, our technology.
If we choose to go to court to stop another party from using the inventions claimed in any patents we obtain, that individual or company has the right to ask the court to rule that such patents are invalid or should not be enforced against that third party. These lawsuits are expensive and would consume time and resources and divert the attention of managerial and scientific personnel even if we were successful in stopping the infringement of such patents. In addition, there is a risk that the court will decide that such patents are not valid and that we do not have the right to stop the other party from using the inventions. There is also the risk that, even if the validity of such patents is upheld, the court will refuse to stop the other party on the grounds that such other party's activities do not infringe our rights to such patents. In addition, the U.S. Supreme Court has recently modified some tests used by the USPTO in granting patents over the past 20 years, which may decrease the likelihood that we will be able to obtain patents and increase the likelihood of challenge of any patents we obtain or license.
Furthermore, a third party may claim that we or our manufacturing or commercialization partners are using inventions covered by the third party's patent rights and may go to court to stop us from engaging in our normal operations and activities, including making or selling our product candidates. These lawsuits are costly and could affect our results of operations and divert the attention of managerial and scientific personnel. There is a risk that a court would decide that we or our commercialization partners are infringing the third party's patents and would order us or our partners to stop the activities covered by the patents. In that event, we or our commercialization partners may not have a viable way around the patent and may need to halt commercialization of the relevant product. In addition, there is a risk that a court will order us or our partners to pay the other party damages for having violated the other party's patents. In the future, we may agree to indemnify our commercial partners against certain intellectual property infringement claims brought by third parties.
The pharmaceutical and biotechnology industries have produced a proliferation of patents, and it is not always clear to industry participants, including us, which patents cover various types of products or methods of use. The coverage of patents is subject to interpretation by the courts, and the interpretation is not always uniform. If we are sued for patent infringement, we would need to demonstrate that our products or methods either do not infringe the patent claims of the relevant patent or that the patent claims are invalid, and we may not be able to do this. Proving invalidity is difficult. For example, in the United States, proving invalidity requires a showing of clear and convincing evidence to overcome the presumption of validity enjoyed by issued patents.
Because some patent applications in the United States may be maintained in secrecy until the patents are issued, because patent applications in the United States and many foreign jurisdictions are typically not published until eighteen months after filing and because publications in the scientific literature often lag behind actual discoveries, we cannot be certain that others have not filed patent applications for technology covered by our pending applications, or that we were the first to invent the technology. Our competitors may have filed, and may in the future file, patent applications covering technology similar to ours. Any such patent application may have priority over our patent applications, which could further require us to obtain rights to issued patents covering such technologies. If another party has filed a U.S. patent application on inventions similar to ours, we may have to participate in an interference proceeding declared by the USPTO to determine priority of invention in the United States. The costs of these proceedings could be substantial, and it is possible that such efforts would be unsuccessful if, unbeknownst to us, the other party had independently arrived at the same or similar invention prior to our own invention, resulting in a loss of our U.S. patent position with respect to such inventions.
Patents covering the composition of matter of tavaborole and AN2718 that were owned by others have expired. Our patent applications and patents include or support claims on other aspects of tavaborole or AN2718, such as pharmaceutical formulations containing tavaborole or AN2718, methods of using tavaborole or AN2718 to treat disease and methods of manufacturing tavaborole or AN2718. Without patent protection on the composition of matter of tavaborole or AN2718, our ability to assert our patents to stop others from using or selling tavaborole or AN2718 in a non-pharmaceutically acceptable formulation may be limited.
Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. In addition, any uncertainties resulting from the initiation and continuation of any litigation could have a material adverse effect on our ability to raise the funds necessary to continue our operations. For example, in our current legal proceedings with Valeant regarding IDP-108, we have spent considerable resources, including management time, in the proceedings and we expect that, as we move closer to arbitration hearings, the costs will increase. Notwithstanding our commitment to move forward, Valeant has significantly more resources than we do and in any event there can be no assurance that our efforts in this proceeding will be successful.
We do not have exclusive rights to intellectual property we developed under U.S. federally funded research grants and contracts in connection with certain of our neglected diseases initiatives, and, in the case of U.S. funded research, we could ultimately lose the rights we do have under certain circumstances.
Some of our intellectual property rights related to compounds that are not in clinical development as of February 1, 2013 were initially developed in the course of research funded by the U.S. government. As a result, the U.S. government may have certain rights to intellectual property embodied in our current or future products pursuant to the Bayh-Dole Act of 1980. Government rights in certain inventions developed under a government-funded program include a non-exclusive, non-transferable, irrevocable worldwide license to use inventions for any governmental purpose. In addition, the U.S. government has the right to require us to grant exclusive licenses to any of these inventions to a third
party if they determine that: (i) adequate steps have not been taken to commercialize the invention; (ii) government action is necessary to meet public health or safety needs; or (iii) government action is necessary to meet requirements for public use under federal regulations. The U.S. government also has the right to take title to these inventions if we fail to disclose the invention to the government and fail to file an application to register the intellectual property within specified time limits. In addition, the U.S. government may acquire title in any country in which a patent application is not filed within specified time limits.
Some of our intellectual property rights related to boron-containing compounds that are in clinical development as of February 1, 2013 were developed through collaborations. We accept research funding from DNDi. We have a co-exclusive, royalty-free, sublicensable license with DNDi to make, use, import and manufacture products for treatment of human African trypanosomiasis, Chagas disease and cutaneous and visceral leishmaniasis in humans in all countries of the world, specifically excluding Japan, Australia, New Zealand, Russia, China and all countries of North America and Europe, or DNDi Territory. We also grant to DNDi an exclusive, royalty-free, sublicensable license to distribute, including uses by, or on behalf of, a public sector agency, products containing molecules synthesized under the research plan for treatment of human African trypanosomiasis, Chagas disease and cutaneous and visceral leishmaniasis in humans in the DNDi Territory. As a result, we may not be able to realize any revenue in the DNDi Territory for any human therapeutics that we discover for these diseases. In March 2012, DNDi initiated a Phase 1 clinical trial for AN5568 in France. AN5568 is being developed for the treatment of sleeping sickness, or HAT. As of February 1, 2013, the boron-containing compounds being studied in this collaboration are structurally distinct from our other clinical product candidates. As of February 1, 2013, none of our other clinical product candidates are being considered for use in the DNDi collaboration. Some of our intellectual property rights related to boron-containing compounds that are not in clinical development as of February 1, 2013 were developed through a collaboration with Medicines for Malaria Venture, or MMV. We accept research and development funding from MMV, and we provide MMV with a worldwide, royalty-free non-exclusive license (without the right to sublicense, except with prior Anacor written approval) to intellectual property rights arising under the collaboration to develop human therapeutics for the treatment of malaria under our research and development agreements with MMV. In September 2011, we amended the MMV agreements to include an exclusive license to GSK to further develop certain of the compounds under development through our collaboration with MMV. As of February 1, 2013, the boron-containing compounds under development in this collaboration are structurally distinct from our clinical product candidates. As of February 1, 2013, none of our clinical product candidates are being considered for use in the MMV collaboration.
We do not have exclusive rights to certain intellectual property as our rights to certain patents and molecules in our collaborations are jointly owned with our collaborators.
We jointly own 1 provisional U.S. patent application and 1 non-provisional U.S. patent application with a collaborator, and have a license under 1 non-provisional U.S. patent application and 16 non-U.S. patent applications solely owned by the collaborator. Under a separate collaboration, we jointly own 2 non-provisional U.S. patent applications, 2 international (PCT) patent applications, and 14 non-U.S. patent applications with claims to boron-containing compounds.
Risks Related to Employee Matters and Managing Growth
We may need to expand certain of our operations and increase the size of our company, and we may experience difficulties in managing growth.
As we increase the number of product development programs we have underway and advance our product candidates through preclinical studies, clinical trials and commercialization, we will need to increase our product development, scientific, marketing, sales and administrative headcount to manage
these efforts. Our management, personnel and systems currently in place may not be adequate to support this future growth. Our need to effectively manage our operations, growth and various projects requires that we:
•successfully attract and recruit new employees with the expertise and experience we will require;
•manage our clinical programs effectively, which we anticipate being conducted at numerous clinical sites;
•develop a marketing and sales infrastructure; and
•continue to develop our operational, financial and management controls, reporting systems and procedures.
If we are unable to successfully manage this growth, our business may be adversely affected.
We may not be able to manage our business effectively if we are unable to attract and retain key personnel.
We may not be able to attract or retain qualified management, finance, scientific and clinical personnel in the future due to the intense competition for qualified personnel among biotechnology, pharmaceutical and other businesses, particularly in Northern California. If we are not able to attract and retain necessary personnel to accomplish our business objectives, we may experience constraints that will significantly impede the achievement of our development objectives, our ability to raise additional capital and our ability to implement our business strategy.
Our industry has experienced a high rate of turnover of management personnel in recent years. We are highly dependent on the development, regulatory, commercialization and business development expertise of our executive officers and key employees. If we lose one or more of our executive officers or key employees, our ability to implement our business strategy successfully could be seriously harmed. We have entered into change of control and severance agreements with each of our officers as part of our retention efforts. Replacing executive officers and key employees may be difficult and may take an extended period of time because of the limited number of individuals in our industry with the breadth of skills and experience required to develop, gain regulatory approval of and commercialize products successfully. Competition to hire from this limited pool is intense, and we may be unable to hire, train, motivate or retain these additional key personnel. Our failure to retain key personnel could materially harm our business.
If we fail to maintain proper and effective internal controls, our ability to produce accurate financial statements on a timely basis could be impaired, which would adversely affect our business and our stock price.
We operate in an increasingly demanding regulatory environment, which requires us to comply with the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and the related rules and regulations of the Securities and Exchange Commission, expanded disclosure requirements, accelerated reporting requirements and more complex accounting rules. Company responsibilities required by the Sarbanes-Oxley Act include establishing adequate internal control over financial reporting and disclosure controls and procedures. Effective internal controls are necessary for us to produce reliable financial reports and are important to help prevent financial fraud. The growth of our operations and our initial public offering created a need for additional resources within the accounting and finance functions in order to produce timely financial information and to create the level of segregation of duties customary for a U.S. public company.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally
accepted accounting principles. Our management does not expect that our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within our company will have been detected.
We were required to comply with Section 404 of the Sarbanes-Oxley Act, or Section 404, in connection with the Annual Report on Form 10-K for the year ending December 31, 2012. We have expended significant resources to develop the necessary documentation and testing procedures required by Section 404. We cannot be certain that the actions we have taken to improve our internal control over financial reporting will be sufficient, and if we are unable to produce accurate financial statements on a timely basis, investors could lose confidence in the reliability of our financial statements, which could cause the market price of our common stock to decline and make it more difficult for us to finance our operations and growth.
Other Risks Relating to Our Business
We face potential product liability exposure, and if successful claims are brought against us, we may incur substantial liability for a product candidate and may have to limit its commercialization.
The use of our product candidates in clinical trials and the sale of any products for which we may obtain marketing approval expose us to the risk of product liability claims. Product liability claims may be brought against us or our partners by participants enrolled in our clinical trials, patients, healthcare providers or others using, administering or selling our products. If we cannot successfully defend ourselves against any such claims, we would incur substantial liabilities. Regardless of merit or eventual outcome, product liability claims may result in:
•withdrawal of clinical trial participants;
•termination of clinical trial sites or entire trial programs;
•costs of related litigation;
•substantial monetary awards to patients or other claimants;
•decreased demand for our product candidates and loss of revenues;
•impairment of our business reputation;
•diversion of management and scientific resources from our business operations; and
•the inability to commercialize our product candidates.
We have obtained limited product liability insurance coverage for our clinical trials domestically and in selected foreign countries where we are conducting clinical trials. Our coverage is currently limited to $5.0 million per occurrence and $5.0 million in the aggregate per year, as well as additional local country product liability coverage for trials conducted outside of the U.S. as required by the local country regulations. As such, our insurance coverage may not reimburse us or may not be sufficient to reimburse us for any expenses or losses we may suffer. Moreover, insurance coverage is becoming increasingly expensive, and, in the future, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to product liability. We intend to expand our insurance coverage for products to include the sale of commercial products if we obtain marketing approval for our product candidates in development, but we may be unable to obtain commercially reasonable product liability insurance for any products approved for marketing. Large judgments have been awarded in class action lawsuits based on drugs that had unanticipated side
effects. A successful product liability claim or series of claims brought against us, particularly if judgments exceed our insurance coverage, could decrease our cash and adversely affect our business.
Our operations involve hazardous materials, which could subject us to significant liabilities.
Our research and development processes involve the controlled use of hazardous materials, including chemicals. Our operations produce hazardous waste products. We cannot eliminate the risk of accidental contamination or discharge or injury from these materials. Federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of these materials. We could be subject to civil damages in the event of exposure of individuals to hazardous materials. In addition, claimants may sue us for injury or contamination that results from our use of these materials and our liability may exceed our total assets. We have general liability insurance coverage of up to $5.0 million per occurrence, with an annual aggregate limit of $6.0 million, which excludes pollution liability. This coverage may not be adequate to cover all claims related to our biological or hazardous materials. Furthermore, if we were to be held liable for a claim involving our biological or hazardous materials, this liability could exceed our insurance coverage, if any, and our other financial resources. Compliance with environmental and other laws and regulations may be expensive and current or future regulations may impair our research, development or production efforts.
In addition, we may incur substantial costs in order to comply with current or future environmental, health and safety laws and regulations. These current or future laws and regulations may impair our research, development or production efforts. Failure to comply with these laws and regulations also may result in substantial fines, penalties or other sanctions.
Our insurance policies are expensive and protect us only from some business risks, which will leave us exposed to significant uninsured liabilities.
We do not carry insurance for all categories of risk that our business may encounter. For example, we do not carry earthquake insurance. In the event of a major earthquake in our region, our business could suffer significant and uninsured damage and loss. Some of the policies we currently maintain include general liability, employment practices liability, property, auto, workers' compensation, products liability and directors' and officers' insurance. We do not know, however, if we will be able to maintain existing insurance with adequate levels of coverage. Any significant uninsured liability may require us to pay substantial amounts, which would adversely affect our cash position and results of operations.
Risks Relating to Owning Our Common Stock
Our executive officers, directors and principal stockholders have the ability to control all matters submitted to our stockholders for approval.
As of February 15, 2013, our executive officers, directors and stockholders who own more than 5% of our outstanding common stock, together beneficially own shares representing approximately 70% of our common stock based on reports filed with the SEC. As a result, if these stockholders were to choose to act together, they would be able to control all matters submitted to our stockholders for approval, as well as our management and affairs. For example, these persons, if they choose to act together, will control the election of directors and approval of any merger, consolidation, sale of all or substantially all of our assets or other business combination or reorganization. This concentration of voting power could delay or prevent an acquisition of us on terms that other stockholders may desire. The interests of this group of stockholders may not always coincide with your interests or the interests of other stockholders and they may act in a manner that advances their best interests and not necessarily those of other stockholders, including seeking a premium value for their common stock, and might affect the prevailing market price for our common stock.
If we raise additional capital by issuing securities in the future, it will cause dilution to existing stockholders and may cause our share price to decline.
We may raise additional funds through the issuance and sale of additional shares of our common stock or other securities convertible into or exchangeable for our common stock. For example, in January 2013, we entered into an equity distribution agreement with Wedbush Securities Inc., or Wedbush, pursuant to which we may issue and sell shares of our common stock having an aggregate offering price up to $25.0 million, from time to time. The number of shares ultimately offered for sale by Wedbush is dependent upon the number of shares that we elect to sell through Wedbush under the agreement. Depending upon market liquidity at the time, sales of shares of our common stock through Wedbush under the agreement may cause the trading price of our common stock to decline.
To the extent that we raise additional capital by issuing equity securities under the agreement with Wedbush or otherwise, our stockholders will experience additional dilution, and any such issuances may result in downward pressure on the price of our common stock.
Sales of our common stock in the "at the market" offering, or the perception that such sales may occur, could cause the market price of our common stock to fall.
We may issue shares of our common stock with aggregate sales proceeds of up to $25.0 million from time to time in connection with the "at the market" offering. Through March 14, 2013, we sold shares of our common stock for net proceeds of approximately $1.3 million and currently have approximately $23.6 million potentially remaining available for sale under our "at the market" offering and the issuance from time to time of these new shares of common stock, or our ability to issue these new shares of common stock in this offering, could have the effect of depressing the market price for our common stock.
We do not anticipate paying cash dividends, and accordingly, stockholders must rely on stock appreciation for any return on their investment.
We do not anticipate paying cash dividends in the future. As a result, only appreciation of the price of our common stock, which may never occur, will provide a return to stockholders. Investors seeking cash dividends should not invest in our common stock. In addition, our ability to pay cash dividends is currently prohibited by the terms of our loan and security agreement with Oxford and Horizon.
Our share price may be volatile and could decline significantly.
The market price of shares of our common stock could be subject to wide fluctuations in response to many risk factors listed in this section, and others beyond our control, including:
•results of our clinical trials;
•results of clinical trials of our competitors' products;
•regulatory actions with respect to our products or our competitors' products;
•actual or anticipated fluctuations in our financial condition and operating results;
•actual or anticipated changes in our product sales growth rates relative to those of our competitors;
•actual or anticipated fluctuations in our competitors' operating results or changes in their product sales growth rates;
•competition from existing products or new products that may emerge;
•announcements by us, our collaborators or our competitors of significant acquisitions, strategic partnerships, joint ventures, collaborations or capital commitments;
•issuance of new or updated research or reports by securities analysts;
•fluctuations in the valuation of companies perceived by investors to be comparable to us;
•share price and volume fluctuations attributable to inconsistent trading volume levels of our shares;
•additions or departures of key management or scientific personnel;
•disputes or other developments related to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our technologies;
•announcement or expectation of additional financing efforts;
•sales of our common stock by us, our insiders or our other stockholders;
•market conditions for biopharmaceutical stocks in general; and
•general economic and market conditions.
Furthermore, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political and market conditions such as recessions, interest rate changes or international currency fluctuations, may negatively impact the market price of shares of our common stock. You may not realize any return on an investment in us and may lose some or all of your investment.
We may be subject to securities litigation, which is expensive and could divert management attention.
Our share price may be volatile, and in the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management's attention from other business concerns, which could seriously harm our business.
A significant portion of our total outstanding shares of common stock is subject to demand registration rights, which could require us to register such shares for public sale at the holders' option.
Holders of shares of our common stock who are party to an investors' rights agreement and a registration rights agreement with us have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders.
As a public company, we are subject to additional expenses and administrative burden.
As a public company, we incur significant legal, accounting and other expenses and our administrative staff is required to perform additional tasks, such as adopting additional internal controls, disclosure controls and procedures, retaining a transfer agent and bearing all of the internal and external costs of preparing and distributing periodic public reports in compliance with our obligations under the securities laws.
In addition, changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act and related regulations implemented by the Securities and Exchange Commission and The NASDAQ Global Market, are creating uncertainty for public
companies, increasing legal and financial compliance costs and making some activities more time consuming. We are currently evaluating and monitoring these rules and proposed changes to rules, and cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment will result in increased general and administrative expenses and may divert management's time and attention from product development activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us and our business may be harmed. In the future, it may be more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee and compensation committee, and qualified executive officers.
Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.
Provisions in our amended and restated certificate of incorporation and our bylaws may delay or prevent an acquisition of us. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, who are responsible for appointing the members of our management team. In addition, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibits, with some exceptions, stockholders owning in excess of 15% of our outstanding voting stock from merging or combining with us. Finally, our charter documents establish advance notice requirements for nominations for election to our board of directors and for proposing matters that can be acted upon at stockholder meetings. Although we believe these provisions together provide for an opportunity to receive higher bids by requiring potential acquirers to negotiate with our board of directors, they would apply even if the offer may be considered beneficial by some stockholders.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
ITEM 2. PROPERTIES
We lease a 36,960 square-foot building consisting of office and laboratory space in Palo Alto, California, which serves as our corporate headquarters. The lease term commenced in March 2008 and has scheduled annual rent increases through the lease expiration in March 2018. We also have a lease for a 15,300 square-foot building consisting of office and laboratory space in Palo Alto, California, which we extended through December 2013, and have two (2) one-year options to extend the lease through each of 2014 and 2015. This lease is cancelable with four months' notice. We believe that the facilities that we currently lease are adequate for our needs for the immediate future and that, should it be needed, additional space can be leased to accommodate any future growth.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
On October 24, 2012, we provided notice to Valeant Pharmaceuticals International, Inc. ((Valeant), successor in interest to Dow Pharmaceutical Sciences, Inc. (DPS)) seeking to commence arbitration before JAMS of a breach of contract dispute under a master services agreement dated March 26, 2004 between DPS and us related to certain development services provided by DPS in connection with our efforts to develop our topical antifungal product candidate for the treatment of onychomycosis. We have asserted claims for breach of contract, breach of fiduciary duty, intentional interference with prospective business advantage and unfair competition. We are seeking injunctive relief and damages of at least $215.0 million. The hearing for the preliminary injunction has been set for May 6 - 8, 2013. We currently expect the resolution of the arbitration to occur in the second half of 2013. We have carefully reviewed our position and believe that we have meritorious claims; however, we will need to prove such claims in the arbitration hearings.
On November 28, 2012, we filed for arbitration with JAMS for breach of contract by Medicis Pharmaceutical Corporation (Medicis) seeking damages related to payment for the achievement of certain preclinical milestones under the research and development option and license agreement with Medicis dated February 9, 2011. On December 11, 2012, apparently in reaction to our filing the arbitration demand, Medicis filed a complaint for breach of the agreement and a motion for preliminary injunction in the Delaware Court of Chancery seeking to enjoin us from prosecuting our claims through arbitration and to require us to continue to use diligent efforts to conduct research and development under the agreement. On January 16, 2013, we filed a motion requesting that the Delaware Court of Chancery dismiss the Medicis suit and send the dispute back to arbitration. On February 15, 2013, Medicis filed a brief in opposition to our motion to dismiss in favor of arbitration. On March 4, 2013, we filed a reply brief in support of our motion to dismiss. We intend to vigorously enforce our rights under the agreement and believe we have meritorious defenses against Medicis' filed complaint and motion. Medicis was acquired by Valeant in December 2012.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
PRICE RANGE OF COMMON STOCK
Our common stock began trading on the NASDAQ Global Market under the symbol "ANAC" on November 24, 2010. Prior to this date, there was no public market for our common stock. The following table sets forth the high and low closing prices of our common stock for the period indicated as reported on the NASDAQ Global Market.
The closing price for our common stock as reported by The NASDAQ Global Market on March 11, 2013 was $3.66 per share.
As of March 11, 2013, there were 36,056,895 shares of our common stock issued and outstanding with approximately 36 stockholders of record. A significantly larger number of stockholders may be in "street name" or beneficial holders, whose shares of record are held by banks, brokers and other financial institutions. The number of record holders does not include shares held in "street name" through brokers.
STOCK PRICE PERFORMANCE GRAPH
The following stock performance graph compares our total stock return with the total return for (i) the NASDAQ Composite Index and the (ii) the NASDAQ Biotechnology Index for the period from November 24, 2010 (the date our common stock commenced trading on the NASDAQ Global Market) through December 31, 2012. The figures represented below assume an investment of $100 in our common stock at the closing price of $5.09 on November 24, 2010 and in the NASDAQ Composite Index and the NASDAQ Biotechnology Index on November 24, 2010 and the reinvestment of dividends into shares of common stock. The comparisons in the table are required by the Securities and Exchange Commission, or SEC, and are not intended to forecast or be indicative of possible future performance of our common stock. This graph shall not be deemed "soliciting material" or be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any of our filings under the Securities Act of 1933, as amended, or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.
Stock Price Performance Graph
DIVIDEND POLICY
We have never declared or paid any cash dividends. We currently expect to retain earnings for use in the operation and expansion of our business, and therefore do not anticipate paying any cash dividends in the foreseeable future. In addition, our ability to pay cash dividends is currently prohibited by the terms of our loan and security agreement with Oxford Finance LLC and Horizon Technology Finance Corporation.
USE OF PROCEEDS
There has been no material change in our planned use of proceeds from the IPO from that described in the final prospectus filed with the SEC pursuant to Rule 424(b) on November 24, 2010), except that we have used some of the proceeds for the development of AN2728 in atopic dermatitis ahead of psoriasis as a result of the positive outcome of our Phase 2 trial in mild-to-moderate atopic dermatitis, which we completed in 2011. In 2012, we had used the entire net proceeds for our clinical trials for tavaborole and AN2728, for repayment of scheduled debt obligations, to fund our other research and development programs and for working capital, capital expenditures and general corporate purposes.
RECENT SALE OF UNREGISTERED SECURITIES
None.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The data in the tables below should be read together with our financial statements and accompanying notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this Annual Report on Form 10-K. The selected financial data in this section is not intended to replace our financial statements and the accompanying notes. Our historical results are not necessarily indicative of our future results.
The statements of operations data for 2012, 2011 and 2010 and the balance sheet data as of December 31, 2012 and 2011 were derived from our audited financial statements appearing elsewhere in this Annual Report on Form 10-K. The statements of operations data for 2009 and 2008 and the balance sheet data as of December 31, 2010, 2009 and 2008 were derived from our audited financial statements that are not included in this Annual Report on Form 10-K.
(1)Includes the following noncash, stock-based compensation expense:
(2)Please see Note 2 to our audited financial statements for an explanation of the method used to calculate basic and diluted net loss per common share and the number of shares used in the computation of the per share amounts. There is a lack of comparability in the per share amounts between the periods presented above. During the fourth quarter of 2010, we issued 12,000,000 shares of common stock sold in our initial public offering (IPO), 2,000,000 shares of common stock sold in a concurrent private placement and 1,382,651 shares of common stock sold pursuant to an over-allotment option granted to the underwriters of our IPO. Also during that quarter, all convertible preferred stock shares outstanding were converted into 11,120,725 shares of common stock at the closing of our IPO.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis together with our financial statements and the notes to those statements included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. We use words such as "may," "will," "expect," "anticipate," "estimate," "intend," "plan," "predict," "potential," "believe," "should" and similar expressions to identify forward-looking statements. These statements appearing throughout this Annual Report on Form 10-K are statements regarding our intent, belief, or current expectations, primarily regarding our operations. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Annual Report on Form 10-K. As a result of many factors, such as those set forth under "Risk Factors" and elsewhere in this Annual Report on Form 10-K, our actual results may differ materially from those anticipated in these forward-looking statements.
Overview
We are a biopharmaceutical company focused on discovering, developing and commercializing novel small-molecule therapeutics derived from our boron chemistry platform. The productivity of our internal discovery capability has enabled us to generate a pipeline of both topical and systemic boron-based compounds. We have discovered, synthesized and developed eight molecules that are currently in development.
Our lead product candidates include two topically administered dermatologic compounds-tavaborole (formerly referred to as AN2690), an antifungal for the treatment of onychomycosis, and AN2728, an anti-inflammatory for the treatment of atopic dermatitis and psoriasis. In addition, we have three wholly-owned clinical product candidates-AN2718 and AN2898, which are backup compounds to tavaborole and AN2728, respectively, and AN3365 (formerly referred to as GSK2251052, or GSK '052), an antibiotic for the treatment of infections caused by Gram-negative bacteria, which previously was licensed to GlaxoSmithKline LLC, or GSK. In October 2012, GSK advised us that it had discontinued further development of AN3365; accordingly, all rights to this compound reverted to us. We are considering our options for further development, if any, of this compound. We have also discovered three other compounds that we have out-licensed for further development-two are licensed to Eli Lilly and Company, or Lilly, for the treatment of animal health indications and the third compound, AN5568, also referred to as SCYX-7158, is licensed to Drugs for Neglected Diseases initiative, or DNDi, for human African trypanosomiasis (HAT, or sleeping sickness). We also have a pipeline of other internally discovered topical and systemic boron-based compounds in development.
Our most advanced product candidate is tavaborole. We initiated our Phase 3 clinical trials for tavaborole in the fourth quarter of 2010 and completed enrollment for these trials in the fourth quarter of 2011. In the first quarter of 2013, we reported positive results from both Phase 3 trials conducted under a Special Protocol Assessment, or SPA, with the United States Food and Drug Administration, or FDA. Tavaborole achieved a high degree of statistical significance on all primary and secondary endpoints. In the first trial, 6.5% of patients treated with tavaborole met the primary endpoint of "complete cure," compared with 0.5% of patients treated with vehicle (p=0.001) at week 52. In the second trial, 9.1% of patients treated with tavaborole met the primary endpoint of "complete cure," compared with 1.5% of patients treated with vehicle (p<0.001) at week 52. "Complete cure" is a composite endpoint that requires both a mycological cure and a completely clear nail. In addition, we completed a cardiac safety study and a repeat insult patch test, or RIPT, study in November 2012. We are currently in the process of preparing to file a New Drug Application, or NDA, in mid-2013.
For AN2728, we completed a Phase 2 dose-ranging trial in psoriasis in the second quarter of 2010, a second Phase 2 clinical trial in psoriasis in the second quarter of 2011 and a Phase 1 absorption trial in the third quarter of 2011. We also completed a Phase 2 trial of AN2728 and AN2898, our second topical anti-inflammatory product candidate, in mild-to-moderate atopic dermatitis in the fourth quarter
of 2011. In early 2012, we completed two safety studies of AN2728. Given the positive outcome from our atopic dermatitis trial, the safety profile exhibited by AN2728 and the large unmet need in atopic dermatitis relative to psoriasis, we intend to focus our AN2728 development efforts on atopic dermatitis in the near future and defer the start of the Phase 3 trial for psoriasis. As such, we initiated a Phase 2 safety, pharmacokinetics, or PK, and efficacy trial for mild-to-moderate atopic dermatitis in adolescents in July 2012 and a Phase 2 dose-ranging study in mild-to-moderate atopic dermatitis in adolescents in August 2012. We completed the Phase 2 safety, PK and efficacy trial in December 2012 and expect results from our Phase 2 dose-ranging study in March 2013. Our future development plans for AN2728 will be determined following the results of our Phase 2 dose-ranging study.
In October 2007, we entered into a research and development collaboration, option and license agreement with GSK for the discovery, development and worldwide commercialization of boron-based systemic anti-infectives. In September 2011, we amended and expanded the GSK agreement to, among other things, provide GSK the option to extend its rights around the bacterial enzyme target leucyl-tRNA synthetase, or LeuRS, as well as to add a new research program using our boron chemistry platform for tuberculosis, or TB, and GSK is currently funding our TB research activities. The amendment also gives GSK options to initiate an additional collaborative research program directed towards LeuRS and to acquire rights to certain specified compounds from Anacor's malaria program, which is currently being conducted through a collaboration with Medicines for Malaria Venture, or MMV. None of the compounds currently being evaluated as potential lead candidates under this program are subject to GSK's option.
In August 2010, we entered into a research, license and commercialization agreement with Lilly, under which we are collaborating to discover products for a variety of animal health applications. Pursuant to this agreement, Lilly selected the first development compound for an animal health indication in August 2011, and in December 2012, they selected a second development compound for another animal health indication. Lilly will be responsible for all further development and commercialization of these compounds.
In February 2011, we entered into a research and development collaboration with Medicis Pharmaceutical Corporation, or Medicis, to discover and develop compounds directed against a target for the potential treatment of acne. On November 28, 2012, we filed for arbitration with JAMS for breach of contract by Medicis seeking damages in the form of payment for the achievement of certain preclinical milestones under the collaboration. On December 11, 2012, Medicis filed a complaint for breach of the collaboration and a motion for preliminary injunction in the Delaware Court of Chancery seeking to enjoin us from prosecuting our claims through arbitration and to require us to continue to use diligent efforts to conduct research and development under the agreement. On January 16, 2013, we filed a motion requesting that the Delaware Court of Chancery dismiss the Medicis suit and send the dispute back to arbitration. On February 15, 2013, Medicis filed a brief in opposition to our motion to dismiss in favor of arbitration. On March 4, 2013, we filed a reply brief in support of our motion to dismiss. We intend to vigorously enforce our rights under the collaboration and believe that we have meritorious defenses against Medicis' filed complaint and motion. Medicis was acquired by Valeant in December 2012.
We also have several collaborations with organizations that fund research leveraging our boron chemistry to discover new treatments for neglected diseases. In addition to potentially developing new therapies for such diseases, these collaborations provide us the potential benefits of expanding the chemical diversity of our boron compounds, understanding new properties of our boron compounds, receiving future incentives, such as the potential grant of a priority review voucher by the FDA and, if a drug is ultimately approved, potential revenue in some regions. Our collaboration partners include DNDi to develop new therapeutics for HAT, visceral leishmaniasis and Chagas disease, MMV to develop compounds for the treatment of malaria, the Sandler Center for Drug Discovery at the University of California at San Francisco to discover new drug therapies for the treatment of river blindness, the Global Alliance for Livestock Veterinary Medicines, or GALVMed, for the treatment of
animal African trypanosomiasis and the University of California at San Francisco to develop compounds for the treatment of malaria under a National Institutes of Health grant. In 2011, DNDi completed pre-clinical studies of AN5568 for HAT and, in March 2012, AN5568 became the first compound from our neglected diseases initiatives to enter human clinical trials.
In February 2012, we issued and sold 3,250,000 shares of our common stock in connection with an underwriting agreement, or the Canaccord Underwriting Agreement, with Canaccord Genuity Inc., or Canaccord. The price to the public in this offering was $6.60 per share, for gross proceeds of approximately $21.5 million, and Canaccord purchased the shares from us pursuant to the Canaccord Underwriting Agreement at a price of $6.25 per share. Our net proceeds from this offering were approximately $19.9 million, after deducting the underwriting discount and other offering costs.
In October 2012, we issued and sold 4,000,000 shares of our common stock pursuant to an underwriting agreement, or the Cowen Underwriting Agreement, with Cowen & Company, LLC, or Cowen. The price to the public in this offering was $6.00 per share for gross proceeds of $24.0 million, and Cowen purchased the shares from us pursuant to the Cowen Underwriting Agreement at a price of $5.76 per share. The net proceeds to us from this offering were approximately $22.6 million, after deducting the underwriting discount and other offering costs.
We began business operations in March 2002. To date, we have not generated any revenue from product sales and have never been profitable. As of December 31, 2012, we have an accumulated deficit of $215.2 million. We have funded our operations primarily through the sale of equity securities, payments received under our agreements with Schering Corporation, or Schering, GSK, Lilly and Medicis, government contracts and grants, contracts with not-for-profit organizations for neglected diseases and borrowings under debt arrangements. We expect to incur losses in future periods. The size of our future losses will depend, in part, on the rate of growth of our expenses, our ability to enter into additional licensing, research and development agreements and future payments earned under our agreements with GSK, Lilly, Medicis or any such future collaboration partners. Our intent is to enter into additional licensing and development agreements to further develop certain of our product candidates and to fund other areas of our research. If the GSK, Lilly and/or Medicis agreements are terminated or we are unable to enter into other collaboration agreements, we may incur additional operating losses and our ability to expand and continue our research and development activities and move our product candidates into later stages of development may be limited. While management believes that we currently have sufficient resources to fund our operations until the filing of our NDA, additional capital will be needed to complete the development and potential commercialization of tavaborole, fund the other research and development activities and meet our operating requirements through 2013 and beyond. To fund our future operations, including research, development and commercialization of our product candidates, we will need to seek additional capital through research and development collaborations; a possible license, collaboration or other similar arrangement with respect to commercialization rights to tavaborole or our other product candidates; equity offerings or debt financings; or a combination of these sources.
Financial Operations Overview
Revenues
Our recent revenues are comprised primarily of collaboration agreement-related revenues and government grants, while historically we also had government contract revenues. Collaboration agreement-related revenues have included license fees, development reimbursements and development milestone fees. In addition, we received an amendment fee in 2011 in connection with the modification of our research and development collaboration with GSK, or the Amendment Fee, and a termination and release payment in 2010 with respect to our previous agreement with Schering. Government grant revenues have consisted of grant funding received from government entities and government contract revenues have included cost and cost plus fixed fee reimbursements for allowable costs.
We have generated approximately $141.0 million in revenue from inception through December 31, 2012. Through 2004, we had recognized cumulative revenues of $16.1 million through our contract with the U.S. Department of Defense for the development of antibiotics against infective anthrax. In September 2005, we were awarded a $1.0 million National Institutes of Health, or NIH, grant for the identification of targets for certain antifungal compounds, which included work on the mechanism of action of tavaborole. In March 2007, we received from Schering a $40.0 million upfront fee that was recognized ratably over the estimated period during which we performed development-related activities to transition tavaborole to Schering. The estimated period was based on the research transition plan jointly developed by Schering and us. In addition to the upfront fee, we were paid for our development-related activities, which included certain preclinical and clinical activities. Inception-to-date, we have recognized revenue of $49.5 million under the Schering agreement, which was comprised of the full recognition of the $40.0 million upfront fee and $9.5 million for our development-related transition activities. In November 2009, Schering merged with Merck & Co., Inc., or Merck, and in May 2010, upon termination of the 2007 agreement, we regained the exclusive worldwide rights to tavaborole and received a $5.8 million payment from Merck, which was recognized as revenue during 2010.
In October 2007, we received a $12.0 million upfront fee under our agreement with GSK, which was being recognized ratably over the six-year research term. In September 2011, the remaining $4.2 million of deferred revenue was recognized upon the amendment of the contract, as was the $5.0 million Amendment Fee we received that month. Through December 31, 2012, we recognized $44.7 million under this agreement, which was comprised of $12.0 million related to the upfront fee, $25.1 million for achievement of performance milestones, $5.0 million for the Amendment Fee, $1.6 million related to reimbursement for the TB program and $1.0 million in reimbursement for patent costs, procurement of drug material and performance of certain clinical studies for AN3365. In October 2012, GSK discontinued further development of AN3365; accordingly, all rights to this compound reverted to us. We are considering our options for further development, if any, of this compound. In the future, revenue under our agreement with GSK may include fees for our GSK product candidates achieving specified development, regulatory and sales goals and product royalties.
In September 2010, we received a non-creditable, non-refundable upfront fee of $3.5 million under our agreement with Lilly, which we are recognizing ratably over the four-year research term on a straight-line basis. Under this agreement, we have received $7.1 million in research funding through December 31, 2012 with the potential to receive up to a total of $12.0 million in research funding, if neither party cancels the agreement prior to the completion of the research term. Through December 31, 2012, we have recognized $11.6 million under this agreement, which was comprised of $2.1 million related to the upfront fee, $7.5 million in research funding and $2.0 million in milestone fees for the selection of development compounds.
In October 2010, we were awarded $1.5 million from the United States Department of the Treasury under the Qualifying Therapeutic Discovery Project Program to support research for six projects with the potential to produce new therapies. The full amount was recognized as government grant revenue in 2010.
In February 2011, we received a non-creditable, non-refundable upfront fee of $7.0 million under our agreement with Medicis, which we are recognizing ratably over the six-year research term on a straight-line basis. Through December 31, 2012, we have recognized $2.2 million of the upfront fee.
From inception through December 31, 2012, we have recognized $8.6 million of revenue for research relating to animal health indications and for research performed under our agreements with not-for-profit organizations for neglected diseases.
Research and Development Expenses
Research and development expenses consist primarily of costs associated with research activities, as well as costs associated with our product development efforts, including preclinical studies and clinical trials. Research and development expenses, including those paid to third parties, are recognized as incurred. Research and development expenses include:
•external research and development expenses incurred pursuant to agreements with third-party manufacturing organizations, contract research organizations and investigational sites;
•employee and consultant-related expenses, which include salaries, benefits, stock-based compensation and consulting fees;
•third-party supplier expenses; and
•facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities, amortization or depreciation of leasehold improvements, equipment and laboratory supplies and other expenses.
Our expenses associated with preclinical studies and clinical trials are based upon the terms of the service contracts, the amount of the services provided and the status of the related activities. We expect that research and development expenses will remain comparable in the future as we progress our product candidates through clinical development, conduct our research and development activities under our agreements with GSK, Lilly, Medicis and various current and potential collaborations, including those related to our neglected diseases initiatives, advance our discovery research projects into the preclinical stage and continue our early-stage research.
The table below sets forth our research and development expenses for 2012, 2011 and 2010, and for the period from January 1, 2004 through December 31, 2012, for four of our clinical-stage product candidates, other work conducted under the GSK agreement, work on our Lilly and Medicis collaborations and work on neglected diseases and other programs, including programs that are currently inactive. Prior to January 1, 2004, we did not separately track expenses for tavaborole or any other product candidates due to the early stage of their development. A portion of our research and development costs, including indirect costs relating to our product candidates, are not tracked on a program-by-program basis and are allocated based on the personnel resources assigned to each program.
We expect our research and development expenses for tavaborole to decrease in the near future due to the completion of our tavaborole clinical activities and the filing of our NDA in mid-2013. We
expect costs associated with AN2728 to increase as we expand the clinical and preclinical activities for this program. In October 2012, GSK advised us that it had discontinued further development of AN3365 and all rights to this compound reverted to us. We are considering our options for further development, if any, of this compound. We also expect costs associated with our early stage research activities on our Lilly collaborations to increase in future periods. We expect our spending associated with the Medicis program to be limited until our current dispute with them is resolved. In addition, spending for our early-stage research programs, including our GSK TB program and other potential GSK programs, will be dependent upon our success in developing and advancing new product candidates for these programs.
We cannot determine with certainty the duration and completion costs of the current or future clinical trials of our product candidates or if, when or to what extent we will generate revenues from the commercialization and sale of any of our product candidates. We or our collaboration partners may never succeed in achieving marketing approval for any of our product candidates. The duration, costs and timing of clinical trials and development of our product candidates will depend on a variety of factors, including the uncertainties of future clinical and preclinical studies, uncertainties in clinical trial enrollment rates and significant and changing government regulation and whether our current or future collaborators are committed to, and make progress in, programs licensed to them. In addition, the probability of success for each product candidate will depend on numerous factors, including competition, manufacturing capability and commercial viability. Consequently, we are unable to provide a meaningful estimate of the period in which material cash inflows will be received. We will determine which programs to pursue and how much to fund each program in response to the scientific and clinical success of each product candidate, as well as an assessment of each product candidate's commercial potential.
Our strategy includes entering into additional collaborations with third parties for the development and commercialization of some of our product candidates. To the extent that such third parties have control over preclinical development or clinical trials for some of our product candidates, we will be dependent upon their efforts for the progress of such product candidates. We cannot forecast with any degree of certainty which of our product candidates, if any, will be subject to future collaborations or how such arrangements would affect our development plans or capital requirements.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and related costs for our personnel, including stock-based compensation and travel expenses, in executive, finance, business development and other administrative functions. Other general and administrative expenses include facility-related costs not otherwise included in research and development expenses, consulting costs associated with financial services, professional fees for legal services, including patent-related services, and auditing and tax services. We expect that general and administrative expenses will increase in the future as we expand our operating activities, hire additional staff and incur additional costs associated with operating as a public company.
Critical Accounting Policies and Significant Judgments and Estimates
Our management's discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments related to revenue recognition, preclinical study and clinical trial accruals, deferred advance payments and stock-based compensation. We base our estimates on historical experience and on various other factors that we believe to be reasonable under the circumstances and
review our estimates on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions.
While our significant accounting policies are described in more detail in Note 2 of our financial statements included in this 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 financial statements.
Revenue Recognition
Our contract revenues are generated primarily through research and development collaboration agreements, which typically may include non-refundable, non-creditable upfront fees, funding for research and development efforts, payments for achievement of specified development, regulatory and sales goals and royalties on product sales of licensed products.
We recognize revenue when persuasive evidence of an arrangement exists; transfer of technology has been completed, services are performed or products have been delivered; the fee is fixed or determinable; and collection is reasonably assured.
For arrangements with multiple deliverables, we evaluate each deliverable to determine whether it qualifies as a separate unit of accounting. This determination is generally based on whether the deliverable has stand-alone value to the customer. The selling price used for each unit of accounting will be based on vendor-specific objective evidence, if available, third-party evidence if vendor-specific objective evidence is not available or estimated selling price if neither vendor-specific nor third-party evidence is available. Our management may be required to exercise considerable judgment in determining whether a deliverable is a separate unit of accounting and in estimating the selling prices of identified units of accounting for new agreements. Where multiple deliverables are combined as a single unit of accounting, revenues are recognized based on the performance requirements of the related agreement.
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 to be provided by us. Typically, we have determined that the licenses we have granted to collaborators do not have stand-alone value separate from the value of the research and development services provided. As such, upfront payments are recorded as deferred revenue in the balance sheet and are recognized as contract revenue ratably over the contractual or estimated performance period that is consistent with the term of the research and development obligations contained in the research and development collaboration agreement. When stand-alone value is identified, the related consideration is recorded as revenue in the period in which the license or other intellectual property rights are issued.
Some arrangements involving the licensing of our intellectual property, the provision of research and development services or both may also include exclusivity clauses whereby we agree that, for a specified period of time, we will not conduct further research on licensed compounds or on compounds that would compete with licensed compounds or that we will do so only on a limited basis. Such provisions may also restrict the future development or commercialization of such compounds. We do not treat such exclusivity clauses as a separate element within an arrangement and any upfront payments received related to the exclusivity clause would be allocated to the identified elements in the arrangement and recognized as described in the preceding paragraph.
Payments resulting from our efforts under research and development agreements or government grants are recognized as the activities are performed and are presented on a gross basis. Revenue is recorded gross because we act as a principal, with discretion to choose suppliers, bear credit risk and perform part of the services. The costs associated with these activities are reflected as a component of research and development expense in our statements of operations and the revenues recognized from such activities approximate the related costs.
For certain contingent payments under research or development arrangements, we recognize revenue using the milestone method. Under the milestone method, a payment that is contingent upon the achievement of a substantive milestone is recognized in its entirety in the period in which the milestone is achieved. A milestone is an event (i) that can be achieved based in whole or in part on either our performance or on the occurrence of a specific outcome resulting from our performance, (ii) for which there is substantive uncertainty at the date the arrangement is entered into that the event will be achieved and (iii) that would result in additional payments being due to us. The determination that a milestone is substantive is judgmental and is made at the inception of the arrangement. Milestones are considered substantive when the consideration earned from the achievement of the milestone is (i) commensurate with either our performance to achieve the milestone or the enhancement of value of the item delivered as a result of a specific outcome resulting from our performance to achieve the milestone, (ii) relates solely to past performance and (iii) is reasonable relative to all deliverables and payment terms in the arrangement. In making the determination as to whether a milestone is substantive or not, we consider all facts and circumstances relevant to the arrangement, including factors such as the scientific, regulatory, commercial and other risks that must be overcome to achieve the respective milestone, the level of effort and investment required to achieve the respective milestone and whether any portion of the milestone consideration is related to future performance or deliverables.
Other contingent payments received for which payment is either contingent solely upon the passage of time or the results of a collaboration partner's performance, or bonus payments, are not accounted for using the milestone method. Such bonus payments will be recognized as revenue when earned and when collectibility is reasonably assured.
Royalties based on reported sales of licensed products will be recognized based on contract terms when reported sales are reliably measurable and collectibility is reasonably assured. To date, none of our products have been approved and therefore we have not earned any royalty revenue from product sales.
Preclinical Study and Clinical Trial Accruals and Deferred Advance Payments
We estimate preclinical study and clinical trial expenses based on the services performed pursuant to contracts with research institutions and clinical research organizations that conduct these activities on our behalf. In recording service fees, we estimate the time period over which the related services will be performed and compare the level of effort expended through the end of each period to the cumulative expenses recorded and payments made for such services and, as appropriate, accrue additional service fees or defer any non-refundable advance payments until the related services are performed. If the actual timing of the performance of services or the level of effort varies from our estimate, we will adjust our accrual or deferred advance payment accordingly. If we underestimate or overestimate the level of services performed or the costs of these services, our actual expenses could differ from our estimates. To date, we have not experienced significant changes in our estimates of preclinical study and clinical trial accruals.
Stock-Based Compensation
Employee stock-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the employee's requisite service period (generally the vesting period). Stock option awards granted to our nonemployee directors for their board-related services are included in employee stock-based compensation in accordance with current accounting standards. We use the Black-Scholes option-pricing model to estimate the fair value of our stock-based awards and use the straight-line (single-option) method for expense attribution. We estimate forfeitures and recognize expense only for those shares expected to vest.
We account for equity instruments issued to nonemployees based on their fair values on the measurement dates using the Black-Scholes option-pricing model. The fair values of the options granted to nonemployees are remeasured as they vest. As a result, the noncash charge to operations for nonemployee options that vest in any given reporting period is affected by changes in the fair value of our common stock during that period.
We recorded noncash stock-based compensation for employee and nonemployee stock option grants and Employee Stock Purchase Program, or ESPP, stock purchase rights of $3.6 million, $4.4 million and $2.8 million during 2012, 2011 and 2010, respectively. As of December 31, 2012, there were outstanding options to purchase 3,912,182 shares of our common stock and we had $5.6 million of unrecognized stock-based compensation expense, net of estimated forfeitures, related to outstanding stock options and $39,000 related to ESPP stock purchase rights that will be recognized over weighted-average periods of 2.2 years and 0.4 years, respectively. There were 96,584 common shares purchased under the ESPP for the year ended December 31, 2012. We expect to continue to grant stock options and ESPP stock purchase rights in the future and, if any of the assumptions used in the Black-Scholes model change significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period.
Results of Operations
Comparison of Years Ended December 31, 2012 and 2011
(1)Includes the following stock-based compensation expenses:
Contract revenue. For the year ended December 31, 2012, we recognized revenues of $3.4 million for research funding, $1.0 million for a development milestone earned and $0.9 million of the $3.5 million upfront fee received under the Lilly agreement, $1.2 million of the $7.0 million upfront fee received under the Medicis agreement and $1.3 million primarily for research funding under our collaboration agreement with GSK. We also recognized $2.9 million for research work performed under other research and development agreements, including our agreements with not-for-profit organizations for neglected diseases. During the year ended December 31, 2011, we recognized $5.5 million of the original upfront fee received from GSK, including $3.5 million as a result of the material modification of our GSK agreement in September 2011, and an additional $5.0 million for the related Amendment Fee. We also recognized $0.3 million for GSK research funding and reimbursement of patent costs by GSK. In addition, for the year ended December 31, 2011, under the Lilly agreement, we recognized $3.1 million for research funding, $1.0 million for a development milestone and $0.9 million of the $3.5 million upfront fee. We also recognized $1.0 million of the upfront fee received under the Medicis
agreement and $3.5 million for research work performed under our other research and development agreements, including our agreements with not-for-profit organizations for neglected diseases.
Research and development expenses. Research and development expenses decreased by $3.8 million for the year ended December 31, 2012 as compared with the same period in the prior year primarily due to decreases in our AN2898 and AN2728 program costs of $3.4 million and $2.3 million, respectively, partially offset by an increase in our tavaborole program of $3.8 million. Due to our revised near-term focus on developing AN2728 instead of AN2898 for atopic dermatitis, our activities for AN2898 were minimal in 2012 as compared to 2011, when we were conducting and completing our Phase 2 trial in atopic dermatitis, manufacturing clinical supplies and conducting preclinical studies for this compound. Our manufacturing activities and our internal clinical efforts were more extensive for AN2728 in 2011 than they were in 2012. In 2011, we were building up our AN2728 drug product supplies to be used in our 2011 and 2012 long-term toxicology studies and clinical trials, while in 2012 our drug manufacturing activities were more limited. For our tavaborole program, our regulatory and pre-commercialization activities, which included preparations for our expected NDA filing in mid-2013, manufacturing of registration batches and start-up activities with a newly selected contract manufacturing organization, were more extensive in 2012 than they were during the same period in 2011 and these increased activities were only partially offset by a decline in our 2012 clinical trial activities for tavaborole versus the prior year as our Phase 3 trials were nearing completion by the end of 2012.
For the year ended December 31, 2012 compared to the same period in 2011, our research and development spending also decreased by $2.8 million and $0.7 million for our collaborations with Medicis and our other research activities, including our neglected diseases programs, respectively. These decreases were offset by an increase of $1.1 million and $0.5 million in spending under our collaboration with GSK and Lilly, respectively.
General and administrative expenses. The increase in general and administrative expenses of $1.1 million in 2012 compared to 2011 was primarily due to increases of $0.5 million in legal fees relating to intellectual property and corporate activities, $0.5 million in our expenses for marketing consulting and other pre-commercialization activities for tavaborole and $0.2 million in salaries and related expenses due to the hiring of additional personnel. These increases were partially offset by decreases in our stock compensation expense of $0.2 million in 2012 as compared to 2011.
Interest income. The decrease in interest income for the year ended 2012 compared to 2011 was due to a reduction in average investment balances and lower yields.
Interest expense and loss on early extinguishment of debt. Interest expense increased in 2012 compared to the same period in 2011 due to the higher outstanding balance of our debt, which was only partially offset by a lower effective interest rate. Upon the early extinguishment of our Lighthouse Capital Partners V, L.P., or Lighthouse, debt in March 2011, we incurred a loss of $0.3 million, which consisted of the unaccrued portion of the final payment, the unamortized portions of the debt discount and deferred issuance costs, plus a prepayment penalty.
Other expense. The increase in other expense in the year ended December 31, 2012 compared to the same period in 2011 was a result of the deferred financing fees relating to our debt.
Comparison of Years Ended December 31, 2011 and 2010
(1)Includes the following stock-based compensation expenses:
Contract revenue. During 2011, we recognized the remaining $5.5 million of the upfront fee received from GSK in 2007, of which $3.5 million was recognized as a result of the material modification of our GSK arrangement in September 2011, or the Master Amendment, an additional $5.0 million amendment fee related to the additional rights provided to GSK under the Master Amendment and $0.3 million for funding of our TB research activities and patent costs. We also recognized $3.1 million for research funding, $1.0 million for a development milestone earned and $0.9 million of the upfront fee received under the Lilly agreement. Additionally, we recognized $1.0 million of the upfront fee received under the Medicis agreement and $3.5 million for work performed under other research and development agreements, including our agreements with not-for-profit organizations for neglected diseases.
During 2010, we recognized $15.0 million for a development milestone earned under the collaboration with GSK, $0.9 million of revenue for reimbursement of patent and clinical costs related to AN3365 and $2.0 million of the upfront fee received from GSK in 2007. We also recognized revenue in 2010 for the $5.8 million payment that we received from Merck upon the termination of the Schering license agreement. In addition, we recognized $1.1 million for research funding and $0.3 million of the upfront fee under the Lilly agreement and $1.3 million of revenue for work we performed under research and development agreements, including under agreements with not-for-profit organizations for neglected diseases.
Government grant revenue. During 2010, we recognized the full $1.5 million of the Qualifying Therapeutic Discovery Project grant funds awarded to us in October 2010 by the United States Department of the Treasury for eligible investments we made in six of our projects during 2009 and 2010.
Research and development expenses. The increase in research and development expenses for 2011 compared to 2010 was primarily due to the increases in manufacturing, development and clinical trial activities, which caused our expenses for tavaborole, AN2728 and AN2898 to increase by $17.3 million, $7.9 million and $2.9 million, respectively. In the fourth quarter of 2010, we initiated our Phase 3 trials for tavaborole and completed enrollment of approximately 1,200 patients during 2011. During this period, we were also manufacturing, packaging and labeling our clinical supplies for these trials and beginning our work to develop processes to manufacture the product in commercial quantities. In contrast, while we began manufacturing clinical supplies and planning for our Phase 3 clinical trials in
the second half of 2010, most of the activity in the first half of that year was administrative in nature. As such, tavaborole expenses were significantly higher in 2011 than in 2010. For AN2728, our activities during 2011 consisted of enrolling patients and completing both our Phase 2b clinical trial in psoriasis, our Phase 2 trial in atopic dermatitis and Phase 1 absorption trial, initiating two safety trials and conducting preclinical studies. This compared to fewer AN2728-related activities in 2010, which consisted of conducting our initial Phase 2 trial for AN2728, completing preclinical studies and initiating manufacturing activities in anticipation of starting additional preclinical studies and clinical trials. Our activities in 2011 for AN2898 consisted of enrolling patients in and completing our Phase 2 trial in atopic dermatitis, manufacturing clinical supplies and conducting preclinical studies, which resulted in an increase in AN2898 expenses compared to 2010, during which our AN2898-related activities were limited.
For 2011 compared to 2010, our research and development spending also increased by $1.8 million and $4.8 million under our contracts with Lilly and Medicis, respectively. Our collaboration with Lilly was initiated in August 2010 and our collaboration with Medicis commenced in February 2011. In addition, spending on our neglected diseases initiatives increased by $2.6 million in 2011 compared to 2010.
The increases in expenses for our tavaborole, AN2728 and AN2898 programs and for the Lilly and Medicis collaborations were partially offset by decreases of $2.0 million and $4.5 million in spending for AN3365 and our other GSK programs, respectively. In 2010, we were conducting the Phase 1 clinical trial for AN3365 at our own expense, whereas during 2011 GSK was solely responsible for expenditures related to AN3365 following their licensing of the compound in July 2010. In 2011, our activities on the other GSK programs were reduced compared to 2010 due to the cessation of further development of compounds under these programs.
Our efforts on our internal early-stage research projects decreased by $4.6 million in 2011 as compared with 2010 as we redirected our internal resources towards our collaborative efforts with Medicis and Lilly. Our neglected diseases program expenses for 2011 increased by $2.6 million compared to 2010 as our efforts and funding on certain of these initiatives increased.
General and administrative expenses. The increase in general and administrative expenses for 2011 as compared with 2010 was primarily due to the higher costs of operating as a public company. Our professional accounting and finance consulting fees, legal fees, board of directors compensation, directors and officers insurance and investor relations expenses all increased. We also added additional staff in the latter part of 2010, including our Chief Financial Officer. Our noncash stock compensation expenses and consulting fees also increased for 2011 as compared to 2010. These increases were only partially offset by lower patent-related legal fees as we allowed certain of our patents to lapse.
Interest income. The rise in interest income for 2011 compared to 2010 was due to the increase in our investment balances as a result of the proceeds from our IPO in November 2010 and our debt drawdown in March 2011.
Interest expense and loss on early extinguishment of debt. In March 2011, we drew down $10.0 million under our new loan facility with Oxford Finance LLC, or Oxford, and Horizon Technology Finance Corporation, or Horizon, and used $6.6 million of the proceeds to repay the remaining obligations under our loan facility with Lighthouse Capital Partners V, L.P., or Lighthouse. In December 2011, we borrowed an additional $8.0 million. Interest expense decreased for 2011 compared to 2010 due to the lower average effective interest rate on our new loan. Upon the early extinguishment of our Lighthouse debt in March 2011, we incurred a loss of $0.3 million, which consisted of the unaccrued portion of the final payment, the unamortized portions of the debt discount and deferred issuance costs, plus a prepayment penalty.
Other income (expense). The decrease in other income (expense) in 2011 compared to 2010 reflected the net reduction in the fair values of our preferred stock warrants during 2010. In connection with our IPO in November 2010, the preferred stock warrants automatically converted to common stock warrants, the related liability was reclassified to additional paid-in capital and subsequent revaluations are no longer required.
Income Taxes
At December 31, 2012, we had net operating loss carryforwards for federal income tax purposes of $190.5 million and federal research and development tax credit carryforwards of $6.2 million. Our utilization of the net operating loss and tax credit carryforwards may be subject to annual limitations due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. The annual limitations may result in the expiration of net operating losses and credits prior to utilization. We have determined that an ownership change, as defined by Internal Revenue Code Section 382, occurred in December 2010. However, the computed annual limitation is not expected to prevent us from utilizing our net operating losses prior to their expiration if we can generate sufficient taxable income to do so in the future. We recorded a valuation allowance to offset in full the benefit related to the deferred tax assets because realization of this benefit was uncertain.
Liquidity and Capital Resources
Since our inception, we have financed our operations primarily through our initial public offering, or IPO, in November 2010, common stock offerings, private placements of equity securities, funding from our agreements with Schering, GSK, Lilly, Medicis and organizations that fund neglected diseases research, government contract and grant funding and debt arrangements. We have also earned interest on our cash, cash equivalents and short-term investments. At December 31, 2012, we had available cash and cash equivalents and short-term investments of $45.5 million.
The following table sets forth the primary sources and uses of cash for each of the periods presented below (in thousands):
Net cash used in operating activities was $(54.9) million and $(35.7) million during 2012 and 2011, respectively. The net cash used in operating activities for 2012 primarily reflected our net loss adjusted for noncash items, as well as the net changes in our operating assets and liabilities, including those related to the ongoing amortization of the upfront fees received in prior years from Lilly and Medicis and the increase in current prepaid expenses for our clinical trials and preclinical studies. The net cash used in operating activities in 2011 primarily reflected our net loss adjusted for noncash items, partially offset by changes in operating assets and liabilities, including those resulting from the amortization of the remaining balance of the upfront fee received from GSK due to the September 2011 Master Amendment and the increase in accrued liabilities due to our external development and clinical trial activities. Net cash from operations was also positively impacted by the receipts of the $7.0 million upfront payment from Medicis, the $5.0 million amendment fee from GSK pursuant to the Master Amendment and $2.3 million of research and development funding from MMV, one of our neglected diseases collaborators.
Net cash (used) provided by investing activities was $(0.6) million and $19.4 million for 2012 and 2011, respectively. For 2012, our purchases of short-term investments and property and equipment exceeded the cash generated by maturities of our short-term investments, while in 2011, the cash generated by short-term investment maturities was only partially offset by our purchases of new investments and property and equipment.
Net cash provided by financing activities was $50.7 million for 2012 compared with $9.7 million for 2011. The cash provided by financing activities for 2012 was primarily due to net proceeds of $22.6 million and $19.9 million from the sale of our common stock in October 2012 and February 2012, respectively, and the $12.0 million in notes payable proceeds from the September 2012 drawdown of the third tranche under our loan facility with Oxford Finance LLC and Horizon Technology Finance Corporation, or Oxford and Horizon, which were partially offset by $4.3 million in scheduled principal payments related to our loan. The cash provided by financing activities in 2011 was primarily from the $18.0 million borrowing under our loan facility with Oxford and Horizon, partially offset by $8.1 million in regularly scheduled principal payments and the early extinguishment of our remaining obligations under our Lighthouse loan facility.
We believe that our existing cash, cash equivalents and short-term investments totaling approximately $45.5 million as of December 31, 2012 and the net proceeds of approximately $1.3 million from the sale of 401,500 shares of the Company's common stock in January and February 2013 will be sufficient to meet our anticipated operating requirements until we file our NDA for tavaborole in onychomycosis, which we expect to occur in mid-2013. If necessary, we would make appropriate adjustments to our spending plan in order to ensure sufficient capital resources to complete this filing. While we believe that we currently have sufficient resources to fund our operations until the filing of such NDA, we will need to obtain additional capital to complete the development and potential commercialization of tavaborole, fund our other research and development activities and meet our operating requirements through 2013 and beyond. Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results, including the costs to maintain our currently planned operations, could vary materially.
Our future capital requirements are difficult to forecast and will depend on many factors, including:
•the initiation, progress, timing, costs and results of preclinical studies and clinical trials for our product candidates and potential product candidates, including our ongoing and/or planned Phase 2 and Phase 3 clinical trials for AN2728;
•the success of our collaborations with GSK, Lilly and Medicis and the attainment of contingent event-based payments and royalties, if any, under those agreements;
•the number and characteristics of product candidates that we pursue;
•the terms and timing of any future collaboration, licensing or other arrangements that we may establish;
•the outcome, timing and cost of regulatory approvals;
•the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;
•the effect of competing technological and market developments;
•the cost and timing of completion of commercial-scale outsourced manufacturing activities;
•the cost of establishing sales, marketing and distribution capabilities for any product candidates for which we may receive regulatory approval; and
•the extent to which we acquire or invest in businesses, products or technologies.
We expect to finance our future cash needs through public or private equity offerings, debt financings or a possible license, collaboration or other similar arrangement with respect to commercialization rights to tavaborole or any of our other product candidates, or a combination of the above. If adequate funds are not available on acceptable terms when needed, we could be required to significantly reduce operating expenses and delay, reduce the scope of or eliminate some of our development programs, including our AN2728 trials, or our commercialization efforts for tavaborole, out-license intellectual property rights to tavaborole and/or our other product candidates, sell unsecured assets, or a combination of the above, and/or cease our operations, which may have a material adverse effect on the Company's business, results of operations, financial condition and/or its ability to make its scheduled debt payments on a timely basis or at all.
Based on our cash, cash equivalents and short-term investments balances as of December 31, 2012, the net proceeds of approximately $1.3 million from the sale of 401,500 shares of the Company's common stock in January and February 2013 and our projected spending in 2013, our independent registered public accounting firm has included in their audit opinion for the year ended December 31, 2012 a statement with respect to our ability to continue as a going concern. However, our financial statements have been prepared assuming we will continue to operate as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. If we become unable to continue as a going concern, we may have to liquidate our assets and the values we receive for our assets in liquidation or dissolution could be significantly lower than the values reflected in our financial statements. The reaction of investors to the inclusion of a going concern statement by our auditors, our current lack of cash resources and our potential inability to continue as a going concern may materially adversely affect our share price and our ability to raise new capital or to enter into strategic alliances.
Contractual Obligations
Our contractual obligations consist primarily of obligations under lease agreements and our notes payable obligations. The following table summarizes our contractual obligations at December 31, 2012 and the effect such obligations are expected to have on our liquidity and cash flow in future years.
Operating Leases
We lease a 36,960 square-foot building consisting of office and laboratory space in Palo Alto, California, which serves as our corporate headquarters. The lease commenced in April 2008 and will terminate in March 2018. We also lease a second building in Palo Alto, California, consisting of 15,300 square feet of office and laboratory space. In October 2011, we amended this lease to extend the term to December 31, 2013. In addition, we have two (2) one-year options to extend the lease through each of December 31, 2014 and 2015. The lease is cancelable with four months' notice.
Notes Payable
In March 2011, we entered into a loan and security agreement with Oxford and Horizon to provide up to $30.0 million, available in three tranches. The first $10.0 million tranche was drawn on March 18, 2011, at which time we repaid $6.6 million of the remaining obligations under our previous loan facility with Lighthouse. The second and third tranches of $10.0 million each became available for drawdown upon our achieving full enrollment of the Phase 3 trials for tavaborole in December 2011. We borrowed $8.0 million of the second tranche on December 28, 2011 and the revised third tranche of $12.0 million on September 26, 2012. Payments on the loan were interest only until April 30, 2012 and are now comprised of equal monthly payments of interest and principal through April 1, 2015. Based upon current borrowings, a final payment of $1.7 million will be due on April 1, 2015.
Contracts
We enter into contracts in the normal course of business with clinical research organizations for clinical trials and clinical supply manufacturing and with vendors for preclinical research studies, research supplies and other services and products for operating purposes. These contracts generally provide for termination on notice, and therefore we believe that our non-cancelable obligations under these agreements are not material.
Off-Balance Sheet Arrangements
We currently have no off-balance sheet arrangements, such as structured finance, special purpose entities or variable interest entities.
Recently Adopted Accounting Pronouncements
On January 1, 2012, we adopted new guidance on the presentation of comprehensive income (loss). Specifically, the new guidance allows an entity to present components of net income (loss) and other comprehensive income (loss) in one continuous statement, referred to as the statement of comprehensive income (loss), or in two separate but consecutive statements. The new guidance eliminates the current option to report other comprehensive income (loss) and its components in the statement of changes in stockholders' equity. While the new guidance changes the presentation of comprehensive income (loss), there are no changes to the components that are recognized in net income (loss) or other comprehensive income (loss) under current accounting guidance. We elected to adopt the two separate but consecutive statements presentation and the adoption of this guidance did not have a material impact on our financial statements.
An accounting standard amendment, which modified the fair value measurement guidance and expanded the disclosure requirements related to such measurements, became effective for us on January 1, 2012. The most significant change in the amendment was to the disclosures required for Level 3 measurements based on unobservable inputs. The adoption of this amendment did not have a material impact on our financial statements.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of our investment activities is to preserve our capital for the purpose of funding operations while at the same time maximizing the income we receive from our investments without significantly increasing risk. To achieve these objectives, our investment policy allows us to maintain a portfolio of cash equivalents and short-term investments in a variety of high credit quality securities, including U.S. government instruments, commercial paper, money market funds and corporate debt securities. Our investment policy prohibits us from holding auction rate securities or derivative financial instruments. To the extent that the investment portfolios of companies whose commercial paper is included in our investment portfolio may be subject to interest rate risks, which could be negatively impacted by reduced liquidity in auction rate securities or derivative financial instruments they hold, we may also be subject to these risks. However, our investments as of December 31, 2012 are comprised of U.S treasury securities and federal agency securities with a minimum rating of AAA or A1 with a remaining average maturity of the entire portfolio of 88 days. Due to the short-term nature of our investments, we believe that there is no material exposure to interest rate risk and we are not aware of any material exposure to market risk.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Contents
Report of Independent Registered Public Accounting Firm
Balance Sheets
Statements of Operations
Statements of Comprehensive Loss
Statements of Convertible Preferred Stock and Stockholders' Equity (Deficit)
Statements of Cash Flows
Notes to Financial Statements
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Anacor Pharmaceuticals, Inc.
We have audited the accompanying balance sheets of Anacor Pharmaceuticals, Inc. (the Company) as of December 31, 2011 and 2012 and the related statements of operations, comprehensive loss, convertible preferred stock and stockholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 2012. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Anacor Pharmaceuticals, Inc. at December 31, 2011 and 2012, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2012, in conformity with U.S. generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company's recurring losses from operations and its need for additional capital raise substantial doubt about its ability to continue as a going concern. Management's plans as to these matters are described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 18, 2013 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Redwood City, California
March 18, 2013
Anacor Pharmaceuticals, Inc.
Balance Sheets
(In Thousands, Except Share and Per Share Data)
See accompanying notes.
Anacor Pharmaceuticals, Inc.
Statements of Operations
(In Thousands, Except Share and Per Share Data)
See accompanying notes.
Anacor Pharmaceuticals, Inc.
Statements of Comprehensive Loss
(In Thousands)
See accompanying notes.
Anacor Pharmaceuticals, Inc.
Statements of Convertible Preferred Stock and Stockholders' Equity (Deficit)
(In Thousands, Except Share Data)
See accompanying notes.
Anacor Pharmaceuticals, Inc.
Statements of Cash Flows
(In Thousands)
See accompanying notes.
Anacor Pharmaceuticals, Inc.
Notes to Financial Statements
1. The Company
Nature of Operation
Anacor Pharmaceuticals, Inc. (the Company) is a biopharmaceutical company focused on discovering, developing and commercializing novel small-molecule therapeutics derived from its boron chemistry platform. The Company has discovered, synthesized and developed eight molecules that are currently in development. Its two lead product candidates are topically administered dermatologic compounds-tavaborole, formerly known as AN2690, an antifungal for the treatment of onychomycosis; and AN2728, an anti-inflammatory for the treatment of atopic dermatitis and psoriasis. In addition to its two lead programs, the Company has three other wholly-owned clinical product candidates-AN2718 and AN2898, which are backup compounds to tavaborole and AN2728, respectively, and AN3365 (formerly referred to as GSK2251052, or GSK '052), an antibiotic for the treatment of infections caused by Gram-negative bacteria, which previously was licensed to GlaxoSmithKline LLC (GSK). In October 2012, GSK advised the Company that it had discontinued further development of AN3365 and all rights to this compound reverted to the Company. The Company is considering its options for further development, if any, of AN3365. The Company has discovered three other compounds that it has out-licensed for further development-two are licensed to Eli Lilly and Company (Lilly) for the treatment of animal health indications, and the third compound, AN5568, also referred to as SCYX-7158, is licensed to Drugs for Neglected Diseases initiative for the treatment of human African trypanosomiasis (HAT, or sleeping sickness). The Company also has a pipeline of other internally discovered topical and systemic boron-based compounds in development.
Need to Raise Additional Capital
Since inception, the Company has generated an accumulated deficit as of December 31, 2012 of approximately $215.2 million, and will require substantial additional capital to fund research and development activities, including clinical trials for its development programs and preclinical activities for its product candidates. The Company believes that its existing capital resources will be sufficient to meet its anticipated operating requirements until it files its New Drug Application (NDA) for tavaborole in onychomycosis, which is expected to occur in mid-2013, and, if necessary, would make appropriate adjustments to its spending plan in order to ensure sufficient capital resources to complete this filing. While management believes that the Company currently has sufficient resources to fund its operations until the filing of such NDA, additional capital will be needed to complete the development and potential commercialization of tavaborole, fund the other research and development activities and meet the operating requirements of the Company through 2013 and beyond. The Company expects to finance its future cash needs through public or private equity offerings, debt financings or a possible license, collaboration or other similar arrangement with respect to commercialization rights to tavaborole or any of the Company's other product candidates, or a combination of these sources. If adequate funds are not available on acceptable terms when needed, the Company could be required to significantly reduce operating expenses and delay, reduce the scope of or eliminate some of its development programs or its commercialization efforts, enter into a collaboration or other similar arrangement with respect to commercialization rights to tavaborole or any of our other product candidates, out-license intellectual property rights to tavaborole or our other product candidates and sell unsecured assets, or a combination of the above, which may have a material adverse effect on the Company's business, results of operations, financial condition and/or its ability to make its scheduled debt payments on a timely basis or at all.
Anacor Pharmaceuticals, Inc.
Notes to Financial Statements (Continued)
1. The Company (Continued)
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which considers the realization of assets and the settlement of liabilities and commitments in the normal course of business. The financial statements for the year ended December 31, 2012 do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or on the amounts and classification of liabilities that may result from uncertainty related to the Company's ability to continue as a going concern.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of the financial statements in accordance with U.S. generally accepted accounting principles requires the Company to make estimates and judgments in certain circumstances that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. In preparing these financial statements, management has made its best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. On an ongoing basis, the Company evaluates its estimates, including those related to revenue recognition, fair values of financial instruments in which it invests, income taxes, preclinical study and clinical trial accruals and other contingencies. Management bases its estimates on historical experience or on various other assumptions that it believes to be reasonable under the circumstances. Actual results could differ from these estimates.
Cash, Cash Equivalents and Short-Term Investments
The Company considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash and cash equivalents. Investments with a maturity date of more than three months, but less than twelve months, from the date of purchase are considered short-term investments and are classified as current assets. The Company's short-term investments in marketable securities are classified as available for sale (see Note 3). Securities available for sale are carried at estimated fair value, with unrealized gains and losses reported as part of accumulated other comprehensive income or loss, a separate component of stockholders' equity. The Company has estimated the fair value amounts by using available market information. The cost of available for sale securities sold is based on the specific-identification method.
Fair Value of Financial Instruments
The carrying amounts of certain of the Company's financial instruments, including cash and cash equivalents, short-term investments, restricted investments, contract receivables and accounts payable, approximate their fair value due to their short maturities. Based on the borrowing rates available to the Company for loans with similar terms and average maturities, the carrying value of the Company's long-term notes payable approximate their fair values as of December 31, 2012 and 2011.
Fair value is considered to be the price at which an asset could be exchanged or a liability transferred (an exit price) in an orderly transaction between knowledgeable, willing parties in the principal or most advantageous market for the asset or liability. Where available, fair value is based on or derived from observable market prices or other observable inputs. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve management
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Notes to Financial Statements (Continued)
2. Summary of Significant Accounting Policies (Continued)
estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments' complexity.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash, cash equivalents, short-term investments and restricted investments. Substantially all the Company's cash, cash equivalents and restricted investments are held by two financial institutions that management believes are of high credit quality. Such deposits may, at times, exceed federally insured limits. As of December 31, 2012 and 2011, approximately 85% and 82%, respectively, of the cash and cash equivalents were held in a money market fund invested in U.S. Treasuries, securities guaranteed as to principal and interest by the U.S. government and repurchase agreements in respect of such securities. The Company's short-term investments as of December 31, 2012 and 2011 are held in securities guaranteed as to principal and interest by the U.S. government. During the three years ended December 31, 2012, the Company has not experienced any losses on its deposits of cash, cash equivalents, short-term investments or restricted investments and management believes that its guidelines for investment of its excess cash maintain safety and liquidity through diversification and investment maturity.
Customer Concentration
The Company's revenues consist primarily of contract revenues from collaboration agreements with GSK, Lilly and Medicis Pharmaceutical Corporation (Medicis). Collaborators have accounted for significant revenues in the past and may not provide contract revenues in the future under existing agreements and/or new collaboration agreements, which may have a material effect on the Company's operating results. For certain periods in the table below, the Company also recognized revenues, which accounted for 10% or more of its total revenues, from its research and development agreements with Medicines for Malaria Venture (MMV), subcontracts with a research institution and its now canceled collaboration agreement with Schering Corporation (Schering).
Contract revenues from collaborators, research institutions and not-for-profit organizations that accounted for 10% or more of total revenues were as follows:
*less than 10% of total revenue
(1)Agreement with Schering was terminated in May 2010 (see Note 8).
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Notes to Financial Statements (Continued)
2. Summary of Significant Accounting Policies (Continued)
Contract Receivable
At December 31, 2012 and, 2011, the contract receivable consisted of $0.8 million in research funding due from Lilly (see Note 8) as of both dates, $0.3 million and $0.1 million due from GSK (see Note 8), respectively, and $0.1 million and $0.2 million due from other contracts, respectively.
The Company's contract receivable is primarily composed of amounts due under collaboration agreements and the Company believes that the credit risks associated with these collaborators are not significant. During the three years ended December 31, 2012, the Company has not written-off any contract receivable and, accordingly, does not have an allowance for doubtful accounts as of December 31, 2012 and 2011.
Restricted Investments
Under its facility lease agreements, the Company is required to secure letters of credit. As of both December 31, 2012 and 2011, the Company had approximately $0.2 million of restricted investments to secure these letters of credit.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are calculated using the straight-line method over the estimated useful lives of the respective assets, generally three to five years. Leasehold improvements are amortized over the shorter of the remaining lease term or the estimated useful economic lives of the related assets.
Impairment of Long-Lived Assets
Losses from impairment of long-lived assets used in operations are recorded when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amounts. The Company regularly evaluates its long-lived assets for indicators of possible impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of an asset and its eventual disposition are less than its carrying amount. Impairment, if any, is assessed using discounted cash flows.
Revenue Recognition
The Company's contract revenues are generated primarily through research and development collaboration agreements, which typically may include non-refundable, non-creditable upfront fees, funding for research and development efforts, payments for achievement of specified development, regulatory and sales goals and royalties on product sales of licensed products.
The Company recognizes revenue when persuasive evidence of an arrangement exists; transfer of technology has been completed, services are performed or products have been delivered; the fee is fixed or determinable; and collection is reasonably assured.
For arrangements with multiple deliverables, the Company evaluates each deliverable to determine whether it qualifies as a separate unit of accounting. This determination is generally based on whether
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Notes to Financial Statements (Continued)
2. Summary of Significant Accounting Policies (Continued)
the deliverable has stand-alone value to the customer. The selling price used for each unit of accounting will be based on vendor-specific objective evidence, if available, third-party evidence if vendor-specific objective evidence is not available or estimated selling price if neither vendor-specific nor third-party evidence is available. Management may be required to exercise considerable judgment in determining whether a deliverable is a separate unit of accounting and in estimating the selling prices of identified units of accounting for new agreements. Where multiple deliverables are combined as a single unit of accounting, revenues are recognized based on the performance requirements of the related agreement.
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 to be provided by the Company. Typically, the Company has determined that the licenses it has granted to collaborators do not have stand-alone value separate from the value of the research and development services provided. As such, upfront payments are recorded as deferred revenue in the balance sheet and are recognized as contract revenue ratably over the contractual or estimated performance period that is consistent with the term of the research and development obligations contained in the research and development collaboration agreement. When stand-alone value is identified, the related consideration is recorded as revenue in the period in which the license or other intellectual property rights are issued.
Some arrangements involving the licensing of the Company's intellectual property, the provision of research and development services or both may also include exclusivity clauses whereby the Company agrees that, for a specified period of time, it will not conduct further research on licensed compounds or on compounds that would compete with licensed compounds or that it will do so only on a limited basis. Such provisions may also restrict the future development or commercialization of such compounds. The Company does not treat such exclusivity clauses as a separate element within an arrangement and any upfront payments received related to the exclusivity clause would be allocated to the identified elements in the arrangement and recognized as described in the preceding paragraph.
Payments resulting from the Company's efforts under research and development agreements or government grants are recognized as the activities are performed and are presented on a gross basis. Revenue is recorded gross because the Company acts as a principal, with discretion to choose suppliers, bears credit risk and performs part of the services. The costs associated with these activities are reflected as a component of research and development expense in the statements of operations and the revenues recognized from such activities approximate these costs.
For certain contingent payments under research or development arrangements, the Company recognizes revenue using the milestone method. Under the milestone method, a payment that is contingent upon the achievement of a substantive milestone is recognized in its entirety in the period in which the milestone is achieved. A milestone is an event (i) that can be achieved based in whole or in part on either the Company's performance or on the occurrence of a specific outcome resulting from the Company's performance, (ii) for which there is substantive uncertainty at the date the arrangement is entered into that the event will be achieved and (iii) that would result in additional payments being due to the Company. The determination that a milestone is substantive is judgmental and is made at the inception of the arrangement. Milestones are considered substantive when the consideration earned from the achievement of the milestone is (i) commensurate with either the Company's performance to achieve the milestone or the enhancement of value of the item delivered as a result of a specific
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Notes to Financial Statements (Continued)
2. Summary of Significant Accounting Policies (Continued)
outcome resulting from the Company's performance to achieve the milestone, (ii) relates solely to past performance and (iii) is reasonable relative to all deliverables and payment terms in the arrangement. In making the determination as to whether a milestone is substantive or not, management of the Company considers all facts and circumstances relevant to the arrangement, including factors such as the scientific, regulatory, commercial and other risks that must be overcome to achieve the respective milestone, the level of effort and investment required to achieve the respective milestone and whether any portion of the milestone consideration is related to future performance or deliverables.
Other contingent payments received for which payment is either contingent solely upon the passage of time or the results of a collaborative partner's performance (bonus payments) are not accounted for using the milestone method. Such bonus payments will be recognized as revenue when earned and when collectibility is reasonably assured.
Royalties based on reported sales of licensed products will be recognized based on contract terms when reported sales are reliably measurable and collectibility 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.
Research and Development Expenses
All research and development expenses, including those funded by third parties, are expensed as incurred. Research and development expenses include, but are not limited to, salaries, benefits, stock-based compensation, lab supplies, allocated overhead, fees for professional service providers and costs associated with product development efforts, including preclinical studies and clinical trials.
Preclinical Study and Clinical Trial Accruals and Deferred Advance Payments
The Company estimates preclinical study and clinical trial expenses based on the services performed pursuant to contracts with research institutions and clinical research organizations that conduct these activities on its behalf. In recording service fees, the Company estimates the time period over which the related services will be performed and compares the level of effort expended through the end of each period to the cumulative expenses recorded and payments made for such services and, as appropriate, accrues additional service fees or defers any non-refundable advance payments until the related services are performed. If the actual timing of the performance of services or the level of effort varies from the estimate, the Company will adjust its accrual or deferred advance payment accordingly. If the Company later determines that it no longer expects the services associated with a deferred non-refundable advance payment to be rendered, the deferred advance payment will be charged to expense in the period that such determination is made.
Fair Values of Preferred Stock Warrants and Common Stock Warrants
Prior to the Company's initial public offering of its common stock (IPO) in November 2010, outstanding warrants to purchase shares of its convertible preferred stock were freestanding warrants that were exercisable into convertible preferred stock that was subject to redemption and were therefore classified as liabilities in the balance sheet at fair value. The initial liability recorded was adjusted for changes in the fair values of the Company's preferred stock warrants during each reporting period and was recorded as a component of other income (expense) in the statement of operations for that period.
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Notes to Financial Statements (Continued)
2. Summary of Significant Accounting Policies (Continued)
Upon closing of the Company's IPO and the conversion of the underlying preferred stock to common stock, all outstanding warrants to purchase shares of preferred stock were automatically converted into warrants to purchase shares of the Company's common stock. The aggregate fair value of these warrants upon the closing of the IPO was $0.4 million, which was reclassified from liabilities to additional paid-in capital, a component of stockholders' equity, and the Company ceased recording any related periodic fair value adjustments.
The Company estimates the fair value of common stock warrants using the Black-Scholes option-pricing model, based on the inputs for the fair value of the underlying common stock at the valuation measurement date, the remaining contractual term of the warrant, risk-free interest rates, expected dividend rates and expected volatility of the price of the underlying common stock. These estimates are based on subjective assumptions.
Stock-Based Compensation
Employee stock-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the employee's requisite service period (generally the vesting period). Stock option awards granted to the Company's nonemployee directors for their board-related services are included in employee stock-based compensation in accordance with current accounting standards. The Company uses the Black-Scholes option-pricing model to estimate the fair value of its stock-based awards and uses the straight-line (single-option) method for expense attribution. The Company estimates forfeitures and recognizes expense only for those shares expected to vest.
The Company accounts for equity instruments issued to nonemployees based on their fair values on the measurement dates using the Black-Scholes option-pricing model. The fair values of the options granted to nonemployees are remeasured as they vest. As a result, the noncash charge to operations for nonemployee options that vest in any given reporting period is affected by changes in the fair value of the Company's common stock during that period.
Income Taxes
The Company utilizes the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax reporting bases of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.
The Company recorded a full valuation allowance at each balance sheet date presented. Based on the available evidence, the Company believes that it is more likely than not that it will be unable to utilize all of its deferred tax assets in the future. The Company intends to maintain the full valuation allowances until there is sufficient evidence to support the reversal of the valuation allowances.
The Company accounts for uncertain tax positions in the financial statements when it is more likely than not that the position will be sustained upon examination by the tax authorities. Such tax positions must initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority assuming
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Notes to Financial Statements (Continued)
2. Summary of Significant Accounting Policies (Continued)
full knowledge of the position and relevant facts. The Company's policy is to recognize any interest and penalties related to income taxes in income tax expense.
Net Loss per Common Share
Basic net loss per common share is calculated by dividing the net loss by the weighted-average number of common shares outstanding during the period, without consideration for common stock equivalents. Diluted net loss per share includes the effect of all potential common stock equivalents outstanding for the period, determined using the treasury-stock method. For purposes of this calculation, potentially dilutive securities consisting of convertible preferred stock, stock options and warrants are considered to be common stock equivalents and, for each period presented in these financial statements, are excluded in the calculation of diluted net loss per share because their effect would be antidilutive. The following table presents the calculation of basic and diluted net loss per share of common stock (in thousands, except share and per share data):
Recently Adopted Accounting Pronouncements
On January 1, 2012, the Company adopted new guidance on the presentation of comprehensive income (loss). Specifically, the new guidance allows an entity to present components of net income (loss) and other comprehensive income (loss) in one continuous statement, referred to as the statement of comprehensive income (loss), or in two separate but consecutive statements. The new guidance eliminates the current option to report other comprehensive income (loss) and its components in the statement of changes in stockholders' equity. While the new guidance changes the presentation of comprehensive income (loss), there are no changes to the components that are recognized in net income (loss) or other comprehensive income (loss) under current accounting guidance. The Company elected to adopt the two separate, but consecutive, statements presentation and the adoption of this guidance did not have a material impact on its financial statements.
Anacor Pharmaceuticals, Inc.
Notes to Financial Statements (Continued)
2. Summary of Significant Accounting Policies (Continued)
An accounting standard amendment, which amended the fair value measurement guidance and expanded the disclosure requirements related to such measurements, became effective for the Company on January 1, 2012. The most significant change in the amendment was to the disclosures required for Level 3 measurements based on unobservable inputs. The adoption of this amendment did not have a material impact on the Company's financial statements.
3. Marketable Securities and Fair Value Measurements
Financial Assets
The following tables summarize the estimated fair values of the Company's financial assets measured on a recurring basis as of the dates indicated below. Such financial assets are comprised solely of available for sale securities with remaining contractual maturities of less than one year.
The input levels used in the fair value measurements, the amortized cost and the fair value of marketable securities, with gross unrealized gains and losses, were as follows (in thousands):
All available for sale securities held as of December 31, 2012 and 2011 had original maturities at the date of purchase of less than one year. Management of the Company does not intend to sell these securities and believes that it will be able to hold these securities to maturity and recover their amortized cost bases, unless it is unable to raise additional capital prior to the maturity dates of the securities (see Note 1). There were no realized gains or losses recognized from the sale of available for sale securities in 2012, 2011 or 2010.
Anacor Pharmaceuticals, Inc.
Notes to Financial Statements (Continued)
3. Marketable Securities and Fair Value Measurements (Continued)
In measuring fair value, the Company evaluates valuation techniques such as the market approach, the income approach and the cost approach. A three-level valuation hierarchy, which prioritizes the inputs to valuation techniques that are used to measure fair value, is based upon whether such inputs are observable or unobservable.
Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions made by the reporting entity. The three-level hierarchy for the inputs to valuation techniques is briefly summarized as follows:
•Level 1-Observable inputs such as quoted prices (unadjusted) for identical instruments in active markets;
•Level 2-Observable inputs such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, or model-derived valuations whose significant inputs are observable; and
•Level 3-Unobservable inputs that reflect the reporting entity's own assumptions.
During the year ended December 31, 2012, there were no transfers between Level 1 and Level 2 financial assets. At December 31, 2012 and 2011, the Company utilized the market approach to measure fair value for its marketable securities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable instruments. The fair values of the money market fund (Level 1) were based on quoted market prices in an active market. U.S. treasury securities, federal agency securities and U.S. government guaranteed corporate bonds (Level 2) are valued using third-party pricing sources that apply applicable inputs and other relevant data, such as quoted prices, interest rates and yield curves, into their models to estimate fair value.
4. Property and Equipment
Property and equipment consisted of the following (in thousands):
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Notes to Financial Statements (Continued)
5. Accrued Liabilities
Accrued liabilities consisted of the following (in thousands):
6. Notes Payable
In March 2011, the Company entered into a loan and security agreement with Oxford Finance LLC and Horizon Technology Finance Corporation (the Lenders) to provide up to $30.0 million available in three tranches of $10.0 million each (the Loan Agreement). The first $10.0 million tranche was drawn at the closing of the transaction, at which time the Company repaid $6.6 million of the remaining obligations under its previous loan. The second and third tranches of $10.0 million each became available for drawdown upon the Company's full enrollment of its Phase 3 trials for tavaborole in December 2011. The Company borrowed $8.0 million of the second tranche in December 2011 and borrowed $12.0 million of the revised third tranche in September 2012. The interest rate for each tranche was fixed upon drawdown at a rate equal to the greater of 9.4% or 9.1% plus the 3-month U.S. LIBOR rate. From April 1, 2011 through April 30, 2012, payments under the Loan Agreement were interest only. From May 1, 2012 through April 1, 2015, the Loan Agreement requires equal monthly payments of interest and principal. In addition, a final payment equal to 5.5% of the amounts drawn, or $1,650,000, will be due on the earlier of April 1, 2015, or such earlier date specified in the Loan Agreement. The Company paid the Lenders financing fees of $0.3 million and incurred legal fees of $0.2 million in connection with the loan. These fees are being accounted for as a debt discount and deferred debt issuance costs, respectively.
The Loan Agreement includes standard affirmative and restrictive covenants, but does not include any covenants to attain or maintain any specific financial metrics, and also includes standard events of default, including payment defaults, breaches of covenants following any applicable cure period, a material impairment in the perfection or priority of the Lenders' security interest or in the value of the collateral and a material impairment of the prospect of repayment of the loans. Upon the occurrence of an event of default and following any applicable cure periods, a default interest rate of an additional 5% may be applied to the outstanding loan balances and the Lenders may declare all outstanding obligations immediately due and payable and take such other actions as set forth in the Loan Agreement.
The loan is secured by all assets of the Company except intellectual property. Under the Loan Agreement, the Company also agreed to certain restrictions regarding the pledging or encumbrance of its intellectual property.
In connection with the first and second tranche drawdowns in 2011, the Company issued warrants to the Lenders to purchase 80,527 shares and 88,997 shares, respectively, of its common stock (with an aggregate exercise price equal to $1.1 million). In September 2012, in connection with the third tranche drawdown, the Company issued warrants to the Lenders to purchase 84,226 shares of its common stock
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Notes to Financial Statements (Continued)
6. Notes Payable (Continued)
(with an aggregate exercise price equal to $550,000). The warrants are immediately exercisable, expire seven years from their issuance date and may be exercised on a cashless basis. The aggregate fair values of the warrants issued in 2012 and 2011 were approximately $0.4 million and $0.7 million, respectively, and were calculated using a Black-Scholes valuation model with the following assumptions: risk-free interest rate based upon observed risk-free interest rates appropriate for the expected term of the warrants; expected volatility based on the average historical volatilities of a peer group of publicly-traded companies within the Company's industry; expected term equal to the contractual life of the warrants; and a dividend yield of 0%.
In connection with the issuance of warrants to the Lenders during 2012 and 2011, the Company recorded debt discounts totaling $0.4 million and $0.7 million, respectively.
The Company granted certain piggyback registration rights pursuant to which, under certain conditions, the Company will register its shares of common stock issuable upon exercise of the warrants held by the Lenders.
The interest on the loan was calculated using the interest method with the debt issuance costs paid directly to the Lenders (financing fees) and the fair value of the warrants issued to the Lenders treated as a discount on the debt. The debt issuance costs for legal fees are included in prepaid expenses and other current assets and in other assets in the accompanying balance sheet. The amortization of the debt discount is recorded as a noncash interest expense and the amortization of the debt issuance costs is recorded as other income (expense) in the statements of operations.
In March 2011, the Company recorded a loss of approximately $0.3 million on the early extinguishment of its previous debt. This loss is recorded as a loss on early extinguishment of debt in 2011 in the statements of operations.
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Notes to Financial Statements (Continued)
6. Notes Payable (Continued)
Future payments as of December 31, 2012 are as follows (in thousands):
The Company recorded interest expense related to all borrowings of $2.9 million, $1.4 million and $2.0 million for 2012, 2011 and 2010, respectively. Included in interest expense for these years was $0.5 million, $0.3 million and $0.7 million, respectively, for the amortization of the financing costs and debt discounts. The annual effective interest rate on amounts borrowed under the Loan Agreement, including the amortization of the debt discounts and accretion of the final payments, is 15.6%.
7. Commitments and Contingencies
Operating Leases
The Company leases a 36,960 square-foot building consisting of office and laboratory space in Palo Alto, California, for its corporate headquarters. The lease term commenced in March 2008 and has scheduled annual rent increases through the lease expiration in March 2018. Rent expense is recognized on a straight-line basis over the term of the lease. The Company is also responsible for certain operating expenses. The lease provided a $0.4 million allowance from the landlord for tenant improvements. This amount has been included in deferred rent in the accompanying December 31, 2012 and 2011 balance sheets and is being amortized over the term of the lease, on a straight-line basis, as a reduction to rent expense. Under the lease agreement, the Company provided a security deposit in the amount of $0.1 million in the form of a standing letter of credit.
The Company also leases a second building in Palo Alto, California, consisting of 15,300 square feet of office and laboratory space. In October 2011, the Company amended the lease to extend the lease term through December 31, 2013 and is recognizing rent expense on a straight-line basis over the extension period. In addition, the Company has two (2) one-year options to extend the lease through each of December 31, 2014 and 2015. The 2011 lease amendment provided a $50,000 allowance from the landlord for tenant improvements, of which the Company used $32,000. The lease is cancelable with four months' notice. The Company currently provides a $0.1 million standing letter of credit as a security deposit under its lease agreement, which it will continue to provide with any lease extensions.
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Notes to Financial Statements (Continued)
7. Commitments and Contingencies (Continued)
Rent expense under all facility operating leases was $1.7 million, $1.8 million and $1.8 million for 2012, 2011 and 2010, respectively. Deferred rent of $0.9 million at both December 31, 2012 and 2011 is included in the accompanying balance sheets and represents the difference between recorded rent expense and the cash payments related to the operating leases for the Company's leased facilities, plus the unamortized portion of tenant improvement allowances.
As of December 31, 2012, future minimum cash payments under facility operating leases with initial terms in excess of one year are as follows (in thousands):
Guarantees and Indemnifications
The Company, as permitted under Delaware law and in accordance with its bylaws, indemnifies its officers and directors for certain events or occurrences, subject to certain limits, while the officer or director is or was serving at the Company's request in such capacity. The term of the indemnification period is equal to the officer's or director's lifetime.
The maximum amount of potential future indemnification is unlimited; however, the Company currently holds director and officer liability insurance. This insurance limits the Company's exposure and may enable it to recover a portion of any future amounts paid. The Company believes that the fair value of these indemnification obligations is minimal. Accordingly, the Company has not recognized any liabilities relating to these obligations for any period presented.
The Company has certain agreements with contract research organizations with which it does business that contain indemnification provisions pursuant to which the Company typically agrees to indemnify the party against certain types of third-party claims. The Company accrues for known indemnification issues when a loss is probable and can be reasonably estimated. The Company would also accrue for estimated incurred but unidentified indemnification issues based on historical activity. There were no accruals for or expenses related to indemnification issues for any period presented.
Legal Proceedings
On October 24, 2012, the Company provided notice to Valeant Pharmaceuticals International, Inc. ((Valeant), successor in interest to Dow Pharmaceutical Sciences, Inc. (DPS)) seeking to commence arbitration with JAMS of a breach of contract dispute under a master services agreement dated March 26, 2004 between the Company and DPS related to certain development services provided by DPS in connection with the Company's efforts to develop its topical antifungal product candidate for the treatment of onychomycosis. The Company has asserted claims for breach of contract, breach of fiduciary duty, intentional interference with prospective business advantage and unfair competition. The Company is seeking injunctive relief and damages of at least $215.0 million. The hearing for the
Anacor Pharmaceuticals, Inc.
Notes to Financial Statements (Continued)
7. Commitments and Contingencies (Continued)
preliminary injunction has been set for May 6-8, 2013. The Company currently expects the resolution of the arbitration to occur in the second half of 2013. The Company has carefully reviewed its position and believes that it has meritorious claims; however, the Company will need to prove such claims in the arbitration hearings.
On November 28, 2012, the Company filed an arbitration demand with JAMS alleging breach of contract by Medicis under the February 9, 2011 research and development agreement between Medicis and the Company (the Medicis Agreement) and seeking damages in the form of payment for the achievement of certain preclinical milestones under that agreement. On December 11, 2012, Medicis filed a complaint for breach of the Medicis Agreement and a motion for preliminary injunction in the Delaware Court of Chancery seeking to enjoin the Company from prosecuting its claims through arbitration and to require the Company to continue to use diligent efforts to conduct research and development under the Medicis Agreement. On January 16, 2013, the Company filed a motion requesting that the Delaware Court of Chancery dismiss the Medicis suit and send the dispute back to arbitration. On February 15, 2013, Medicis filed a brief in opposition to the Company's motion to dismiss in favor of arbitration. On March 4, 2013, the Company filed a reply brief in support of its motion to dismiss. The Company intends to vigorously enforce its rights under the Medicis Agreement and believes it has meritorious defenses against Medicis' filed complaint and motion. Medicis was acquired by Valeant in December 2012.
8. License, Research, Development and Commercialization Agreements
GSK
In September 2011, the Company amended and expanded its 2007 research and development collaboration with GSK (the Master Amendment) to, among other things, give effect to certain rights in AN3365 that would be acquired by the U.S. government in connection with GSK's contract for government funding to support GSK's further development of AN3365, provide GSK the option to extend its rights around the bacterial enzyme target leucyl-tRNA synthetase (LeuRS), as well as to add new programs for tuberculosis (TB) and malaria using the Company's boron chemistry platform. As a result of the Master Amendment, the Company received a $5.0 million upfront payment in September 2011 (the Amendment Fee) and may receive additional milestone payments, bonus payments and research funding as described below, all of which, when earned, will be non-refundable and non-creditable. The Company is also eligible to receive royalties on future sales of resulting products. The Master Amendment also terminated any research and development obligations that the Company had with respect to the original agreement.
Under the terms of the Master Amendment, GSK retained sole responsibility for the further development and commercialization of AN3365. In October 2012, GSK advised the Company that it had discontinued further development of AN3365; accordingly, all rights to the compound have reverted to the Company. The Company is considering its options for further development, if any, of AN3365.
The Master Amendment added a new program for TB, pursuant to which GSK is currently funding the Company's TB research activities through to candidate selection. Once TB compounds meet specified candidate selection criteria, GSK will have the option to license such compounds and, upon exercise of this option, would become responsible for all further development and commercialization of such compounds. The Company would be eligible to receive bonus payments, if
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Notes to Financial Statements (Continued)
8. License, Research, Development and Commercialization Agreements (Continued)
certain development and regulatory events occur and if certain sales levels are achieved for resulting TB products, and royalties on sales of such resulting products.
In addition, the Master Amendment provided an option for GSK to expand its rights around LeuRS in return for a bonus payment, the amount of which would depend upon the timing of GSK's exercise of this option. The Master Amendment also allowed GSK to initiate an additional collaborative research program directed toward LeuRS (New Research Program) and, provided such initiation occurs before October 5, 2013, the term of the collaboration agreement would be extended for a minimum of two years from the date of such initiation. If GSK elects to initiate a New Research Program, depending on the target for such New Research Program, the Company would become eligible to receive milestone payments of up to $17.6 million upon the occurrence of certain development events related to selection of compounds as candidates for further development and initiation of a clinical trial. The Company would also become eligible to receive bonus payments, if certain development and regulatory events occur and if certain sales levels are achieved for resulting products, and royalties on sales of such resulting products. However, because the decision to initiate a New Research Program is solely up to GSK, and based on the current status of the Company's research directed toward LeuRS, there can be no assurance that any such milestones or bonus payments will ever be earned or received by the Company.
The Master Amendment also includes the option for GSK to acquire rights to certain compounds from the Company's malaria program, which the Company conducts through a collaboration with MMV. GSK will have the option to license certain compounds from the program on an exclusive worldwide basis upon completion of a proof of concept clinical trial (the Malaria Option). Upon exercise of this option, GSK would assume sole responsibility for the further development and commercialization of any such compounds, the Company would receive a $5.0 million option exercise payment from GSK and, pursuant to a related September 2011 amendment to the Company's development agreement with MMV, the Company would be obligated to pay MMV one-third of the option exercise payment (the MMV Option Exercise Payment). The Company has determined the potential $5.0 million option exercise payment from GSK is a substantive milestone. However, because the exercise of the Malaria Option is solely up to GSK, and based on the compounds the Company and MMV are currently evaluating under the Company's malaria program, there can be no assurance that such milestone payment will ever be earned or received by the Company. The Company would also be eligible to receive bonus payments from GSK, if certain regulatory events occur and if certain sales levels for a resulting malaria compound are achieved, and royalties on such sales of resulting products. The amended development agreement with MMV also obligates the Company to pay MMV one-third of any such bonus payments up to a maximum amount equal to the total amount paid by MMV to the Company pursuant to the research and development agreements between the Company and MMV less the MMV Option Exercise Payment. Development of the initial lead candidate under the MMV collaboration was discontinued in November 2011 and none of the other compounds currently being evaluated by the Company and MMV as potential lead candidates are subject to the Malaria Option under the Company's Master Amendment with GSK.
In 2007, pursuant to the original agreement, GSK paid the Company a $12.0 million non-refundable, non-creditable upfront fee, which the Company was recognizing, up until the date of the Master Amendment, over the six-year research collaboration term on a straight-line basis in accordance with the revenue recognition guidance for multiple element arrangements. The Company determined that the Master Amendment was a material modification to the original agreement for
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Notes to Financial Statements (Continued)
8. License, Research, Development and Commercialization Agreements (Continued)
financial reporting purposes and that there were no undelivered elements remaining from the original agreement. The Company also determined that the only undelivered element resulting from the Master Amendment, other than contingent deliverables, was the research services it is obligated to provide under the new TB program and that the contractual reimbursement rates for these services approximate the fair value of the services. As a result, the remaining deferred revenue balance from the 2007 upfront fee of $4.2 million and the $5.0 million Amendment Fee from the Master Amendment were recognized as revenue in September 2011. As of December 31, 2012, the Company has no deferred revenue associated with the GSK agreement.
Revenues recognized under this agreement were as follows (in thousands):
The Company has evaluated the remaining contingent payments under the agreement with GSK, as amended by the Master Amendment, and determined that certain of these payments meet the definition of a milestone under the current accounting standards and that all such milestones are substantive. Accordingly, revenue from such milestones will be recognized in its entirety in the period when the milestone is achieved and collectibility is reasonably assured. Other contingent payments under the agreement, as amended by the Master Amendment, for which payment is contingent upon the results of GSK's performance will not be accounted for using the milestone method. Such payments will be recognized as revenue as earned and when collectibility is reasonably assured. For the year ended December 31, 2012, the Company did not recognize any revenue from milestone payments or bonus payments under its agreement with GSK. GSK is further obligated to pay the Company royalties on annual net sales of licensed products that result from the TB program, the New Research Program or the malaria program. To date, no products have been approved and therefore no royalties have been earned under this agreement.
Lilly
In August 2010, the Company entered into a research agreement with Lilly under which the companies will collaborate to discover products for a variety of animal health applications. Lilly will be responsible for worldwide development and commercialization of compounds advancing from these efforts. The Company received an upfront payment of $3.5 million in September 2010, which is being recognized over a four-year research term on a straight-line basis. Through December 31, 2012, the Company has also received $7.1 million in research funding with the potential to receive up to a total of $12.0 million in research funding, if neither party cancels the agreement prior to the completion of the research term. In both 2012 and 2011, the Company received milestone payments of $1.0 million each from Lilly for the selection of development compounds and would be eligible to receive additional
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Notes to Financial Statements (Continued)
8. License, Research, Development and Commercialization Agreements (Continued)
payments upon the occurrence of specified development and regulatory events. Included in such additional payments are potential payments of up to $2.0 million for the selection of additional development compounds, which the Company has determined are substantive milestones. In addition, the Company will be eligible to receive tiered royalties, at rates ranging from high single digits to in-the-tens, on net sales of products resulting from compounds licensed by Lilly under the research agreement. To date, no products have been approved and therefore no royalties have been earned under this agreement. As of December 31, 2012, the Company has deferred revenue of $1.4 million related to the upfront fee and $0.8 million related to the research funding.
Unless earlier terminated, the agreement continues in effect until the termination of royalty payment obligations. The agreement allows for termination by Lilly upon written notice, with certain additional payments to the Company and a notice period that has a duration dependent on whether the notice is delivered prior to the first regulatory approval of a product under the agreement or thereafter. In addition, either party may terminate for the other party's uncured material breach of the agreement. In the event of termination by the Company for material breach by Lilly or termination upon written notice by Lilly, Lilly would assign to the Company certain trademarks and regulatory materials used in connection with the products under the agreement and grant to the Company an exclusive license under Lilly's patent rights covering such products, and the Company would pay to Lilly a reasonable royalty on sales of such products should the Company desire an exclusive license. In the event of termination for material breach by the Company, Lilly will be entitled to a return of all research funding payments for expenses the Company has not incurred or irrevocably committed.
Revenues recognized under the agreement were as follows (in thousands):
Medicis
In February 2011, the Company entered into a research and development agreement with Medicis to discover and develop boron-based small molecule compounds directed against a target for the potential treatment of acne. The Company will be primarily responsible during a defined research collaboration term for discovering and conducting early development of product candidates that utilize the Company's proprietary boron chemistry platform. The Company granted Medicis a non-exclusive, non-royalty bearing license to utilize a relevant portion of the Company's intellectual property, solely as and to the extent necessary, to enable Medicis to perform additional development work under the agreement. Medicis will also have an option to obtain an exclusive license for products resulting from this collaboration. Upon exercise of this option, Medicis will assume sole responsibility for further development and commercialization of the applicable product candidate on a worldwide basis. On November 28, 2012, the Company filed an arbitration demand alleging breach of contract by Medicis under the Medicis Agreement, and on December 11, 2012, Medicis filed a complaint for breach of the
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Notes to Financial Statements (Continued)
8. License, Research, Development and Commercialization Agreements (Continued)
Medicis Agreement and a motion for preliminary injunction. On January 16, 2013, the Company filed a motion to dismiss the Medicis suit and send the dispute back to arbitration. On February 15, 2013, Medicis filed a brief in opposition to the Company's motion to dismiss in favor of arbitration. On March 4, 2013, the Company filed a reply brief in support of its motion to dismiss (see Note 7). Medicis was acquired by Valeant in December 2012.
Under the terms of the agreement, the Company received a $7.0 million upfront payment from Medicis in February 2011. The Company has identified the deliverables within the arrangement as a license on the technology and on-going research and development activities. The Company has concluded that the license is not a separate unit of accounting as it does not have stand-alone value to Medicis. As a result, the Company is recognizing revenue from the upfront payment on a straight-line basis over a six-year research term. As of December 31, 2012, the Company has deferred revenue of $4.8 million related to this upfront fee.
The Company will also be eligible to receive contingent payments if specified development and regulatory events occur. All such contingent payments, when earned, will be non-refundable and non-creditable. The Company evaluated the contingent payments under the agreement with Medicis and determined that certain of these payments meet the definition of a milestone under the current accounting standards and that all such milestones are substantive. Accordingly, revenue related to such milestones will be recognized in its entirety in the period when the milestone is achieved and collectibility is reasonably assured. These potential milestone payments of up to $33.0 million would be due upon the occurrence of certain development events related to selection of compounds as candidates for further development or as back-up compounds, initiation of a clinical trial and achievement of proof of concept criteria. However, based on the current status of compounds subject to the agreement with Medicis and our current legal proceedings with Medicis, as well as the fact that the decisions that may result in these milestone payments are within Medicis' control, there can be no assurance that such milestone payments will ever be earned or received by the Company. Other contingent payments under the agreement for which payment is contingent upon the results of Medicis' performance will not be accounted for using the milestone method. Such payments will be recognized as revenue when earned and when collectibility is reasonably assured. Through December 31, 2012, the Company did not recognize any revenue from milestones or other contingent payments under its agreement with Medicis.
In addition, the Company will be eligible to receive tiered royalties on annual net sales of licensed product sold by Medicis or its sublicensees. To date, no products have been approved and therefore no royalties have been earned under this agreement.
Revenues recognized under this agreement related to the upfront payment were as follows (in thousands):
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Notes to Financial Statements (Continued)
8. License, Research, Development and Commercialization Agreements (Continued)
MMV
In March 2011, the Company entered into a three-year development agreement with MMV to collaborate on the development of compounds for the treatment of malaria through human proof-of-concept studies. This development agreement was preceded by a 2010 research agreement between the two parties. In August 2011, the Company and MMV amended the development agreement (Amendment 1) to expand, and increase the funding for, the Company's malaria compound development activities. In addition, pursuant to Amendment 1, any advance payments in excess of the actual costs incurred by the Company for the research and development activities under the agreement are either refundable or creditable against future payments at MMV's option. In September 2011, the Company and MMV further amended their research and development agreements (Amendment 2) to allow, among other things, the Company to grant GSK an option to sublicense certain malaria compounds on an exclusive worldwide basis upon the completion of a proof of concept clinical trial. Upon exercise of this option, GSK would assume sole responsibility for the further development and commercialization of the licensed compounds subject to the option, the Company would receive an option exercise payment from GSK and the Company would be obligated to pay MMV one-third of the option exercise payment (the MMV Option Exercise Payment). The Company would also be eligible to receive from GSK bonus payments, if certain regulatory events occur and if certain sales levels for a resulting malaria compound are achieved, and royalties on such sales of resulting products. Amendment 2 also obligates the Company to pay MMV one-third of any such bonus payments up to a maximum amount equal to the total amount paid by MMV to the Company pursuant to the research and development agreements between the Company and MMV less the MMV Option Exercise Payment. In November 2011, development of the initial lead candidate under the MMV collaboration was discontinued and the Company and MMV are in the process of evaluating other compounds of the Company to determine if there is another potential lead candidate for development. None of the other compounds currently being evaluated are subject to the Malaria Option under the Company's Master Amendment with GSK.
Pursuant to the March 2011 development agreement and Amendment 1 thereto, the Company received $2.6 million of advance payments from MMV during 2011 to fund malaria compound development activities through December 2011. In 2011, the Company also received an advance payment of $0.6 million to fund ongoing research activities through December 2011 in connection with an extension of its previous research agreement with MMV. In addition, MMV awarded the Company $0.6 million for 2012 research funding. In February 2012, the Company paid MMV $0.3 million of unspent 2011 advances that were recorded as an accrued liability as of December 31, 2011. Additional funding for 2013 will be determined on an annual basis at the sole discretion of MMV. The Company will recognize revenue from the advance payments as the research and development activities are performed. As of December 31, 2012, the Company has no deferred revenue associated with its agreements with MMV.
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Notes to Financial Statements (Continued)
8. License, Research, Development and Commercialization Agreements (Continued)
Revenues recognized under the MMV research and development agreements were as follows (in thousands):
Schering
In November 2009, Schering merged with Merck & Co., Inc. (Merck). In May 2010, the Company entered into a mutual termination and release agreement with Merck pursuant to which the 2007 exclusive license, development and commercialization agreement with Schering for the development and worldwide commercialization of tavaborole was terminated. Under the May 2010 agreement, the Company regained the exclusive worldwide rights to tavaborole, Merck provided for the transfer to the Company of all material and information related to tavaborole, Merck paid $5.8 million to the Company, and the parties released each other from any and all claims, liabilities or other types of obligations relating to the 2007 agreement. Merck did not retain any rights to this compound. No amounts were recognized subsequent to 2010.
Revenues recognized in 2010 under the agreement with Schering and the related mutual termination and release agreement with Merck were as follows (in thousands):
9. Convertible Preferred Stock
The Company previously recorded its convertible preferred stock at fair value on the dates of issuance, net of issuance costs. The Company had classified the convertible preferred stock outside of stockholders' equity (deficit) because the shares contained redemption features that were not solely within its control. Upon closing of the Company's IPO in November 2010, 10,909,478 outstanding shares of convertible preferred stock were automatically converted into 11,120,725 shares of common stock, and the related carrying value of $87.5 million was reclassified to additional paid-in capital. As of December 31, 2012 and 2011, no convertible preferred shares were authorized, issued or outstanding.
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Notes to Financial Statements (Continued)
10. Preferred Stock Warrants Liability and Common Stock Warrants
In connection with its prior debt financings, the Company issued warrants to purchase convertible preferred stock (Warrants #1, #2 and #3). In 2010, the preferred stock warrants liability was adjusted to its fair value at the end of each reporting period using the Black-Scholes option-pricing model to determine such fair value. During 2010 (prior to the IPO), the Company recorded other income for the changes in the fair value of the warrants of $1.4 million. In connection with the closing of the IPO in November 2010, all three of the preferred stock warrants automatically converted into common stock warrants and the preferred stock warrants liability, totaling $0.4 million as of the conversion date, was reclassified to additional paid-in capital. In connection with the 2012 and 2011 debt borrowings, the Company issued additional common stock warrants to purchase common stock of the Company (Warrants #4, #5 and #6) (see Note 6).
As of December 31, 2012, the following common stock warrants were issued and outstanding:
11. Stockholders' Equity
Shelf Registrations
In December 2011, the Company filed a shelf registration statement on Form S-3 with the SEC (the First Shelf Registration). The First Shelf Registration was declared effective by the SEC on January 5, 2012 and permitted the Company to sell, from time to time, up to $50.0 million of common stock, preferred stock, debt securities and warrants. In December 2012, the Company filed another shelf registration statement on Form S-3 with the SEC (the Second Shelf Registration). The Second Shelf Registration was declared effective by the SEC on December 21, 2012 and permits the Company to sell, from time to time, up to $75.0 million of common stock, preferred stock, debt securities and warrants.
Common Stock Offerings
In February 2012, under the First Shelf Registration, the Company issued and sold 3,250,000 shares of the Company's common stock pursuant to an underwriting agreement (the Canaccord Underwriting Agreement) with Canaccord Genuity Inc. (Canaccord). The price to the public in this offering was $6.60 per share for gross proceeds of approximately $21.5 million, and Canaccord purchased the shares from the Company pursuant to the Canaccord Underwriting Agreement at a price of $6.25 per share. The net proceeds to the Company from this offering were approximately $19.9 million, after deducting the underwriting discount of $1.1 million and other offering costs of $0.4 million.
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Notes to Financial Statements (Continued)
11. Stockholders' Equity (Continued)
In October 2012, under the First Shelf Registration, the Company issued and sold 4,000,000 shares of the Company's common stock pursuant to an underwriting agreement (the Cowen Underwriting Agreement) with Cowen & Company, LLC (Cowen). The price to the public in this offering was $6.00 per share for gross proceeds of $24.0 million, and Cowen purchased the shares from the Company pursuant to the Cowen Underwriting Agreement at a price of $5.76 per share. The net proceeds to the Company from this offering were approximately $22.6 million, after deducting the underwriting discount of $1.0 million and other offering costs of $0.4 million.
Initial Public Offering
In November 2010, the Company completed its IPO of common stock pursuant to a registration statement that was declared effective on November 23, 2010. The Company sold 13,382,651 shares of its common stock, which included 1,382,651 shares of the Company's common stock sold pursuant to an over-allotment option granted to the underwriters, at a price to the public of $5.00 per share. As a result of the IPO, the Company raised a total of $66.9 million in gross proceeds, and approximately $61.0 million in net proceeds after deducting underwriting discounts and commissions of $3.2 million and estimated offering expenses of $2.7 million. Costs directly associated with the Company's IPO were initially capitalized and recorded as deferred offering costs prior to the closing of the IPO. These costs were then recorded as a reduction of the IPO proceeds received to determine the amount to be recorded in additional paid-in capital. Upon the closing of the IPO, 10,909,478 outstanding shares of the Company's convertible preferred stock automatically converted into 11,120,725 shares of its common stock.
Concurrent with the closing of the IPO, the Company sold 2,000,000 shares of its common stock through a private placement offering at a price of $5.00 per share. Gross proceeds raised in the private placement were $10.0 million with issuance costs of approximately $16,000.
Preferred Stock
In November 2010, the Company amended and restated its certificate of incorporation to authorize 10,000,000 shares of preferred stock upon the completion of its IPO. As of December 31, 2012 and 2011, there was no preferred stock outstanding.
Common Stock
In November 2010, the Company amended and restated its certificate of incorporation to increase the authorized common stock to 100,000,000 shares upon the completion of the IPO of its common stock.
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Notes to Financial Statements (Continued)
11. Stockholders' Equity (Continued)
The following table presents common stock reserved for future issuance for the following equity instruments as of December 31, 2012:
2010 Equity Incentive Plan
In November 2010, the Company's board of directors approved the Company's 2010 Equity Incentive Plan (2010 Plan), which became effective on the date of the Company's IPO. A total of 929,832 shares of common stock were initially reserved for future issuance under the 2010 Plan; and shares subject to outstanding stock awards granted under the Company's 2001 Equity Incentive Plan (2001 Plan) that expire or terminate for any reason prior to their exercise or settlement and would otherwise return to the 2001 Plan reserve will be added to the shares reserved under the 2010 Plan. At the 2011 annual meeting of stockholders of the Company held on May 25, 2011, the stockholders approved the Company's 2010 Plan, as amended, to among other things, increase the aggregate number of shares of common stock authorized for issuance under the plan by 1,200,000 shares. In addition, the number of shares of common stock available for issuance under the 2010 Plan will automatically increase on January 1st of each year for ten years commencing on January 1, 2012 by an amount equal to 4% of the total number of shares outstanding on December 31st of the preceding calendar year, or a lesser number of shares of common stock as determined by the Company's board of directors. On January 1, 2013 and 2012, automatic increases of 1,423,625 and 1,127,765 shares, respectively, were added to the 2010 Plan. The 2010 Plan provides for the new issuance of common stock of the Company upon the exercise of stock options. The maximum number of all shares that may be issued under the 2010 Plan as of December 31, 2012 is 5,001,401 shares. As of December 31, 2012, the Company had 1,089,219 shares of common stock available for future grants under the 2010 Plan.
The 2010 Plan provides for the grant of awards to employees, directors and consultants in the form of incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance awards and other awards. Incentive stock options may be granted to employees and nonstatutory options may be granted to employees, directors or consultants at exercise prices of no less than 100% of the fair value of the common stock on the grant date as determined by the board of directors. Incentive stock options may only be granted for ten years from the date the 2010 Plan was approved by the board of directors. Options granted to employees vest as determined by the board of directors, typically at the rate of 25% at the end of the first year, with the remaining balance vesting monthly over the next three years, but may be granted with different vesting terms. Options granted under the 2010 Plan expire no later than ten years after the date of grant. The stock issuable under the 2010 Plan may be shares of authorized but unissued or reacquired
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Notes to Financial Statements (Continued)
11. Stockholders' Equity (Continued)
common stock of the Company, including shares repurchased by the Company on the open market or otherwise.
2010 Employee Stock Purchase Plan
The Company's board of directors adopted the 2010 Employee Stock Purchase Plan (ESPP) in November 2010, and the Company's stockholders approved the ESPP in November 2010. The ESPP became effective on the date of the Company's IPO. A total of 250,000 shares of common stock were initially reserved for future issuance under the ESPP and may be issued pursuant to purchase rights granted to the Company's employees or to employees of any of the Company's designated affiliates. The number of shares of common stock reserved for issuance under the ESPP will automatically increase on January 1st of each year for ten years commencing on January 1, 2012 by the least of (i) 1% of the total number of shares outstanding on December 31st of the preceding calendar year, (ii) 80,000 shares or (iii) the number of shares of common stock as determined by the Company's board of directors. On January 1, 2013 and 2012, automatic increases of 80,000 shares each were added to the ESPP. The ESPP permits eligible employees to purchase common stock at a discount by contributing, normally through payroll deductions, up to 10% of their base compensation during defined offering periods. The price at which the stock is purchased is equal to the lower of 85% of the fair value of the common stock on the first date of an offering period or 85% of the fair value of the common stock on the date of purchase. Through December 31, 2012, the Company has issued 141,481 shares of the Company's common stock through purchases under the ESPP. As of December 31, 2012, 188,519 shares remain available for future issuance under the ESPP.
2001 Equity Incentive Plan
In connection with the Company's IPO, no further options or stock purchase rights will be granted under the 2001 Plan. Any shares remaining for issuance under the 2001 Plan as of the IPO date became available for issuance under the 2010 Plan. All outstanding stock awards granted under the 2001 Plan will remain subject to the terms of the 2001 Plan; however, shares that expire, terminate or are forfeited prior to exercise or settlement of such shares become available for issuance under the 2010 Plan. As of December 31, 2012, there were 1,598,835 shares of common stock reserved for future issuance upon the exercise of options granted under the 2001 Plan.
Under the 2001 Plan, the board of directors was authorized to grant options or stock purchase rights to employees, directors and consultants. Options granted were either incentive stock options or nonstatutory stock options. Incentive stock options were granted to employees with exercise prices of no less than the fair value, and nonstatutory options could be granted to employees or consultants at exercise prices of no less than 85% of the fair value of the common stock on the grant date as determined by the board of directors. Options granted to employees vest as determined by the board of directors, generally at the rate of 25% at the end of the first year, with the remaining balance vesting monthly over the next three years. Options granted under the 2001 Plan expire no later than ten years after the date of grant. The 2001 Plan provides for the new issuance of common stock of the Company upon the exercise of stock options. As of December 31, 2012 and 2011, there were no shares subject to repurchase by the Company.
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Notes to Financial Statements (Continued)
11. Stockholders' Equity (Continued)
Stock Option Activity
The following table summarizes stock option activity:
The aggregate intrinsic value of options outstanding as of December 31, 2012 is calculated as the difference between the exercise price of the underlying options and the Company's common stock closing price for the 887,689 shares that had exercise prices that were lower than the closing stock price of $5.20 as of December 31, 2012. The weighted-average fair values of options granted to employees and the Company's nonemployee directors in 2012, 2011 and 2010 were $3.65, $4.64 and $4.13 per share, respectively.
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Notes to Financial Statements (Continued)
11. Stockholders' Equity (Continued)
Stock options by exercise price as of December 31, 2012 were as follows:
Stock-Based Compensation
The Company estimates the fair value of stock options granted on the date of grant using the Black-Scholes option-pricing model, which requires the use of highly subjective and complex assumptions to determine the fair value of stock-based awards. Since the Company has been a public company for only slightly more than two years, sufficient relevant historical data does not exist to support the volatility of the Company's common stock prices or the expected term of its stock options. Therefore, the Company has used the average historical volatilities of a peer group of publicly-traded companies within its industry to determine a reasonable estimate of its expected volatility. In addition, the Company has opted to use the simplified method for estimating the expected term of options granted to employees.
The risk-free interest rate assumptions are based on U.S. Treasury Constant Maturities rates with durations similar to the expected term of the related awards. The expected dividend yield assumption is based on the Company's historic and expected absence of dividend payouts.
For options granted prior to January 1, 2006, the graded-vested (multiple-option) method continues to be used for expense attribution related to the portion of those options that were unvested as of January 1, 2006. The straight-line (single-option) method is being used for expense attribution of all awards granted on or after January 1, 2006.
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Notes to Financial Statements (Continued)
11. Stockholders' Equity (Continued)
The fair values for stock options granted (estimated at the date of grant) to employees and the Company's nonemployee directors and the fair value of ESPP stock purchase rights granted in 2012 and 2011 were estimated using the Black-Scholes valuation model with the following assumptions:
Prior to its IPO, the Company had historically granted stock options at exercise prices not less than the fair market value of its common stock as determined by the board of directors based on input from management. The determination of the estimated fair value of its common stock on the date of grant had been based on a number of objective and subjective factors including: recent sales of convertible preferred stock to investors; comparable rights and preferences of other outstanding equity securities; progress of research and development efforts and milestones attained; results of operations, financial position and levels of debt and available capital resources of the Company; perspective provided by valuation analyses of the Company's stock performed by management; and, based on prevailing market and biotechnology sector conditions, the likelihood of a liquidity event such as an IPO or the sale of the Company.
Based on the assumptions used in the Black-Scholes valuation model for ESPP, the weighted-average estimated fair values of employee stock purchase rights granted under the ESPP in 2012 and 2011 were $2.68 and $2.85, respectively.
Employee stock-based compensation expense recognized in 2012, 2011 and 2010 was calculated based on awards ultimately expected to vest and has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
The Company recorded stock-based compensation expense as follows (in thousands):
As of December 31, 2012, the Company had $5.6 million and $39,000 of total unrecognized compensation expense, net of estimated forfeitures, related to outstanding stock options and ESPP stock purchase rights, respectively, that will be recognized over weighted-average periods of 2.2 years and 0.4 years, respectively.
Anacor Pharmaceuticals, Inc.
Notes to Financial Statements (Continued)
11. Stockholders' Equity (Continued)
Stock Options Granted to Nonemployee Advisors
During 2012, 2011 and 2010, the Company granted nonemployee advisors 59,975, 51,400 and 67,500 option shares, respectively, to purchase common stock. Grants to nonemployee advisors do not include grants made to the Company's nonemployee directors for their board-related services. Stock-based compensation expense related to stock options granted to nonemployee advisors is recognized as the stock options vest. The stock-based compensation expense related to nonemployee advisors will fluctuate as the fair value of the Company's common stock fluctuates. The Company believes that the fair values of the stock options are more reliably measurable than the fair values of the services received. The fair values of nonemployee advisor options in 2012, 2011 and 2010 were estimated using the Black-Scholes valuation model with the following weighted-average assumptions: expected life is equal to the remaining contractual term of the award as of the measurement date; risk-free rate is based on the U.S. Treasury Constant Maturity rate with a term similar to the expected life of the option at the measurement date; expected dividend yield of 0%; and an average volatility ranging from 70% to 80%. The Company has used the average historical volatilities of a peer group of publicly-traded companies within its industry to estimate volatility.
12. 401(k) Plan
The Company sponsors a 401(k) Plan to which eligible employees may elect to contribute, on a pretax basis, subject to certain limitations. The Company does not match any employee contributions.
13. Income Taxes
A reconciliation of the expected income tax benefit computed using the federal statutory income tax rate to the Company's effective income tax rate is as follows:
On January 2, 2013, legislation was enacted retroactively extending the federal research credits for the 2012 tax year. Because the retroactive extension of the research credit was not enacted on or before December 31, 2012, the Company cannot include the 2012 federal research credit in its 2012 provision. The 2012 federal research credit amount will be appropriately included in the Company's 2013 provision.
Anacor Pharmaceuticals, Inc.
Notes to Financial Statements (Continued)
13. Income Taxes (Continued)
Significant components of the Company's deferred tax assets for federal and state income taxes were as follows (in thousands):
Due to the Company's lack of earnings history, the deferred assets have been fully offset by a valuation allowance as of December 31, 2012 and 2011. The increase in the valuation allowance on the deferred tax assets was $21.1 million, $19.4 million and $5.1 million for 2012, 2011 and 2010, respectively.
As of December 31, 2012, the Company had net operating loss carryforwards for federal and state income tax purposes of approximately $190.5 million and $190.0 million, respectively. These federal and state carryforwards will begin to expire in the years 2021 and 2013, respectively. Approximately $0.3 million of the net operating loss carryforwards relates to stock option deductions, the benefit of which will be credited to additional paid in capital in the year such losses are utilized. The Company also had federal research and development tax credit carryforwards of approximately $6.2 million, which expire beginning in 2024 if not utilized. In addition, state research and development tax credit carryforwards of approximately $4.6 million will carry over indefinitely.
Internal Revenue Code Section 382 places a limitation (the Section 382 Limitation) on the amount of taxable income, that can be offset by net operating loss carryforwards after a change in control (generally, a greater than 50% change in ownership). Typically, after a control change, a company cannot deduct operating loss carryforwards in excess of the Section 382 Limitation. Due to these changes in ownership provisions, utilization of the net operating loss and tax credit carryforwards may be subject to an annual limitation regarding their utilization against taxable income in future periods. The Company determined that a change in control, as defined by Internal Revenue Code Section 382, occurred in December 2010. However, the computed Section 382 Limitation is not expected to prevent the Company from utilizing its net operating losses prior to their expiration if the Company can generate sufficient taxable income to do so in the future.
Upon adoption of the standard for accounting for uncertainties in income taxes, the Company recognized no material adjustment in the liability for unrecognized tax benefits. As of December 31, 2012 and 2011, the Company had approximately $2.2 million and $2.0 million, respectively, of unrecognized tax benefits, none of which would currently affect the Company's effective tax rate if recognized due to the Company's deferred tax assets being fully offset by a valuation allowance. The
Anacor Pharmaceuticals, Inc.
Notes to Financial Statements (Continued)
13. Income Taxes (Continued)
Company does not believe there will be any material changes in its unrecognized tax positions over the next twelve months.
The activity related to unrecognized tax benefits was as follows (in thousands):
If applicable, the Company would classify interest and penalties related to uncertain tax positions in income tax expense. Through December 31, 2012, there has been no interest expense or penalties related to unrecognized tax benefits. The tax years 2001 through 2012 remain open to examination by one or more major taxing jurisdictions to which the Company is subject. There are no income tax examinations currently in progress.
14. U.S. Government Grant
In October 2010, the Company was awarded $1.5 million in grant funds by the United States Department of the Treasury under the Qualifying Therapeutic Discovery Project program to support research for six projects with the potential to produce new therapies. The qualifying expenses under this program were incurred by the Company during 2010 and 2009. The Company recognized $1.5 million as government grant revenue for the year ended December 31, 2010. As of December 31, 2010, $0.1 million was due to the Company and was included in government grant receivable.
15. Quarterly Financial Data (Unaudited)
The following table summarizes the unaudited quarterly financial data for the last two fiscal years (in thousands, except per share data):
Selected Quarterly Data:
Anacor Pharmaceuticals, Inc.
Notes to Financial Statements (Continued)
15. Quarterly Financial Data (Unaudited) (Continued)
Net loss per share amounts for the 2012 and 2011 quarters and full years have been computed separately. Accordingly, quarterly amounts may not add to the annual amounts because of differences in the weighted average shares outstanding during each quarter.
16. Subsequent Events
Common Stock Offering
On January 18, 2013, the Company entered into an equity distribution agreement (the Wedbush Agreement) with Wedbush Securities Inc. (Wedbush) under which the Company may, from time to time, offer and sell its common stock having aggregate sales proceeds of up to $25.0 million through Wedbush, or to Wedbush, for resale. Sales of the Company's common stock through Wedbush, if any, will be made by means of ordinary brokers' transactions on The NASDAQ Global Market or otherwise at market prices prevailing at the time of sale, in block transactions, or as otherwise agreed upon by the Company and Wedbush and may be made in sales deemed to be "at-the-market" equity offerings as defined in Rule 415 promulgated under the Securities Act of 1933, as amended. Wedbush will use commercially reasonable efforts to sell the Company's common stock from time to time, based upon instructions from the Company (including any price, time or size limits or other customary parameters or conditions the Company may impose). The Company will pay Wedbush a commission, or allow a discount, as the case may be, in each case equal to 2.0% of the gross sales proceeds of any common stock sold through Wedbush as agent under the Wedbush Agreement. The Company has also agreed to reimburse Wedbush for certain expenses up to an aggregate of $150,000.
Under the terms of the Wedbush Agreement, the Company also may sell its common stock to Wedbush, as principal for its own account, at a price to be agreed upon at the time of sale. Through March 14, 2013, the Company sold 401,500 shares of the Company's common stock under the Agreement. The net proceeds to the Company from this offering were approximately $1.3 million, after deducting the underwriting discount and other offering costs, including commissions to Wedbush for such sales of approximately $27,000.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2012. The term "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC'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 that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2012 at the reasonable assurance level.
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2012 based on the guidelines established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Our internal control over financial reporting includes policies and procedures that provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles. Based on the results of our evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2012. We reviewed the results of management's assessment with our Audit Committee. The Company's independent registered public accountants, Ernst & Young LLP, audited the financial statements included in this Annual Report on Form 10-K and have issued an attestation report on the Company's internal control over financial reporting. The report on the audit of internal control over financial reporting appears below.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Anacor Pharmaceuticals, Inc.
We have audited Anacor Pharmaceuticals, Inc.'s internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("the COSO criteria"). Anacor Pharmaceuticals, Inc.'s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Anacor Pharmaceuticals, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2012 financial statements of Anacor Pharmaceuticals, Inc. and our report dated March 18, 2013 expressed an unqualified opinion thereon that included an explanatory paragraph regarding Anacor Pharmaceuticals, Inc.'s ability to continue as a going concern.
/s/ Ernst & Young LLP
Redwood City, California
March 18, 2013
Changes in Internal Control Over Financial Reporting
There were no changes in our internal controls over financial reporting during the fourth quarter of 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
Certain information required by Part III is omitted from this Report on Form 10-K and is incorporated herein by reference to our definitive Proxy Statement for our 2013 Annual Meeting of Stockholders (the "Proxy Statement"), which we intend to file pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, within 120 days after December 31, 2012.
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item concerning our directors is incorporated by reference to the information set forth in the section titled "Directors and Corporate Governance" in our Proxy Statement. Information required by this item concerning our executive officers is incorporated by reference to the information set forth in the section entitled "Executive Officers of the Company" in our Proxy Statement. Information regarding Section 16 reporting compliance is incorporated by reference to the information set forth in the section entitled "Section 16(a) Beneficial Ownership Reporting Compliance" in our Proxy Statement.
Our written code of ethics applies to all of our directors and employees, including our executive officers, including without limitation our principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions. The code of ethics is available on our website at http://www.anacor.com in the Investors section under "Corporate Governance." Changes to or waivers of the code of ethics will be disclosed on the same website. We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding any amendment to, or waiver of, any provision of the code of ethics in the future by disclosing such information on our website.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item regarding executive compensation is incorporated by reference to the information set forth in the sections titled "Executive Compensation" in our Proxy Statement.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item regarding security ownership of certain beneficial owners and management is incorporated by reference to the information set forth in the section titled "Security Ownership of Certain Beneficial Owners and Management" and "Equity Compensation Plan Information" in our Proxy Statement.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item regarding certain relationships and related transactions and director independence is incorporated by reference to the information set forth in the sections titled
"Certain Relationships and Related Transactions" and "Election of Directors", respectively, in our Proxy Statement.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item regarding principal accountant fees and services is incorporated by reference to the information set forth in the section titled "Principal Accountant Fees and Services" in our Proxy Statement.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)The following documents are filed as part of this report:
(1)FINANCIAL STATEMENTS
Financial Statements-See Index to Consolidated Financial Statements at Item 8 of this Annual Report on Form 10-K.
(2)FINANCIAL STATEMENT SCHEDULES
Financial statement schedules have been omitted in this Annual Report on Form 10-K because they are not applicable, not required under the instructions, or the information requested is set forth in the consolidated financial statements or related notes thereto.
(b)Exhibits. The exhibits listed in the accompanying index to exhibits are filed as part of, or incorporated by reference into, this Annual Report on Form 10-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Palo Alto, State of California, on the 18th day of March 2013.
ANACOR PHARMACEUTICALS, INC.
By:
/s/ DAVID P. PERRY
David P. Perry
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints David P. Perry and Geoffrey M. Parker, jointly and severally, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her, and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises hereby ratifying and confirming all that said attorneys-in-fact and agents, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report on Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Exhibit Index
+Indicates management contract or compensatory plan.
Confidential treatment has been received with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.
Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.
(1)Filed as an exhibit to the Registrant's Current Report on Form 8-K filed on December 6, 2010, and incorporated herein by reference.
(2)Filed as an exhibit to the Registrant's Registration Statement on Form S-1 (File No. 333-169322), effective November 23, 2010, and incorporated herein by reference.
(3)Filed as an exhibit to the Registrant's Current Report on Form 8-K filed on March 21, 2011, and incorporated herein by reference.
(4)Filed as an exhibit to the Registrant's Annual Report on Form 10-K filed for the year ended December 31, 2010 on March 29, 2011, and incorporated herein by reference.
(5)Filed as an exhibit to the Registrant's Registration Statement on Form S-3 (File No. 333-178766), effective January 5, 2012, and incorporated herein by reference.
(6)Filed as an exhibit to the Registrant's Current Report on Form 8-K filed on May 26, 2011, and incorporated herein by reference.
(7)Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2011 on November 14, 2011, and incorporated herein by reference.
(8)Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2011 on May 12, 2011, and incorporated herein by reference.
(9)Filed as an exhibit to the Registrant's Annual Report on Form 10-K filed for the year ended December 31, 2011 on March 15, 2012, and incorporated herein by reference.
(10)Filed as an exhibit to the Registrant's Quarterly on Form 10-Q filed for the quarter ended September 30, 2012 on November 9, 2012, and incorporated herein by reference.
(11)Filed as an exhibit to the Registrant's Current Report on Form 8-K filed on March 5, 2012, and incorporated herein by reference.
(12)This certification "accompanies" the Annual Report on Form 10-K to which it relates, is not deemed filed with the Commission and is not to be incorporated by reference into any filing of Registrant under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Annual Report on Form 10-K), irrespective of any general incorporation language contained in such filing.