Cascadian Therapeutics
Oncothyreon Inc. (Form: 10-Q, Received: 11/12/2013 17:08:08)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

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

For the quarterly period ended September 30, 2013

or

 

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

For the transition period from              to             

Commission file number: 001-33882

 

 

ONCOTHYREON INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   26-0868560

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

2601 Fourth Ave., Suite 500

Seattle, Washington

  98121
(Address of principal executive offices)   (Zip Code)

(206) 801-2100

(Registrant’s telephone number, including area code)

 

 

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

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

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

 

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

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

As of November 12, 2013, the number of outstanding shares of the registrant’s common stock, par value $0.0001 per share, was 69,314,108.

 

 


Table of Contents

ONCOTHYREON INC.

FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2013

INDEX

 

     Page  

PART I — FINANCIAL INFORMATION

     1   

Item 1. Financial Statements (Unaudited)

     1   

Condensed Consolidated Balance Sheets

     1   

Condensed Consolidated Statements of Operations

     2   

Condensed Consolidated Statements of Comprehensive Loss

     3   

Condensed Consolidated Statements of Cash Flows

     4   

Notes to the Condensed Consolidated Financial Statements

     5   

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

     15   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     24   

Item 4. Controls and Procedures

     24   

PART II — OTHER INFORMATION

     24   

Item 1. Legal Proceedings

     24   

Item 1A. Risk Factors

     24   

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

     37   

Item 3. Defaults Upon Senior Securities

     37   

Item 4. Mine Safety Disclosure

     38   

Item 5. Other Information

     38   

Item 6. Exhibits

     39   

Signatures

     40   

 

-ii-


Table of Contents

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

ONCOTHYREON INC.

Condensed Consolidated Balance Sheets

(In thousands, except share and per share amounts)

 

     September 30,
2013
    December 31,
2012
 
     (Unaudited)        
ASSETS     

Current:

    

Cash and cash equivalents

   $ 12,774      $ 22,266   

Short-term investments

     48,582        58,988   

Accounts and other receivables

     1,687        323   

Prepaid and other current assets

     1,048        840   
  

 

 

   

 

 

 

Total current assets

     64,091        82,417   

Long-term investments

     10,560        2,502   

Property and equipment, net

     1,819        1,887   

Goodwill

     2,117        2,117   

Other assets

     644        512   
  

 

 

   

 

 

 

Total assets

   $ 79,231      $ 89,435   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Current:

    

Accounts payable

   $ 677      $ 1,133   

Accrued and other liabilities

     1,920        852   

Accrued compensation and related liabilities

     1,065        1,042   

Current portion of restricted share unit liability

     244        44   

Current portion of warrant liability

     215        —     
  

 

 

   

 

 

 

Total current liabilities

     4,121        3,071   

Deferred rent

     463        533   

Restricted share unit liability

     201        227   

Warrant liability

     1,910        3,251   

Class UA preferred stock, 12,500 shares authorized, 12,500 shares issued and outstanding

     30        30   
  

 

 

   

 

 

 
     6,725        7,112   
  

 

 

   

 

 

 

Commitments and contingencies

    

Stockholders’ equity:

    

Preferred stock, $0.0001 par value; 10,000,000 shares authorized, no shares issued or outstanding

     —          —     

Common stock, $0.0001 par value; 100,000,000 shares authorized, 68,060,844 and 57,216,237 shares issued and outstanding

     353,854        353,853   

Additional paid-in capital

     149,409        126,832   

Accumulated deficit

     (425,722     (393,326

Accumulated other comprehensive loss

     (5,035     (5,036
  

 

 

   

 

 

 

Total stockholders’ equity

     72,506        82,323   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 79,231      $ 89,435   
  

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements

 

-1-


Table of Contents

ONCOTHYREON INC.

Condensed Consolidated Statements of Operations

(In thousands, except share and per share amounts)

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2013     2012     2013     2012  
     (Unaudited)  

Operating expenses

        

Research and development

   $ 5,517      $ 5,783      $ 27,374      $ 16,348   

General and administrative

     2,085        1,902        6,266        5,181   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     7,602        7,685        33,640        21,529   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (7,602     (7,685     (33,640     (21,529
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expenses)

        

Investment and other income (expenses), net

     66        32        118        (167

Interest expense

     —          —          —          (309

Change in fair value of warrant liability

     (174     (972     1,126        14,336   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expenses), net

     (108     (940     1,244        13,860   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (7,710   $ (8,625   $ (32,396   $ (7,669
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share — basic

   $ (0.12   $ (0.15   $ (0.54   $ (0.15
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share — diluted (Note 6)

   $ (0.12   $ (0.15   $ (0.54   $ (0.41
  

 

 

   

 

 

   

 

 

   

 

 

 

Shares used to compute basic net loss per share

     63,886,874        57,186,749        59,962,328        52,564,914   
  

 

 

   

 

 

   

 

 

   

 

 

 

Shares used to compute diluted net loss per share

     63,886,874        57,186,749        59,962,328        53,899,276   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

-2-


Table of Contents

ONCOTHYREON INC.

Condensed Consolidated Statements of Comprehensive Loss

(In thousands)

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2013     2012     2013     2012  
     (Unaudited)  

Net loss

   $ (7,710   $ (8,625   $ (32,396   $ (7,669

Other comprehensive income:

        

Available-for-sale securities:

        

Unrealized gain (loss) during the period, net

     22        38        1        8   

Reclassification adjustment

     —          —          —          1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income

     22        38        1        9   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

   $ (7,688   $ (8,587   $ (32,395   $ (7,660
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements

 

-3-


Table of Contents

ONCOTHYREON INC.

Condensed Consolidated Statements of Cash Flows

(In thousands)

 

     Nine months ended
September 30,
 
     2013     2012  
     (Unaudited)  

Cash flows from operating activities

    

Net loss

   $ (32,396   $ (7,669

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

    

Depreciation and amortization

     367        396   

Amortization of discount and deferred financing costs on notes payable

     —          78   

Amortization of premiums and accretion of discounts on securities

     473        587   

Share-based compensation expense

     1,628        992   

Change in fair value of warrant liability

     (1,126     (14,336

Cash settled on conversion of restricted share units

     (11     (39

Other

     (45     264   

Net change in assets and liabilities:

    

Accounts and other receivable

     84        (111

Prepaid expenses and other current assets

     (208     (525

Other long term assets

     (132     (79

Accounts payable

     (456     1,475   

Accrued and other liabilities

     1,068        (280

Accrued compensation and related liabilities

     23        77   

Deferred rent

     (70     (63
  

 

 

   

 

 

 

Net cash used in operating activities

     (30,801     (19,233
  

 

 

   

 

 

 

Cash flows from investing activities

    

Purchases of investments

     (50,190     (72,037

Redemption of investments

     52,066        45,698   

Purchases of property and equipment, net

     (253     (686
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     1,623        (27,025
  

 

 

   

 

 

 

Cash flows from financing activities

    

Proceeds from issuance of common stock, net of issuance cost

     19,686        50,377   

Principal payments on notes payable

     —          (909

Repayment on notes payable

     —          (4,135
  

 

 

   

 

 

 

Net cash provided by financing activities

     19,686        45,333   
  

 

 

   

 

 

 

Decrease in cash and cash equivalents

     (9,492     (925

Cash and cash equivalents, beginning of period

     22,266        11,609   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 12,774      $ 10,684   
  

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

-4-


Table of Contents

ONCOTHYREON INC.

Notes to the Condensed Consolidated Financial Statements

Three and nine months ended September 30, 2013 and September 30, 2012

(Unaudited)

1. DESCRIPTION OF BUSINESS

Oncothyreon Inc. (the Company), is a clinical-stage biopharmaceutical company incorporated in the State of Delaware on September 7, 2007. The Company is focused primarily on the development of therapeutic products for the treatment of cancer. The Company’s goal is to develop and commercialize novel synthetic vaccines and targeted small molecules that have the potential to improve the lives and outcomes of cancer patients. The Company’s operations are not subject to any seasonality or cyclicality factors.

2. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial statements. The accounting principles and methods of computation adopted in these condensed consolidated financial statements are the same as those of the audited consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 filed with the Securities Exchange Commission (the SEC), on March 14, 2013.

Omitted from these statements are certain information and note disclosures normally included in the audited consolidated financial statements prepared in accordance with U.S. GAAP. The Company believes all adjustments necessary for a fair statement of the results for the periods presented have been made, and such adjustments consist only of those considered normal and recurring in nature. The financial results for the three and nine months ended September 30, 2013 are not necessarily indicative of financial results for the full year. The condensed consolidated balance sheet as of December 31, 2012 has been derived from the audited financial statements at that date. The unaudited condensed consolidated financial statements and notes presented should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2012 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 filed with the SEC on March 14, 2013.

Reclassifications

The Company reclassified amortization of premiums and accretion of discounts on securities out of investing activities into operating activities. The prior years’ amortization of premiums and accretion of discounts were reclassified for consistency with current period presentation. These reclassifications had no effect on reported operating expenses, loss from operations, or net loss.

Accumulated Other Comprehensive Income (Loss)

Comprehensive income or loss is comprised of net income or loss and other comprehensive income or loss. Other comprehensive income or loss includes unrealized gains and losses on the Company’s available-for-sale investments. In addition to unrealized gains and losses on investments, accumulated other comprehensive income or loss consists of foreign currency translation adjustments which arose from the conversion of the Canadian dollar functional currency consolidated financial statements to the U.S. dollar reporting currency consolidated financial statements prior to January 1, 2008. Should the Company liquidate or substantially liquidate its investments in its foreign subsidiaries, the Company would be required to recognize the related cumulative translation adjustments pertaining to the liquidated or substantially liquidated subsidiaries, as a charge to earnings in the Company’s condensed consolidated statement of operations and comprehensive loss.

There were no reclassifications out of accumulated other comprehensive loss during the three and nine months ended September 30, 2013. The table below shows the changes in accumulated balances of each component of accumulated other comprehensive loss for the three and nine months ended September 30, 2013:

 

     Three months ended September 30, 2013  
     Net unrealized
gains/(losses) on
Available-for-sale
Securities
     Foreign
Currency
Translation
Adjustment
    Accumulated
Other
Comprehensive
Loss
 
     (In thousands)  

Balance at June 30, 2013

   $ 9       $ (5,066   $ (5,057

Current period other comprehensive income

     22         —          22   
  

 

 

    

 

 

   

 

 

 

Balance at September 30, 2013

   $ 31       $ (5,066   $ (5,035
  

 

 

    

 

 

   

 

 

 

 

-5-


Table of Contents
     Nine months ended September 30, 2013  
     Net unrealized
gains/(losses) on
Available-for-sale
Securities
     Foreign
Currency
Translation
Adjustment
    Accumulated
Other
Comprehensive
Loss
 
     (In thousands)  

Balance at December 31, 2012

   $ 30       $ (5,066   $ (5,036

Current period other comprehensive income

     1         —          1   
  

 

 

    

 

 

   

 

 

 

Balance at September 30, 2013

   $ 31       $ (5,066   $ (5,035
  

 

 

    

 

 

   

 

 

 

3. RECENT ACCOUNTING PRONOUNCEMENTS

In July 2013, the Financial Accounting Standards Board (FASB) issued guidance on presentation of an unrecognized tax benefit in financial statements when a net operating loss (NOL) carryforward, a similar tax loss, or a tax credit carryforward exists. This guidance requires an entity to present an unrecognized tax benefit as a reduction of a deferred tax asset for an NOL carryforward, or similar tax loss or tax credit carryforward, rather than as a liability when (1) the uncertain tax position would reduce the NOL or other carryforward under the tax law of the applicable jurisdiction and (2) the entity intends to use the deferred tax asset for that purpose. The guidance does not require new recurring disclosures. The guidance is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013 for public entities. Early adoption and retrospective application are permitted. The adoption of this standard is not expected to have impact on the presentation of the Company’s unrecognized tax benefits or on the consolidated financial position or results of operations.

In February 2013, FASB issued new guidance on reporting of amounts reclassified out of accumulated other comprehensive income. This guidance requires an entity to disclose the amount reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present either on the face of the Consolidated Statements of Operations or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required to be reclassified to net income in its entirety in the same reporting period. For amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional detail about these amounts. The guidance does not change the current requirements for reporting net income or other comprehensive income in financial statements. The guidance is effective for all reporting periods (interim and annual) beginning after December 15, 2012. The adoption of this guidance on January 1, 2013 had no impact on the Company’s consolidated financial position or results of operations.

4. FAIR VALUE MEASUREMENTS

The Company measures certain financial assets and liabilities at fair value in accordance with a hierarchy which requires an entity to maximize the use of observable inputs which reflect market data obtained from independent sources and minimize the use of unobservable inputs which reflect the Company’s market assumptions when measuring fair value. There are three levels of inputs that may be used to measure fair value:

 

   

Level 1 — quoted prices in active markets for identical assets or liabilities;

 

   

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

 

   

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

The Company’s financial assets and liabilities measured at fair value consisted of the following as of September 30, 2013 and December 31, 2012:

 

     September 30, 2013      December 31, 2012  
     Level 1      Level 2      Level 3      Total      Level 1      Level 2      Level 3      Total  
     (In thousands)  

Financial assets:

                       

Money market funds

   $ 10,636       $ —        $ —        $ 10,636       $ 19,859       $ —        $ —        $ 19,859   

Debt securities of U.S. government agencies

     —          45,602         —          45,602         —          52,444         —          52,444   

Corporate bonds

     —          13,540         —          13,540         —          9,046         —          9,046   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 10,636       $ 59,142       $ —        $ 69,778       $ 19,859       $ 61,490       $ —        $ 81,349   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

-6-


Table of Contents
     September 30, 2013      December 31, 2012  
     Level 1      Level 2      Level 3      Total      Level 1      Level 2      Level 3      Total  
     (In thousands)  

Financial liabilities:

                       

Restricted share units

   $ 445       $ —        $ —        $ 445       $ 271       $ —        $ —        $ 271   

Warrants

   $ —        $ —        $ 2,125       $ 2,125       $ —        $ —        $ 3,251       $ 3,251   

If quoted market prices in active markets for identical assets are not available to determine fair value, then the Company uses quoted prices of similar instruments and other significant inputs derived from observable market data obtained from third-party data providers. These investments are included in Level 2 and consist of debt securities of U.S government agencies and corporate bonds. There were no transfers between Levels 1 and 2 during the three and nine month periods ending September 30, 2013 and 2012. The Company classifies its warrant liability within Level 3 because the warrant liability is valued using valuation models with significant unobservable inputs. The estimated fair value of warrants accounted for as liabilities was determined on the issuance date and are subsequently remeasured to fair value at each reporting date. The change in fair value of the warrants is recorded in the statement of operations as other income or other expense estimated by using the Black-Scholes option-pricing model. A discussion of the valuation techniques and inputs to determine fair value of these instruments is included in Note 8.

5. FINANCIAL INSTRUMENTS

Financial instruments consist of cash and cash equivalents, investments and accounts and other receivables that will result in future cash receipts, as well as accounts payable, accrued and other liabilities, restricted share unit liabilities, warrant liabilities and Class UA preferred stock that may require future cash outlays.

Investments

Investments are classified as available-for-sale securities and are carried at fair value with unrealized temporary holding gains and losses, where applicable, excluded from net income or loss and reported in other comprehensive income or loss and also as a net amount in accumulated other comprehensive income or loss until realized. Available-for-sale securities are written down to fair value through income whenever it is necessary to reflect an other-than-temporary impairment. The Company determined that the unrealized losses on its marketable securities as of September 30, 2013 were temporary in nature, and the Company currently does not intend to sell these securities before recovery of their amortized cost basis. All short-term investments are limited to a final maturity of less than one year from the reporting date. The Company’s long-term investments are investments with maturities exceeding 12 months but less than five years from the reporting date. The Company is exposed to credit risk on its cash equivalents, short-term investments and long-term investments in the event of non-performance by counterparties, but does not anticipate such non-performance and mitigates exposure to concentration of credit risk through the nature of its portfolio holdings. If a security falls out of compliance with the Company’s investment policy, it may be necessary to sell the security before its maturity date in order to bring the investment portfolio back into compliance. The fair value of available-for-sale securities is based on prices obtained from a third-party pricing service. The Company utilizes third-party pricing services for all of its marketable debt security valuations. The Company reviews the pricing methodology used by the third-party pricing services including the manner employed to collect market information. On a periodic basis, the Company also performs review and validation procedures on the pricing information received from the third-party pricing services. These procedures help ensure that the fair value information used by the Company is determined in accordance with applicable accounting guidance. The amortized cost, unrealized gain or losses and fair value of the Company’s cash, cash equivalents and investments for the periods presented are summarized below:

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair Value  
     (In thousands)  

As of September 30, 2013

          

Cash

   $ 2,138       $ —        $ —       $ 2,138   

Money market funds

     10,636         —          —         10,636   

Debt securities of U.S. government agencies

     45,581         21         —          45,602   

Corporate bonds

     13,530         10         —          13,540   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 71,885       $ 31       $ —        $ 71,916   
  

 

 

    

 

 

    

 

 

   

 

 

 

As of December 31, 2012

          

Cash

   $ 2,407       $ —        $ —       $ 2,407   

Money market funds

     19,859         —          —         19,859   

Debt securities of U.S. government agencies

     52,415         29         —         52,444   

Corporate bonds

     9,045         3         (2 )     9,046   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 83,726       $ 32       $ (2 )   $ 83,756   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

-7-


Table of Contents

The following table summarizes the Company’s available-for-sale securities by contractual maturity:

 

     As of September 30, 2013      As of December 31, 2012  
     Amortized Cost      Fair Value      Amortized Cost      Fair Value  
     (In thousands)  

Less than one year

   $ 59,196       $ 59,218       $ 78,819       $ 78,847   

Greater than one year but less than five years

     10,551         10,560         2,500         2,502   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 69,747       $ 69,778       $ 81,319       $ 81,349   
  

 

 

    

 

 

    

 

 

    

 

 

 

Accounts and Other Receivables, Accounts Payable and Accrued and Other Liabilities

The carrying amounts of accounts and other receivables, accounts payable and accrued and other liabilities approximate their fair values due to the short-term nature of these financial instruments.

Class UA Preferred Stock

The fair value of class UA preferred stock is assumed to be equal to its carrying value as the amounts that will be paid and the timing of the payments cannot be determined with any certainty.

Limitations

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment; therefore, they cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

6. NET LOSS PER SHARE

Basic net loss per share is calculated by dividing net loss by the weighted average number of shares outstanding for the period. Diluted net loss per share is calculated by adjusting the numerator and denominator of the basic net loss per share calculation for the effects of all potentially dilutive common shares. Potential dilutive shares of the Company’s common stock include stock options, restricted share units, warrants and shares granted under the 2010 Employee Stock Purchase Plan (ESPP). The calculation of diluted loss per share requires that, to the extent the average market price of the underlying shares for the reporting period exceeds the exercise price of the warrants and the presumed exercise of such securities are dilutive to loss per share for the period, adjustments to net loss used in the calculation are required to remove the change in fair value of the warrants for the period. Furthermore, adjustments to the denominator are required to reflect the addition of the related dilutive shares.

The following table is a reconciliation of the numerator and denominator used in the calculation of basic and diluted net loss per share for the three and nine months ended September 30, 2013 and September 30, 2012:

 

     Three Months  Ended
September 30,
    Nine Months  Ended
September 30,
 
     2013     2012     2013     2012  
     (in thousands, except share and per share amounts)  

Numerator

        

Net loss used to compute net loss per share

        

Basic

   $ (7,710   $ (8,625   $ (32,396   $ (7,669

Adjustments for change in fair value of warrant liability

     —         —          —          (14,336
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ (7,710   $ (8,625   $ (32,396   $ (22,005
  

 

 

   

 

 

   

 

 

   

 

 

 

Denominator

        

Weighted average shares outstanding used to compute net loss per share:

        

Basic

     63,886,874        57,186,749        59,962,328        52,564,914   

Dilutive effect of warrants

     —         —          —          1,334,362   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     63,886,874        57,186,749        59,962,328        53,899,276   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share — basic

   $ (0.12   $ (0.15   $ (0.54   $ (0.15
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share — diluted

   $ (0.12   $ (0.15   $ (0.54   $ (0.41
  

 

 

   

 

 

   

 

 

   

 

 

 

 

-8-


Table of Contents

The following table presents the number of shares that were excluded from the number of shares used to calculate diluted net loss per share:

 

     Three Months  Ended
September 30,
     Nine Months  Ended
September 30,
 
     2013      2012      2013      2012  

Director and employee stock options

     2,909,699         2,482,862         2,909,699         2,482,862   

Warrants

     10,922,090         5,922,089         10,922,090         48,701   

Non-employee director restricted share units

     215,829         140,968         215,829         140,968   

Employee stock purchase plan

     23,374         19,223         23,374         19,223   

7. EQUITY BASED TRANSACTIONS

Equity Financing

On June 4, 2013, the Company closed a registered direct offering of 5,000,000 units, with each unit consisting of one share of the Company’s common stock and a warrant to purchase one share of the Company’s common stock, at $2.00 per unit for gross proceeds of $10 million. The warrants are exercisable at an exercise price of $5.00 per share any time on or after December 5, 2013 and expire December 5, 2018. The shares and warrants were sold to Biotechnology Value Fund, L.P. and other affiliates of BVF Partners L.P. in a registered direct offering conducted without an underwriter or placement agent. The net proceeds from the offering, after deducting estimated offering expenses, were approximately $9.9 million.

On April 3, 2012, the Company closed an underwritten public offering of 13,512,500 shares of its common stock at a price to the public of $4.00 per share for gross proceeds of approximately $54.1 million. The net proceeds from the sale of the shares, after deducting the underwriters’ discounts and other offering expenses payable by the Company, were approximately $50.3 million.

“At-the-Market” Program

On February 3, 2012, the Company entered into a Sales Agreement with Cowen and Company, LLC (the Sales Agreement) to sell shares of the Company’s common stock, having aggregate gross sales proceeds up to $50,000,000, from time to time, through an “at the market” equity offering program under which Cowen and Company, LLC (Cowen) will act as sales agent. Under the Sales Agreement, the Company sets the parameters for the sale of shares, including the number of shares to be issued, the time period during which sales are requested to be made, limitation on the number of shares that may be sold in any one trading day and any minimum price below which sales may not be made. The Sales Agreement provides that Cowen will be entitled to compensation for its services that will not exceed, but may be lower than, 3.0% of the gross sales price per share of all shares sold through Cowen under the Sales Agreement. The Company has no obligation to sell any shares under the Sales Agreement, and may at any time suspend solicitation and offers under the Sales Agreement. On July 1, 2013, the Company commenced selling its common stock through the “at the market” equity offering program under the Sales Agreement. During the three months ended September 30, 2013, the Company sold an aggregate of 5,791,697 shares for gross proceeds of $11.5 million. The net proceeds from the sale of the shares, after deducting commission of approximately $0.3 million, were approximately $11.2 million. That amount includes $1.4 million of net proceeds that were pending settlement as of September 30, 2013, which are recorded in this Form 10-Q in accounts and other receivables. The pending settlement amount was received in October 2013. As of September 30, 2013, approximately $38.5 million of the Company’s common stock remained available for sale under the “at the market” equity offering program.

 

-9-


Table of Contents

8. WARRANTS

Warrants consist of liability-classified warrants and equity-classified warrants. As of September 30, 2013, warrants to purchase a total of 10,922,090 shares of the Company’s common stock were outstanding. No warrants expired or were exercised in each of the three and nine months ended September 30, 2013 and September 30, 2012.

Equity-Classified Warrants

Equity-classified warrants consist of warrants issued in connection with the Company’s registered direct offering to Biotechnology Value Fund, L.P. and other affiliates of BVF Partners L.P. (collectively, BVF) and warrants issued in connection with a term loan with General Electric Capital Corporation (GECC). In June 2013, the Company issued warrants to purchase 5,000,000 shares of common stock at an exercise price of $5.00 per share in connection with a registered direct offering to BVF. The warrants expire on December 5, 2018. In February 2011, the Company issued warrants to purchase 48,701 shares of common stock at an exercise price of $3.08 per share in connection with a loan and security agreement entered into with GECC. The warrants expire on February 8, 2018. As of September 30, 2013, warrants to purchase 5,048,701 shares of common stock were outstanding and classified as equity.

Liability-Classified Warrants

Liability-classified warrants consist of warrants issued in conjunction with equity financings in May 2009 and September 2010. The warrants issued in May 2009 and September 2010 have been classified as liabilities, as opposed to equity, due to potential cash settlement upon the occurrence of certain transactions specified in the warrant agreement. As of September 30, 2013, warrants to purchase 2,691,242 and 3,182,147 shares of the Company’s common stock, from the May 2009 and September 2010 financings respectively, totaling 5,873,389 shares, were outstanding and classified as a liability.

The estimated fair value of outstanding warrants accounted for as liabilities is determined at each balance sheet date. The change in the estimated fair value of such warrants is recorded in the condensed consolidated statement of operations as other income (expenses). The fair value of the warrants is estimated using the Black-Scholes option-pricing model with the following inputs for the warrants:

 

     As of
September 30, 2013
 
     May 2009
Warrants
    September 2010
Warrants
 

Exercise price

   $ 3.74      $ 4.24   

Market value of stock at end of period

   $ 2.06      $ 2.06   

Expected dividend rate

     0.0     0.0

Expected volatility

     61.5     88.5

Risk-free interest rate

     0.1     0.3

Expected life (in years)

     0.65        2.03   

 

     As of
December 31, 2012
 
     May 2009
Warrants
    September 2010
Warrants
 

Exercise price

   $ 3.74      $ 4.24   

Market value of stock at end of period

   $ 1.92      $ 1.92   

Expected dividend rate

     0.0     0.0

Expected volatility

     99.2     81.1

Risk-free interest rate

     0.2     0.3

Expected life (in years)

     1.40        2.78   

The fair value of the warrant liability and the changes in its fair value during the three and nine months ended September 30, 2013 and September 30, 2012 were as follows:

 

     Three months ended September 30,  
     2013      2012  
     (In thousands)  

Balance at beginning of period

   $ 1,951       $ 13,463   

Change in fair value of warrant liability included in:

     

Other expense (income)

     174         972   
  

 

 

    

 

 

 

Balance at the end of period

   $ 2,125       $ 14,435   
  

 

 

    

 

 

 

 

-10-


Table of Contents
     Nine months ended September 30,  
     2013     2012  
     (In thousands)  

Balance at beginning of period

   $ 3,251      $ 28,771   

Change in fair value of warrant liability included in:

    

Other expense (income)

     (1,126     (14,336
  

 

 

   

 

 

 

Balance at the end of period

   $ 2,125      $ 14,435   
  

 

 

   

 

 

 

Expected volatility is an unobservable input that is inter-related with the market value or price of the Company’s stock, since the calculation of volatility is based on the Company’s historical closing prices. If volatility were to increase or decrease by 10%, the value of the warrant liability would increase or decrease respectively, by approximately $0.4 million.

9. SHARE-BASED COMPENSATION

Share Option Plan

The Company sponsors an option plan (the Share Option Plan) under which a maximum fixed reloading percentage of 10% of the issued and outstanding common stock of the Company may be granted to employees, directors and service providers. Options granted under the Share Option Plan prior to January 2010 began vesting after one year from the date of grant, are exercisable in equal amounts over four years on the anniversary date of the grant, and expire eight years following the date of grant. Options granted under the Share Option Plan after January 2010 vest 25% on the first anniversary of the hiring date, with the balance vesting in monthly increments for 36 months following the first anniversary of hiring, and expire eight years following the date of grant. As of September 30, 2013, the number of shares of common stock reserved for issuance under the Share Option Plan was 6,806,084. As of September 30, 2013, 2,794,003 shares of common stock remained available for future grant under the Share Option Plan.

During the three months ended September 30, 2013 and September 30, 2012, the Company granted 10,000 and 75,000 stock options, respectively, and recorded stock compensation expense of $0.4 million and $0.3 million, respectively. During the nine months ended September 30, 2013 and September 30, 2012, the Company granted 10,000 and 100,500 stock options, respectively, and recorded stock compensation expense of $1.3 million and $1.0 million, respectively. Stock options granted during the nine months ended September 30, 2012 were higher due to the addition of an increased number of new employees during the period. No stock options were exercised during each of the three and nine months ended September 30, 2013 and September 30, 2012.

The Company uses the Black-Scholes option pricing model to value the options at each grant date, using the following weighted average assumptions:

 

     Three months
ended  September 30,
    Nine months
ended  September 30,
 
     2013     2012     2013     2012  

Weighted average grant-date fair value for stock options granted

   $ 1.27      $ 3.62      $ 1.27      $ 3.63   

Expected dividend rate

     0.00     0.00     0.00     0.00

Expected volatility

     89.64     84.78     89.64     84.62

Risk-free interest rate

     1.80     0.86     1.80     0.90

Expected life of options in years

     6        6        6        6   

The expected term represents the period that the Company’s stock options are expected to be outstanding and was determined based on the simplified method, which calculates the expected life as the average of the vesting term and the contractual term of the option. The Company’s historical stock option exercise data was impacted by a restructuring of its business in 2008. Because the Company does not have sufficient historical stock option exercise data to accurately estimate the expected term used for its valuation of stock options, the Company continues to use the simplified method to calculate the expected term of new stock option grants. As the Company accumulates more data and history related to the exercises of stock option awards, the Company will reassess its use of the simplified method to determine the expected term.

Employee Stock Purchase Plan

The Company adopted an Employee Stock Purchase Plan (ESPP) on June 3, 2010, pursuant to which a total of 900,000 shares of common stock were reserved for sale to employees of the Company. The ESPP is administered by the compensation committee of the board of directors and is open to all eligible employees of the Company. Under the terms of the ESPP, eligible employees may purchase shares of the Company’s common stock at six month intervals during 18-month offering periods through periodic payroll deductions, which may not exceed 15% of any employee’s compensation and may not exceed a value of $25,000 in any calendar year, at a price not less than the lesser of an amount equal to 85% of the fair market value of the Company’s common

 

-11-


Table of Contents

stock at the beginning of the offering period or an amount equal to 85% of the fair market value of the Company’s common stock on each purchase date. The maximum aggregate number of shares that may be purchased by each eligible employee during each offering period is 15,000 shares of the Company’s common stock. For the three and nine months ended September 30, 2013, expense related to this plan was $44,273 and $107,847, respectively. For the three and nine months ended September 30, 2012, expense related to this plan was $54,928 and $134,030, respectively. Under the ESPP, the Company did not issue any shares to employees during each of the three months periods ended September 30, 2013 and September 30, 2012. The Company issued 35,895 shares and 28,591 shares to employees during the nine months ended September 30, 2013 and September 30, 2012, respectively. There are 716,278 shares reserved for future issuances under the ESPP as of September 30, 2013.

Restricted Share Unit Plan

The Company also sponsors a restricted share unit plan (RSU Plan) for non-employee directors that was established in 2005. The RSU Plan provides for grants to be made from time to time by the board of directors or a committee thereof. Each unit granted will be made in accordance with the RSU Plan and terms specific to that grant and will be converted into one share of common stock less the cash payment provisions described below at the end of the grant period (not to exceed five years) without any further consideration payable to the Company in respect thereof. The current maximum number of common shares of the Company reserved for issuance pursuant to the RSU Plan is 466,666. As of September 30, 2013, 79,022 shares of common stock remain available for future grant under the RSU Plan. During the three months ended September 30, 2013, the Company granted 17,341 restricted share units (RSUs) with a fair value of $30,000 to its new board member. The Company did not grant any RSUs during the three months ended September 30, 2012. The Company granted 97,551 and 40,870 RSUs, with a fair value of $180,000 and $150,000 during nine months ended September 30, 2013 and September 30, 2012, respectively. No shares were issued upon conversion of RSUs for the three months ended September 30, 2013 and September 30, 2012. During the nine months ended September 30, 2013 and September 30, 2012, 22,690 and 43,397 shares were issued upon conversion of RSUs, respectively. The fair value of each RSU has been determined to be the closing trading price of the Company’s common shares on the date of grant as quoted in NASDAQ Global Market.

Approximately 25% of each RSU represents a contingent right to receive cash upon vesting, and the Company is required to deliver an amount in cash equal to the fair market value of the shares on the vesting date to facilitate the satisfaction of the non-employee directors’ U.S. federal income tax obligation with respect to the vested RSUs. The outstanding RSU awards are required to be remeasured at each reporting date until settlement of the award, and changes in valuation are recorded as compensation expense for the period. To the extent that the liability recorded in the balance sheet is less than the original award value, the difference is recognized in equity. The fair value of the outstanding RSUs on the reporting date is determined to be the closing trading price of the Company’s common shares on that date.

The remeasurement of the outstanding RSUs resulted in an additional $0.1 million and $0.2 million in share-based compensation expense recorded in general and administrative expenses in the condensed consolidated statement of operations for the three and nine months ended September 30, 2013, respectively. The remeasurement of the outstanding RSUs resulted in an additional $0.1 million and a reduction of $0.2 million in share-based compensation expense recorded in general and administrative expenses in the condensed consolidated statement of operations for the three and nine months ended September 30, 2012, respectively.

10. CONTINGENCIES, COMMITMENTS, AND GUARANTEES

Litigation Contingency

On April 30, 2013, a putative shareholder derivative action was filed in the United States District Court for the Western District of Washington, purportedly on behalf of Oncothyreon and naming certain executive officers and the members of our board of directors as defendants. The complaint asserted claims for breaches of fiduciary duty, unjust enrichment, abuse of control, and mismanagement based on allegedly false statements made by us in public filings and press releases in 2011 and 2012. The lawsuit sought unspecified damages allegedly sustained by Oncothyreon, which was named in the suit as a nominal defendant, as well as certain corporate reforms, disgorgement, and attorneys’ fees and litigation expenses. On June 24, 2013, the plaintiff in the lawsuit filed an amended complaint asserting the same claims and seeking the same relief. On July 18, 2013, we filed a motion to dismiss the amended complaint on the basis that the plaintiff lacks standing to pursue derivative claims on behalf of the company. On September 16, 2013, the court entered an order granting our motion and dismissing the lawsuit with prejudice, which means that the plaintiff was not permitted to further amend his complaint to bolster his claims. The period to appeal the dismissal order has now expired, with no appeal being filed, so the lawsuit is concluded.

 

-12-


Table of Contents

Royalties

In connection with the issuance of the Class UA preferred stock, the Company has agreed to pay to the holders a royalty in the amount of 3% of the net proceeds of sale of any products sold by the Company employing technology acquired in exchange for the shares. None of the Company’s product candidates currently under development employ the technology acquired.

Pursuant to various license agreements, the Company is obligated to make payments based both on the achievement of certain milestones and a percentage of revenues derived from the licensed technology and royalties on net sales.

Guarantees

The Company is contingently liable under a mutual undertaking of indemnification with Merck KGaA of Darmstadt, Germany (Merck KGaA) for any withholding tax liability that may arise from payments under the Company’s agreements with them.

In the normal course of operations, the Company indemnifies counterparties in transactions such as purchase and sale contracts for assets or shares, service agreements, director/officer contracts and leasing transactions. These indemnification agreements may require the Company to compensate the counterparties for costs incurred as a result of various events, including environmental liabilities, changes in (or in the interpretation of) laws and regulations, or as a result of litigation claims or statutory sanctions that may be suffered by the counterparties as a consequence of the transaction. The terms of these indemnification agreements vary based upon the contract, the nature of which prevents the Company from making a reasonable estimate of the maximum potential amount that could be required to pay to counterparties. Historically, the Company has not made any significant payments under such indemnification agreements and no amounts have been accrued in the accompanying condensed consolidated financial statements with respect to these indemnification guarantees.

11. COLLABORATIVE AND LICENSE AGREEMENTS

Merck KGaA

The Company has granted an exclusive, worldwide license to Merck KGaA for the development, manufacture and commercialization of tecemotide (formerly known as L-BLP25 or Stimuvax). The Company has no continuing involvement in the ongoing development, manufacturing or commercialization of tecemotide. Under the 2008 license agreement, the Company may receive milestone payments of up to $90 million upon the occurrence of certain specified events. These contingent payments would be recognized as revenue upon the occurrence of such events. The Company is also entitled to receive royalties based on net sales of tecemotide ranging from a percentage in the mid-teens to high single digits, depending on the territory in which the net sales occur. The Company has (1) agreed not to develop any product, other than ONT-10, that is competitive with tecemotide and (2) granted to Merck KGaA a right of first negotiation in connection with any contemplated collaboration or license agreement with respect to the development or commercialization of ONT-10. No amounts were recognized in connection with this agreement during the three and nine months ended September 30, 2013 and September 30, 2012.

Array BioPharma Inc.

On May 30, 2013, the Company entered into a collaborative agreement with Array BioPharma Inc. (Array). Under the agreement, Array and the Company will collaborate to develop and commercialize, an orally active, reversible and selective small-molecule HER2 inhibitor which the Company refers to as ONT-380. HER2, also known as ErbB2, is a receptor tyrosine kinase that is over-expressed in breast cancer and other cancers such as gastric and ovarian cancer. Array previously completed a Phase 1 clinical trial of ONT-380 in patients with heavily pre-treated metastatic breast cancer which demonstrated that the compound was well tolerated and had anti-tumor activity.

The Company paid Array an upfront fee of $10 million, which was recorded as part of research and development expense upon initiation of the collaboration. Under the agreement, the Company will fund and conduct the clinical development of ONT-380 through a defined set of combination proof-of-concept trials in patients with metastatic breast cancer, including patients with brain metastases.

The Company and Array intend to jointly conduct Phase 3 development supported by the proof-of-concept studies, with each party retaining the right to opt out of further development and commercialization in exchange for a significant royalty. Array is responsible for worldwide commercialization of the product. The Company has a co-promotion right in the U.S., and the two companies will share the cost of U.S. commercialization, including any profit, equally. Outside of the U.S., the Company will receive a double-digit royalty on net sales intended to approximate a fifty percent profit share, and the two companies will share equally the proceeds from any sublicense of marketing rights.

12. INCOME TAX

Due to actual and projected losses for the years ended December 31, 2013 and 2012, respectively, and the Company’s history of losses, the Company has not recorded an income tax provision for the three and nine months ended September 30, 2013 and September 30, 2012. The Company’s net deferred tax assets and deferred tax liabilities were recorded in other assets and accrued and other liabilities, respectively on the Condensed Consolidated Balance Sheets.

 

-13-


Table of Contents

13. SUBSEQUENT EVENTS

None

 

-14-


Table of Contents

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

The information in this Item 2 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be read in conjunction with our condensed consolidated financial statements and related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements or incorporates by reference forward-looking statements. You should read these statements carefully because they discuss future expectations, contain projections of future results of operations or financial condition, or state other “forward-looking” information. These statements relate to our, or in some cases, our partners’ future plans, objectives, expectations, intentions and financial performance and the assumptions that underlie these statements. These forward-looking statements include, but are not limited to, statements regarding:

 

   

the prospects for developing, obtaining regulatory approval for, and commercializing our lead product candidate, tecemotide (formerly known as L-BLP25 or Stimuvax);

 

   

the results we anticipate from our pre-clinical development activities and the clinical trials of our product candidates;

 

   

our belief that our product candidates could potentially be useful for many different oncology indications that address large markets;

 

   

our ability to manage our growth;

 

   

the size of the markets for the treatment of conditions our product candidates target;

 

   

our ability to acquire or in-license additional product candidates and technologies;

 

   

our ability to manage our relationship with Merck KGaA and Array to develop and commercialize tecemotide and ONT-380, respectively;

 

   

our ability to generate future revenue;

 

   

financing to support our operations, clinical trials and commercialization of our products;

 

   

our ability to adequately protect our proprietary information and technology from competitors and avoid infringement of proprietary information and technology of our competitors;

 

   

the possibility that government-imposed price restrictions may make our products, if successfully developed and commercialized following regulatory approval, unprofitable;

 

   

potential exposure to product liability claims and the impact that successful claims against us will have on our ability to commercialize our product candidates;

 

   

our ability to obtain on commercially reasonable terms adequate product liability insurance for our commercialized products;

 

   

the possibility that competing products or technologies may make our products, if successfully developed and commercialized following regulatory approval, obsolete;

 

   

our ability to succeed in finding and retaining joint venture and collaboration partners to assist us in the successful marketing, distribution and commercialization of our products;

 

   

our ability to attract and retain highly qualified scientific, clinical, manufacturing, and management personnel;

 

   

our ability to identify and capitalize on possible collaboration, strategic partnering, acquisition or divestiture opportunities; and

 

   

potential problems with third parties, including suppliers and key personnel, upon whom we are dependent.

All forward-looking statements are based on information available to us on the date of this quarterly report and we will not update any of the forward-looking statements after the date of this quarterly report, except as required by law. Our actual results could differ materially from those discussed in this quarterly report. The forward-looking statements contained in this quarterly report, and other written and oral forward-looking statements made by us from time to time, are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in this quarterly report in Part II, Item 1A — “Risk Factors,” and elsewhere in this quarterly report.

Overview

We are a clinical-stage biopharmaceutical company focused primarily on the development of therapeutic products for the treatment of cancer. Our goal is to develop and commercialize novel synthetic vaccines and targeted small molecules that have the potential to improve the lives and outcomes of cancer patients. Our cancer vaccines are designed to stimulate the immune system to attack cancer cells, while our small molecule compounds are designed to inhibit the activity of specific cancer-related proteins. We are advancing our product candidates through in-house development efforts and strategic collaborations.

 

-15-


Table of Contents

Our most advanced cancer vaccine product candidate, tecemotide (formerly known as L-BLP25 or Stimuvax), is being evaluated for the treatment of non-small cell lung cancer, or NSCLC. We have granted an exclusive, worldwide license to Merck KGaA for the development, manufacture and commercialization of tecemotide. In December 2012 Merck KGaA announced that the Phase 3 START trial of tecemotide did not meet its primary endpoint of an improvement in overall survival in patients with unresectable, locally advanced stage IIIA or stage IIIB NSCLC. Merck KGaA also announced, however, that notable treatment effects were seen for tecemotide in certain subgroups and in May 2013, Merck KGaA announced that in a predefined subgroup of patients receiving initial concurrent chemoradiotherapy, a combination of chemotherapy and radiotherapy given at the same time, a median overall survival of 30.8 months versus 20.6 months was observed based on a post hoc analysis in patients treated with tecemotide versus placebo respectively. In September 2013, Merck Serono, the biopharmaceutical division of Merck KGaA, announced that it has decided to continue clinical development of tecemotide, and that it will conduct a new Phase 3 trial called START2 based on the outcome of the prior START trial. START2 will be a Phase 3, multicenter, randomized, double-blind, placebo-controlled clinical trial designed to assess the efficacy, safety and tolerability of tecemotide in 1,000 patients with unresectable, locally advanced (Stage IIIA or IIIB) NSCLC who have had a response or stable disease after at least two cycles of platinum-based concurrent chemoradiotherapy. In addition, the ongoing clinical program of tecemotide that includes studies in the Asia Pacific region is continuing.

We are also conducting a Phase 1 trial for ONT-10, a cancer vaccine directed against a target similar to tecemotide, which is proprietary to us. Initial results from this trial have demonstrated that ONT-10, unlike tecemotide, activates the humoral arm of the immune system and elicits antibodies specific for MUC1. Natural antibodies against MUC1 have been shown to correlate with improved survival in patients with tumors expressing MUC1. We are continuing the ongoing Phase 1 trial and evaluating options for the continued development of ONT-10. The Phase 1 trial of ONT-10 is also the first-in-man trial for our novel vaccine adjuvant PET-Lipid A, a fully-synthetic toll-like receptor 4 agonist.

We also are developing novel targeted small molecules for the treatment of cancer. We are collaborating with Array to develop and commercialize ONT-380, an orally active, reversible and selective small-molecule HER2 inhibitor. HER2, also known as ErbB2, is a receptor tyrosine kinase that is over-expressed in breast cancer and other cancers such as gastric and ovarian cancer. Array previously completed a Phase 1 clinical trial of ONT-380 in patients with heavily pre-treated metastatic breast cancer which demonstrated that the compound was well tolerated and had anti-tumor activity. Under our collaboration agreement with Array, we will fund and conduct the clinical development of ONT-380 through a defined set of combination proof-of-concept trials in patients with metastatic breast cancer, including patients with brain metastases. ONT-380 has demonstrated superior activity, based on overall survival, compared to Tykerb ® (lapatinib) and to the investigational drug, neratinib, in an intracranial HER2+ breast cancer xenograft model. This provides a rationale to explore whether ONT-380 can provide benefit to patients with brain metastases, which occur in approximately one-third of women with metastatic HER2+ breast cancer.

Array and we intend to jointly conduct Phase 3 development supported by the proof-of-concept studies, with each party retaining the right to opt out of further development and commercialization in exchange for a significant royalty. Array is responsible for worldwide commercialization of the product. We hold a co-promotion right in the U.S., and the two companies will share the cost of U.S. commercialization, including any profit, equally. Outside of the U.S., we will receive a double-digit royalty on net sales intended to approximate a fifty percent profit share, and the two companies will share equally the proceeds from any sublicense of marketing rights.

We are also developing PX-866, for which we are conducting four Phase 1/2 or Phase 2 trials in a variety of cancer indications. PX-866 is an irreversible, pan-isoform phosphatidylinositol-3-kinase, or PI-3-kinase inhibitor, we obtained when we acquired ProlX Pharmaceuticals Corporation, or ProlX, in 2006. The Phase 2 portions of two randomized trials in patients with head and neck cancer are fully enrolled; we expect data from these trials in late 2013. The Phase 1 portion of a Phase 1/2 trial of PX-866 in combination with vemurafenib is ongoing in patients with BRAF mutant tumors. A Phase 2 trial is currently enrolling patients with castration resistant prostate cancer who are receiving combination treatment with PX-866, abiraterone and prednisone after progression on abiraterone and prednisone alone. Earlier this year we announced that our trials of PX-866 in patients with NSCLC and metastatic colorectal cancer did not meet their primary endpoints of an improvement in progression free survival or overall response rate, respectively. We have not licensed any rights to PX-866 to any third party and retain all development, commercialization and manufacturing rights. If data from the ongoing trials of PX-866 are supportive, we intend to seek a partner for the further development of PX-866.

We believe the quality and breadth of our product candidate pipeline, strategic collaborations and scientific team will potentially enable us to become an integrated biopharmaceutical company with a diversified portfolio of novel, commercialized therapeutics for major diseases.

In May 2001, we entered into a collaborative arrangement with Merck KGaA to pursue joint global product research, clinical development and commercialization of tecemotide. In December 2008, we entered into a license agreement with Merck KGaA, which replaced our pre-existing agreements with them. Upon the execution of the 2008 license agreement, all of our future

 

-16-


Table of Contents

performance obligations related to the collaboration for the clinical development and development of the manufacture process of tecemotide were removed and our continuing involvement in the development and manufacturing of tecemotide ceased. Pursuant to the 2008 license agreement, we received an up-front cash payment of approximately $10.5 million. We may receive cash payments of up to $90 million, which figure excludes the $2.0 million received in December 2009 and $19.8 million received prior to the execution of the 2008 license agreement. We are also entitled to receive royalties based on net sales of tecemotide ranging from a percentage in the mid-teens to high single digits, depending on the territory in which the net sales occur. Royalty rates were reduced relative to prior agreements by a specified amount which we believe is consistent with our estimated costs of goods, manufacturing scale-up costs and certain other expenses assumed by Merck KGaA. In addition, pursuant to the terms of the 2008 license agreement we (1) agreed not to develop any product, other than ONT-10, that is competitive with tecemotide and (2) granted to Merck KGaA a right of first negotiation in connection with any contemplated collaboration or license agreement with respect to the development or commercialization of ONT-10. For additional information regarding our relationship with Merck KGaA, see “Note 8 — Collaborative and License Agreements” of the audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2012 filed with the SEC on March 14, 2013.

We have not developed a therapeutic product to the commercial stage. As a result, with the exception of the unusual effects of the transaction with Merck KGaA in December 2008, our revenue has been limited to date, and we do not expect to recognize any material revenue for the foreseeable future. In particular, our ability to generate revenue in future periods will depend substantially on the progress of ongoing and/or future clinical trials for tecemotide, ONT-10, ONT-380 and PX-866, our ability to obtain development and commercialization partners for PX-866, Merck KGaA’s success in obtaining regulatory approval for tecemotide, Array’s or our success in obtaining regulatory approval for ONT-380, our success in obtaining regulatory approval for PX-866 and ONT-10, and Merck KGaA’s, Array’s and our respective abilities to establish commercial markets for these drugs.

Any adverse clinical results relating to tecemotide or any decision by Merck KGaA to discontinue its efforts to develop and commercialize the product would have a material and adverse effect on our future revenues and results of operations and would be expected to have a material adverse effect on the trading price of our common stock. ONT-380, ONT-10 and PX-866 are much earlier in the development stage than tecemotide, and we do not expect to realize any revenues associated with the commercialization of our products candidates for the foreseeable future.

The continued research and development of our product candidates will require significant additional expenditures, including preclinical studies, clinical trials, manufacturing costs and the expenses of seeking regulatory approval. We rely on third parties to conduct a portion of our preclinical studies, all of our clinical trials and all of the manufacturing of current good manufacturing practice, or cGMP, material. We expect expenditures associated with these activities to increase in future years as we continue the development of ONT-380 and ONT-10.

We have incurred substantial losses since our inception. As of September 30, 2013, our accumulated deficit totaled $425.7 million. We incurred a net loss of $32.4 million for the nine months ended September 30, 2013 compared to a net loss of $7.7 million for the same period in 2012. The increase in net loss for the nine months ended September 30, 2013 was primarily due to lower non-cash income from the change in fair value of warrant liability, which was $1.1 million for the nine months ended September 30, 2013 compared to $14.3 million for the nine months ended September 30, 2012. The change in the fair value of the warrant liability is attributable to changes in our stock price as well as volatility and expected life of our warrants that were classified as liability. In addition, the increase in loss was also due to an upfront payment of $10.0 million to Array in connection with our collaborative agreement. See the section captioned “Note 11 — Collaborative and License Agreements” of the unaudited financial statements included in this report for additional information. In future periods, we expect to continue to incur substantial net losses as we expand our research and development activities with respect to our product candidates. To date we have funded our operations principally through the sale of our equity securities, cash received through our strategic alliance with Merck KGaA, government grants, debt financings, and equipment financings.

On July 1, 2013, we commenced selling our common stock through the “at the market” equity offering program under our Sales Agreement with Cowen. During the three months ended September 30, 2013, we sold an aggregate of 5,791,697 shares of our common stock and generated net proceeds of approximately $11.2 million which includes $1.4 million of net proceeds that were pending settlement as of September 30, 2013 and were received in October 2013. On June 4, 2013, we completed a registered direct financing, in which we sold 5,000,000 shares of our common stock and warrants to purchase 5,000,000 shares of our common stock, generating net proceeds of approximately $9.9 million. In April 2012, we completed a financing, in which we issued an aggregate of 13.5 million shares and generated net proceeds of approximately $50.3 million. See the section captioned “Liquidity and Capital Resources” of the unaudited financial statements included in this report for additional information. Because we have limited revenues and substantial research and development and operating expenses, we expect that we will in the future seek additional working capital funding from the sale of equity, debt securities, loans or the licensing of product candidate rights to third parties.

 

-17-


Table of Contents

Key Financial Metrics

Expenses

Research and Development . Research and development expense consists of costs associated with research activities as well as costs associated with our product development efforts, conducting preclinical studies and clinical trial and manufacturing costs. These expenses include external research and development expenses incurred pursuant to collaboration agreements; agreements with third-party manufacturing and contract research organizations; technology access and licensing fees related to the use of proprietary third-party technologies; employee related expenses, including salaries, share-based compensation expense, benefits and related costs; allocated facility overhead which includes depreciation and amortization; and third-party consulting and supplier expenses. To date, we have recognized research and development expenses, including those paid to third parties, as they have been incurred.

General and Administrative . General and administrative expense consists principally of salaries, benefits, share-based compensation expense and related costs for personnel in our executive, finance, accounting, legal, human resource functions and information technology services. Other general and administrative expenses include professional fees for legal, consulting, accounting services and allocation of our facility costs, which includes depreciation and amortization.

Investment and Other Income (Expense), Net . Net investment and other net income (expense) consists of interest and other income on our cash and short-term and long-term investments, debt, foreign exchange gains and losses and other non-operating income (expense). Our investments consist of debt securities of U.S government agencies and corporate bonds. In 2012, we incurred a loss on extinguishment of debt of our term loan with General Electric Capital Corporation which consisted of a prepayment penalty of 3% on the outstanding principal, the write-off of unamortized deferred financing costs and unamortized debt discount and legal expenses. For more information, see “Note 5 — Notes Payable” of the audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2012 filed with the SEC on March 14, 2013.

Interest Expense. Interest expense consists of interest paid and accrued and includes non-cash amortization of the debt discount and capitalized loan fees.

Change in Fair Value of Warrants . Warrants issued in connection with our securities offerings in May 2009 and September 2010 are classified as a liability due to their potential settlement in cash and other terms, and as such, were recorded at their estimated fair value on the date of the closing of the respective transactions. The warrants are marked to market for each financial reporting period, with changes in estimated fair value recorded as a gain or loss in our condensed consolidated statements of operations. The fair value of the warrants is determined using the Black-Scholes option-pricing model, which requires the use of significant judgment and estimates for the inputs used in the model. For more information, see “Note 8—Warrants” of the unaudited financial statements included in this report.

Critical Accounting Policies and Significant Judgments and Estimates

We have prepared this Management’s Discussion and Analysis of Financial Condition and Results of Operations based on our condensed consolidated financial statements, which have been included elsewhere in this report and which have been prepared in accordance with generally accepted accounting principles in the United States. These accounting principles require us to make estimates and judgments that can affect the reported amounts of assets and liabilities as of the dates of our consolidated financial statements as well as the reported amounts of revenue and expense during the periods presented. Some of these judgments can be subjective and complex, and, consequently, actual results may differ from these estimates. For any given individual estimate or assumption we make, there may also be other estimates or assumptions that are reasonable. We believe that the estimates and judgments upon which we rely are reasonable based upon historical experience and information available to us at the time that we make these estimates and judgments. To the extent there are material differences between these estimates and actual results, our consolidated financial statements will be affected. Although we believe that our judgments and estimates are appropriate, actual results may differ from these estimates.

Our critical accounting policies and significant estimates are detailed in our Annual Report on Form 10-K for the year ended December 31, 2012 filed with the SEC on March 14, 2013. There have been no material changes in our critical accounting policies and judgments since that date.

 

-18-


Table of Contents

Results of Operations for the Three and Nine Month Periods Ended September 30, 2013 and September 30, 2012

The following table sets forth selected consolidated statements of operations data for each of the periods indicated.

Overview

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2013     2012     2013     2012  
    

(In millions, except per

share amounts)

   

(In millions, except per

share amounts)

 

Operating expenses

   $ (7.6   $ (7.6   $ (33.6   $ (21.5

Other income (expenses), net

     0.1        —          0.1        (0.5

Change in fair value of warrant liability — income (loss)

     (0.2     (1.0     1.1        14.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (7.7   $ (8.6   $ (32.4   $ (7.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share — basic

   $ (0.12   $ (0.15   $ (0.54   $ (0.15
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share — diluted

   $ (0.12   $ (0.15   $ (0.54   $ (0.41
  

 

 

   

 

 

   

 

 

   

 

 

 

We did not recognize any revenue for the three and nine months ended September 30, 2013 and September 30, 2012. As discussed in more detail below, the net loss of $7.7 million for the three months ended September 30, 2013 compared to the net loss of $8.6 million for the three months ended September 30, 2012 was primarily due to a $0.2 million non-cash expense from the change in fair value of warrant liability for the three months ended September 30, 2013 compared to a $1.0 million non-cash expense from the change in fair value of warrant liability for the three months ended September 30, 2012. In addition, the decrease in net loss was also due to slight decreases in research and development expenses. The decrease was partially offset by slight increases in general and administrative expense.

Operating expenses for the nine months ended September 30, 2013 included an upfront fee of $10.0 million paid to Array upon initiation of a collaboration agreement that we entered into in May 2013. See the section captioned “Note 11 — Collaborative and License Agreements” of the unaudited financial statements included in this report for additional information.

Income or expense associated with the change in fair value of the warrant liability are the result of the remeasurement of the fair value of the warrant liability at each reporting date. Changes in the fair value of the warrant liability are attributable to increases or decreases in our stock price as well as volatility and expected life of our warrants that were classified as liability. For more information, see “Note 8 — Warrants” of the unaudited financial statements included elsewhere in this report.

The net loss of $32.4 million for the nine months ended September 30, 2013 compared to the net loss of $7.7 million for the nine months ended September 30, 2012 was primarily due to lower non-cash income from the change in fair value of warrant liability; $1.1 million for the nine months ended September 30, 2013, compared to $14.3 million for the nine months ended September 30, 2012. In addition, the increase in loss was also due to increases in research and development expenses, which were attributable to an upfront payment of $10.0 million to Array and greater activity related to the development of ONT-10 and ONT-380. The increase in loss was also the result of higher general and administrative expenses.

Based on our development plans for our small molecule and vaccine candidates, we expect to continue to incur operating losses for the foreseeable future.

Research and Development Expense

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2013      2012      2013      2012  
     (In millions)      (In millions)  

Research and development

   $ 5.5       $ 5.8       $ 27.4       $ 16.3   

Research and development expenses decreased by $0.3 million, or 5.2%, for the three months ended September 30, 2013 compared to the three months ended September 30, 2012, principally due to decreases in clinical trials expense of $1.3 million related to PX-866. The decrease was partly offset by higher manufacturing development and preclinical expense of $0.7 million due to greater activity related to the development of ONT-10 and ONT-380 and increased salaries and benefits of $0.4 million attributable to increased headcount.

Research and development expenses increased by $11.1 million, or 68.1%, for the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012, principally due to an upfront payment of $10.0 million to Array. In addition, the increase in research and development expense was also due to higher manufacturing development and preclinical expense of $1.8 million as a result of greater manufacturing and preclinical activity related to the development of ONT-10 and ONT-380 and increased salaries and benefits of $1.0 million attributable to increased headcount. The increase was partly offset by decrease in clinical trials expense of $1.8 million primarily related to the development of PX-866.

 

-19-


Table of Contents

General and Administrative Expense

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2013      2012      2013      2012  
     (In millions)      (In millions)  

General and administrative

   $ 2.1       $ 1.9       $ 6.3       $ 5.2   

The $0.2 million, or 10.5%, increase in general and administrative expense for the three months ended September 30, 2013 compared to the three months ended September 30, 2012 was principally due to a $0.1 million increase in salaries and benefits expense attributable to increased headcount, a $0.1 million increase in insurance expense and a $0.1 million increase in director compensation primarily related to the change in fair value of the outstanding liability-classified RSUs, which was attributable to the change in the price of our common stock. In addition, the increase in director compensation was also due to RSUs granted to our new board member during the three months ended September 30, 2013. See “Note 9 – Share-Based Compensation” of the unaudited financial statements in this report for additional information on liability classified RSUs and RSUs granted during three months ended September 30, 2013. The increase was partially offset by a $0.1 million decrease in professional fees primarily related to regulatory compliance activities during the three months ended September 30, 2012.

The $1.1 million, or 21.2%, increase in general and administrative expense for the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012 was principally due to a $0.7 million increase in salaries and benefits expense attributable to increased headcount, a $0.1 million increase in insurance expense and a $0.4 million increase in director compensation primarily related to the change in fair value of the outstanding liability-classified RSUs, which was attributable to the change in the price of our common stock. In addition, the increase in director compensation was also due to RSUs granted to our new board member during the three months ended September 30, 2013. The increase was partially offset by a $0.2 million decrease in professional fees primarily related to regulatory compliance during the nine months ended September 30, 2012.

Investment and other income (expense), net

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2013      2012      2013      2012  
     (In millions)      (In millions)  

Investment and other income (expense), net

   $ 0.1       $ —         $ 0.1       $ (0.2

Net investment and other income (expense) increased by $0.1 million for the three months ended September 30, 2013 compared to the three months ended September 30, 2012 primarily due to a gain on disposal of an asset. The increase was partially offset by lower interest income during the three months ended September 30, 2013.

Net investment and other income (expense) increased by $0.3 million for the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012 primarily due to a loss on early extinguishment of debt in June 2012 and higher gains on disposal of assets during the nine months ended September 30, 2013. The increase was partially offset by lower interest income during the nine months ended September 30, 2013.

For additional information on the early extinguishment of debt, see “Note 5 — Notes Payable” of the audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2012 filed with the SEC on March 14, 2013.

Interest expense

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2013      2012      2013      2012  
     (In millions)      (In millions)  

Interest expense

   $ —         $ —         $ —         $ 0.3   

There was no interest expense during each of the three and nine months ended September 30, 2013 and the three months ended September 30, 2012. The $0.3 million, or 100.0% decrease in interest expense, for the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012, was attributable to the pay off of the outstanding balance of our term loan with GECC in June 2012.

For additional information, see “Note 5 — Notes Payable” of the audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2012 filed with the SEC on March 14, 2013.

 

-20-


Table of Contents

Change in Fair Value of Warrant Liability

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2013     2012     2013      2012  
     (In millions)     (In millions)  

Change in fair value of warrant liability — income (expense)

   $ (0.2   $ (1.0   $ 1.1       $ 14.3   

The $0.2 million non-cash expense and $1.1 million non-cash income recorded in the three and nine months ended September 30, 2013, respectively, was due to the change in the estimated fair value of warrant liability during that period. Such change was attributable to the change in the price of our common stock as well as volatility and expected life of the warrants and pertains to warrants issued in connection with the May 2009 and September 2010 financings. We determined the fair value of the warrants using the Black-Scholes model. For more information, see “Note 8 — Warrants” of the unaudited financial statements included in this report.

Liquidity and Capital Resources

Cash, Cash Equivalents, Investments and Working Capital

As of September 30, 2013, our principal sources of liquidity consisted of cash and cash equivalents of $12.8 million, short-term investments of $48.6 million and long-term investments of $10.6 million. Our cash and cash equivalents consist of cash, money market funds and securities with an initial maturity of less than 90 days. Our short-term investments are invested in debt securities of U.S. government agencies and corporate bonds with maturities not exceeding 12 months from the reporting date. Our long-term investments are invested in debt securities of U.S. government agencies with maturities exceeding 12 months from the reporting date. Our primary source of cash has historically been proceeds from the issuance of equity securities, exercise of warrants, debt, payments to us under grants, licensing and collaboration agreements. These proceeds have been used to fund our operations.

Our cash and cash equivalents were $12.8 million as of September 30, 2013 compared to $22.3 million as of December 31, 2012, a decrease of $9.5 million, or 42.6%. The decrease was primarily attributable to cash used to fund our operations of $30.8 million and equipment purchases of $0.3 million. Such decrease was partially offset by cash received of $9.8 million from the sale of our common stock through the “at the market” equity offering program under the Sales Agreement with Cowen, net proceeds of $9.9 million from our June 2013 registered direct offering and net investment redemption of $1.9 million.

As of September 30, 2013, our working capital (defined as current assets less current liabilities) was $60.0 million compared to $79.3 million as of December 31, 2012, a decrease of $19.3 million, or 24.3%. The decrease in working capital was primarily attributable to a decrease in cash and cash equivalents of $9.5 million, a decrease in short-term investments of $10.4 million and an increase in accrued and other liabilities of $1.1 million. The decrease in working capital was partially offset by an increase in prepaid and other current assets of $0.2 million and an increase in accounts and other receivables of $1.4 million due to proceeds receivable from pending settlement of transactions through the “at the market” equity offering program under the Sales Agreement with Cowen. The $1.4 million was received in October 2013.

On July 1, 2013, we commenced selling our common stock through the “at the market” equity offering program under the Sales Agreement with Cowen. During the three months ended September 30, 2013, we sold an aggregate of 5,791,697 shares of our common stocks for gross proceeds of $11.5 million. The net proceeds from the sale of the shares, after deducting commission of $0.3 million, were approximately $11.2 million, which includes $1.4 million of net proceeds that were pending settlement as of September 30, 2013 and were received in October 2013.

On June 4, 2013, we closed a registered direct offering of 5,000,000 units, with each unit consisting of one share of our common stock and a warrant to purchase one share of our common stock, at $2.00 per unit for gross proceeds of $10.0 million. After deducting estimated offering expenses, net proceeds were approximately $9.9 million.

On April 3, 2012, we closed an underwritten public offering of 13,512,500 shares of our common stock at a price to the public of $4.00 per share for gross proceeds of approximately $54.1 million. The net proceeds from the sale of the shares, after deducting the underwriters’ discounts and other offering expenses payable by us, were approximately $50.3 million.

We believe that our currently available cash and cash equivalents and investments will be sufficient to finance our operations for at least the next 12 months. Nevertheless, we expect that we will require additional capital from time to time in the future in order to continue the development of products in our pipeline and to expand our product portfolio. We would expect to seek additional financing from the sale and issuance of equity or debt securities, including but not limited to under our Sales Agreement with Cowen, but we cannot predict whether financing will be available when and as we need financing or that, if available, the financing terms will be commercially reasonable. If we are unable to raise additional capital when and if we require, it would have a material adverse effect on our business and results of operations. To the extent we issue additional equity securities, our existing shareholders could experience substantial dilution.

 

-21-


Table of Contents

Cash Flows from Operating Activities

Cash used by operating activities increased $11.6 million to $30.8 million for the nine months ended September 30, 2013, compared to $19.2 million of cash used by operating activities for the nine months ended September 30, 2012. This increase was primarily due to an upfront payment of $10.0 million to Array on entry into our collaboration agreement with Array. See the section captioned “Collaborative and License Agreements” of the unaudited financial statements included in this report for additional information. In addition, the increase in cash used by our operating activities was also due to an increase in general and administrative expenses and research and development expenses.

Cash Flows from Investing Activities

We had cash inflows of $1.6 million from investing activities for the nine months ended September 30, 2013, compared to cash outflows from investing activities of $27.0 million for the nine months ended September 30, 2012. This change was attributable primarily to net redemption of investments as compared to net purchases of investments for the nine months ended September 30, 2013 and the nine months ended September 30, 2012, respectively. In addition, purchases of property and equipment decreased by $0.4 million during the nine months ended September 30, 2013 compared to the same period in 2012.

Cash Flows from Financing Activities

We generated $19.7 million of cash during the nine months ended September 30, 2013, which consisted of net proceeds of $9.8 million received from the sale of our common stock through our “at the market” equity offering program under the Sales Agreement with Cowen, and net proceeds of $9.9 million received from a registered direct offering completed in June 2013.

Cash provided by financing activities for the nine months ended September 30, 2012 was $45.3 million, which consisted primarily of net proceeds of approximately $50.3 million from our April 2012 common stock offering. The proceeds from this offering were partially offset by the repayment of the GECC term loan of $4.1 million in June 2012 and $0.9 million in principal payments on notes payable.

 

-22-


Table of Contents

Contractual Obligations and Contingencies

In our continuing operations, we have entered into long-term contractual arrangements from time to time for our facilities, the provision of goods and services, and acquisition of technology access rights, among others. The following table presents contractual obligations arising from these arrangements as of September 30, 2013:

 

     Payments Due by Period  
     Total      Less than
1 Year
     1-3 Years      3-5 Years      After
5 Years
 
     (In thousands)  

Operating leases

   $ 3,198       $ 597       $ 1,221       $ 1,247       $ 133   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

In May 2008, we entered into a lease for an office and laboratory facility in Seattle, Washington totaling approximately 17,000 square feet. The lease provides for a base monthly rent of $47,715, increasing to $52,259 in 2018. We also have entered into operating lease obligations through June 2017 for certain office equipment.

Under certain licensing arrangements for technologies incorporated into our product candidates, we are contractually committed to payment of ongoing licensing fees and royalties, as well as contingent payments when certain milestones (as defined in the agreements) have been achieved.

Guarantees and Indemnification

In the ordinary course of our business, we have entered into agreements with our collaboration partners, vendors, and other persons and entities that include guarantees or indemnity provisions. For example, our agreements with Merck KGaA contain certain tax indemnification provisions, and we have entered into indemnification agreements with our officers and directors. Based on information known to us as of September 30, 2013, we believe that our exposure related to these guarantees and indemnification obligations is not material.

Off-Balance Sheet Arrangements

During the periods presented, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or for another contractually narrow or limited purpose.

Recent Accounting Pronouncements

In July 2013, FASB issued guidance on presentation of an unrecognized tax benefit in financial statement when a NOL carryforward, a similar tax loss, or a tax credit carryforward exists. This guidance requires an entity to present an unrecognized tax benefit as a reduction of a deferred tax asset for an NOL carryforward, or similar tax loss or tax credit carryforward, rather than as a liability when (1) the uncertain tax position would reduce the NOL or other carryforward under the tax law of the applicable jurisdiction and (2) the entity intends to use the deferred tax asset for that purpose. The guidance does not require new recurring disclosures. The guidance is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013 for public entities. Early adoption and retrospective application are permitted. The adoption of this standard is not expected to have impact on the presentation of our unrecognized tax benefits or on our consolidated financial position or results of operations.

In February 2013, FASB issued new guidance on reporting of amounts reclassified out of accumulated other comprehensive income. This guidance requires an entity to disclose the amount reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present either on the face of the Consolidated Statements of Operations or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required to be reclassified to net income in its entirety in the same reporting period. For amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional detail about these amounts. The guidance does not change the current requirements for reporting net income or other comprehensive income in financial statements. The guidance is effective for all reporting periods (interim and annual) beginning after December 15, 2012. The amendments are effective for reporting periods beginning after December 15, 2013 for private companies. The adoption of this guidance on January 1, 2013 has no impact on our consolidated financial position or results of operations.

 

-23-


Table of Contents

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Sensitivity

We had cash, cash equivalents, short-term investments and long-term investments totaling $71.9 million and $83.8 million as of September 30, 2013 and December 31, 2012, respectively. We do not enter into investments for trading or speculative purposes. We believe that we do not have any material exposure to changes in the fair value of these assets as a result of changes in interest rates since a majority of these assets are of a short term nature. Declines in interest rates, however, would reduce future investment income. A 10 basis point decline in interest rates, occurring January 1, 2013 and sustained throughout the period ended September 30, 2013, would result in a decline in investment income of approximately $58,000 for that same period.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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, as of the end of the period covered by this report, of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act. The purpose of this evaluation was to determine whether as of the evaluation date our disclosure controls and procedures were effective to provide reasonable assurance that the information we are required to disclose in our filings with the SEC under the Exchange Act (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (2) 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 have concluded that, as of September 30, 2013, our disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting during the three months ended September 30, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitation on the Effectiveness of Internal Controls

The effectiveness of any system of internal control over financial reporting, including ours, is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, any system of internal control over financial reporting, including ours, no matter how well designed and operated, can only provide reasonable, not absolute assurances. In addition, 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. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business, but cannot assure you that such improvements will be sufficient to provide us with effective internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

On April 30, 2013, a putative shareholder derivative action was filed in the United States District Court for the Western District of Washington, purportedly on behalf of Oncothyreon and naming certain executive officers and the members of our board of directors as defendants. The complaint asserted claims for breaches of fiduciary duty, unjust enrichment, abuse of control, and mismanagement based on allegedly false statements made by us in public filings and press releases in 2011 and 2012. The lawsuit sought unspecified damages allegedly sustained by Oncothyreon, which was named in the suit as a nominal defendant, as well as certain corporate reforms, disgorgement, and attorneys’ fees and litigation expenses. On June 24, 2013, the plaintiff in the lawsuit filed an amended complaint asserting the same claims and seeking the same relief. On July 18, 2013, we filed a motion to dismiss the amended complaint on the basis that the plaintiff lacks standing to pursue derivative claims on behalf of the company. On September 16, 2013, the court entered an order granting our motion and dismissing the lawsuit with prejudice, which means that the plaintiff was not permitted to further amend his complaint to bolster his claims. The period to appeal the dismissal order has now expired, with no appeal being filed, so the lawsuit is concluded.

In addition, from time to time, we may become involved in legal proceedings in the ordinary course of our business.

Item 1A. Risk Factors

Set forth below and elsewhere in this report, and in other documents we file with the SEC are descriptions of risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements

 

-24-


Table of Contents

contained in this report. Because of the following factors, as well as other variables affecting our operating results, past financial performance should not be considered a reliable indicator of future performance and investors should not use historical trends to anticipate results or trends in future periods. The risks and uncertainties described below are not the only ones facing us. Other events that we do not currently anticipate or that we currently deem immaterial may also affect our results of operations and financial condition.

Risks Relating to our Business

We cannot be certain that our most advanced product candidate tecemotide (formerly known as L-BLP25 or Stimuvax) will be successfully developed or receive regulatory approval or be successfully commercialized.

Our most advanced cancer vaccine product candidate, tecemotide, is being evaluated for the treatment of NSCLC. Under our license agreement with Merck KGaA for tecemotide, Merck KGaA is entirely responsible for the development, manufacture and worldwide commercialization of tecemotide. In December 2012, Merck KGaA announced that the Phase 3 START trial of tecemotide did not meet its primary endpoint of an improvement in overall survival in patients with unresectable, locally advanced stage IIIA or stage IIIB NSCLC. Merck KGaA announced, however, that notable treatment effects were seen for tecemotide in certain subgroups and in May 2013, Merck KGaA announced that in a predefined subgroup of patients receiving initial concurrent chemoradiotherapy, a combination of chemotherapy and radiotherapy given at the same time, a median overall survival of 30.8 months versus 20.6 months was observed based on a post hoc analysis in patients treated with tecemotide versus placebo respectively. In September 2013, Merck Serono, the biopharmaceutical division of Merck KGaA, announced that it has decided to continue clinical development of tecemotide, and that it will conduct a new Phase 3 trial called START2 based on the outcome of the prior START trial. START2 will be a Phase 3, multicenter, randomized, double-blind, placebo-controlled clinical trial designed to assess the efficacy, safety and tolerability of tecemotide in 1,000 patients with unresectable, locally advanced (Stage IIIA or IIIB) NSCLC who have had a response or stable disease after at least two cycles of platinum-based concurrent chemoradiotherapy. In addition, the ongoing clinical program of tecemocide that includes studies in the Asia Pacific region is continuing. Before submitting a biologic license application or its foreign equivalent for approval, we expect that Merck KGaA must successfully complete START2 and/or other clinical trials in NSCLC. This process could take many years and require the expenditure of substantial resources, and may ultimately be unsuccessful.

Pursuant to our agreement with Merck KGaA, Merck KGaA is responsible for the development and the regulatory approval process and any subsequent commercialization of tecemotide. We cannot assure you that Merck KGaA will complete additional clinical trials of tecemotide or continue to advance the development and commercialization of tecemotide. In the event ongoing clinical trials proceed or additional clinical trials are pursued and these clinical trials fail to demonstrate that tecemotide is safe and effective, it will not receive regulatory approval. Even if tecemotide receives regulatory approval, it may never be successfully commercialized. If tecemotide does not receive regulatory approval or is not successfully commercialized, or if Merck KGaA decides not to continue to advance the development and commercialization of tecemotide, we may not be able to generate revenue, become profitable or continue our operations which would have a material adverse effect on our business, operating results, and financial condition and could result in a substantial decline in the price of our common stock.

Products that appear promising in research and development may be delayed or may fail to reach later stages of clinical development.

The successful development of pharmaceutical products is highly uncertain. Products that appear promising in research and development may be delayed or fail to reach later stages of development. For example, our product candidate tecemotide did not meet its primary endpoint in a Phase 3 clinical trial. Additionally, the on-going Phase 2 clinical trials currently being run for PX-866 may fail to demonstrate that PX-866 is sufficiently safe and effective to warrant further development. For example, we recently announced that PX-866 administered with docetaxel in patients with NSCLC, and PX-866 administered with cetuximab in patients with recurrent, metastatic colorectal carcinoma, each in a Phase 2 trial, did not meet their primary endpoints. We are continuing to test PX-866 in several other indications, and expect data from these clinical trials in the second half of 2013.

Furthermore, decisions regarding the further development of product candidates must be made with limited and incomplete data, which makes it difficult to ensure or even accurately predict whether the allocation of limited resources and the expenditure of additional capital on specific product candidates will result in desired outcomes. Preclinical and clinical data can be interpreted in different ways, and negative or inconclusive results or adverse medical events during a clinical trial could delay, limit or prevent the development of a product candidate, which could harm our business, financial condition and results or the trading price of our securities. There can be no assurance as to whether or when we will receive regulatory approvals for any of our product candidates, including tecemotide, ONT-10, ONT-380 or PX-866.

 

-25-


Table of Contents

Tecemotide and ONT-10 are based on novel technologies, which may raise new regulatory issues that could delay or make FDA or foreign regulatory approval more difficult.

The process of obtaining required Food and Drug Administration (FDA), and other regulatory approvals, including foreign approvals, is expensive, often takes many years and can vary substantially based upon the type, complexity and novelty of the products involved. Tecemotide and ONT-10 are novel; therefore, regulatory agencies may lack experience with them, which may lengthen the regulatory review process, increase our development costs and delay or prevent commercialization of tecemotide and our other active vaccine products under development.

To date, the FDA has approved for commercial sale in the United States only one active vaccine designed to stimulate an immune response against cancer. Consequently, there is limited precedent for the successful development or commercialization of products based on our technologies in this area. This may lengthen the regulatory review process, increase our development costs and delay or prevent commercialization of our products under development.

If we fail to acquire and develop products or product candidates at all or on commercially reasonable terms, we may be unable to grow our business.

The success of our product pipeline strategy depends, in part, on our ability to identify, select and acquire product candidates. Proposing, negotiating and implementing an economically viable product acquisition or license is a lengthy and complex process. We compete for partnering arrangements and license agreements with pharmaceutical and biotechnology companies and academic research institutions. Our competitors may have stronger relationships with third parties with whom we are interested in collaborating or may have more established histories of developing and commercializing products. As a result, our competitors may have a competitive advantage in entering into partnering arrangements with such third parties. In addition, even if we find promising product candidates, and generate interest in a partnering or strategic arrangement to acquire such product candidates, we may not be able to acquire rights to additional product candidates or approved products on terms that we find acceptable, if at all. If we fail to acquire and develop product candidates from others, we may be unable to grow our business.

We expect that any product candidate to which we acquire rights will require additional development efforts prior to commercial sale, including extensive clinical evaluation and approval by the FDA and non-U.S. regulatory authorities. All product candidates are subject to the risks of failure inherent in pharmaceutical product development, including the possibility that the product candidate will not be shown to be sufficiently safe and effective for approval by regulatory authorities. Even if the product candidates are approved, we can make no assurance that we would be capable of economically producing the product or that the product would be commercially successful.

We have a history of net losses, we anticipate additional losses and we may never become profitable.

Other than the year ended December 31, 2008, we have incurred net losses in each fiscal year since we commenced our research activities in 1985. The net income we realized in 2008 was due entirely to our December 2008 transactions with Merck KGaA, and we do not anticipate realizing net income again for the foreseeable future. As of September 30, 2013, our accumulated deficit was approximately $425.7 million. Our losses have resulted primarily from expenses incurred in research and development of our product candidates. We may make significant capital commitments to fund the development of our product candidates. If these development efforts are unsuccessful, the development costs would be incurred without any future revenue, which could have a material adverse effect on our financial condition. We do not know when or if we will complete our product development efforts, receive regulatory approval for any of our product candidates, or successfully commercialize any approved products. As a result, it is difficult to predict the extent of any future losses or the time required to achieve profitability, if at all. Any failure of our products to complete successful clinical trials and obtain regulatory approval and any failure to become and remain profitable would adversely affect the price of our common stock and our ability to raise capital and continue operations.

There is no assurance that we will be granted regulatory approval for any of our product candidates.

Merck KGaA has been testing our most advanced cancer vaccine product candidate, tecemotide, in clinical trials for the treatment of NSCLC. We are currently conducting four Phase 1/2 or Phase 2 trials for PX-866 and a Phase 1 trial for ONT-10. We also recently began collaborating with Array to develop ONT-380, which we expect to test in clinical trials beginning in late 2013 or early 2014. There can be no assurance that we will demonstrate sufficient safety and efficacy to obtain the requisite regulatory approvals. A number of companies in the biotechnology and pharmaceutical industries, including our company, have suffered significant setbacks in advanced clinical trials, even after promising results in earlier trials. For example, in December 2012, we and Merck KGaA announced that tecemotide did not meet its primary endpoint of improvement in overall survival in a Phase 3 trial in patients with NSCLC.

Further, we, any of our collaborators or Merck KGaA may be unable to submit applications to regulatory agencies within the time frame we currently expect. Once submitted, applications must be approved by various regulatory agencies before we, any of our collaborators or Merck KGaA can commercialize the product described in the application. Additionally, even if applications are submitted, regulatory approval may not be obtained for any of our product candidates, and regulatory agencies could require additional studies to verify safety or efficacy, which could make further development of our product candidates impracticable. If our product candidates are not shown to be safe and effective in clinical trials, we may not receive regulatory approval, which would have a material adverse effect on our business, financial condition and results of operations.

 

-26-


Table of Contents

We and our collaborators currently rely on third-party manufacturers to supply our product candidates. Any disruption in production, inability of these third-party manufacturers to produce adequate quantities to meet our needs or our collaborators’ needs or other impediments with respect to development or manufacturing could adversely affect the clinical development and commercialization of tecemotide, our ability to continue our research and development activities or successfully complete pre-clinical studies and clinical trials, delay submissions of our regulatory applications or adversely affect our ability to commercialize our other product candidates in a timely manner, or at all.

Merck KGaA currently depends on a single manufacturer, Baxter International Inc., or Baxter, for the supply of our most advanced product candidate, tecemotide, and on Corixa Corp. (now a part of GlaxoSmithKline plc, or GSK) for the manufacture of the adjuvant in tecemotide. If tecemotide is not approved by 2015, Corixa/GSK may terminate its obligation to supply the adjuvant. In this case, we would retain the necessary licenses from Corixa/GSK required to have the adjuvant manufactured, but the transfer of the process to a third party would delay the development and commercialization of tecemotide, which could materially harm our business.

Our product candidates have not yet been manufactured on a commercial scale. In order to commercialize a product candidate, the third-party manufacturer may need to increase its manufacturing capacity, which may require the manufacturer to fund capital improvements to support the scale up of manufacturing and related activities. With respect to certain of our product candidates, we may be required to provide all or a portion of these funds. The third-party manufacturer may not be able to successfully increase its manufacturing capacity for our product candidate for which we obtain marketing approval in a timely or economic manner, or at all. If any manufacturer is unable to provide commercial quantities of a product candidate, we (or Merck KGaA or Array, in the case of tecemotide or ONT-380, respectively) will need to successfully transfer manufacturing technology to a new manufacturer. Engaging a new manufacturer for a particular product candidate could require us (or Merck KGaA or Array, in the case of tecemotide or ONT-380, respectively) to conduct comparative studies or use other means to determine equivalence between product candidates manufactured by a new manufacturer and those previously manufactured by the existing manufacturer, which could delay or prevent commercialization of our product candidates. If any of these manufacturers is unable or unwilling to increase its manufacturing capacity or if alternative arrangements are not established on a timely basis or on acceptable terms, the development and commercialization of our product candidates may be delayed or there may be a shortage in supply.

Any manufacturer of our products must comply with cGMP, requirements enforced by the FDA through its facilities inspection program or by foreign regulatory agencies. These requirements include quality control, quality assurance and the maintenance of records and documentation. Manufacturers of our products may be unable to comply with these cGMP requirements and with other FDA, state and foreign regulatory requirements. We have little control over our manufacturers’ compliance with these regulations and standards. A failure to comply with these requirements may result in fines and civil penalties, suspension of production, suspension or delay in product approval, product seizure or recall, or withdrawal of product approval. If the safety of any quantities supplied is compromised due to our manufacturers’ failure to adhere to applicable laws or for other reasons, we may not be able to obtain regulatory approval for or successfully commercialize our products.

Pre-clinical and clinical trials are expensive and time consuming, and any failure or delay in commencing or completing clinical trials for our product candidates could severely harm our business.

We are currently conducting clinical trials for PX-866 and ONT-10 and we expect to begin conducting clinical trials for ONT-380 in late 2013 or early 2014. Each of our product candidates must undergo extensive pre-clinical studies and clinical trials as a condition to regulatory approval. Pre-clinical studies and clinical trials are expensive and take many years to complete. The commencement and completion of clinical trials for our product candidates may be delayed by many factors, including:

 

   

safety issues or side effects;

 

   

delays in patient enrollment and variability in the number and types of patients available for clinical trials;

 

   

poor effectiveness of product candidates during clinical trials;

 

   

governmental or regulatory delays and changes in regulatory requirements, policy and guidelines;

 

   

our or our collaborators’ ability to obtain regulatory approval to commence a clinical trial and conduct a trial in accordance with good clinical practices;

 

   

our or our collaborators’ ability to manufacture or obtain from third parties materials sufficient for use in pre-clinical studies and clinical trials; and

 

   

varying interpretation of data by the FDA and similar foreign regulatory agencies.

 

-27-


Table of Contents

It is possible that none of our product candidates will complete clinical trials in any of the markets in which we or our collaborators intend to sell those product candidates. Accordingly, we or our collaborators may not receive the regulatory approvals necessary to market our product candidates. Any failure or delay in commencing or completing clinical trials or obtaining regulatory approvals for product candidates would prevent or delay their commercialization and severely harm our business and financial condition.

The failure to enroll patients for clinical trials may cause delays in developing our product candidates.

We may encounter delays if we, any collaboration partner or Merck KGaA are unable to enroll enough patients to complete clinical trials. Patient enrollment depends on many factors, including, the size of the patient population, the nature of the protocol, the proximity of patients to clinical sites and the eligibility criteria for the trial. Moreover, when one product candidate is evaluated in multiple clinical trials simultaneously, patient enrollment in ongoing trials can be adversely affected by negative results from completed trials. Our product candidates are focused in oncology, which can be a difficult patient population to recruit. If we fail to enroll patients for clinical trials, our clinical trials may be delayed or suspended, which could delay our ability to generate revenues.

We and our collaborators rely on third parties to conduct our clinical trials. If these third parties do not perform as contractually required or otherwise expected, we or our collaborators may not be able to obtain regulatory approval for or be able to commercialize our product candidates.

We and our collaborators rely on third parties, such as contract research organizations, medical institutions, clinical investigators and contract laboratories, to assist in conducting our clinical trials. We and our collaborators have, in the ordinary course of business, entered into agreements with these third parties. Nonetheless, we and our collaborators are responsible for confirming that each of our clinical trials is conducted in accordance with its general investigational plan and protocol. Moreover, the FDA and foreign regulatory agencies require us and our collaborators to comply with regulations and standards, commonly referred to as good clinical practices, for conducting, recording and reporting the results of clinical trials to assure that data and reported results are credible and accurate and that the trial participants are adequately protected. Our reliance on third parties does not relieve us or our collaborators of these responsibilities and requirements. If these third parties do not successfully carry out their contractual duties or regulatory obligations or meet expected deadlines, if the third parties need to be replaced or if the quality or accuracy of the data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements or for other reasons, our and our collaborators’ pre-clinical development activities or clinical trials may be extended, delayed, suspended or terminated, and we may not be able to obtain regulatory approval for our product candidates.

Our product candidates may never achieve market acceptance even if we obtain regulatory approvals.

Even if we receive regulatory approvals for the commercial sale of our product candidates, the commercial success of these product candidates will depend on, among other things, their acceptance by physicians, patients, third-party payers such as health insurance companies and other members of the medical community as a therapeutic and cost-effective alternative to competing products and treatments. New patterns of care, alternative new treatments or different reimbursement and payor paradigms, possibly due to economic conditions or governmental policies, could negatively impact the commercial viability of our product candidates. If our product candidates fail to gain market acceptance, we may be unable to earn sufficient revenue to continue our business. Market acceptance of, and demand for, any product that we may develop and commercialize will depend on many factors, including:

 

   

our ability to provide acceptable evidence of safety and efficacy;

 

   

the prevalence and severity of adverse side effects;

 

   

availability, relative cost and relative efficacy of alternative and competing treatments;

 

   

the effectiveness of our marketing and distribution strategy;

 

   

publicity concerning our products or competing products and treatments; and

 

   

our ability to obtain sufficient third-party insurance coverage or reimbursement.

If our product candidates do not become widely accepted by physicians, patients, third-party payers and other members of the medical community, our business, financial condition and results of operations would be materially and adversely affected.

The suspension or termination of Merck’s clinical development program for tecemotide could severely harm our business.

Pursuant to our agreement, Merck KGaA has the exclusive right to develop, manufacture and commercialize tecemotide in return for our right to receive cash payments upon the occurrence of certain events and royalties based on net sales. Merck KGaA has the right to terminate the license agreement upon 30 days’ prior written notice if, in its reasonable judgment, it determines there are issues concerning the safety or efficacy of tecemotide that would materially and adversely affect tecemotide’s medical, economic or competitive viability. Merck KGaA may ultimately decide not to continue development of tecemotide and may terminate the 2008

 

-28-


Table of Contents

license agreement. Any future payments under the license agreement, including royalties to us, will depend on the extent to which Merck KGaA advances tecemotide through development and commercialization. The opportunity for us to realize these payments is dependent upon Merck KGaA continuing to develop tecemotide.

If Merck KGaA terminates the agreement for safety or efficacy reasons, or breaches the agreement, the further development and commercialization of tecemotide would be severely impaired, and the development of ONT-10 may be negatively impacted, as both ONT-10 and tecemotide are targeted at the MUC1 antigen. We could also become involved in disputes with Merck KGaA, which could lead to delays in or termination of our development and commercialization of tecemotide and time-consuming and expensive litigation or arbitration. If Merck KGaA terminates or breaches its agreement with us, or otherwise fails to complete its obligations in a timely manner, the likelihood of successfully developing or commercializing tecemotide would be materially and adversely affected.

Even if regulatory approval is received for our product candidates, the later discovery of previously unknown problems with a product, manufacturer or facility may result in restrictions, including withdrawal of the product from the market.

Approval of a product candidate may be conditioned upon certain limitations and restrictions as to the drug’s use, or upon the conduct of further studies, and may be subject to continuous review. After approval of a product, if any, there will be significant ongoing regulatory compliance obligations, and if we or our collaborators, including Array, fail to comply with these requirements, we, any of our collaborators or Merck KGaA could be subject to penalties, including:

 

   

warning letters;

 

   

fines;

 

   

product recalls;

 

   

withdrawal of regulatory approval;

 

   

operating restrictions;

 

   

disgorgement of profits;

 

   

injunctions; and

 

   

criminal prosecution.

Regulatory agencies may require us, any of our collaborators or Merck KGaA to delay, restrict or discontinue clinical trials on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk. In addition, all statutes and regulations governing the conduct of clinical trials are subject to change in the future, which could affect the cost of such clinical trials. Any unanticipated delays in clinical studies could delay our ability to generate revenues and harm our financial condition and results of operations.

Failure to obtain regulatory approval in foreign jurisdictions would prevent us from marketing our products internationally.

We intend to have our product candidates marketed outside the United States. In order to market our products in the European Union and many other non-U.S. jurisdictions, we must obtain separate regulatory approvals and comply with numerous and varying regulatory requirements. To date, we have not filed for marketing approval for any of our product candidates and may not receive the approvals necessary to commercialize our product candidates in any market.

The approval procedure varies among countries and may include all of the risks associated with obtaining FDA approval. The time required to obtain foreign regulatory approval may differ from that required to obtain FDA approval, and additional testing and data review may be required. We may not obtain foreign regulatory approvals on a timely basis, if at all. Additionally, approval by the FDA does not ensure approval by regulatory agencies in other countries, and approval by one foreign regulatory authority does not ensure approval by regulatory agencies in other foreign countries or by the FDA. However, a failure or delay in obtaining regulatory approval in one jurisdiction may have a negative effect on the regulatory approval process in other jurisdictions, including approval by the FDA. The failure to obtain regulatory approval in foreign jurisdictions could limit commercialization of our products, reduce our ability to generate profits and harm our business.

Our ability to continue with our planned operations is dependent on our success at raising additional capital sufficient to meet our obligations on a timely basis. If we fail to obtain additional financing when needed, we may be unable to complete the development, regulatory approval and commercialization of our product candidates.

We have expended and continue to expend substantial funds in connection with our product development activities and clinical trials and regulatory approvals. The very limited funds generated currently from our operations will be insufficient to enable us to bring all of our products currently under development to commercialization. Accordingly, we need to raise additional funds from the sale of our securities, partnering arrangements or other financing transactions in order to finance the commercialization of our

 

-29-


Table of Contents

product candidates. We cannot be certain that additional financing will be available when and as needed or, if available, that it will be available on acceptable terms. If financing is available, it may be on terms that adversely affect the interests of our existing stockholders or restrict our ability to conduct our operations. To the extent that we raise additional funds through collaboration and licensing arrangements, we may be required to relinquish some rights to our technologies or product candidates, or grant licenses on terms that are not favorable to us. If adequate financing is not available, we may need to continue to reduce or eliminate our expenditures for research and development, testing, production and marketing for some of our product candidates. Our actual capital requirements will depend on numerous factors, including:

 

   

activities and arrangements related to the commercialization of our product candidates;

 

   

the progress of our research and development programs;

 

   

the progress of pre-clinical and clinical testing of our product candidates;

 

   

the time and cost involved in obtaining regulatory approvals for our product candidates;

 

   

the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights with respect to our intellectual property;

 

   

the effect of competing technological and market developments;

 

   

the effect of changes and developments in our existing licensing and other relationships; and

 

   

the terms of any new collaborative, licensing and other arrangements that we may establish.

If we require additional financing and cannot secure sufficient financing on acceptable terms, we may need to delay, reduce or eliminate some or all of our research and development programs, any of which would be expected to have a material adverse effect on our business, operating results, and financial condition.

We may expand our business through the acquisition of companies or businesses or by entering into collaborations or in-licensing product candidates that could disrupt our business and harm our financial condition.

We have in the past and may in the future seek to expand our pipeline and capabilities by acquiring one or more companies or businesses, entering into collaborations or in-licensing one or more product candidates. For example, in May 2013 we announced that we are collaborating with Array to develop ONT-380. Acquisitions, collaborations and in-licenses, including our ONT-380 collaboration, involve numerous risks, including:

 

   

substantial cash expenditures;

 

   

potentially dilutive issuance of equity securities;

 

   

incurrence of debt and contingent liabilities, some of which may be difficult or impossible to identify at the time of acquisition;

 

   

difficulties in assimilating the operations of the acquired companies;

 

   

potential disputes regarding contingent consideration;

 

   

diverting our management’s attention away from other business concerns;

 

   

entering markets in which we have limited or no direct experience; and

 

   

potential loss of our key employees or key employees of the acquired companies or businesses.

Our experience in making acquisitions, entering collaborations and in-licensing product candidates is limited. We cannot assure you that any acquisition, collaboration or in-license will result in short-term or long-term benefits to us. We may incorrectly judge the value or worth of an acquired company or business or in-licensed product candidate. In addition, our future success would depend in part on our ability to manage the rapid growth associated with some of these acquisitions, collaborations and in-licenses. We cannot assure you that we would be able to successfully combine our business with that of acquired businesses, manage a collaboration or integrate in-licensed product candidates or that such efforts would be successful. Furthermore, the development or expansion of our business or any acquired business or company or any collaboration or in-licensed product candidate may require a substantial capital investment by us. We may also seek to raise funds by selling shares of our capital stock, which could dilute our current stockholders’ ownership interest, or securities convertible into our capital stock, which could dilute current stockholders’ ownership interest upon conversion.

 

-30-


Table of Contents

If we are unable to maintain and enforce our proprietary rights, we may not be able to compete effectively or operate profitably.

Our success is dependent in part on maintaining and enforcing our patents and other proprietary rights and will depend in large part on our ability to:

 

   

defend patents once issued;

 

   

preserve trade secrets; and

 

   

operate without infringing the patents and proprietary rights of third parties.

As of September 30, 2013, we owned approximately 13 U.S. patents and 14 U.S. patent applications, as well as the corresponding foreign patents and patent applications, and held exclusive or partially exclusive licenses to approximately 11 U.S. patents and 1 U.S. patent applications, as well as the corresponding foreign patents and patent applications. In addition to the aforementioned patents and patent applications, we have an exclusive license to Array’s patents that cover ONT-380, subject to certain rights retained by Array. The degree of future protection for our proprietary rights is uncertain. For example:

 

   

we might not have been the first to make the inventions covered by any of our patents, if issued, or 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 products and/or duplicate any of our technologies and/or products;

 

   

it is possible that none of our pending patent applications will result in issued patents or, if issued, these patents may not be sufficient to protect our technology or provide us with a basis for commercially-viable products and may not provide us with any competitive advantages;

 

   

if our pending applications issue as patents, they may be challenged by third parties as infringed, invalid or unenforceable under U.S. or foreign laws;

 

   

if issued, the patents under which we hold rights may not be valid or enforceable; or

 

   

we may develop additional proprietary technologies that are not patentable and which may not be adequately protected through trade secrets, if for example a competitor were to independently develop duplicative, similar or alternative technologies.

The patent position of biotechnology and pharmaceutical firms is highly uncertain and involves many complex legal and technical issues. There is no clear policy involving the breadth of claims allowed in patents or the degree of protection afforded under patents. Although we believe our potential rights under patent applications provide a competitive advantage, it is possible that patent applications owned by or licensed to us will not result in patents being issued, or that, if issued, the patents will not give us an advantage over competitors with similar products or technology, nor can we assure you that we can obtain, maintain and enforce all ownership and other proprietary rights necessary to develop and commercialize our product candidates.

In addition to the intellectual property and other rights described above, we also rely on unpatented technology, trade secrets, trademarks and confidential information, particularly when we do not believe that patent protection is appropriate or available. However, trade secrets are difficult to protect and it is possible that others will independently develop substantially equivalent information and techniques or otherwise gain access to or disclose our unpatented technology, trade secrets and confidential information. We require each of our employees, consultants and advisors to execute a confidentiality and invention assignment agreement at the commencement of an employment or consulting relationship with us. However, it is possible that these agreements will not provide effective protection of our confidential information or, in the event of unauthorized use of our intellectual property or the intellectual property of third parties, provide adequate or effective remedies or protection.

If we are unable to obtain intellectual property rights to develop or market our products or we infringe on a third-party patent or other intellectual property rights, we may need to alter or terminate a product development program.

If our vaccine technology or our product candidates infringe or conflict with the rights of others, we may not be able to manufacture or market our product candidates, which could have a material and adverse effect on us and on our collaborations with Merck KGaA and Array.

Issued patents held by others may limit our ability to develop commercial products. All issued patents are entitled to a presumption of validity under the laws of the United States. If we need licenses to such patents to permit us to develop or market our product candidates, we may be required to pay significant fees or royalties, and we cannot be certain that we would be able to obtain such licenses on commercially reasonable terms, if at all. Competitors or third parties may obtain patents that may cover subject matter we use in developing the technology required to bring our products to market, that we use in producing our products, or that we use in treating patients with our products.

 

-31-


Table of Contents

We know that others have filed patent applications in various jurisdictions that relate to several areas in which we are developing products. Some of these patent applications have already resulted in the issuance of patents and some are still pending. We may be required to alter our processes or product candidates, pay licensing fees or cease activities. Certain parts of our vaccine technology, including the MUC1 antigen, originated from third-party sources.

These third-party sources include academic, government and other research laboratories, as well as the public domain. If use of technology incorporated into or used to produce our product candidates is challenged, or if our processes or product candidates conflict with patent rights of others, third parties could bring legal actions against us, in Europe, the United States and elsewhere, claiming damages and seeking to enjoin manufacturing and marketing of the affected products. Additionally, it is not possible to predict with certainty what patent claims may issue from pending applications. In the United States, for example, patent prosecution can proceed in secret prior to issuance of a patent. As a result, third parties may be able to obtain patents with claims relating to our product candidates, which they could attempt to assert against us. Further, as we develop our products, third parties may assert that we infringe the patents currently held or licensed by them and it is difficult to provide the outcome of any such action. Ultimately, we could be prevented from commercializing a product, or forced to cease some aspect of our business operations, as a result of claims of patent infringement or violation of other intellectual property rights, which could have a material and adverse effect on our business, financial condition and results of operations.

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 protect our rights in, or to use, our technology.

There has been significant litigation in the biotechnology industry over patents and other proprietary rights and if we become involved in any litigation, it could consume a substantial portion of our resources, regardless of the outcome of the litigation. Others may challenge the validity, inventorship, ownership, enforceability or scope of our patents or other technology used in or otherwise necessary for the development and commercialization of our product candidates. We may not be successful in defending against any such challenges. If these legal actions are successful, in addition to any potential liability for damages, we could be required to obtain a license, grant cross-licenses and pay substantial royalties in order to continue to manufacture or market the affected products.

Moreover, the cost of litigation to uphold the validity of patents to prevent infringement or to otherwise protect our proprietary rights can be substantial. If the outcome of litigation is adverse to us, third parties may be able to use the challenged technologies without payment to us. There is also the risk that, even if the validity of a patent were upheld, a court would refuse to stop the other party from using the inventions, including on the ground that its activities do not infringe that patent. There is no assurance that we would prevail in any legal action or that any license required under a third-party patent would be made available on acceptable terms or at all. If any of these events were to occur, our business, financial condition and results of operations would be materially and adversely effected.

If any products we develop become subject to unfavorable pricing regulations, third-party reimbursement practices or healthcare reform initiatives, our ability to successfully commercialize our products will be impaired.

Our future revenues, profitability and access to capital will be affected by the continuing efforts of governmental and private third-party payers to contain or reduce the costs of health care through various means. We expect a number of federal, state and foreign proposals to control the cost of drugs through government regulation. We are unsure of the impact recent health care reform legislation may have on our business or what actions federal, state, foreign and private payers may take in response to the recent reforms. Therefore, it is difficult to provide the effect of any implemented reform on our business. Our ability to commercialize our products successfully will depend, in part, on the extent to which reimbursement for the cost of such products and related treatments will be available from government health administration authorities, such as Medicare and Medicaid in the United States, private health insurers and other organizations. Significant uncertainty exists as to the reimbursement status of newly approved health care products, particularly for indications for which there is no current effective treatment or for which medical care typically is not sought. Adequate third-party coverage may not be available to enable us to maintain price levels sufficient to realize an appropriate return on our investment in product research and development. If adequate coverage and reimbursement levels are not provided by government and third-party payers for use of our products, our products may fail to achieve market acceptance and our results of operations will be harmed.

Governments often impose strict price controls, which may adversely affect our future profitability.

We intend to seek approval to market our future products in both the United States and foreign jurisdictions. If we obtain approval in one or more foreign jurisdictions, we will be subject to rules and regulations in those jurisdictions relating to our product. In some foreign countries, particularly in the European Union, prescription drug pricing is subject to government control. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a drug candidate. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our future product to other available therapies.

In addition, it is unclear what impact, if any, recent health care reform legislation will have on the price of drugs in the United States. In March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, or collectively, PPACA, became law in the United States. PPACA substantially changes the way healthcare is financed by both governmental and private insurers and significantly affects the pharmaceutical industry.

 

-32-


Table of Contents

We anticipate that the PPACA, as well as other healthcare reform measures that may be adopted in the future, may result in more rigorous coverage criteria and downward pressure on the price for any approved product, and could seriously harm our prospects. Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payers. If reimbursement of our future products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, we may be unable to achieve or sustain profitability.

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 obtain marketing approval expose us to the risk of product liability claims. Product liability claims might be brought against us by consumers, health care providers, pharmaceutical companies or others selling our products. If we cannot successfully defend ourselves against these claims, we will incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:

 

   

decreased demand for our product candidates;

 

   

impairment of our business reputation;

 

   

withdrawal of clinical trial participants;

 

   

costs of related litigation;

 

   

substantial monetary awards to patients or other claimants;

 

   

loss of revenues; and

 

   

the inability to commercialize our product candidates.

Although we currently have product liability insurance coverage for our clinical trials for expenses or losses up to a $10 million aggregate annual limit, our insurance coverage may not reimburse us or may not be sufficient to reimburse us for any or all 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 liability. We intend to expand our insurance coverage 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. On occasion, large judgments have been awarded in class action lawsuits based on products that had unanticipated side effects. A successful product liability claim or series of claims brought against us could cause our stock price to fall and, if judgments exceed our insurance coverage, could decrease our cash and adversely affect our business.

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

The life sciences industry is highly competitive, and we face significant competition from many pharmaceutical, biopharmaceutical and biotechnology companies that are researching and marketing products designed to address cancer indications for which we are currently developing products or for which we may develop products in the future. Our future success depends on our ability to demonstrate and maintain a competitive advantage with respect to the design, development and commercialization of our product candidates. We expect any product candidate that we commercialize with our collaborative partners or on our own will compete with existing, market-leading products and products in development.

Tecemotide. There are currently two products approved as maintenance therapy following treatment of inoperable locoregional Stage III NSCLC with induction chemotherapy, Tarceva (erlotinib), a targeted small molecule from Genentech, Inc., a member of the Roche Group, and Alimta (pemetrexed), a chemotherapeutic from Eli Lilly and Company. Tecemotide has not been tested in combination with or in comparison to these products. It is possible that other existing or new agents will be approved for this indication. In addition, there are at least two vaccines in development for the treatment of NSCLC, including GSK’s MAGE A3 vaccine in Phase 3 and Transgene’s TG-4010 in Phase 2/3. TG-4010 also targets MUC1, although using technology different from tecemotide.

ONT-380. ONT-380 is an inhibitor of the receptor tyrosine kinase HER2, also known as ErbB2. There are multiple marketed products which target HER2, including the antibodies trastuzumab (Herceptin ® ) and pertuzumab (Perjeta ® ) and the antibody toxin conjugate T-DM1 (Kadcyla TM ), all from Roche/Genentech. In addition, GlaxoSmithKline markets the dual HER1/HER2 oral kinase inhibitor lapatinib (Tykerb ® ) for the treatment of metastatic breast cancer, and Puma Biotechnology is developing the HER1/HER2/HER4 inhibitor neratinib in Phase 3.

 

-33-


Table of Contents

PX-866. PX-866 is an inhibitor of PI-3-kinase. We are aware of numerous companies that have entered clinical trials with competing compounds targeting the same protein, many of which have significantly greater financial, manufacturing, marketing and drug development resources than we do. Among these competitors are Novartis (Phase 3), Roche/Genentech (Phase 2), Bayer (Phase 1), Sanofi-Aventis (Phase 2), Chugai (Phase 1) and GlaxoSmithKline (Phase 1/2). There are also several approved targeted therapies for cancer and in development against which PX-866 might compete.

Many of our potential competitors have substantially greater financial, technical and personnel resources than we have. In addition, many of these competitors have significantly greater commercial infrastructures than we have. Our ability to compete successfully will depend largely on our ability to:

 

   

design and develop products that are superior to other products in the market;

 

   

attract qualified scientific, medical, sales and marketing and commercial personnel;

 

   

obtain patent and/or other proprietary protection for our processes and product candidates;

 

   

obtain required regulatory approvals; and

 

   

successfully collaborate with others in the design, development and commercialization of new products.

Established competitors may invest heavily to quickly discover and develop novel compounds that could make our product candidates obsolete. In addition, any new product that competes with a generic market-leading product must demonstrate compelling advantages in efficacy, convenience, tolerability and safety in order to overcome severe price competition and to be commercially successful. If we are not able to compete effectively against our current and future competitors, our business will not grow and our financial condition and operations will suffer.

If we are unable to enter into agreements with partners to perform sales and marketing functions, or build these functions ourselves, we will not be able to commercialize our product candidates.

We currently do not have any internal sales, marketing or distribution capabilities. In order to commercialize any of our product candidates, we must either acquire or internally develop a sales, marketing and distribution infrastructure or enter into agreements with partners to perform these services for us. Under our agreements with Merck KGaA, Merck KGaA is responsible for developing and commercializing tecemotide. Under our agreement with Array, we are responsible for a defined set of proof-of-concept trials for ONT-380, we and Array will jointly conduct any Phase 3 development supported by the proof-of-concept studies and Array is responsible for commercialization of ONT-380 worldwide. Any problems with our relationship with Merck KGaA or with Array could delay the development and commercialization of tecemotide or ONT-380. Additionally, we may not be able to enter into arrangements with respect to our product candidates not covered by the Merck KGaA or Array agreements on commercially acceptable terms, if at all. Factors that may inhibit our efforts to commercialize our product candidates without entering into arrangements with third parties include:

 

   

our inability to recruit and retain adequate numbers of effective sales and marketing personnel;

 

   

the inability of sales personnel to obtain access to or persuade adequate numbers of physicians to prescribe our products;

 

   

the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage relative to companies with more extensive product lines; and

 

   

unforeseen costs and expenses associated with creating a sales and marketing organization.

If we are not able to partner with a third party and are not successful in recruiting sales and marketing personnel or in building a sales and marketing and distribution infrastructure, we will have difficulty commercializing our product candidates, which would adversely affect our business and financial condition.

If we lose key personnel, or we are unable to attract and retain highly-qualified personnel on a cost-effective basis, it would be more difficult for us to manage our existing business operations and to identify and pursue new growth opportunities.

Our success depends in large part upon our ability to attract and retain highly qualified scientific, clinical, manufacturing, and management personnel. In addition, future growth will require us to continue to implement and improve our managerial, operational and financial systems, and continue to retain, recruit and train additional qualified personnel, which may impose a strain on our administrative and operational infrastructure. Any difficulties in hiring or retaining key personnel or managing this growth could disrupt our operations. The competition for qualified personnel in the biopharmaceutical field is intense. We are highly dependent on our continued ability to attract, retain and motivate highly-qualified management, clinical and scientific personnel. Due to our limited resources, we may not be able to effectively recruit, train and retain additional qualified personnel. If we are unable to retain key personnel or manage our growth effectively, we may not be able to implement our business plan.

Furthermore, we have not entered into non-competition agreements with all of our key employees. In addition, we do not maintain “key person” life insurance on any of our officers, employees or consultants. The loss of the services of existing personnel, the failure to recruit additional key scientific, technical and managerial personnel in a timely manner, and the loss of our employees to our competitors would harm our research and development programs and our business.

 

-34-


Table of Contents

Our business is subject to increasingly complex environmental legislation that has increased both our costs and the risk of noncompliance.

Our business may involve the use of hazardous material, which will require us to comply with environmental regulations. We face increasing complexity in our product development as we adjust to new and upcoming requirements relating to the materials composition of many of our product candidates. If we use biological and hazardous materials in a manner that causes contamination or injury or violates laws, we may be liable for damages. Environmental regulations could have a material adverse effect on the results of our operations and our financial position. We maintain insurance under our general liability policy for any liability associated with our hazardous materials activities, and it is possible in the future that our coverage would be insufficient if we incurred a material environmental liability.

If we fail to establish and 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 consolidated operating results, our ability to operate our business, and our stock price and could result in litigation or similar actions.

Ensuring that we have adequate internal financial and accounting controls and procedures in place to produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. Failure on our part to have effective internal financial and accounting controls would cause our financial reporting to be unreliable, could have a material adverse effect on our business, operating results, and financial condition, and could cause the trading price of our common stock to fall dramatically. 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. GAAP. 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 the company will have been detected.

We cannot be certain that the actions we have taken to ensure we have adequate internal controls over financial reporting will be sufficient. In future periods, if the process required by Section 404 of the Sarbanes-Oxley Act reveals any material weaknesses or significant deficiencies, the correction of any such material weaknesses or significant deficiencies could require remedial measures which could be costly and time-consuming. In addition, in such a case, we may be unable to produce accurate financial statements on a timely basis. Any associated accounting restatement could create a significant strain on our internal resources and cause delays in our release of quarterly or annual financial results and the filing of related reports, increase our cost and cause management distraction. Any of the foregoing could cause investors to lose confidence in the reliability of our consolidated 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.

We may face risks related to securities litigation that could result in significant legal expenses and settlement or damage awards.

We have in the past and may in the future become subject to claims and litigation alleging violations of the securities laws or other related claims, which could harm our business and require us to incur significant costs. For example, in April 2013, a putative shareholder derivative action was filed in the United States District Court for the Western District of Washington, purportedly on behalf of Oncothyreon and naming certain executive officers and the members of our board of directors as defendants. The complaint asserted claims for breaches of fiduciary duty, unjust enrichment, abuse of control, and mismanagement based on allegedly false statements made by us in public filings and press releases in 2011 and 2012. In September 2013, the court entered an order granting our motion to dismiss the lawsuit with prejudice, which means that the plaintiff was not permitted to further amend his complaint to bolster his claims. The period to appeal the dismissal order has now expired, with no appeal being filed, so the lawsuit is concluded. We are generally obliged, to the extent permitted by law, to indemnify our current and former directors and officers who are named as defendants in these types of lawsuits. Any future litigation may require significant attention from management and could result in significant legal expenses, settlement costs or damage awards that could have a material impact on our financial position, results of operations, and cash flows.

 

-35-


Table of Contents

Risks Related to the Ownership of Our Common Stock

The trading price of our common stock may be volatile.

The market prices for and trading volumes of securities of biotechnology companies, including our securities, have been historically volatile. In particular, we experienced significant volatility after we and Merck KGaA announced in December 2012 that tecemotide failed to meet its primary endpoint in a Phase 3 trial. We experienced additional volatility in May 2013 following an additional release regarding the Merck KGaA study of tecemotide and the release of the results of our trials of PX-866 in patients with glioblastoma and castration resistant prostate cancer. The market has from time to time experienced significant price and volume fluctuations unrelated to the operating performance of particular companies. The market price of our common shares may fluctuate significantly due to a variety of factors, including:

 

   

the results of pre-clinical testing and clinical trials by us, our collaborators, our competitors and/or companies that are developing products that are similar to ours (regardless of whether such products are potentially competitive with ours);

 

   

public concern as to the safety of products developed by us or others;

 

   

technological innovations or new therapeutic products;

 

   

governmental regulations;

 

   

developments in patent or other proprietary rights;

 

   

litigation;

 

   

comments by securities analysts;

 

   

the issuance of additional shares of common stock, or securities convertible into, or exercisable or exchangeable for, shares of our common stock in connection with financings, acquisitions or otherwise;

 

   

the incurrence of debt;

 

   

general market conditions in our industry or in the economy as a whole; and

 

   

political instability, natural disasters, war and/or events of terrorism.

We may seek to raise additional capital in the future; however, such capital may not be available to us on reasonable terms, if at all, when or as we require additional funding. If we issue additional shares of our common stock or other securities that may be convertible into, or exercisable or exchangeable for, our common stock, our existing stockholders would experience further dilution.

We expect that we will seek to raise additional capital from time to time in the future. For example, in connection with our June 2013 registered direct offering, we sold an aggregate of 5,000,000 shares of our common stock and warrants to purchase 5,000,000 shares of our common stock. Future financings may involve the issuance of debt, equity and/or securities convertible into or exercisable or exchangeable for our equity securities. These financings may not be available to us on reasonable terms or at all when and as we require funding. If we are able to consummate such financings, the trading price of our common stock could be adversely affected and/or the terms of such financings may adversely affect the interests of our existing stockholders. Any failure to obtain additional working capital when required would have a material adverse effect on our business and financial condition and would be expected to result in a decline in our stock price. Any issuances of our common stock, preferred stock, or securities such as warrants or notes that are convertible into, exercisable or exchangeable for, our capital stock, would have a dilutive effect on the voting and economic interest of our existing stockholders.

In February 2012 we entered into an agreement with Cowen to sell shares of our common stock having aggregate sales proceeds of $50,000,000, from time to time, through an “at the market” equity offering program under which Cowen will act as sales agent. When we access the “at the market” equity offering program, we set the parameters for the sale of shares, including the number of shares to be issued, the time period during which sales are requested to be made, limitation on the number of shares that may be sold in any one trading day and any minimum price below which sales may not be made. Subject to the terms and conditions of our agreement with Cowen, they may sell the shares by methods deemed to be an “at the market” offering as defined in Rule 415 under the Securities Act, including sales made directly on The NASDAQ Global Market or other trading market or through a market maker. In July 2013, we commenced selling our common stock through this “at the market” equity offering program and during the three months ended September 30, 2013, we sold an aggregate of 5,791,697 shares of our common stock for gross proceeds of $11.5 million. The sale of additional shares of our common stock pursuant to our agreement with Cowen will have a dilutive impact on our existing stockholders. Sales by us through Cowen could cause the market price of our common stock to decline significantly. Sales of our common stock under such agreement, or the perception that such sales will occur, could encourage short sales by third parties, which could contribute to the further decline of our stock price.

Because we do not expect to pay dividends on our common stock, stockholders will benefit from an investment in our common stock only if it appreciates in value.

We have never paid cash dividends on our common shares and have no present intention to pay any dividends in the future. We are not profitable and do not expect to earn any material revenues for at least several years, if at all. As a result, we intend

 

-36-


Table of Contents

to use all available cash and liquid assets in the development of our business. Any future determination about the payment of dividends will be made at the discretion of our board of directors and will depend upon our earnings, if any, capital requirements, operating and financial conditions and on such other factors as our board of directors deems relevant. As a result, the success of an investment in our common stock will depend upon any future appreciation in its value. There is no guarantee that our common stock will appreciate in value or even maintain the price at which stockholders have purchased their shares.

We can issue shares of preferred stock that may adversely affect the rights of a stockholder of our common stock.

Our certificate of incorporation authorizes us to issue up to 10,000,000 shares of preferred stock with designations, rights, and preferences determined from time-to-time by our board of directors. Accordingly, our board of directors is empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights superior to those of holders of our common stock. For example, an issuance of shares of preferred stock could:

 

   

adversely affect the voting power of the holders of our common stock;

 

   

make it more difficult for a third party to gain control of us;

 

   

discourage bids for our common stock at a premium;

 

   

limit or eliminate any payments that the holders of our common stock could expect to receive upon our liquidation; or

 

   

otherwise adversely affect the market price or our common stock.

We have in the past, and we may at any time in the future, issue additional shares of authorized preferred stock.

We expect our quarterly operating results to fluctuate in future periods, which may cause our stock price to fluctuate or decline.

Our quarterly operating results have fluctuated in the past, and we believe they will continue to do so in the future. Some of these fluctuations may be more pronounced than they were in the past as a result of the issuance by us in May 2009 and September 2010 of warrants to purchase shares of our common stock in connection with equity financings. As of September 30, 2013, there were outstanding warrants from the May 2009 and September 2010 financings exercisable for up to 2,691,242 shares of our common stock and 3,182,147 shares of our common stock, respectively. These warrants are classified as a liability. Accordingly, the fair value of the warrants is recorded on our consolidated balance sheet as a liability, and such fair value is adjusted at each financial reporting date with the adjustment to fair value reflected in our consolidated statement of operations. The fair value of the warrants is determined using the Black-Scholes option-pricing model. Fluctuations in the assumptions and factors used in the Black-Scholes model can result in adjustments to the fair value of the warrants reflected on our balance sheet and, therefore, our statement of operations. Due to the classification of such warrants and other factors, quarterly results of operations are difficult to forecast, and period-to-period comparisons of our operating results may not be predictive of future performance. In one or more future quarters, our results of operations may fall below the expectations of securities analysts and investors. In that event, the market price of our common stock could decline. In addition, the market price of our common stock may fluctuate or decline regardless of our operating performance.

Our management will have broad discretion over the use of proceeds from the sale of shares of our common stock and may not use such proceeds in ways that increase the value of our stock price.

In June 2013, we generated approximately $9.9 million of net proceeds from the sale of shares of our common stock and warrants to purchase shares of our common stock in a registered direct offering. In July 2013, we commenced selling our common stock through the “at the market” equity offering program under our Sales Agreement with Cowen and during the three months ended September 30, 2013, we sold an aggregate of 5,791,697 shares of our common stock for net proceeds of approximately $11.2 million. In April 2012, we generated approximately $50.3 million of net proceeds from the sale of shares of our common stock in an underwritten public offering. We will have broad discretion over the use of proceeds from the sale of those shares and the sale of additional shares of common stock to Cowen pursuant to the “at the market” equity offering program, and we could spend the proceeds in ways that do not improve our results of operations or enhance the value of our common stock. Our failure to apply these funds effectively could have a material adverse effect on our business, delay the development of our product candidates and cause the price of our common stock to decline.

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

None.

Item 3. Defaults Upon Senior Securities

None.

 

-37-


Table of Contents

Item 4. Mine Safety Disclosure

Not applicable.

Item 5. Other Information

Not applicable.

 

-38-


Table of Contents

Item 6. Exhibits

 

Exhibit
Number
    

Description

  31.1       Certification of Robert L. Kirkman, M.D., President and Chief Executive Officer, pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31.2       Certification of Julia M. Eastland, Chief Financial Officer, pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32.1#       Certification of Robert L. Kirkman, M.D., President and Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  32.2#       Certification of Julia M. Eastland, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  101.INS       XBRL Instance Document
  101.SCH       XBRL Taxonomy Extension Schema Document
  101.CAL       XBRL Taxonomy Extension Calculation Linkbase Document
  101.DEF       XBRL Taxonomy Extension Definition Linkbase Document
  101.LAB       XBRL Taxonomy Extension Labels Linkbase Document
  101.PRE       XBRL Taxonomy Extension Presentation Linkbase Document

 

# This certification is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended (Exchange Act), or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended (Securities Act), or the Exchange Act.

 

-39-


Table of Contents

SIGNATURES

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

 

      ONCOTHYREON INC.
Date: November 12, 2013       /s/ Robert L. Kirkman, M.D.                                  
      Robert L. Kirkman, M.D.
     

President, CEO and Director

(Principal Executive Officer)

 

Date: November 12, 2013       /s/ Julia M. Eastland                                                
      Julia M. Eastland
     

Chief Financial Officer

(Principal Financial and Accounting Officer)

 

-40-


Table of Contents

INDEX OF EXHIBITS

 

Exhibit
Number
  

Description

31.1    Certification of Robert L. Kirkman, M.D., President and Chief Executive Officer, pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2    Certification of Julia M. Eastland, Chief Financial Officer, pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1#    Certification of Robert L. Kirkman, M.D., President and Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2#    Certification of Julia M. Eastland, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema Document
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document
101.LAB    XBRL Taxonomy Extension Labels Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document

 

# This certification is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended (Exchange Act), or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended (Securities Act), or the Exchange Act.

 

-41-

EXHIBIT 31.1

CERTIFICATION

I, Robert L. Kirkman, M.D., certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Oncothyreon Inc., (the “Registrant”);

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

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

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

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

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

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

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

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

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

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

 

November 12, 2013      

/s/ Robert L. Kirkman, M.D.

      Robert L. Kirkman, M.D.
      President and Chief Executive Officer
      (Principal Executive Officer)

EXHIBIT 31.2

CERTIFICATION

I, Julia M. Eastland, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Oncothyreon Inc., (the “Registrant”);

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

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

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

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

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

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

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

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

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

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

 

November 12, 2013      

/s/ Julia M. Eastland

      Julia M. Eastland,
     

Chief Financial Officer, Secretary and Vice President of

Corporate Development

      (Principal Financial and Accounting Officer)

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

(18 U.S.C. SECTION 1350)

I, Robert L. Kirkman, M.D., certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report on Form 10-Q of Oncothyreon Inc. for the quarterly period ended September 30, 2013, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Oncothyreon Inc.

 

November 12, 2013      

/s/ Robert L. Kirkman, M.D.

      Robert L. Kirkman, M.D.
      President and Chief Executive Officer
      (Principal Executive Officer)

EXHIBIT 32.2

CERTIFICATION PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

(18 U.S.C. SECTION 1350)

I, Julia M. Eastland, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report on Form 10-Q of Oncothyreon Inc. for the quarterly period ended September 30, 2013, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Oncothyreon Inc.

 

November 12, 2013      

/s/ Julia M. Eastland

      Julia M. Eastland
     

Chief Financial Officer, Secretary and Vice President of

Corporate Development

      (Principal Financial and Accounting Officer)