Alder Biopharmaceuticals
ALDER BIOPHARMACEUTICALS INC (Form: 10-Q, Received: 11/03/2014 16:17:08)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

x

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

For the quarterly period ended September 30, 2014

OR

¨

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

For the transition period from              to             

Commission File Number: 001-36431

 

Alder BioPharmaceuticals, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

90-0134860

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification No.)

11804 North Creek Parkway South

Bothell, WA 98011

(Address of principal executive offices including zip code)

Registrant’s telephone number, including area code: (425) 205-2900

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   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.

 

Large accelerated filer

 

¨

  

Accelerated filer

 

¨

 

 

 

 

Non-accelerated filer

 

x  (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 October 28, 2014, the registrant had 30,806,533 shares of common stock, $0.0001 par value per share, outstanding.

 

 

 


 

Alder BioPharmaceuticals, Inc.

Quarterly Report on Form 10-Q

For the Quarter Ended September 30, 2014

INDEX

 

 

Page

 

PART I. FINANCIAL INFORMATION (Unaudited)

 

 

Item 1.

 

 

Condensed Consolidated Financial Statements

3

 

 

 

Condensed Consolidated Balance Sheets

3

 

 

 

Condensed Consolidated Statements of Operations

4

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss)

5

 

 

 

Condensed Consolidated Statements of Cash Flows

6

 

 

 

Notes to Condensed Consolidated Financial Statements

7

 

Item 2.

 

 

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

12

 

Item 3.

 

 

Quantitative and Qualitative Disclosures About Market Risk

20

 

Item 4.

 

 

Controls and Procedures

20

 

PART II. OTHER  INFORMATION

 

 

Item 1.

 

 

Legal Proceedings

21

 

Item 1A.

 

 

Risk Factors

21

 

Item 2.

 

 

Unregistered Sales of Equity Securities and Use of Proceeds

46

 

Item 6.

 

 

Exhibits

47

 

SIGNATURES

48

In this Quarterly Report on Form 10-Q, “we,” “our,” “us,” “Alder,” and “the Company” refer to Alder BioPharmaceuticals, Inc. and, where appropriate, its consolidated subsidiaries. “Alder” and the Alder logo are the property of Alder BioPharmaceuticals, Inc. This report contains references to our trademarks and to trademarks belonging to other entities. Solely for convenience, trademarks and trade names referred to in this report may appear without the ® or ™ symbols, but such references are not intended to indicate, in any way, that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto. We do not intend our use or display of other companies’ trade names or trademarks to imply a relationship with, or endorsement or sponsorship of us by, any other companies

 

 

.

2


 

PART I. – FINANCIAL INFORMATION

 

I tem 1.

Condensed Consolidated Financial Statements

Alder BioPharmaceuticals, Inc.

Condensed Consolidated Balance Sheets

(unaudited)

 

 

September 30,

 

 

December 31,

 

 

2014

 

 

2013

 

 

(in thousands, except share and per share data)

 

Assets

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

$

57,553

 

 

$

23,227

 

Short-term investments

 

9,052

 

 

 

 

Accounts receivable

 

81

 

 

 

316

 

Prepaid expenses and other assets

 

7,065

 

 

 

1,982

 

Total current assets

 

73,751

 

 

 

25,525

 

Long-term investments

 

978

 

 

 

 

Property and equipment, net

 

1,095

 

 

 

1,214

 

Total assets

$

75,824

 

 

$

26,739

 

Liabilities, convertible preferred stock and stockholders’ equity (deficit)

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable

$

1,776

 

 

$

2,223

 

Accrued liabilities

 

2,472

 

 

 

2,128

 

Deferred revenue

 

6,323

 

 

 

18,717

 

Deferred rent

 

128

 

 

 

 

Total current liabilities

 

10,699

 

 

 

23,068

 

Deferred revenue

 

 

 

 

35,607

 

Deferred rent

 

217

 

 

 

52

 

Total liabilities

 

10,916

 

 

 

58,727

 

Commitments and contingencies

 

 

 

 

 

 

 

Convertible preferred stock; $0.0001 par value; no shares and 116,020,270 shares authorized, respectively;  no shares and 20,914,137 shares issued and outstanding, respectively

 

 

 

 

111,374

 

Stockholders’ equity (deficit)

 

 

 

 

 

 

 

Common stock; $0.0001 par value; 200,000,000 and 140,000,000 shares authorized, respectively; 30,806,533 and 988,685 shares issued and outstanding, respectively

 

3

 

 

 

 

Additional paid-in capital

 

194,873

 

 

 

2,443

 

Accumulated deficit

 

(129,964

)

 

 

(145,814

)

Accumulated other comprehensive income (loss)

 

(4

)

 

 

9

 

Total stockholders’ equity (deficit)

 

64,908

 

 

 

(143,362

)

Total liabilities, convertible preferred stock and stockholders’ equity (deficit)

$

75,824

 

 

$

26,739

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

 

3


 

Alder BioPharmaceuticals, Inc.

Condensed Consolidated Statements of Operations

(unaudited)

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

September 30,

 

 

September 30,

 

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

 

(in thousands, except share and per share data)

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collaboration and license agreements

 

$

38,784

 

 

$

4,710

 

 

$

48,269

 

 

$

13,972

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

7,047

 

 

 

8,922

 

 

 

23,444

 

 

 

25,549

 

General and administrative

 

 

3,158

 

 

 

1,859

 

 

 

9,054

 

 

 

5,321

 

Total operating expenses

 

 

10,205

 

 

 

10,781

 

 

 

32,498

 

 

 

30,870

 

Income (loss) from operations

 

 

28,579

 

 

 

(6,071

)

 

 

15,771

 

 

 

(16,898

)

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

18

 

 

 

9

 

 

 

30

 

 

 

47

 

Other income

 

 

49

 

 

 

158

 

 

 

49

 

 

 

158

 

Other expense

 

 

 

 

 

(5

)

 

 

 

 

 

(45

)

Total other income

 

 

67

 

 

 

162

 

 

 

79

 

 

 

160

 

Net income (loss)

 

$

28,646

 

 

$

(5,909

)

 

$

15,850

 

 

$

(16,738

)

Net income (loss) per share - basic

 

$

0.93

 

 

$

(6.05

)

 

$

0.93

 

 

$

(17.21

)

Net income (loss) per share - diluted

 

$

0.88

 

 

$

(6.05

)

 

$

0.56

 

 

$

(17.21

)

Weighted average number of common shares used in net income (loss) per share - basic

 

 

30,805,163

 

 

 

976,584

 

 

 

17,006,362

 

 

 

972,624

 

Weighted average number of common shares used in net income (loss) per share - diluted

 

 

32,513,113

 

 

 

976,584

 

 

 

28,240,947

 

 

 

972,624

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

 

4


 

Alder BioPharmaceuticals, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(unaudited)

 

 

Three Months Ended

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

September 30,

 

 

September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

(in thousands)

 

Net income (loss)

$

28,646

 

 

$

(5,909

)

 

$

15,850

 

 

$

(16,738

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on securities available-for-sale, net of tax

 

14

 

 

 

 

 

 

(16

)

 

 

 

Foreign currency translation income (loss), net of tax

 

(8

)

 

 

6

 

 

 

3

 

 

 

(1

)

Total other comprehensive income (loss)

 

6

 

 

 

6

 

 

 

(13

)

 

 

(1

)

Comprehensive income (loss)

$

28,652

 

 

$

(5,903

)

 

$

15,837

 

 

$

(16,739

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

 

5


 

Alder BioPharmaceuticals, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

 

 

Nine Months Ended

 

 

September 30,

 

 

2014

 

 

2013

 

 

(in thousands)

 

Operating activities

 

 

 

 

 

 

 

Net income (loss)

$

15,850

 

 

$

(16,738

)

Adjustments to reconcile net income (loss) to net cash used in operating activities

 

 

 

 

 

 

 

Depreciation and amortization

 

527

 

 

 

708

 

Loss on retirement of property and equipment

 

 

 

 

43

 

Stock-based compensation

 

758

 

 

 

433

 

Changes in operating assets and liabilities

 

 

 

 

 

 

 

Accounts receivable

 

235

 

 

 

30

 

Prepaid expenses and other assets

 

(5,083

)

 

 

963

 

Accounts payable

 

(539

)

 

 

(798

)

Accrued liabilities

 

344

 

 

 

1,246

 

Deferred rent

 

293

 

 

 

(120

)

Deferred revenue

 

(48,001

)

 

 

(13,760

)

Net cash used in operating activities

 

(35,616

)

 

 

(27,993

)

Investing activities

 

 

 

 

 

 

 

Purchases of investments

 

(10,046

)

 

 

 

Proceeds from maturities of investments

 

 

 

 

4,885

 

Purchases of property and equipment

 

(408

)

 

 

(115

)

Decrease in restricted cash

 

 

 

 

119

 

Net cash provided by (used in) investing activities

 

(10,454

)

 

 

4,889

 

Financing activities

 

 

 

 

 

 

 

Proceeds from issuance of common stock, net of offering costs

 

80,351

 

 

 

 

Proceeds from exercise of stock options

 

42

 

 

 

16

 

Net cash provided by financing activities

 

80,393

 

 

 

16

 

Effect of exchange rate changes on cash

 

3

 

 

 

(1

)

Net increase (decrease) in cash and cash equivalents

 

34,326

 

 

 

(23,089

)

Cash and cash equivalents

 

 

 

 

 

 

 

Beginning of period

 

23,227

 

 

 

53,753

 

End of period

$

57,553

 

 

$

30,664

 

 

 

 

 

 

 

 

 

Supplemental disclosures:

 

 

 

 

 

 

 

Offering costs included in accounts payable

$

92

 

 

$

-

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

 

6


 

Alder BioPharmaceuticals, Inc.

Notes to Condensed Consolidated Financial Statements

 

1 .

Nature of Business

 

Alder BioPharmaceuticals, Inc. (the “Company”) is a clinical-stage biopharmaceutical company that discovers, develops and seeks to commercialize therapeutic antibodies with the potential to transform current treatment paradigms. The Company uses its proprietary antibody platform designed to select and manufacture antibodies that have the potential to maximize efficacy as well as speed of onset and durability of therapeutic response. The Company is developing ALD403, a monoclonal antibody targeted to calcitonin gene-related peptide, or CGRP, for migraine prevention and plans to advance ALD403 into a Phase 2b trial for the treatment of chronic migraines in 2014. The Company was incorporated in Delaware on May 20, 2002 and is located in Bothell, Washington.

Reverse Stock Split

On April 9, 2014, the Company filed a Certificate of Amendment to its Amended and Restated Certificate of Incorporation to effect a 1-for-5.5 reverse stock split of its outstanding common stock and convertible preferred stock. The par value per share and the authorized number of shares of common stock and preferred stock were not adjusted as a result of the reverse stock split. All issued and outstanding shares of common stock and preferred stock, options to purchase common stock and related per share amounts contained in the condensed consolidated financial statements have been retroactively adjusted to reflect the reverse stock split for all periods presented.

Initial Public Offering

In May 2014, the Company completed an initial public offering (“IPO”) of its common stock. In connection with its IPO, the Company issued and sold 8,875,396 shares of its common stock, which included 875,396 shares the Company issued pursuant to the underwriters’ partial exercise of their over-allotment option, at a price to the public of $10.00 per share. The Company’s shares of common stock began trading on the NASDAQ Global Market on May 8, 2014. As a result of the IPO, the Company received approximately $80.3 million in net proceeds, after deducting underwriting discounts and commissions of $6.2 million and offering expenses of $2.2 million. The offering expenses of $2.2 million represent legal, accounting and other direct costs related to the Company's efforts to raise capital through an IPO. These costs were previously deferred through the completion of the IPO and have been reclassified to additional paid-in capital as a reduction of the proceeds. At the closing of the IPO, 20,914,137 shares of outstanding convertible preferred stock were automatically converted into 20,914,137 shares of common stock. Following the IPO, there were no shares of preferred stock outstanding. In connection with the IPO, the Company amended and restated its Amended and Restated Certificate of Incorporation to change the authorized capital stock to 200,000,000 shares designated as common stock and 10,000,000 shares designated as preferred stock, all with a par value of $0.0001 per share.

 

2.

Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements reflect the accounts of Alder BioPharmaceuticals, Inc. and its wholly-owned subsidiaries. All inter-company balances and transactions have been eliminated in consolidation. The condensed consolidated balance sheet data as of December 31, 2013 were derived from audited financial statements. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) and generally accepted accounting principles in the United States of America (“GAAP”) for unaudited condensed consolidated financial information. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. The accompanying unaudited condensed consolidated financial statements reflect all adjustments consisting of normal recurring adjustments which, in the opinion of management, are necessary for a fair statement of the Company’s financial position and results of its operations, as of and for the periods presented. The Company manages its business as one operating segment; however, the Company operates in two geographic regions: United States (Bothell, WA) and Australia. Substantially all of the Company’s assets are located in, and revenues are generated in, the United States.

These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the prospectus that forms a part of the Company’s Registration Statement on Form S-1 (File No. 333-194672), which prospectus was filed with the SEC pursuant to Rule 424 promulgated under the Securities Act of 1933 on May 8, 2014.

7


 

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The results of the Company’s operations for the three and nine months ended September 30, 2014 are not necessarily indicative of the results to be expected for the full year or for any other period.

Concentrations of Credit Risk and Major Collaborators

The Company is exposed to credit risk from its deposits of cash and cash equivalents and investments in excess of amounts insured by the Federal Deposit Insurance Corporation.

One of the Company’s collaborators accounted for nearly 100% of total revenues for the three and nine months ended September 30, 2014 and 2013. This collaborator accounted for nearly 100% of total accounts receivable as of September 30, 2014 and December 31, 2013. The agreement with this collaborator will be terminated effective as of December 29, 2014, as further described in Note 3 below.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in Accounting Standards Codification 605, Revenue Recognition. This ASU stipulates that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. This ASU is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is not permitted, and retrospective application is required. The Company is currently evaluating the impact of the adoption of this ASU on its consolidated financial statements.

In June 2014, the FASB issued ASU No. 2014-12, Compensation – Stock Compensation.  This ASU requires entities that grant their employees share-based payments in which the terms of the award provide that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition.  The ASU will become effective for the Company beginning January 1, 2016. The Company is currently evaluating the impact of the adoption of this ASU on its consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements – Going Concern.  This ASU requires entities to evaluate for each annual and interim reporting period, whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable).  The ASU will become effective for the Company for annual reporting periods beginning after December 15, 2016. The Company is currently evaluating the impact of the adoption of this ASU on its consolidated financial statements.

As an “emerging growth company,” the Jumpstart our Business Startups Act, or the JOBS Act, allows the Company to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. As a result, the Company’s financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective date for new or revised accounting standards that are applicable to public companies.

 

3 .

Termination of License and Collaboration Agreement with Bristol-Myers Squibb

In November 2009, the Company entered into a license and collaboration agreement with Bristol-Myers Squibb, or BMS, for the development and commercialization of Clazakizumab, an antibody product candidate for the treatment of both rheumatoid arthritis and psoriatic arthritis and cancer. Under the terms of the agreement, the Company received a non-refundable upfront payment of $85 million and granted BMS worldwide exclusive rights to develop and commercialize Clazakizumab for all indications other than cancer. On August 29, 2014, the Company received written notice that BMS has elected to terminate the license and collaboration

8


 

agreement effective as of December 29, 2014, (the “Termination Date”) at which time all rights to Clazakizumab will be returned to the Company.

In addition to the upfront payment of $85 million, the Company has received an aggregate of $18.5 million in milestone payments from BMS and has been reimbursed for clinical supply and development costs of $26.8 million. The Company recognizes revenue relating to the deliverables in the agreement as a single unit of accounting using a time-based proportional performance model.  The proportional performance model results in the recognition of the upfront license fee and other payments received under the arrangement over the estimated performance period based on the passage of time.  As a result of the termination of the agreement, the estimated development period was adjusted to conclude as of the Termination Date, which was accounted for prospectively as a change in accounting estimate.  In the three and nine months ended September 30, 2014, the Company recognized revenue which had previously been deferred in the amounts of $38.8 million and $48.1 million, respectively.  The acceleration of revenue recognition as a result of the early termination of the collaboration agreement resulted in the Company reporting net income for the three months and nine months ended September 30, 2014.

BMS continues to be responsible until June 29, 2015 for all costs of the clinical trials that were initiated prior to August 29, 2014. If any milestone event is achieved during the period between August 29, 2014 and the Termination Date, BMS will not be obligated to pay the corresponding milestone payment. Effective on the Termination Date, all rights granted to BMS with respect to Clazakizumab will terminate and revert to the Company, and BMS will grant to our wholly owned subsidiary, AlderBio Holdings LLC (“AlderBio”), an exclusive license, with the right to grant sublicenses, under certain BMS intellectual property solely to make, have made, use, import, export, offer for sale, and sell Clazakizumab. BMS is obligated to transfer to the Company the Investigational New Drug Application that BMS filed for Clazakizumab with the U.S. Food and Drug Administration and all material data related to Clazakizumab that has not previously been transferred to the Company. The Company has the right to purchase all of BMS’ existing inventory of Clazakizumab at cost and, at the Company’s request, BMS is obligated to use diligent efforts to supply the Company with Clazakizumab until the earlier of 20 months after December 29, 2014, or the date that the Company obtains an alternative source of supply.

The Company will be required to pay a low single-digit royalty to BMS on sales of Clazakizumab unless the regulatory approval of Clazakizumab is not based in whole or in part upon data from BMS’s Phase 2b clinical trial(s) in rheumatoid arthritis and psoriatic arthritis. Aside from those clinical trial expenses that BMS is obligated to pay after the Termination Date, the Company will be solely responsible for performing and funding any new Clazakizumab development and clinical trial activities initiated after the Termination Date, which could significantly delay or result in the discontinuation of the development of Clazakizumab.

 

4 .

Net Income (Loss) Per Share

Basic net income (loss) per share is calculated by dividing net income (loss) by the weighted average common shares outstanding during the period, without consideration for common stock equivalents. Diluted net income (loss) per share is calculated by adjusting the weighted average common shares outstanding for the dilutive effect of common stock equivalents outstanding for the period, determined using the treasury-stock method.  

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Numerator

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) (in thousands)

$

28,646

 

 

$

(5,909

)

 

$

15,850

 

 

$

(16,738

)

Denominator

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding -basic

 

30,805,163

 

 

 

976,584

 

 

 

17,006,362

 

 

 

972,624

 

Dilutive effect of common shares from preferred stock

 

 

 

 

 

 

 

9,729,287

 

 

 

 

Dilutive effect of common shares from employee stock purchase plan

 

9,698

 

 

 

 

 

 

3,743

 

 

 

 

Dilutive effect of common shares from stock options

 

1,698,252

 

 

 

 

 

 

1,501,555

 

 

 

 

Weighted-average common shares outstanding -diluted

 

32,513,113

 

 

 

976,584

 

 

 

28,240,947

 

 

 

972,624

 

Net income (loss) per share-basic

$

0.93

 

 

$

(6.05

)

 

$

0.93

 

 

$

(17.21

)

Net income (loss) per share-diluted

$

0.88

 

 

$

(6.05

)

 

$

0.56

 

 

$

(17.21

)

 

 

 

9


 

 

The following weighted average numbers of convertible preferred stock and outstanding stock options were excluded from the calculation of diluted net loss per share for the three and nine months ended September 30, 2013 because including them would have had an anti-dilutive effect. Therefore, basic and diluted net loss per share were the same for the three and nine months ended September 30, 2013. The convertible preferred stock numbers shown in the table are on a common stock equivalent basis.

 

 

 

 

Three Months Ended

 

 

 

 

Nine Months Ended

 

 

 

 

September 30,

 

 

 

 

September 30,

 

 

 

 

2013

 

 

 

 

2013

 

Convertible preferred stock

 

 

 

20,914,137

 

 

 

 

 

20,914,137

 

Stock options

 

 

 

2,138,055

 

 

 

 

 

2,175,888

 

 

 

 

 

23,052,192

 

 

 

 

 

23,090,025

 

 

 

5 .

Investments

 

Investments consisted of available-for-sale securities as follows (in thousands):

 

 

Amortized

 

 

Gross unrealized

 

 

Gross unrealized

 

 

Fair

 

 

Cost

 

 

gains

 

 

losses

 

 

Value

 

 

(in thousands)

 

Type of security as of September 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Negotiable certificates of deposit maturing in one year or less

$

9,065

 

 

$

 

 

$

13

 

 

$

9,052

 

Negotiable certificates of deposit maturing after one year through two years

 

980

 

 

 

 

 

 

2

 

 

 

978

 

Total available-for-sale securities

$

10,045

 

 

$

 

 

$

15

 

 

$

10,030

 

 

 

Realized gains and losses are determined based on the specific identification method and are reported in other income in the condensed consolidated statement of operations. There were no realized gains or losses on sales of available-for sale securities in the three or nine months ended September 30, 2013 and 2014.

 

 

6 .

Fair Value Disclosures

The Company holds financial instruments that are measured at fair value which is determined according to a fair value hierarchy that prioritizes the inputs and assumptions used, and the valuation techniques used to measure fair value. The three levels of the fair value hierarchy are described as follows:

Level   1

Inputs are unadjusted quoted prices in active markets for identical assets or liabilities.

Level   2

Inputs are quoted prices for similar assets and liabilities in active markets or quoted prices for identical or similar instruments in markets that are not active and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

Level   3

Inputs are unobservable inputs based on the Company’s own assumptions and valuation techniques used to measure assets and liabilities at fair value. The inputs require significant management judgment or estimation.

The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.

The Company established the fair value of its assets and liabilities using the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and established a fair value hierarchy based on the inputs used to measure fair value.


10


 

 

The following table presents the Company’s financial instruments by level within the fair value hierarchy:

 

 

Fair Value Measurement Using

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

(in thousands)

 

As of September 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

56,434

 

 

 

 

 

 

 

 

$

56,434

 

Short term investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Negotiable certificates of deposit

 

9,052

 

 

 

 

 

 

 

 

 

9,052

 

Long term investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Negotiable certificates of deposit

 

978

 

 

 

 

 

 

 

 

 

978

 

 

$

66,464

 

 

$

 

 

$

 

 

$

66,464

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

22,238

 

 

$

 

 

$

 

 

$

22,238

 

 

Accounts receivable, accounts payable and accrued liabilities are carried at cost, which approximates fair value due to the short-term nature of these financial instruments.

 

 

 

11


 

 

Item 2.

  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

 

  

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This section should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included in Part I, Item 1 of this report and our audited consolidated financial statements and related notes thereto and management’s discussion and analysis of financial condition and results of operations for the year ended December 31, 2013 included in our prospectus dated May 7, 2014, filed with the Securities and Exchange Commission, or SEC, pursuant to Rule 424(b) under the Securities Act of 1933, as amended, or the Securities Act, on May 8, 2014.

Forward-Looking Statements

This discussion contains certain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are identified by words such as “believe,” “will,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “expect,” “predict,” “could,” “potentially” or the negative of these terms or similar expressions. 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 future plans, objectives, expectations, intentions and financial performance and the assumptions that underlie these statements. These forward-looking statements 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 report in Part II, Item 1A — “Risk Factors,” and elsewhere in this report. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. These statements, like all statements in this report, speak only as of their date, and we undertake no obligation to update or revise these statements in light of future developments.

Overview

We are a clinical-stage biopharmaceutical company that discovers, develops and seeks to commercialize therapeutic antibodies with the potential to meaningfully transform current treatment paradigms. We have developed a proprietary antibody platform designed to select antibodies that have the potential to maximize efficacy as well as speed of onset and durability of therapeutic response. In addition, we believe our ability to efficiently manufacture antibodies using our yeast-based manufacturing technology, MabXpress, allows us to target diseases that traditionally have not been addressed by antibodies. ALD403 was discovered internally, has achieved proof-of-concept and we have initiated a Phase 2b dose-ranging trial for the preventative treatment of chronic migraines in preparation for progression to Phase 3 trials if supported by the data.

ALD403 is our wholly-owned novel monoclonal antibody targeted to calcitonin gene-related peptide, or CGRP, for migraine prevention. We have completed a three month randomized, placebo-controlled proof-of-concept trial of ALD403 in 163 patients suffering from five to 14 migraine days per month, or high frequency migraine. In July 2014, we initiated a multiple dose, placebo-controlled trial of ALD403 to assess safety, pharmacodynamics and pharmacokinetics of a subcutaneous formulation of ALD403.  We have initiated a Phase 2b dose-ranging trial for the preventative treatment of chronic migraines with an intravenous formulation and we plan to initiate a trial in frequent episodic migraines with a subcutaneous formulation in the first half of 2015 with the goal of initiating pivotal Phase 3 trials in 2016.  

Clazakizumab is a novel monoclonal antibody that inhibits the pro-inflammatory cytokine interleukin-6, or IL-6, for the treatment of both rheumatoid arthritis, or RA, and psoriatic arthritis, or PsA. In November 2009, we entered into a license and collaboration agreement with Bristol-Myers Squibb, or BMS, under which we granted BMS worldwide exclusive rights to develop and commercialize Clazakizumab for all indications other than cancer. On August 29, 2014, we received written notice that BMS has elected to terminate the license and collaboration agreement effective as of the Termination Date, December 29, 2014, at which time all rights to Clazakizumab will be returned to us.

We are also currently evaluating four programs with the view of advancing at least one candidate into the clinic in 2015 for a disease indication where therapeutic antibodies have not previously played a role. We will continue to enhance our technologies to discover optimized product candidates that can be manufactured efficiently on a very large scale. We may seek to monetize our technology platform by consummating partnerships with leading biotechnology and pharmaceutical companies. We also intend to continue to deploy capital to selectively develop our own portfolio of product candidates.

As of September 30, 2014, we had an accumulated deficit of $130.0 million. We expect to experience increasing operating losses for the foreseeable future. We expect our expenses will increase substantially in connection with our ongoing activities, as we:

·

conduct clinical trials for ALD403;

12


 

·

seek a partner to continue our development plans for Clazakizumab in autoimmune/inflammatory disease;

·

continue to evaluate our preclinical programs and advance at least one product candidate into the clinic;

·

enhance our proprietary antibody platform and conduct discovery and preclinical activities;

·

manufacture antibodies for our preclinical programs and clinical trials;

·

seek regulatory approval for our product candidates; and

·

operate as a public company.

We will not generate revenues from product sales unless and until we or our future collaborators successfully complete development and obtain regulatory approval for one or more of our product candidates, which we expect will take a number of years and is subject to significant uncertainty. If we obtain regulatory approval for ALD403 or any future product candidate, we expect to incur significant commercialization expenses related to sales, marketing, manufacturing and distribution to the extent that such costs are not paid by future collaborators. As a result of the termination of the Clazakizumab collaboration agreement with BMS, we will need to obtain substantial additional sources of funding to develop ALD403 as currently contemplated. If such additional funding is not available on favorable terms or at all, we may need to delay or reduce the scope of our ALD403 development program or grant rights in the United States, as well as outside the United States, to ALD403 to one or more partners.

Recent Developments

In November 2009, we entered into a license and collaboration agreement with BMS for the development and commercialization of Clazakizumab and received an $85 million upfront payment. On August 29, 2014, we received written notice that BMS has elected to terminate the license and collaboration agreement effective as of the Termination Date, December 29, 2014, at which time all rights to Clazakizumab will be returned to us. The decision by BMS to terminate the BMS Agreement was the result of an internal BMS portfolio review process wherein BMS determined that Clazakizumab did not warrant further investment based on other priorities in their pipeline. Under the terms of the agreement, we granted BMS worldwide exclusive rights to develop and commercialize Clazakizumab for all indications other than cancer. In addition to the $85 million upfront payment, BMS was responsible for paying 100% of worldwide development costs for all indications, except cancer, and reimbursing us for certain clinical supply and development costs. To date, in addition to the upfront payment, we have received two milestone payments totaling $18.5 million in the aggregate and we have been reimbursed for clinical supply and development costs of $26.8 million. We would have been eligible to receive additional development-based, regulatory-based and sales-based milestone payments and tiered royalties on net sales of Clazakizumab had the BMS Agreement not been terminated.

BMS continues to be responsible for all costs of the clinical trials through June 29, 2015 that were initiated prior to August 29, 2014. If any milestone event is achieved during the period between August 29, 2014 and the Termination Date, BMS will not be obligated to pay the corresponding milestone payment. Effective on the Termination Date, all rights granted to BMS with respect to Clazakizumab will terminate and revert to us, and BMS will grant to us an exclusive license, with the right to grant sublicenses, under certain BMS intellectual property solely to make, have made, use, import, export, offer for sale, and sell Clazakizumab. BMS is obligated to transfer to us the Investigational New Drug Application that BMS filed for Clazakizumab with the U.S. Food and Drug Administration and all material data related to Clazakizumab that has not previously been transferred to us. We have the right to purchase all of BMS’ existing inventory of Clazakizumab at cost and, at our request, BMS is obligated to use diligent efforts to supply us with Clazakizumab until the earlier of 20 months after December 29, 2014, or the date that we obtain an alternative source of supply.

We will be required to pay a low single-digit royalty to BMS on sales of Clazakizumab unless the regulatory approval of Clazakizumab is not based in whole or in part upon data from BMS’s Phase 2b clinical trial(s) in rheumatoid arthritis and psoriatic arthritis. Aside from those clinical trial expenses that BMS is obligated to pay after the Termination Date, we will be solely responsible for performing and funding any new Clazakizumab development and clinical trial activities initiated after the Termination Date.  We intend to seek a partner to continue the development of Clazakizumab and in the event that we do not find a partner, the development of Clazakizumab could be significantly delayed or result in the discontinuation of the development of Clazakizumab.

 

13


 

Financial Operations Overview

Revenues

Substantially all of our revenues for the three and nine months ended September 30, 2014 and 2013 were derived from our collaboration with BMS. Upfront fees, milestone payments and reimbursed clinical supply and development costs received under our collaboration agreements are deferred and are recognized as revenues over the performance period using a time-based approach. As a result of the early termination of the agreement, the estimated performance period was adjusted to reflect the December 29, 2014 termination date, which accelerated the recognition of revenue which had previously been deferred. We recognized $38.8 million and $48.1 million of deferred revenue for the three and nine months ended September 30, 2014, respectively.  We anticipate recognizing $6.3 million in deferred revenue under the BMS collaboration agreement in the quarter ending December 31, 2014.

We have not generated any revenues from the sale of products. In the future, we may generate revenues from product sales and from collaboration agreements in the form of license fees, milestone payments, reimbursements for clinical supply and development costs and royalties on product sales. We expect that any revenues we generate will fluctuate from quarter to quarter as a result of the uncertain timing and amount of such payments and sales.

Research and Development Expenses

Research and development expenses represent costs incurred by us for the discovery and development of our product candidates. The following items are included in research and development expenses:

·

external costs under agreements with clinical research organizations, or CROs, contract manufacturing organizations, or CMOs, and other significant third-party vendors or consultants used to perform preclinical, clinical and manufacturing activities;

·

internal costs including employee-related costs such as salaries, benefits, stock-based compensation expense, travel, laboratory consumables and services for our research and development personnel; and

·

allocated facilities, depreciation, and other expenses, which include rent and maintenance of facilities, information technology services and other infrastructure expenses.

We use our employee and infrastructure resources across multiple research and development programs directed toward evaluating our monoclonal antibodies for selecting product candidates. We manage certain activities such as preclinical toxicology studies, clinical trial operations and manufacture of product candidates through third-party CROs, CMOs or other third-party vendors. We track our significant external costs by each product candidate. We also track our human resource efforts on certain programs for purposes of billing our collaborators for time incurred at agreed upon rates. We do not, however, assign or allocate to individual product candidates or development programs our internal costs and we group these internal research and development activities into three categories:

 

Category

  

Description

 

Preclinical discovery and development

  

 

Research and development expenses incurred in activities substantially in support of discovery of new targets through the selection of a single product candidate. These activities encompass the discovery and translational medicine functions, including pharmacokinetic and drug metabolism preclinical studies, toxicology and early strain and assay development activities.

 

Pharmaceutical operations

  

 

Research and development expenses incurred related to manufacturing preclinical study and clinical trial materials, including scale-up process development and quality control activities.

 

Clinical development

  

 

Research and development expenses incurred related to Phase 1, Phase 2 and Phase 3 clinical trials, including regulatory affairs activities.

14


 

We plan to increase our research and development expenses for the foreseeable future as we continue the development of ALD403 and evaluate the advancement of future product candidates into clinical development. We intend to seek a new partner for the clinical development of Clazakizumab in autoimmune/inflammatory disease. The timing and amount of research and development expenses incurred will depend largely upon the outcomes of current and future clinical trials for our product candidates as well as the related regulatory requirements, manufacturing costs and any costs associated with the advancement of our preclinical programs. We cannot determine with certainty the duration and completion costs of the current or future clinical trials of our product candidates. The duration, costs and timing of clinical trials and development of our product candidates will depend on a variety of factors, including:

·

the scope, rate of progress, and expense of our ongoing, as well as any additional, clinical trials and other research and development activities;

·

future clinical trial results;

·

potential changes in government regulation; and

·

the timing and receipt of any regulatory approvals.

A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and related benefits, including stock-based compensation, related to our executive, business development, intellectual property, finance, human resources and support functions. Other general and administrative expenses include allocated facility-related costs not otherwise included in research and development expenses, travel expenses and professional fees for auditing, tax and legal services, including intellectual property related legal services. We have incurred and expect to incur additional expenses as a result of operating as a public company, including expenses related to compliance with the rules and regulations of the SEC, and those of the NASDAQ Stock Market LLC, or NASDAQ, additional insurance expenses, investor relations activities and other administrative and professional services.


15


 

Results of Operations

Comparison of the Three and Nine Months Ended September 30, 2014 and 2013

Revenues

Revenues recognized and cash payments received under our collaboration agreements were as follows:

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

(in thousands)

 

 

(in thousands)

 

Revenues recognized:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bristol-Myers Squibb:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of deferred revenue from upfront payments

$

25,262

 

 

$

3,058

 

 

$

31,279

 

 

$

9,075

 

Recognition of milestone payments

 

5,498

 

 

 

666

 

 

 

6,808

 

 

 

1,976

 

Recognition of reimbursed clinical supply and development costs

 

8,024

 

 

 

986

 

 

 

10,017

 

 

 

2,921

 

Bristol-Myers Squibb total

 

38,784

 

 

 

4,710

 

 

 

48,104

 

 

 

13,972

 

Other collaborations

 

 

 

 

 

 

 

165

 

 

 

 

Total revenues recognized

$

38,784

 

 

$

4,710

 

 

$

48,269

 

 

$

13,972

 

Cash payments received:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bristol-Myers Squibb:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reimbursed clinical supply and development costs

$

21

 

 

$

100

 

 

$

203

 

 

$

243

 

Bristol-Myers Squibb total

 

21

 

 

 

100

 

 

 

203

 

 

 

243

 

Other collaborations

 

15

 

 

 

 

 

 

265

 

 

 

 

Total cash payments received

$

36

 

 

$

100

 

 

$

468

 

 

$

243

 

Revenues for the three and nine months ended September 30, 2014 and 2013 were derived primarily from our collaboration agreement with BMS. For the three and nine months ended September 30, 2014, revenues increased by $34.1 million and $34.3 million, respectively, compared to the same periods of 2013, due primarily to the acceleration of recognition of revenue as a result of the early termination of the BMS agreement. We anticipate recognizing $6.3 million in deferred revenue under the BMS collaboration agreement in the quarter ending December 31, 2014. Following the Termination Date, we will not recognize any additional future revenue under the BMS collaboration agreement.

Research and Development Expenses

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2014

 

 

2013

 

 

% change

 

 

2014

 

 

2013

 

 

% change

 

 

(dollars in thousands)

 

 

(dollars in thousands)

 

External costs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  ALD403

$

2,522

 

 

$

4,020

 

 

 

(37

%)

 

$

8,921

 

 

$

9,104

 

 

 

(2

%)

  Clazakizumab

 

34

 

 

 

252

 

 

 

(87

%)

 

 

1,029

 

 

 

2,021

 

 

 

(49

%)

Unallocated internal costs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Preclinical discovery and development

 

2,779

 

 

 

3,124

 

 

 

(11

%)

 

 

8,572

 

 

 

9,060

 

 

 

(5

%)

  Pharmaceutical operations

 

1,302

 

 

 

1,186

 

 

 

10

%

 

 

3,766

 

 

 

3,682

 

 

 

2

%

  Clinical development

 

410

 

 

 

340

 

 

 

21

%

 

 

1,156

 

 

 

1,682

 

 

 

(31

%)

Total research and development expenses

$

7,047

 

 

$

8,922

 

 

 

(21

%)

 

$

23,444

 

 

$

25,549

 

 

 

(8

%)

 

Research and development expenses decreased by $1.9 million, or 21%, for the three months ended September 30, 2014 compared to the same period of 2013. During such period, external costs for ALD403 decreased $1.5 million due to higher manufacturing costs incurred in the 2013 period to advance our Phase 2 program for migraine.  Costs for Clazakizumab and unallocated internal costs decreased in the 2014 period.

 

16


 

Research and development expenses decreased by $2.1 million, or 8%, for the nine months ended September 30, 2014 compared to the same period of 2013. In 2013 we decided to discontinue our clinical trial in cancer for Clazakizumab which resulted in a decrease of $1.0 million in the 2014 period. We anticipate incurring $1.2 million in expenses during 2014 as our clinical trial of Clazakizumab in cancer concludes. Unallocated internal costs also decreased $1.0 million due to decreased activities related to our preclinical programs, and decreases in personnel-related and other operating costs.

 

In August, we regained the worldwide rights to Clazakizumab from BMS.  BMS continues to be responsible until June 29, 2015 for all costs of the clinical trials that were initiated by BMS prior to August 29, 2014.  We plan to seek out a new partner to continue the clinical development of Clazakizumab in autoimmune/inflammatory disease.  

General and Administrative Expenses

General and administrative expenses increased by $1.3 million, or 70%, for the three months ended September 30, 2014 compared to the same period of 2013.  The increase was primarily due to increases of $0.6 million in consulting and professional fees to operate as a public company, legal and other fees related to our patent filings, personnel-related costs, business insurance and other administrative costs of $0.7 million.  

General and administrative expenses increased by $3.7 million, or 70%, for the nine months ended September 30, 2014 compared to the same period of 2013.  The increase was primarily due to increases in legal and other fees related to our patent filings of $1.5 million, increases in other consulting and professional fees to operate as a public company of $1.1 million and other increases in personnel related costs, business insurance and other administrative costs of $1.1 million.  

Interest Income

The increase of $9,000 in interest income for the three months ended September 30, 2014 compared to the same period of 2013 was due to an increase in the average balances of cash, cash equivalents and investments.  The decrease of $17,000 in interest income for the nine months ended September 30, 2014 compared to the same period of 2013 was due primarily to a decrease in the average interest rate earned.  

Other Income/(Other Expense)

Other income primarily represents incentive payments received by our Australian subsidiary from the Australian government for eligible research and development expenditures in the prior calendar year.   We received $45,000 in such incentive payments in the three and nine months ended September 30, 2014 and $158,000 in such incentive payments in the three and nine months ended September 30, 2013.    The decrease in the incentive payments received in the 2014 periods was due to a lower level of eligible expenditures in Australia in 2013 compared to expenditures in 2012.  

Liquidity and Capital Resources

Due to our significant research and development expenditures, we have generated significant operating losses from inception through June 30, 2014. We have funded our operations primarily through sales of our convertible preferred stock, payments from our collaboration partners and proceeds from our initial public offering, or IPO, which we completed in May 2014. As of September 30, 2014, we had available cash, cash equivalents and investments of $67.6 million, which consisted of cash, money market funds and negotiable certificates of deposit.

We believe that our available cash, cash equivalents and investments will be sufficient to meet our projected operating requirements into the fourth quarter of 2015. We are currently focusing our resources on development of ALD403 and we are actively seeking a partner for Clazakizumab. We plan to utilize any funds derived from such a partnership to further advance ALD403 and may also consider possible partnerships for ALD403 or sources of equity financing. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. Furthermore, our operating plan may change, and we may need additional funds to meet operational needs and capital requirements for product development and commercialization sooner than planned. We currently have no credit facility or committed sources of capital. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates and the extent to which we may enter into additional collaborations with third parties to participate in their development and commercialization, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our current and anticipated clinical trials. Our future funding requirements will depend on many factors, as we:

·

initiate or continue clinical trials of ALD403, our wholly-owned novel monoclonal antibody for prevention of migraine;

·

seek out a new partner to continue the clinical development of Clazakizumab in autoimmune/inflammatory disease;

17


 

·

continue the research and development of our product candidates;

·

seek to discover additional product candidates;

·

seek regulatory approvals for our product candidates that successfully complete clinical trials;

·

establish a sales, marketing and distribution infrastructure and scale-up manufacturing capabilities to commercialize products which receive regulatory approval;

·

enhance operational, financial and information management systems and hire additional personnel, including personnel to support development of our product candidates and, if a product candidate is approved, our commercialization efforts; and

·

incur additional costs associated with being a public company.

We plan to continue to fund our operations and capital funding needs through equity and/or debt financing. The sale of additional equity would result in additional dilution to our stockholders. The incurrence of debt financing would result in debt service obligations and the instruments governing such debt could provide for operating and financing covenants that would restrict our operations. We are seeking a new partner for Clazakizumab and we may also consider partnering ALD403 for further clinical development and commercialization. To the extent that we raise additional capital through marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our product candidates, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us. If we do need to raise additional capital to fund our operations, funding may not be available to us on acceptable terms, or at all. If we are not able to secure adequate additional funding we may be forced to make reductions in spending, extend payment terms with suppliers, liquidate assets where possible, and/or suspend or curtail planned programs. Any of these actions could harm our business, results of operations and future prospects.

Historical Cash Flow Trends

The following table summarizes our cash flows for the periods indicated:  

 

Nine Months Ended

 

 

September 30,

 

 

2014

 

 

2013

 

Net cash used in operating activities

$

(35,616

)

 

$

(27,993

)

Net cash provided by (used in) investing activities

 

(10,454

)

 

 

4,889

 

Net cash provided by financing activities

 

80,393

 

 

 

16

 

Cash Used in Operating Activities

In the nine months ended September 30, 2014 our net income was $15.9 million, which included recognition of deferred revenue of $48.0 million, which revenue did not result in cash proceeds in 2014.  Net cash used in operating activities includes net income, adjusted for non-cash charges and the changes in deferred revenue and components of working capital.  In the nine months ended September 30, 2014, net cash used in operating activities was $35.6 million compared to $28.0 million during the same period of 2013. The increase in cash used in operating activities of $7.6 million was driven primarily by an increase in operating expenses of $1.6 million, an increase in prepaid expenses and other assets of $5.1 million and other changes in components of working capital.

Cash Provided by (Used in) Investing Activities

Net cash used in investing activities was $10.5 million in the nine months ended September 30, 2014 due primarily to purchases of investments and to a lesser extent, purchases of property and equipment.  Net cash provided by investing activities was $4.9 million in the nine months ended September 30, 2013 due primarily to the maturity of investments and decrease in restricted cash, offset in part by purchases of property and equipment.

Cash Provided by Financing Activities

Cash provided by financing activities in the nine months ended September 30, 2014 was $80.4 million due primarily to our IPO, in which we received proceeds of $82.5 million net of underwriting discounts and commissions.  In addition, we incurred approximately $2.2 million in offering costs, of which $2.1 million were paid in the nine months ended September 30, 2014 and $0.1 million were included in accounts payable at September 30, 2014.  In the nine months ended September 30, 2013, cash provided by financing activities was the result of stock option exercises.

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Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements in the nine months ended September 30, 2014.

Contractual Obligations

 

Our contractual obligations as of September 30, 2014 were as follows:

 

 

 

 

 

 

Less Than

 

 

 

 

 

 

 

 

 

 

More Than

 

 

Total

 

 

1 Year

 

 

1-3 Years

 

 

3-5 Years

 

 

5 Years

 

 

(in thousands)

 

Operating lease obligations (1)

$

1,828

 

 

$

605

 

 

$

1,223

 

 

$

 

 

$

 

License agreements (2)

 

835

 

 

 

90

 

 

 

165

 

 

 

155