Kite Pharma, Inc.
Kite Pharma, Inc. (Form: 10-Q, Received: 08/08/2016 15:50:56)

 

 

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 June 30, 2016

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: 001-36508

 

KITE PHARMA, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

Delaware

 

27-1524986

(State or Other Jurisdiction of
Incorporation or Organization)

 

(I.R.S. Employer
Identification No.)

2225 Colorado Avenue
Santa Monica, California

 

90404

(Address of Principal Executive Offices)

 

(Zip Code)

(310) 824-9999

(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 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

 

x

  

Accelerated filer

 

¨

 

 

 

 

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 August 5, 2016, the number of outstanding shares of the registrant’s common stock, par value $0.001 per share, was 49,596,938.

 

 

 


KITE PHARMA, INC.

FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2016

INDEX

 

 

Page

Part I — Financial Information

2

 

Item 1. Condensed Consolidated Financial Statements - Unaudited

2

 

Condensed Consolidated Balance Sheets

2

 

Condensed Consolidated Statements of Operations and 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

25

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

32

 

Item 4. Controls and Procedures

32

 

Part II — Other Information

33

 

Item 1. Legal Proceedings

33

 

Item 1A. Risk Factors

33

 

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

62

 

Item 3. Defaults Upon Senior Securities

62

 

Item 4. Mine Safety Disclosures

62

 

Item 5. Other Information

62

 

Item 6. Exhibits

63

 

SIGNATURES

64

 

Trademarks and Trade names

We have common law, unregistered trademarks for Kite Pharma and eACT based on use of the trademarks in the United States. This Quarterly Report contains references to our trademarks and to trademarks belonging to other entities. Solely for convenience, trademarks and trade names referred to in this Quarterly Report, including logos, artwork and other visual displays, may appear without the ® or TM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. 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.

 

 

 


PART I — FINAN CIA L INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

KITE PHARMA, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

 

 

JUNE 30, 2016

 

 

DECEMBER 31,

 

 

(UNAUDITED)

 

 

2015

 

ASSETS

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

$

170,158

 

 

$

392,843

 

Marketable securities

 

360,968

 

 

 

221,879

 

Prepaid expenses and other current assets

 

10,472

 

 

 

16,371

 

Total current assets

 

541,598

 

 

 

631,093

 

Restricted cash

 

3,663

 

 

 

1,540

 

Property and equipment, net

 

42,466

 

 

 

30,116

 

Intangible assets, net

 

9,460

 

 

 

11,380

 

Goodwill

 

25,820

 

 

 

25,360

 

Other assets

 

12,668

 

 

 

8,474

 

Total assets

$

635,675

 

 

$

707,963

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable

$

6,802

 

 

$

8,049

 

Deferred revenue

 

16,167

 

 

 

16,333

 

Accrued expenses and other current liabilities

 

20,050

 

 

 

11,787

 

Total current liabilities

 

43,019

 

 

 

36,169

 

Deferred revenue, less current portion

 

25,139

 

 

 

32,176

 

Contingent consideration

 

16,685

 

 

 

16,080

 

Other non-current liabilities

 

5,376

 

 

 

7,778

 

Total liabilities

 

90,219

 

 

 

92,203

 

COMMITMENTS AND CONTINGENCIES (NOTE 11)

 

 

 

 

 

 

 

STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

Preferred Stock, $0.001 par value, 10,000,000 shares authorized, 0 shares issued and

   outstanding at June 30, 2016 and December 31, 2015

 

 

 

 

 

Common stock, $0.001 par value, 200,000,000 shares authorized, 49,511,226 and

   48,671,757 shares issued and outstanding, excluding 595,032 and 1,091,306

   shares subject to repurchase at June 30, 2016 and December 31, 2015,

   respectively

 

50

 

 

 

49

 

Additional paid-in capital

 

812,490

 

 

 

775,588

 

Accumulated other comprehensive income (loss)

 

762

 

 

 

(220

)

Accumulated deficit

 

(267,846

)

 

 

(159,657

)

Total stockholders' equity

 

545,456

 

 

 

615,760

 

Total liabilities and stockholders' equity

$

635,675

 

 

$

707,963

 

 

See accompanying notes.

 

 

 

2


KITE PHARMA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except share and per share amounts)

(Unaudited)

 

 

THREE MONTHS ENDED

 

 

SIX MONTHS ENDED

 

 

JUNE 30,

 

 

JUNE 30,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Revenue

$

4,795

 

 

$

4,403

 

 

$

9,922

 

 

$

7,284

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

47,356

 

 

 

16,588

 

 

 

81,771

 

 

 

25,849

 

General and administrative

 

23,520

 

 

 

9,774

 

 

 

40,013

 

 

 

18,945

 

Total operating expenses

 

70,876

 

 

 

26,362

 

 

 

121,784

 

 

 

44,794

 

Loss from operations

 

(66,081

)

 

 

(21,959

)

 

 

(111,862

)

 

 

(37,510

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

953

 

 

 

498

 

 

 

1,769

 

 

 

965

 

Interest expense

 

(196

)

 

 

(1

)

 

 

(322

)

 

 

(5

)

Other income (expense)

 

(30

)

 

 

570

 

 

 

(63

)

 

 

571

 

Total other income

 

727

 

 

 

1,067

 

 

 

1,384

 

 

 

1,531

 

Loss before income taxes

 

(65,354

)

 

 

(20,892

)

 

 

(110,478

)

 

 

(35,979

)

Benefit from income taxes

 

1,080

 

 

 

 

 

 

2,289

 

 

 

 

Net loss

$

(64,274

)

 

$

(20,892

)

 

$

(108,189

)

 

$

(35,979

)

Net loss per share, basic and diluted

$

(1.31

)

 

$

(0.48

)

 

$

(2.21

)

 

$

(0.84

)

Weighted-average shares outstanding, basic and diluted

 

49,156,705

 

 

 

43,249,349

 

 

 

48,876,791

 

 

 

42,859,708

 

Comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

$

(64,274

)

 

$

(20,892

)

 

$

(108,189

)

 

$

(35,979

)

Foreign currency translation adjustments, net of tax

 

(438

)

 

 

680

 

 

 

355

 

 

 

681

 

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

 

175

 

 

 

(133

)

 

 

627

 

 

 

(44

)

Comprehensive loss

$

(64,537

)

 

$

(20,345

)

 

$

(107,207

)

 

$

(35,342

)

 

See accompanying notes.

 

 

 

3


KITE PHARMA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

  

 

SIX MONTHS ENDED JUNE 30,

 

 

2016

 

 

2015

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net loss

$

(108,189

)

 

$

(35,979

)

Adjustment to reconcile net loss to net cash from operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

4,527

 

 

 

1,471

 

Stock-based compensation

 

34,622

 

 

 

16,058

 

Deferred rent

 

(191

)

 

 

668

 

Amortization of discount on marketable securities, net

 

791

 

 

 

(173

)

Gain on sale of available for sale securities, net

 

(444

)

 

 

 

Restricted cash

 

(2,122

)

 

 

(1,540

)

Gain on adjustment of contingent consideration

 

 

 

 

(580

)

Noncash interest expense

 

314

 

 

 

 

Loss related to equity investee operations

 

28

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Deferred revenue

 

(7,204

)

 

 

54,078

 

Prepaid expenses and other current assets

 

5,950

 

 

 

(6,141

)

Other assets

 

1,802

 

 

 

(9,098

)

Accounts payable

 

(1,396

)

 

 

2,127

 

Accrued expenses and liabilities

 

6,555

 

 

 

1,711

 

Due to related party

 

15

 

 

 

78

 

Net cash provided by (used in) operating activities

 

(64,942

)

 

 

22,680

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of marketable securities

 

(254,037

)

 

 

(48,072

)

Sales and maturities of marketable securities

 

115,181

 

 

 

76,291

 

Purchase of property and equipment

 

(13,784

)

 

 

(9,456

)

Cash paid for equity investment in Cell Design Labs

 

(6,025

)

 

 

 

Net cash paid related to acquisition of T-Cell Factory, B.V.

 

 

 

 

(14,690

)

Net cash provided by (used in) investing activities

 

(158,665

)

 

 

4,073

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Principal payments on capital lease obligations

 

(57

)

 

 

(17

)

Proceeds from issuance of common stock

 

 

 

 

26,664

 

Proceeds from exercise of stock options

 

977

 

 

 

694

 

Net cash provided by financing activities

 

920

 

 

 

27,341

 

Effect of exchange rate changes on cash

 

2

 

 

 

(155

)

Net change in cash and cash equivalents

 

(222,685

)

 

 

53,939

 

Cash and cash equivalents at beginning of period

 

392,843

 

 

 

209,298

 

Cash and cash equivalents at end of period

$

170,158

 

 

$

263,237

 

Supplemental schedule of cash flows information:

 

 

 

 

 

 

 

Cash paid for interest

$

 

 

$

2

 

Supplemental schedule of non-cash investing and financing activities:

 

 

 

 

 

 

 

Tenant improvement allowance receivable

$

 

 

$

2,633

 

Employee stock purchase plan compensation

$

765

 

 

$

361

 

Issuance of stock to purchase T-Cell Factory, B.V.

$

 

 

$

4,209

 

 

See accompanying notes.

 

4


KITE PHARMA, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2016

 

NOTE 1—BUSINESS AND NATURE OF OPERATIONS

Nature of Operations

Kite Pharma, Inc. (the “Company”) was incorporated on June 1, 2009 in the State of Delaware. The Company is a clinical-stage biopharmaceutical company focused on the development and commercialization of novel cancer immunotherapy products designed to harness the power of a patient’s own immune system to target and kill cancer cells. The Company is developing multiple product candidates using its engineered autologous cell therapy (“eACT”), which involves the genetic engineering of T cells to express either chimeric antigen receptors (“CARs”) or T cell receptors (“TCRs”).

The Company’s headquarters and operations are in Santa Monica, California. Since commencing operations, the Company has devoted substantially all of its efforts to securing intellectual property rights, performing research and development activities, including clinical trials, in collaboration with the Surgery Branch of the National Cancer Institute (“NCI”), hiring personnel, and raising capital to support and expand these activities. On March 17, 2015, the Company acquired T-Cell Factory, B.V. (“TCF”), a Dutch company, for the opportunity to significantly expand the Company’s pipeline of TCR-based product candidates. TCF has been renamed Kite Pharma EU B.V. (“Kite Pharma EU”).

 

NOTE 2—BASIS OF PRESENTATION AND MANAGEMENT PLANS

The Company has not generated any revenue from the sale of products since its inception. The Company has experienced net losses since its inception and has an accumulated deficit of $267.8 million and $159.7 million as of June 30, 2016 and December 31, 2015, respectively. The Company expects to incur losses and have negative net cash flows from operating activities as it expands its portfolio and engages in further research and development activities, particularly conducting preclinical studies and clinical trials.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of the Company’s management, the accompanying condensed consolidated financial statements contain all adjustments (consisting of normal recurring accruals and adjustments) necessary to present fairly the financial position, results of operations and cash flows of the Company at the dates and for the periods indicated. The interim results for the periods ended June 30, 2016 are not necessarily indicative of results for the full 2016 fiscal year or any other future interim periods.

The success of the Company depends on its ability to develop its technologies to the point of U.S. Food and Drug Administration (“FDA”) approval and subsequent revenue generation or through the sale, merger, or other transfer of all or substantially all of the Company’s assets and, accordingly, to raise enough capital to finance these developmental efforts. In the future, management will need to raise additional capital to finance the continued operating and capital requirements of the Company. Any amounts raised will be used to further develop the Company’s technologies, acquire additional product licenses and for other working capital purposes. There can be no assurances that the Company will be able to secure such additional financing, or if available, that it will be sufficient to meet its needs. If the Company cannot obtain adequate working capital, it will be forced to curtail its planned business operations.

 

NOTE 3—SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the reporting period. Accordingly, actual results could differ from those estimates.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents consist primarily of money market funds and bank money market accounts and are stated at cost, which approximates fair value.

5


Investments

All investments have been classified as “available-for-sale” and are carried at fair value as determined based upon quoted market prices or pricing models for similar securities. Management determines the appropriate classification of its investments in debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. Unrealized gains and losses are excluded from earnings and are reported as a component of comprehensive loss. Realized gains and losses and declines in fair value judged to be other than temporary, if any, on available-for-sale securities are included in interest income and other expense, net, respectively.

Restricted Cash

The Company has two certificates of deposit that are posted as secured collateral in connection with letters of credit relating to the Company’s leases of its commercial manufacturing and support facilities. Amounts related to the certificates of deposit were reported as restricted cash and totaled $3.7 million at June 30, 2016.

C oncentration of Credit Risk

Financial instruments, which potentially subject the Company to significant concentrations of credit risk, consist primarily of cash and cash equivalents and marketable securities. The primary objectives for the Company’s investment portfolio are the preservation of capital and the maintenance of liquidity. The Company does not enter into any investment transaction for trading or speculative purposes.

The Company’s investment policy limits investments to certain types of instruments such as certificates of deposit, money market instruments, obligations issued by the U.S. government and U.S. government agencies as well as corporate debt securities, and places restrictions on maturities and concentration by type and issuer. The Company maintains cash balances in excess of amounts insured by the FDIC and concentrated within a limited number of financial institutions. The accounts are monitored by management to mitigate the risk.

Foreign Currencies

As a result of a business combination, the Company now operates in multiple currencies. Related to the wholly-owned subsidiary, Kite Pharma EU, the Company has determined that based on the nature of the transactions occurring within this entity, the functional currency of the subsidiary is the Euro, and accordingly, any net assets of Kite Pharma EU, including goodwill and identifiable intangible assets, will be translated into U.S. dollars at the rates prevailing as of the balance sheet date. The equity of Kite Pharma EU will be translated into U.S. dollars at the historical rate at which such equity was recorded. Any translation impact will be recognized in other comprehensive income for the period. The operating results of Kite Pharma EU are translated into U.S. dollars using the average exchange rates for the period correlating with those operating results.

 

Income Taxes

The Company provides for income taxes based on pretax income, if any, and applicable tax rates available in the various jurisdictions in which the Company operates. Deferred income taxes are recorded for the expected tax consequences of temporary differences between the bases of assets and liabilities for financial reporting purposes and amounts recognized for income tax purposes. A valuation allowance is recorded to reduce the Company’s deferred tax assets to the amount of future tax benefit that is more likely than not to be realized.

Equity Investments and Business Combinations

For equity investments in other companies, the Company utilizes the cost method of accounting when it does not have the ability to exercise significant influence over the investee. For equity investments where the Company has the ability to exercise significant influence, the Company utilizes the equity method of accounting in accordance with ASC Topic 323, Investments – Equity Method and Joint Ventures.

For business combinations, the Company utilizes the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations. These standards require that the total cost of an acquisition be allocated to the tangible and intangible assets acquired and liabilities assumed based on their respective fair values at the date of acquisition. The allocation of the purchase price is dependent upon certain valuations and other studies. Acquisition costs are expensed as incurred. The Company recognizes separately from goodwill the fair value of assets acquired and the liabilities assumed. Goodwill as of the acquisition date is measured as the excess of consideration transferred and the acquisition date fair values of the assets acquired and liabilities assumed. While the Company uses its best estimates and assumptions as a part of the purchase price allocation process to accurately value assets acquired and liabilities

6


assumed at the acquisition date, the Company’s estimates are subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company may retroactively record adjustments to the fair value of the assets acquired and liabilities assu med, with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the Company’ s condensed consolidated statements of operations.

Goodwill and Other Intangible Assets

Certain intangible assets were acquired as part of a business combination, and have been capitalized at their acquisition date fair value. Acquired definite life intangible assets are amortized using the straight-line method over their respective estimated useful lives, which are evaluated whenever events or circumstances would indicate that an adjustment to the estimated useful lives would be appropriate.  The Company will additionally test its goodwill and indefinite life intangible assets for impairment annually, or whenever events or changes in circumstances indicate an impairment may have occurred. Impairment may result from, among other things, deterioration in the performance of the acquired business, adverse market conditions, adverse changes in applicable laws or regulations and a variety of other circumstances. If the Company determines that an impairment has occurred, it is required to record a write-down of the carrying value and charge the impairment as an operating expense in the period the determination is made. In evaluating the recoverability of the carrying value of goodwill and other intangible assets, the Company must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the acquired assets. Changes in strategy or market conditions could significantly impact those judgments in the future and require an adjustment to the recorded balances. The Company tests its goodwill for impairment annually during the fourth quarter and more frequently if events or changes in circumstances indicate that it is more likely than not that the asset is impaired.

Property and Equipment

Property and equipment is recorded at historical cost, net of accumulated depreciation, amortization and, if applicable, impairment charges. The Company reviews its property and equipment assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Depreciation is provided over the assets’ useful lives on a straight-line basis, generally over a three to seven year time period. Leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or lease terms. See Note 5 for further discussion regarding property and equipment.

Consolidation

The Company’s condensed consolidated financial statements include the accounts of its subsidiary, Kite Pharma EU. Intercompany balances and transactions have been eliminated during consolidation.

Patent Costs

The costs related to acquiring patents and to prosecuting and maintaining intellectual property rights are charged to general and administrative expense as incurred due to the uncertainty surrounding the drug development process and the uncertainty of future benefits. Expenses related to patents were $1.2 million and $0.3 million for the three months ended June 30, 2016 and 2015, respectively and were $1.4 million and $0.3 million for the six months ended June 30, 2016 and 2015, respectively.

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following as of June 30, 2016 and December 31, 2015 (in thousands):

 

 

JUNE 30,

2016

 

 

DECEMBER 31,

2015

 

Accrued compensation costs

$

9,017

 

 

$

6,630

 

Accrued research and development costs

 

4,374

 

 

 

796

 

Accrued legal expenses

 

925

 

 

 

449

 

Stock option early exercise liability

 

673

 

 

 

940

 

Accrued clinical expenses

 

2,323

 

 

 

999

 

Deferred rent and capital lease obligations

 

591

 

 

 

101

 

Tenant improvement liabilities - short term

 

313

 

 

 

300

 

Accrued patent costs

 

106

 

 

 

156

 

Accrued related party costs

 

104

 

 

 

89

 

Accrued other expense

 

1,624

 

 

 

1,327

 

Total accrued expenses and other current liabilities

$

20,050

 

 

$

11,787

 

7


 

Revenues

On December 31, 2014, the Company entered into a research and collaboration and license agreement with Amgen Inc. (“Amgen”) to develop and commercialize CAR-based product candidates directed against a number of Amgen cancer targets (the “Amgen Agreement”). To date, revenue has been limited to a portion of the upfront payment the Company received under the Amgen Agreement, reimbursed research and development costs relating to the Amgen targets and a portion of the upfront payment the Company received under a research, development and commercialization agreement with the Leukemia & Lymphoma Society, Inc. (“LLS”) ; see Note 6 – License and Collaboration Agreements for more information. The Company received an upfront payment of $60.0 million from Amgen in February 2015. Amgen will fund the research and development costs for all programs with certain limitations through any investigational new drug application (“IND”) filing. Each company will then be responsible for clinical development and commercialization of their respective therapeutic candidates, including all related expenses. The Company may be responsible for the manufacturing and processing of Amgen program product candidates for a certain period following the completion of any Phase 2 clinical trials under a separately negotiated supply agreement, should Amgen choose not to transition manufacturing to itself or to a mutually agreed upon designee of Amgen.

The Company applied the FASB Accounting Standards Update No. 2009-13, Multiple-Deliverable Revenue Arrangements, in evaluating the appropriate accounting for the upfront payment and research funding under the Amgen Agreement. In accordance with this guidance, the Company concluded that the Amgen Agreement should be accounted for as a single unit of accounting and recognize the Amgen Agreement consideration in the same manner as the final deliverable, which is research service. The $60.0 million upfront payment was recorded as deferred revenue and is being recognized over a four-year period, which is the estimated period of performance for the research service under this agreement. In addition, the Amgen research funding relating to Amgen targets, which is due as the related services are performed under the Amgen Agreement, is recorded as revenue on a time and material basis, with the corresponding cost of revenue recorded as research and development expense in the condensed consolidated statements of operations.

Under certain circumstances, the Company may be required to reimburse Amgen for research and development services for Company targets. The Company will defer the recognition of revenue related to research and development services billed until the potential reimbursement contingency has lapsed. Any costs reimbursed by Amgen that relate to a Company program that progresses to an IND filing are recorded as deferred revenue until either an IND is filed and we are required to reimburse Amgen for such expenses, or the program ends without an IND filing, at which point the revenue would be recognized.  

During the three months ended June 30, 2016 and 2015, the Company recognized $4.7 million and $4.4 million of revenue under the Amgen Agreement, respectively and recognized $9.8 million and $7.3 million of revenue for the six months ended June 30, 2016 and 2015, respectively. As of June 30, 2016, the Company had deferred revenue relating to the Amgen Agreement of $40.1 million.

In the future, the Company may be eligible for development, regulatory and commercial milestone payments under the Amgen Agreement. The Company recognizes revenue related to the milestones under the Amgen Agreement in accordance with the Accounting Standards Codification 605-28, Milestone Method of Revenue Recognition (“ASC 605-28”). At the inception of the arrangement we evaluate whether each milestone is substantive and at risk. This evaluation includes an assessment of whether: (i) the consideration is commensurate with either the Company’s performance to achieve the milestone or the enhancement of the value of the delivered item(s) as a result of a specific outcome resulting from the Company’s performance to achieve the milestone; (ii) the consideration relates solely to past performance; and (iii) the consideration is reasonable relative to all of the deliverables and payment terms within the arrangement. The Company has concluded that all of the development and regulatory milestones pursuant to its collaboration with Amgen are substantive and at risk. Thus, in accordance with ASC 605-28, revenue will be recognized in its entirety upon successful accomplishment of the milestone, assuming all other revenue recognition criteria are met.

Milestones related to sales-based activities may be triggered upon meeting net sales benchmarks. Under the Amgen Agreement, the achievement of these commercial milestones is solely dependent on Amgen’s performance, and there are no continuing performance obligations from the Company. These commercial milestones would be achieved after the completion of the Company’s development activities. Revenue from commercial milestone payments will be accounted for as royalties and recorded as revenue upon achievement of the milestone, assuming all other revenue recognition criteria are met.

8


General and Administrative Expenses

General and administrative expenses consist primarily of salaries and other related costs, including stock-based compensation, for personnel in executive, commercial, finance, accounting, legal, investor relations, facilities, patent prosecution, business development and human resources functions. Other significant costs include facility costs not otherwise included in research and development expenses, legal fees relating to corporate matters, sublicense royalties, insurance, public company expenses relating to maintaining compliance with NASDAQ listing rules and SEC requirements, insurance and investor relations costs, and fees for accounting and consulting services. General and administrative costs are expensed as incurred, and the Company accrues for services provided by third parties related to the above expenses by monitoring the status of services provided and receiving estimates from its service providers, and adjusting its accruals as actual costs become known.

Research and Development

Research and development costs are expensed as incurred. Expenses related to collaborative research and development activities approximate the revenue recognized under these agreements. Research and development costs consist of salaries and benefits, including associated stock-based compensation, laboratory supplies and facility costs, as well as fees paid to other entities that conduct certain research and development activities on our behalf and payments made pursuant to license agreements. Clinical trial and other development costs incurred by third parties are expensed as the contracted work is performed. The Company accrues for costs incurred as the services are being provided by monitoring the status of the trial or project and the invoices received from its external service providers. The Company adjusts its accrual as actual costs become known. Where contingent milestone payments are due to third parties under research and development arrangements or license agreements, the milestone payment obligations are expensed when the milestone results are achieved.

Stock-Based Compensation

Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the required service period, which is generally equal to the vesting period. Stock-based compensation is recognized only for those awards that are ultimately expected to vest. Common stock, stock options, and warrants or other equity instruments issued to non-employees, including consultants and members of the Company’s Scientific Advisory Board as consideration for goods or services received by the Company, are accounted for based on the fair value of the equity instruments issued unless the fair value of the consideration received can be more reliably measured. The fair value of stock options is determined using the Black-Scholes option-pricing model. The fair value of any options issued to non-employees is marked to market each period and recorded as expense over the vesting period. The fair value of a restricted stock unit (“RSU”) equals the closing price of our common stock on the grant date. Proceeds from options exercised by employees prior to vesting pursuant to an early exercise provision, the related shares of which the Company has the option to repurchase prior to the vesting date should employment of the early exercised option holder be terminated, are recognized as a liability until the shares vest.

Net Loss per Common Share

Basic net loss per share is computed by dividing the net loss attributable to common shareholders by the weighted-average number of common shares outstanding. Diluted net loss per share is computed similarly to basic net loss per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive.

For all periods presented, potentially dilutive securities are excluded from the computation of fully diluted loss per share as their effect is anti-dilutive.

As of June 30, 2016 and 2015, potentially dilutive securities include:

 

 

JUNE 30,

 

 

2016

 

 

2015

 

Warrants to purchase common stock

 

148,444

 

 

 

148,444

 

Unvested restricted stock units

 

401,286

 

 

 

 

Unvested early exercise options

 

595,032

 

 

 

1,387,580

 

Options to purchase common stock

 

4,275,490

 

 

 

5,900,011

 

Total

 

5,420,252

 

 

 

7,436,035

 

 

9


The unvested early exercised options represent stock options that were exercised pursuant to an early exercise provision in the option agreements of an employee. The Company has the option to repurchase these shares if they do not vest prior to the termination of this employee.

The following table details those securities which have been excluded from the computation of potentially dilutive securities as their exercise prices are greater than the fair market price per common share as of June 30, 2016 and 2015, respectively.

 

 

JUNE 30,

 

 

2016

 

 

2015

 

Options to purchase common stock

 

4,090,650

 

 

 

780,000

 

 

Amounts in the tables above reflect the common stock equivalents of the noted instruments.  

The following table summarizes the calculation of unaudited basic and diluted net loss per common share for the three and six months ended June 30, 2016 and 2015 (in thousands, except share and per share amounts):

 

 

THREE MONTHS ENDED

 

 

SIX MONTHS ENDED

 

 

JUNE 30,

 

 

JUNE 30,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

$

(64,274

)

 

$

(20,892

)

 

$

(108,189

)

 

$

(35,979

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

50,046,668

 

 

 

44,826,366

 

 

 

49,959,382

 

 

 

44,721,065

 

Less: weighted-average unvested common shares subject to

   repurchase

 

(889,963

)

 

 

(1,577,017

)

 

 

(1,082,591

)

 

 

(1,861,357

)

Weighted-average shares used to compute net loss per

   share, basic and diluted

 

49,156,705

 

 

 

43,249,349

 

 

 

48,876,791

 

 

 

42,859,708

 

Net loss per common share, basic and diluted

$

(1.31

)

 

$

(0.48

)

 

$

(2.21

)

 

$

(0.84

)

 

Recent Accounting Pronouncements

 

In March 2016, the FASB issued ASU No. 2016-07, Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting. The new standard no longer requires that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an adjustment must be made to the investment, results of operations and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The Company elected to adopt the new standard during the quarter ended June 30, 2016. See Note 12 for further discussion regarding the impact on our financial position or results of operations.

 

 

NOTE 4 FAIR VALUE MEASUREMENTS AND INVESTMENTS IN MARKETABLE SECURITIES

The Company follows authoritative accounting guidance, which among other things, defines fair value, establishes a consistent framework for measuring fair value and provides disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability.

As a basis for considering such assumptions, a three-tier fair value hierarchy has been established, which prioritizes the inputs used in measuring fair value as follows:

 

Level 1 :

Observable inputs such as unadjusted quoted prices in active markets for identical assets or liabilities.

 

Level 2 :

Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

 

Level 3 :

Unobservable inputs that reflect the reporting entity’s own assumptions.

The carrying amounts of the Company’s prepaid expenses, other current assets, accounts payable and accrued liabilities are generally considered to be representative of their fair value because of the short nature of these instruments. No transfers between levels have occurred during the periods presented.

10


Assets and liabilities measured at fair value on a recurring basis as of June 30, 2016 is as follows (in thousands):

 

 

 

 

 

 

 

Fair Value Measurements Using

 

 

 

 

 

 

 

Quoted Prices

 

 

Significant

 

 

 

 

 

 

 

 

 

 

 

in Active

 

 

Other

 

 

Significant

 

 

 

Balance as of

 

 

Markets for

 

 

Observable

 

 

Unobservable

 

 

 

June 30,

 

 

Identical Assets

 

 

Inputs

 

 

Inputs

 

 

 

2016

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted cash

 

$

3,663

 

 

$

3,663

 

 

$

 

 

$

 

Money market funds (1)

 

 

40,344

 

 

 

40,344

 

 

 

 

 

 

 

Commercial paper (2)

 

 

17,231

 

 

 

 

 

 

17,231

 

 

 

 

Corporate debt securities

 

 

136,514

 

 

 

 

 

 

136,514

 

 

 

 

Government-related debt securities (3)

 

 

280,888

 

 

 

 

 

 

280,888

 

 

 

 

Total assets

 

$

478,640

 

 

$

44,007

 

 

$

434,633

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

16,685

 

 

$

 

 

$

 

 

$

16,685

 

 

(1)

Included within cash and cash equivalents on the Company’s condensed consolidated balance sheets.

(2)

$10.0 million of commercial paper had an original maturity of less than 90 days, and were included within cash and cash equivalents on the Company’s condensed consolidated balance sheets.

(3)

$63.7 million of government-related debt securities had an original maturity of less than 90 days, and were included within cash and cash equivalents on the Company’s condensed consolidated balance sheets.

The Company’s investments in money market funds are valued based on publicly available quoted market prices for identical securities as of June 30, 2016. The Company determines the fair value of corporate bonds and other government-sponsored enterprise related securities with the aid of valuations provided by third parties using proprietary valuation models and analytical tools. These valuation models and analytical tools use market pricing or prices for similar instruments that are both objective and publicly available, including matrix pricing or reported trades, benchmark yields, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids and/or offers.

Additionally, the Company has incurred contingent consideration obligations in connection with the acquisition of Kite Pharma EU.  These contingent consideration obligations are recorded at their estimated fair value, and are revalued when an event takes place or information becomes available that would indicate that the value of these obligations has changed, until such time that the contingencies related to these obligations are resolved. The value of the contingent consideration is accreted every reporting period based on the passage of time, using the discount rates used during their initial determination as of the acquisition date with a corresponding charge to interest expense. During the three and six months ended June 30, 2016 the Company recorded $0.2 million and $0.3 million respectively as interest expense related to contingent consideration accretion, and there were no other changes in the fair value of the contingent consideration as of June 30, 2016. The fair value measurements of these obligations are based on significant unobservable inputs related to sales and development milestones related to the Kite Pharma EU business combination and are reviewed periodically by management. These inputs include the estimated probabilities and timing of achieving specified development and sales milestones, as well as the discount rate used to determine the present value of these milestones. Significant changes that would increase or decrease the probabilities or timing of achieving the development and sales milestones would result in a corresponding increase or decrease in the fair value of the contingent consideration obligations, which would be recognized in other income (expense) in the condensed consolidated statements of operations.

11


Investments classified as available-for-sale at June 30, 2016 consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

Aggregate

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Estimated

 

 

 

Maturity (in years)

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

Marketable Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper (1)

 

1 year or less

 

$

17,231

 

 

$

 

 

$

 

 

$

17,231

 

Corporate debt securities

 

1 year or less

 

 

70,597

 

 

 

52

 

 

 

(11

)

 

 

70,638

 

Corporate debt securities

 

1-2 years

 

 

60,342

 

 

 

202

 

 

 

(9

)

 

 

60,535

 

Corporate debt securities

 

More than 2 years

 

 

5,297

 

 

 

44

 

 

 

 

 

 

5,341

 

Government-related debt securities (2)

 

1 year or less

 

 

201,676

 

 

 

58

 

 

 

 

 

 

201,734

 

Government-related debt securities

 

1-2 years

 

 

38,373

 

 

 

91

 

 

 

(2

)

 

 

38,462

 

Government-related debt securities

 

More than 2 years

 

 

40,551

 

 

 

141

 

 

 

 

 

 

40,692

 

Total available-for-sale securities

 

 

 

$

434,067

 

 

$

588

 

 

$

(22

)

 

$

434,633

 

 

(1)

$10.0 million of commercial paper had an original maturity of less than 90 days, and were included within cash and cash equivalents on the Company’s condensed consolidated balance sheets.

(2)

$63.7 million of government-related debt securities had an original maturity of less than 90 days, and were included within cash and cash equivalents on the Company’s condensed consolidated balance sheets.

The Company recognizes realized gains or losses on sales or maturities of available-for-sale securities as net interest income.  Unrealized gains and losses on available-for-sale securities are included as a component of comprehensive income (loss).   At June 30, 2016, the aggregate fair value of securities held by the Company in an unrealized loss position was $44.9 million, which consisted of 24 securities. Of these securities, four securities have been in an unrealized loss position for more than twelve months, but have an aggregate unrealized loss of less than $4,000. Accordingly, the Company does not believe an impairment is necessary on any of these securities at this time. The Company does not intend to sell these investments and it is not likely that the Company will be required to sell these investments before recovery of their amortized cost basis. The Company reviews its investments to identify and evaluate investments that have an indication of possible other-than-temporary impairment. Factors considered in determining whether a loss is other-than-temporary include the length of time and extent to which fair value has been less than the cost basis, the financial condition and near-term prospects of the investee, and the Company’s intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value.

NOTE 5—PROPERTY AND EQUIPMENT

Property and equipment, consists of the following as of June 30, 2016 and December 31, 2015 (in thousands):

 

 

JUNE 30,

 

 

DECEMBER 31,

 

 

2016

 

 

2015

 

Laboratory equipment

$

17,290

 

 

$

9,392

 

Computer equipment and software

 

2,579

 

 

 

1,715

 

Office equipment and furniture

 

2,274

 

 

 

1,918

 

Leasehold improvements

 

23,774

 

 

 

3,595

 

Construction in progress

 

699

 

 

 

15,314

 

 

 

46,616

 

 

 

31,934

 

Less: accumulated depreciation and amortization

 

(4,150

)

 

 

(1,818

)

Property and equipment, net

$

42,466

 

 

$

30,116

 

 

Depreciation and amortization expense related to property and equipment was $1.6 million and $0.3 million for the three months ended June 30, 2016 and 2015, respectively and was $2.4 million and $0.4 million for the six months ended June 30, 2016 and 2015, respectively. The net book value of assets under capital leases at June 30, 2016 and December 31, 2015 was $0.2 million and $0.2 million respectively, net of accumulated depreciation of $0.2 million and $0.1 million, respectively .

 

 

12


  NOTE 6—LICENSE AND COLLABORATION AGREEMENTS

Cooperative Research and Development Agreements with the NCI

In August 2012, the Company entered into a Cooperative Research and Development Agreement (the “CRADA”) with the U.S. Department of Health and Human Services, as represented by the NCI for the research and development of novel engineered peripheral blood autologous T cell therapeutics for the treatment of multiple cancer indications. This collaboration with the Surgery Branch at the NCI, provides the Company with access to inventions resulting from the CRADA work relating to the current and future clinical product pipeline of autologous peripheral blood T cells, engineered with the NCI’s proprietary tumor-specific TCRs and CARs, directed to multiple hematological and solid tumor types. The CRADA will help support the development of certain technologies licensed from the National Institutes of Health (“NIH”). Pursuant to the CRADA, the NCI will provide scientific staff and other support necessary to conduct research and related activities as described in the CRADA.

The CRADA had a five-year term commencing August 31, 2012 and expiring on August 30, 2017. On February 24, 2015, the Company amended the CRADA by expanding the research plan. To support the additional research activities under the amended CRADA, beginning in the first quarter of 2015, the Company’s quarterly payments to the NCI increased from $250,000 to $750,000. Total expenses recognized under the CRADA were $0.8 million and $0.8 million for the three months ended June 30, 2016 and 2015, respectively and were $1.5 million and $1.2 million for the six months ended June 30, 2016 and 2015, respectively.

Pursuant to the terms of the CRADA, the Company has agreed to hold the NCI harmless and to indemnify the NCI from all liabilities, demands, damages, expenses and losses arising out of the Company’s use for any purpose of the data generated, materials produced or inventions discovered in whole or in part by NCI employees under the CRADA, unless due to their negligence or willful misconduct. The CRADA may be terminated at any time upon the mutual written consent of the Company and NCI. The Company or NCI may unilaterally terminate the CRADA at any time by providing written notice at least 60 days before the desired termination date.

Pursuant to the terms of the CRADA, the Company has an option to elect to negotiate an exclusive or nonexclusive commercialization license to any inventions discovered in the performance of the CRADA, whether solely by an NCI employee or jointly with a Company employee for which a patent application has been filed.

The parties jointly own any inventions and materials that are jointly produced by employees of both parties in the course of performing activities under the CRADA.

Cabaret License

On December 12, 2013, the Company entered into an exclusive, worldwide license agreement, including the right to grant sublicenses, with Cabaret Biotech Ltd. (“Cabaret”) and Dr. Zelig Eshhar relating to certain intellectual property and know-how (the “Licensed IP”) owned or controlled by Cabaret (the “Cabaret License”) for use in the treatment of oncology and such other fields as may be agreed to by the parties. Should Cabaret propose to enter into an agreement with a third party relating to the use of the Licensed IP outside of oncology (“Additional Indications”), then Cabaret shall notify the Company in writing and the Company shall have a 60-day right of first negotiation to acquire a license to the Licensed IP in such Additional Indications.

The Company shall be required to make cash milestone payments upon successful completion of clinical and regulatory milestones in the United States and certain major European countries relating to each product covered by the Cabaret License (each, a “Cabaret Licensed Product”). The aggregate potential milestone payments are $3.9 million for each of the first two Cabaret Licensed Products, of which $3.0 million is due only after marketing approval in the United States and at least one major European country. Thereafter, for each subsequent Cabaret Licensed Product such aggregate milestone payments shall be reduced to $2.7 million. The first milestone payment was due upon the acceptance of an IND application by the FDA for the first Cabaret Licensed Product, and was paid during the first quarter of 2015. The Company has also agreed to pay Cabaret royalties on net sales of Cabaret Licensed Products at rates in the mid-single digits. Prior to the first commercial sale of a Cabaret Licensed Product, the Company will pay Cabaret an annual license fee equal to $30,000. To the extent the Company enters into a sublicensing agreement relating to a Cabaret Licensed Product, the Company is required to pay Cabaret a percentage of all non-royalty income received as well as payment on Cabaret’s behalf of any applicable taxes due, which percentage will decrease based upon the stage of development of the Cabaret Licensed Product at the time of sublicensing.

The Company has agreed to defend, indemnify and hold Dr. Eshhar, Cabaret, its affiliates, directors, officers, employees and agents, and if applicable certain other parties, harmless from all losses, liabilities, damages and expenses (including attorneys’ fees and costs) incurred as a result of any claim, demand, action or proceeding to the extent resulting from (a) any breach of the Cabaret License by the Company or its sublicensees, (b) the gross negligence or willful misconduct of the Company or its sublicensees in the performance of its obligations under this Cabaret License, or (c) the manufacture, development, use or sale of Cabaret Licensed Products by the Company or its sublicensees, except in each case to the extent arising from the gross negligence or willful misconduct of Cabaret or Dr. Eshhar or the breach of this Agreement by Dr. Eshhar or Cabaret.

13


The Cabaret License expires on a product-by-product and country-by-country basis on the date on which the Company, its affiliates and sublicensees permanently cease to research, develop, sell and commercialize the Cabaret Licensed Products in such country. Either party may terminate the Cabaret License in the event of a material breach of the agreement that remains uncured following the date that is 60 days from the date that the breaching party is provided with written notice by the non-breaching party. Additionally, the Company may term inate the Cabaret License at its sole discretion at any time upon 30 days written notice to Cabaret and Dr. Eshhar, provided, however, that if the Company elects to terminate the Cabaret License for convenience at any time prior to the third anniversary of the Cabaret License, then the Company will be obligated to pay Cabaret a termination fee equal to $500,000.

Due to the receipt of the $60.0 million upfront license payment from Amgen in connection with the Amgen Agreement, in April 2015 the Company paid $13.8 million to Cabaret as a sublicense fee, which includes $1.8 million of applicable taxes paid on Cabaret’s behalf as required under the Cabaret License. As of June 30, 2016, a $3.5 million deferred asset was recorded under the other current assets caption on the consolidated balance sheets, and a $5.4 million non-current deferred asset was recorded under the other assets caption of the consolidated balance sheets. Both of these amounts will be recognized as sublicense fee expense within general and administrative expense on a straight-line basis over the same period as the license income. For the three months ended June 30, 2016 and 2015, the Company recorded $0.9 million and $0.8 million in sublicense fee expense related to the Cabaret license, respectively and $1.9 million and $1.5 million for the six months ended June 30, 2016 and 2015, respectively.

December 2014 NIH License Agreement

Pursuant to a patent license agreement with the NIH, dated December 31, 2014, the Company holds an exclusive, worldwide license to certain intellectual property related to TCR-based product candidates that target HPV antigens E6 and E7 of the HPV subtype 16.

The Company is required to make performance-based payments upon successful completion of clinical and regulatory benchmarks relating to the licensed products. The aggregate potential benchmark payments for each licensed product are $6.0 million, of which aggregate payments of $5.0 million are due only after marketing approval in the United States or in Europe, Japan, China or India. The first benchmark payment of $50,000 will be due upon the commencement of the Company’s first sponsored Phase 1 clinical trial.

In addition, the Company is required to pay the NIH one-time benchmark payments following aggregate net sales of up to $1.0 billion of licensed products. The aggregate potential amount of these benchmark payments is $7.0 million. The Company must also pay the NIH royalties on net sales of products covered by this license at rates in the mid-single digits. To the extent the Company enters into a sublicensing agreement relating to a licensed product, the Company is required to pay the NIH a percentage of all consideration received from a sublicensee, which percentage will decrease based on the stage of development of the licensed product at the time of the sublicense. Any such sublicense payment is subject to a certain cap.

The license will expire upon expiration of the last patent contained in the licensed patent rights, unless terminated earlier. None of the applications included in the NIH licensed patent rights have issued yet. Any patents issuing from these applications will have a base expiration date no earlier than 2034. The NIH may terminate or modify the license in the event of a material breach, including if the Company does not meet certain milestones by certain dates, or upon certain insolvency events that remain uncured following the date that is 90 days following written notice of such breach or insolvency event. The Company may terminate the license, or any portion thereof, at its sole discretion at any time upon 60 days written notice to the NIH. In addition, the NIH has the right to require the Company to sublicense the rights to the product candidates covered by the license upon certain conditions, including if the Company is not reasonably satisfying required health and safety needs or if the Company is not satisfying requirements for public use as specified by federal regulations.

The expenses recognized under the NIH license were not material for the three and six months ended June 30, 2016 and 2015, respectively.

October 2015 NIH License Agreement

Pursuant to a patent license agreement with the NIH, dated October 1, 2015, the Company holds an exclusive, worldwide license to certain intellectual property related to TCR-based product candidates directed against MAGE A3 and A3/A6 antigens for the treatment of tumors expressing MAGE.  Pursuant to the terms of this license, the Company paid the NIH a cash payment in the aggregate amount of $1.2 million in November 2015.

The Company is required to make performance-based payments upon successful completion of clinical and regulatory benchmarks relating to the licensed products. The aggregate potential benchmark payments for each licensed product are $8.4 million, of which aggregate payments of $6.0 million are due only after marketing approval in the United States or in Europe, Japan, China or India. Also, a benchmark payment of $150,000 will be due upon the commencement of the Company’s first sponsored Phase 1 clinical trial for each licensed product in each indication.

14


In addition, the Company is required to pay the NIH one-time benchmark payments following aggregate net sales of up to $1.0 billion of licensed products. The aggregate potent ial amount of these benchmark payments is $12.0 million. The Company must also pay the NIH royalties on net sales of products covered by this license at rates in the mid-single digits. To the extent the Company enters into a sublicensing agreement relating to a licensed product, the Company is required to pay the NIH a percentage of all consideration received from a sublicensee, which percentage will decrease based on the stage of development of the licensed product at the time of the sublicense. Any such s ublicense payment is subject to a certain cap.

The license will expire upon expiration of the last patent contained in the licensed patent rights, unless terminated earlier. None of the applications included in the NIH licensed patent rights have issued yet. Any patents issuing from these applications will have a base expiration date no earlier than 2032. The NIH may terminate or modify the license in the event of a material breach, including if the Company does not meet certain milestones by certain dates, or upon certain insolvency events that remain uncured following the date that is 90 days following written notice of such breach or insolvency event. The Company may terminate the license, or any portion thereof, at its sole discretion at any time upon 60 days written notice to the NIH. In addition, the NIH has the right to require the Company to sublicense the rights to the product candidates covered by the license upon certain conditions, including if the Company is not reasonably satisfying required health and safety needs or if the Company is not satisfying requirements for public use as specified by federal regulations.

The expenses recognized under the NIH license were not material for the three and six months ended June 30, 2016 and 2015, respectively.

Amgen Research Collaboration and License Agreement

On December 31, 2014, the Company entered into the Amgen Agreement, pursuant to which the Company and Amgen expect to develop and commercialize CAR-based product candidates directed against a number of Amgen cancer targets. Under the terms of the Amgen Agreement, the Company and Amgen will jointly create preclinical development plans through IND filing with the FDA for the research and development of CAR-based product candidates that target certain antigens expressed on the cell surface of various cancers. The Company and Amgen expect to progress multiple Amgen programs, each consisting of the development of one or more CAR-based product candidates directed against a certain Amgen selected cancer target. The Company and Amgen also expect to progress multiple Company programs, each consisting of the development of one or more CAR-based product candidates directed against a certain Company selected cancer target. Under certain circumstances, the collaboration may be expanded to include the research and development of other product candidates.

The Company received an upfront payment of $60.0 million from Amgen in February 2015 as partial consideration for the rights granted to Amgen by the Company for access to the Company platform technology and the Company undertaking preclinical development under certain programs. Amgen will fund the research and development costs for all programs with certain limitations through any IND filing. The Company will reimburse Amgen for the research and development costs for any Company program that progresses to an IND filing, to the extent that Amgen had previously paid the Company for any such research and development costs. Each party will then be responsible for clinical development and commercialization of their respective therapeutic candidates, including all related expenses.

The Company will be responsible for the manufacturing and processing of Amgen program product candidates for a certain period following the completion of any Phase 2 clinical trials under a separately negotiated supply agreement, should Amgen choose not to transition manufacturing to itself or to a mutually agreed upon designee of Amgen. The Company will be eligible to receive a $100.0 million milestone payment upon receipt of the first marketing approval for the first Amgen product from each Amgen program to achieve approval and up to $425.0 million in commercial milestone payments for each Amgen program, based on the Amgen program products meeting certain net sales benchmarks in a calendar year, plus tiered high single to double digit royalties for sales and the license of the Company’s intellectual property for CAR-based product candidates. Amgen will be eligible to receive a $100 million milestone payment upon receipt of the first marketing approval for the first Company product from each Company program to achieve approval and up to $425.0 million in commercial milestone payments for each Company program, based on the Company program products meeting certain net sales benchmarks in a calendar year, plus tiered single digit sales royalties. The Company does not expect any milestones to be achieved or paid until 2021 at the earliest, as all of the collaboration product candidates are currently in the pre-clinical stage.

In addition, Amgen has a one-time option to convert a Company program to an Amgen program for a fee of $35.0 million at any time on or prior to the 60th day after the later of (a) delivery of a final report with data for use in an IND and (b) filing of the IND for the first Company product candidate from a Company program and delivery of such IND to Amgen. This option shall exclude the first and second Company programs for which the Company has filed an IND on the Company program product candidate.  In addition to the milestones described above that would be applicable to the converted Company program, the Company shall be eligible to receive additional milestones of $50.0 million upon the initiation of the first Phase 3 clinical trial for the first product from the converted Company program and $50.0 million upon receipt of marketing approval for a second indication from the converted Company program.

15


The term of the Amgen Agreement will continue on a target-by-target basis until the later o f (1) the date on which the product candidates directed against the target are no longer covered by certain intellectual property rights, (2) the loss of certain regulatory exclusivity and (3) a defined term from the first commercial sale of the first prod uct candidate directed against the target. Either party may terminate the agreement on a target-by-target basis with respect to its own programs with prior written notice. Either party may also terminate the agreement with written notice upon material brea ch by the other party, if such breach has not been cured within a defined period of receiving such notice.

During the three months ended June 30, 2016 and 2015, the Company recognized $4.7 million and $4.4 million of revenue under the Amgen Agreement, respectively and recognized $9.8 million and $7.3 million of revenue for the six months ended June 30, 2016 and 2015, respectively. As of June 30, 2016, the Company had deferred revenue relating to the Amgen Agreement of $40.1 million .

Research, Development and Commercialization Agreement with the Leukemia & Lymphoma Society, Inc.

On June 30, 2015, the Company and LLS entered into a research, development and commercialization agreement to enhance the development of the Company’s lead product candidate, KTE-C19.  Under the agreement, LLS will contribute up to $2.5 million through its Therapy Acceleration Program to help fund the Company’s ongoing ZUMA-1 clinical trial.

LLS paid the Company $0.5 million in July 2015 and an additional $1.0 million in November 2015. The remaining funding will be provided upon reaching certain clinical milestones over the duration of the Company’s ongoing ZUMA-1 clinical trial. Certain regulatory and commercial milestone payments will be made to LLS, based on the development progress of KTE-C19, or upon certain other events, including the out-licensing to a third party of the rights to develop or commercialize KTE-C19, or if the Company combines with or is sold to another company. 

Under the agreement, LLS will launch a broad scope educational program focusing on CAR T-cell therapy for the treatment of blood cancers, as well as support outreach for clinical trial enrollment. The Company separately paid $0.2 million in July 2015 and will pay an additional $0.2 million each year for two years starting in 2016 to support LLS for its rollout of the education program. The Company determined that this arrangement has identifiable benefits to the Company and the payments to LLS should be recognized as expense rather than reduction of the revenue from conducting the research and development services. This education program enables the Company to access one of the country’s largest voluntary health organizations and its patients and providers’ base to improve patients’ understanding of T cell therapy as a potential treatment for blood cancers and enhance providers’ knowledge of T cell therapy including trials involving KTE-C19. The Company believes that the costs reflect the fair market value of the education program.

The Company considers its agreement with LLS to be a revenue arrangement with multiple deliverables.  The Company determined that the substantive deliverables are limited to the clinical development of KTE-C19, Research Advisory Committee (“RAC”) participation, and participating in LLS activities, which together represented a single unit of accounting. The Company deemed that the participation on the RAC is tied to the development of KTE-C19 and occurs concurrently with the research and development services. Participation on the RAC does not have a separate and stand-alone value, as it is essential to the development of KTE-C19 and the Company has sole responsibility for the research and development activities. Participation in activities for LLS are not considered to have a significant value to LLS as the participation is limited to two times per calendar year and the expected value is immaterial. The Company recorded the $1.5 million upfront payment as deferred revenue, which will be recognized as revenue over the expected development period. The Company recorded $0.1 million and $0.2 million in revenue related to the LLS upfront payment for the three and six months ended June 30, 2016.

License and Research Agreement with Alpine Immune Sciences, Inc.

On October 26, 2015, the Company and Alpine Immune Sciences, Inc. (“AIS”) entered into an exclusive, worldwide license and research agreement to research, develop, and commercialize engineered autologous T cell therapies incorporating two programs from AIS’ transmembrane immunomodulatory protein (“TIP™”) technology.

Under the terms of the Agreement, AIS will conduct initial research to deliver two program TIPs with certain pre-defined characteristics. The Company will then conduct further research on the program TIPs with the goal of demonstrating proof-of-concept. If successful, the Company would further engineer the program TIPs into certain CAR and TCR product candidates that would potentially enhance anti-tumor response.

16


In connection with entering into the Agreement, the Company paid AIS a $5.0 million upfront payment and paid $0.5 million in additional payments to support AIS’ research. The Company recorded $1.8 million to research and development expense, and $3.7 million as a deferred asset that was recognized as research and development expense for certain research and development activities which were performed during the three months ended June 30, 2016. AIS will be eligible to receive up to $530.0 million in total milestone payments based on the successful completion of research, clin ical and regulatory milestones relating to both program TIPs. At the Company’s option, a portion of the milestones may be paid in shares of the Company’s common stock. AIS will also be eligible to receive a low single digit royalty for sales on a licensed product-by-licensed product and country-by-country basis, until the later of (i) the date on which the licensed product is no longer covered by certain intellectual property rights, and (ii) a defined term from the first commercial sale of the licensed pro duct. 

The Company may terminate the agreement with prior written notice after a defined research term. Either party may also terminate the agreement upon certain insolvency events of the other party, or with written notice upon material breach by the other party, if such breach has not been cured within a defined period of receiving such notice.

Research Collaboration and License Agreement with Cell Design Labs, Inc.

On June 1, 2016, the Company entered into a Research Collaboration and License Agreement with Cell Design Labs, Inc. (“Cell Design Labs”) for the development of next generation CAR-based product candidates that incorporate Cell Design Labs’ molecular “on/off switch” technology.

Under the terms of the agreement, Cell Design Labs will be responsible for developing the “on/off switches” for the Company’s CAR T cell pipeline. The Company will receive exclusive worldwide rights to develop and commercialize CAR-based product candidates containing Cell Design Labs’ “on/off switches” directed to certain targets that are associated with acute myeloid leukemia. The Company also has the exclusive option for a pre-defined period to develop and commercialize CAR-based product candidates containing “on/off switches” directed to certain targets that are associated with B-cell malignancies.

Pursuant to the agreement, the Company paid Cell Design Labs a $2.0 million upfront payment and will pay up to an additional $9.0 million during the research and development term to support Cell Design Labs’ research. The Company previously made a $1.0 million equity investment in Cell Design Labs in December 2015 and, in connection with entering into the agreement, the Company made an additional equity investment in Cell Design Labs of approximately $6.0 million. Cell Design Labs will be eligible to receive up to $56.5 million in total milestone payments based on the successful completion of research, clinical, regulatory and commercial milestones. Cell Design Labs will also be eligible to receive tiered single digit royalties for sales on a licensed product-by-licensed product and country-by-country basis, until the date on which the licensed product is no longer covered by certain intellectual property rights.

The Company may terminate the agreement with prior written notice. Either party may also terminate the agreement upon certain insolvency events of the other party, or with written notice upon material breach by the other party, if such breach has not been cured within a defined period of receiving such notice.

 

 

NOTE 7—STOCKHOLDERS’ EQUITY

On December 16, 2014, the Company completed its follow-on offering and sold an additional 3,485,000 shares of its common stock at a price of $54.00 per share.  As a result of the follow-on offering, the Company raised a total of approximately $177.1 million in net proceeds after deducting underwriting discounts and commissions of $10.8 million and offering expenses of $0.3 million. Costs directly associated with the follow-on offering were capitalized and recorded as deferred offering costs prior to the completion of the follow-on offering. These costs have been recorded as a reduction of the proceeds received from the follow-on offering. 

As part of the follow-on public offering, in January 2015, the Company sold an additional 522,750 shares of its common stock at a price of $54.00 per share pursuant to the underwriters’ exercise in full of their over-allotment option.  As a result, the total number of shares sold in the follow-on public offering was 4,007,750 shares, and the Company raised a total of approximately $203.7 million in net proceeds after deducting the underwriting discount and commission of $12.4 million and offering expenses of $0.3 million.

On December 15, 2015, the Company completed an additional follow-on offering and sold an additional 4,168,750 shares of its common stock (inclusive of 543,750 shares of common stock sold by the Company pursuant to the full exercise of an overallotment option granted to the underwriters in connection with the offering) at a price of $69.00 per share.  As a result of this offering, the Company raised a total of approximately $272.6 million in net proceeds after deducting underwriting discounts and commissions of $14.4 million and offering expenses of $0.7 million. Costs directly associated with the offering were capitalized and recorded as deferred offering costs prior to the completion of the follow-on offering. These costs have been recorded as a reduction of the proceeds received from the follow-on offering.   

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NOTE 8—STOCK BASED COMPENSATION

Employee Stock Purchase Plan

During June 2014, the Company’s Board of Directors and stockholders approved and adopted the 2014 Employee Stock Purchase Plan (“ESPP”). The ESPP became effective and the first purchase period began on June 19, 2014. Stock compensation expense related to the ESPP was $0.3 million and $0.5 million for the three and six months ended June 30, 2016.

A maximum of 360,000 shares of our common stock may be sold pursuant to purchase rights under the ESPP, subject to adjustment for stock splits, stock dividends, and comparable restructuring activities.  The ESPP also includes an “evergreen” feature, which provides that an additional number of shares will automatically be added to the shares authorized for issuance under the ESPP on January 1st of each year, beginning on the first January 1 immediately following the effective date of June 19, 2014 and ending on (and including) January 1, 2024. The number of shares added each calendar year will be the lesser of (a) 1% of the total number of shares of the Company’s capital stock (including all classes of the Company’s common stock) outstanding on December 31st of the preceding calendar year, and (b) 720,000 shares.  However, the Board may decide to approve a lower number of shares (including no shares) before January 1 of any year.

In January 2015 in accordance with the evergreen feature of the ESPP, the maximum number of common shares issuable under the ESPP was increased by 440,354 shares to 800,354 shares. In January 2016, the maximum number of common shares issuable under the ESPP was increased by 497,630 to 1,297,984 in accordance with the evergreen feature of the ESPP. During the three and six months ended June 30, 2016, the Company issued 0 shares and 34,608 shares under the ESPP.

The stock purchasable under the ESPP will be shares of authorized but unissued or reacquired common stock, including shares repurchased by the Company on the open market. If a purchase right under the ESPP terminates without having been exercised in full, any shares not purchased under that purchase right will again become available for issuance under the ESPP.

Restricted Stock Units and Stock Options

Eligible employees may receive a grant of RSUs annually with the size and type of award generally determined by the employee’s salary grade and performance level. In addition, certain management and professional level employees typically receive stock options and RSU grants upon commencement of employment. Eligible employees may also receive a grant of stock options annually. Non-employee members of our Board of Directors will receive a grant of RSUs and stock options annually and any future new directors are expected to receive a grant of RSUs and stock options.

The Company’s RSU and stock option grants provide for accelerated or continued vesting in certain circumstances as defined in the plans and related grant agreements, including a termination in connection with a change in control. RSUs generally vest in equal amounts on each of the first four anniversaries of the grant date. Stock options generally vest in a 25% increment upon the first anniversary of the grant date, and in equal monthly amounts for the three years following the one year anniversary of the grant date.

In 2009, the Company established an equity incentive plan (the “Plan”) pursuant to which incentives may be granted to officers, employees, directors, consultants and advisors. Incentives under the Plan may be granted in any one or a combination of the following forms: (a) incentive stock options and non-statutory stock options; (b) stock appreciation rights; (c) stock awards; (d) restricted stock; and (e) performance shares.

The Plan is administered by the Board of Directors of the Company or a committee appointed by the Board of Directors, which determines the types of awards to be granted, including the number of shares subject to the awards, the exercise price and the vesting schedule.

In June 2014, the Board of Directors approved an amendment and restatement of the Plan, increasing the shares of common stock issuable under the Plan to 9,150,000 shares as well as allowing for an automatic annual increase (the “evergreen provision”) to the shares issuable under the Plan to the lower of (i) 5% of the total number of shares of common stock outstanding on December 31 of the preceding calendar year; or (ii) a lower number determined by the Board of Directors (which can also be zero). The term of any stock option granted under the Plan cannot exceed 10 years. Options shall not have an exercise price less than 100% of the fair market value of the Company’s common stock on the grant date, and generally vest over a period of four years. If the individual possesses more than 10% of the combined voting power of all classes of stock of the Company, the exercise price shall not be less than 110% of the fair market value of a common share of stock on the date of grant.

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In January 2015, the number of s hares of common stock available for issuance under the Plan was automatically increased in accordance with the evergreen provision by 2,201,772 shares of common stock, for a total number of shares of common stock issuable under the Plan of 11,351,772 share s.

Under the evergreen provision of the Plan, an additional 2,488,153 shares became authorized and available for future grant on January 1, 2016, for a total number of shares of common stock issuable under the Plan of 13,839,925.

A summary of the status of the options issued under the Plan as of June 30, 2016, and information with respect to the changes in options outstanding is as follows:

 

 

 

 

 

 

 

 

 

 

 

WEIGHTED-

 

 

 

 

 

 

 

 

 

 

 

WEIGHTED-

 

 

AVERAGE

 

 

 

 

 

 

 

OUTSTANDING

 

 

AVERAGE

 

 

REMAINING

 

 

AGGREGATE

 

 

 

STOCK

 

 

EXERCISE

 

 

CONTRACTUAL

 

 

INTRINSIC

 

 

 

OPTIONS

 

 

PRICE

 

 

LIFE (YEARS)

 

 

VALUE

 

Balance at January 1, 2016

 

 

7,393,261

 

 

$

34.18

 

 

 

8.8

 

 

$

211,104,379

 

Granted under the Plans

 

 

1,329,700

 

 

 

48.94

 

 

 

 

 

 

 

 

 

Exercised

 

 

(308,071

)

 

 

3.17

 

 

 

 

 

 

 

 

 

Surrendered/Cancelled

 

 

(48,750

)

 

 

58.20

 

 

 

 

 

 

 

 

 

Balance at June 30, 2016

 

 

8,366,140

 

 

$

37.53

 

 

 

8.5

 

 

$

143,486,239

 

Exercisable at June 30, 2016

 

 

2,737,788

 

 

$

22.27

 

 

 

7.9

 

 

$

82,588,267

 

 

The fair value of each stock option granted has been determined using the Black-Scholes option pricing model. The material factors incorporated in the Black-Scholes model in estimating the fair value of the options granted during the six months ended June 30, 2016 and 2015 included the following:

 

 

SIX MONTHS ENDED

JUNE 30,

 

 

2016

 

 

2015

 

Risk-free interest rate

1.28% - 2.00%

 

 

1.19% - 1.75%

 

Expected volatility

67.9% - 72.7%

 

 

72.0% - 80%

 

Stock price

$39.95 - $61.92

 

 

$50.02 - $72.42

 

Expected life

6.25 years

 

 

6 years

 

Expected dividend yield

 

0%

 

 

 

0%

 

 

Due to the Company’s lack of sufficient history as a publicly traded company, management’s estimate of expected volatility is based on the average volatilities of a sampling of five companies with similar attributes to the Company, including: industry, stage of life cycle, size and financial leverage.

Stock-based compensation for the three and six months ended June 30, 2016 and 2015 is as follows (in thousands):

 

 

THREE MONTHS ENDED

 

 

SIX MONTHS ENDED

 

 

JUNE 30,

 

 

JUNE 30,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Research and development

$

8,472

 

 

$

4,765

 

 

$

16,951

 

 

$

7,544

 

General and administrative

 

11,286

 

 

 

4,616

 

 

 

17,671

 

 

 

8,514

 

Total

$

19,758

 

 

$

9,381

 

 

$

34,622

 

 

$

16,058

 

 

The weighted-average grant date fair value per share of options granted under the Plan was $30.53 and $35.47 for the three months ended June 30, 2016 and 2015, respectively and was $30.96 and $40.28 for the six months ended June 30, 2016 and 2015, respectively.

As of June 30, 2016, total compensation expense not yet recognized related to stock option grants amounted to approximately $170.3 million which will be recognized over the next 2.7 years. Additionally, 595,032 options that were early exercised for total proceeds of $0.7 million were unvested, and were recorded as a current and long term liability, based on their vesting date, on the condensed consolidated balance sheets.

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The following table summarizes information about stock options outstanding as of June 30, 2016:

 

 

 

OUTSTANDING