Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
FORM 10-Q
(Mark One)
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
 
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: 001-35867
 
CHIMERIX, INC.
(Exact Name of Registrant as Specified in Its Charter)  
Delaware
 
33-0903395
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
 
 
 
2505 Meridian Parkway, Suite 100
 
 
Durham, North Carolina
 
27713
(Address of Principal Executive Offices)
 
(Zip Code)
 
(919) 806-1074
(Registrant’s Telephone Number, Including Area Code)
 

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.001 per share
CMRX
The Nasdaq Global Market

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 every Interactive Data File required to be submitted 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 such files).  Yes x   No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  o
 
Accelerated filer  x
Non-accelerated filer  o
 
Smaller reporting company  x
 
 
Emerging growth company  o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o




Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x
 
As of October 31, 2019, the number of outstanding shares of the registrant’s common stock, par value $0.001 per share, was 61,382,263.




CHIMERIX, INC.
 
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2019
 
INDEX
  
 
Page
 
 



2




PART I - FINANCIAL INFORMATION
 
ITEM 1.    CONSOLIDATED FINANCIAL STATEMENTS
 
CHIMERIX, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(unaudited) 
 
 
September 30, 2019
 
December 31, 2018
ASSETS
 
 

 
 

Current assets:
 
 

 
 

Cash and cash equivalents
 
$
19,349

 
$
81,106

Short-term investments, available-for-sale
 
97,366

 
105,424

Accounts receivable
 
1,822

 
330

Prepaid expenses and other current assets
 
7,432

 
2,598

Total current assets
 
125,969

 
189,458

Property and equipment, net of accumulated depreciation
 
910

 
1,210

Operating lease right-of-use assets
 
836

 

Other long-term assets
 
36

 
46

Total assets
 
$
127,751

 
$
190,714

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable
 
$
3,477

 
$
4,691

Accrued liabilities
 
11,957

 
8,275

Total current liabilities
 
15,434

 
12,966

Lease-related obligations
 
369

 
144

Total liabilities
 
15,803

 
13,110


 
 
 
 
Stockholders’ equity:
 
 

 
 

Preferred stock, $0.001 par value, 10,000,000 shares authorized at September 30, 2019 and December 31, 2018; no shares issued and outstanding as of September 30, 2019 and December 31, 2018
 

 

Common stock, $0.001 par value, 200,000,000 shares authorized at September 30, 2019 and December 31, 2018; 61,382,263 and 50,735,279 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively
 
61

 
51

Additional paid-in capital
 
777,133

 
733,907

Accumulated other comprehensive gain (loss), net
 
89

 
(92
)
Accumulated deficit
 
(665,335
)
 
(556,262
)
Total stockholders’ equity
 
111,948

 
177,604

Total liabilities and stockholders’ equity
 
$
127,751

 
$
190,714

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




3




CHIMERIX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except share and per share data)
(unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Contract revenue
 
$
1,958

 
$
369

 
$
5,752

 
$
2,352

Operating expenses:
 
 

 
 

 
 

 
 

Research and development
 
7,453

 
11,892

 
34,795

 
39,963

General and administrative
 
4,024

 
5,187

 
18,022

 
18,575

Acquired in-process research and development
 
65,045

 

 
65,045

 

Total operating expenses
 
76,522

 
17,079

 
117,862

 
58,538

Loss from operations
 
(74,564
)
 
(16,710
)
 
(112,110
)
 
(56,186
)
Other (expense) income:
 
 
 
 
 
 
 
 
Interest income and other, net
 
834

 
631

 
3,037

 
1,668

Net loss
 
(73,730
)
 
(16,079
)
 
(109,073
)
 
(54,518
)
Other comprehensive loss:
 
 

 
 

 
 

 
 

Unrealized (loss) gain on debt investments, net
 
(36
)
 
180

 
182

 
302

Comprehensive loss
 
$
(73,766
)
 
$
(15,899
)
 
$
(108,891
)
 
$
(54,216
)
Per share information:
 
 

 
 

 
 

 
 

Net loss, basic and diluted
 
$
(1.26
)
 
$
(0.33
)
 
$
(2.04
)
 
$
(1.14
)
Weighted-average shares outstanding, basic and diluted
 
58,457,110

 
48,172,354

 
53,519,207

 
47,875,895

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

 

4




CHIMERIX, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
(unaudited) 
 
Common
Stock
 
Additional
Paid-in Capital
 
Accumulated Other
Comprehensive
Gain (Loss)
 
Accumulated
Deficit
 
Total 
Stockholders’
Equity (Deficit)
Balance, December 31, 2018
$
51

 
$
733,907

 
$
(92
)
 
$
(556,262
)
 
$
177,604

Share-based compensation

 
4,073

 

 

 
4,073

Exercise of stock options

 
13

 

 

 
13

Employee stock purchase plan purchases

 
170

 

 

 
170

Comprehensive loss:
 
 
 
 
 
 
 
 
 
Unrealized gain on investments, net

 

 
140

 

 
140

Net loss

 

 

 
(17,693
)
 
(17,693
)
Total comprehensive loss
 
 
 
 
 
 
 
 
(17,553
)
Balance, March 31, 2019
$
51

 
$
738,163

 
$
48

 
$
(573,955
)
 
$
164,307

Share-based compensation

 
2,367

 

 

 
2,367

Exercise of stock options

 
17

 

 

 
17

Employee stock purchase plan purchases

 

 

 

 

Comprehensive loss:
 
 
 
 
 
 
 
 
 
Unrealized gain on investments, net

 

 
77

 

 
77

Net loss

 

 

 
(17,650
)
 
(17,650
)
Total comprehensive loss
 
 
 
 
 
 
 
 
(17,573
)
Balance, June 30, 2019
$
51

 
$
740,547

 
$
125

 
$
(591,605
)
 
$
149,118

Share-based compensation

 
1,529

 

 

 
1,529

Exercise of stock options

 
13

 

 

 
13

Employee stock purchase plan purchases

 
154

 

 

 
154

Issuance of common stock, net of issuance costs
10

 
34,890

 

 

 
34,900

Comprehensive loss:
 
 
 
 
 
 
 
 
 
Unrealized gain on investments, net

 

 
(36
)
 

 
(36
)
Net loss

 

 

 
(73,730
)
 
(73,730
)
Total comprehensive loss
 
 
 
 
 
 
 
 
(73,766
)
Balance, September 30, 2019
$
61

 
$
777,133

 
$
89

 
$
(665,335
)
 
$
111,948



5





 
Common
Stock
 
Additional
Paid-in Capital
 
Accumulated Other
Comprehensive
Gain (Loss)
 
Accumulated
Deficit
 
Total 
Stockholders’
Equity (Deficit)
Balance, December 31, 2017
$
47

 
$
709,514

 
$
(963
)
 
$
(486,788
)
 
$
221,810

Share-based compensation
1

 
3,391

 

 

 
3,392

Exercise of stock options

 
60

 

 

 
60

Employee stock purchase plan purchases

 
358

 

 

 
358

Comprehensive loss:
 
 
 
 
 
 
 
 
 
Unrealized loss on investments, net

 

 
(103
)
 

 
(103
)
Net loss

 

 

 
(19,826
)
 
(19,826
)
Total comprehensive loss
 
 
 
 
 
 
 
 
(19,929
)
Balance, March 31, 2018
$
48

 
$
713,323

 
$
(1,066
)
 
$
(506,614
)
 
$
205,691

Share-based compensation

 
4,035

 

 

 
4,035

Exercise of stock options

 
55

 

 

 
55

Employee stock purchase plan purchases

 

 

 

 

Issuance of common stock, net of issuance costs

 

 

 

 

Comprehensive loss:
 
 
 
 
 
 
 
 
 
Unrealized loss on investments, net

 

 
225

 

 
225

Net loss

 

 

 
(18,613
)
 
(18,613
)
Total comprehensive loss
 
 
 
 
 
 
 
 
(18,388
)
Balance, June 30, 2018
$
48

 
$
717,413

 
$
(841
)
 
$
(525,227
)
 
$
191,393

Share-based compensation

 
3,181

 

 

 
3,181

Exercise of stock options

 

 

 

 

Employee stock purchase plan purchases

 
248

 

 

 
248

Issuance of common stock, net of issuance costs
3

 
10,218

 

 

 
10,221

Comprehensive loss:
 
 
 
 
 
 
 
 
 
Unrealized loss on investments, net

 

 
180

 

 
180

Net loss

 

 

 
(16,079
)
 
(16,079
)
Total comprehensive loss
 
 
 
 
 
 
 
 
(15,899
)
Balance, September 30, 2018
$
51

 
$
731,060

 
$
(661
)
 
$
(541,306
)
 
$
189,144



6




CHIMERIX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited) 
 
 
Nine Months Ended September 30,
 
 
2019
 
2018
Cash flows from operating activities:
 
 

 
 

Net loss
 
$
(109,073
)
 
$
(54,518
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 

 
 

Depreciation of property and equipment
 
451

 
691

Amortization of discount/premium on investments
 
(1,557
)
 
(447
)
Share-based compensation
 
7,969

 
10,608

Fair value of common stock issued for license agreement
 
34,900

 

Unrealized loss on equity investment
 

 
311

(Gain)/loss on sale of investments
 
31

 

Lease-related amortization
 
(57
)
 
(44
)
Changes in operating assets and liabilities:
 
 

 
 

Accounts receivable
 
(1,492
)
 
1,350

Prepaid expenses and other assets
 
178

 
202

Accounts payable and accrued liabilities
 
(3,062
)
 
(3,578
)
Net cash used in operating activities
 
(71,712
)
 
(45,425
)
 
 
 
 
 
Cash flows from investing activities:
 
 

 
 

Purchases of property and equipment
 
(150
)
 
(160
)
Purchases of short-term investments
 
(130,351
)
 
(59,259
)
Purchases of long-term investments
 

 
(6,031
)
Proceeds from sales of short-term investments
 
13,112

 
26,000

Proceeds from maturities of short-term investments
 
127,000

 
78,500

Net cash provided by investing activities
 
9,611

 
39,050

 
 
 
 
 
Cash flows from financing activities:
 
 

 
 

Proceeds from exercise of stock options
 
43

 
115

Proceeds from employee stock purchase plan
 
324

 
606

Proceeds from issuance of common stock, net of commissions
 

 
10,460

Payments of deferred offering costs
 
(23
)
 
(363
)
Net cash provided by financing activities
 
344

 
10,818

Net (decrease) increase in cash and cash equivalents
 
(61,757
)
 
4,443

Cash and cash equivalents:
 
 
 
 
Beginning of period
 
81,106

 
18,548

End of period
 
$
19,349

 
$
22,991

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

 
 

7




CHIMERIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
Note 1. The Business and Summary of Significant Accounting Policies
 
Description of Business

Chimerix, Inc. (the Company) is a development-stage biopharmaceutical company dedicated to accelerating the advancement of innovative medicines that make a meaningful impact in the lives of patients living with cancer and other serious diseases. The Company has two clinical-stage product candidates, dociparstat sodium (DSTAT) and brincidofovir (BCV). Dociparstat sodium is a potential first-in-class glycosaminoglycan biologic derived from porcine heparin that has low anticoagulant activity but retains the ability to inhibit activities of several key proteins implicated in the retention and viability of AML blasts and leukemic stem cells in the bone marrow during chemotherapy (e.g., CXCL12, selectins, HMGB1). Mobilization of AML blasts and leukemic stem cells from the bone marrow has been associated with enhanced chemosensitivity and may be a primary mechanism accounting for the observed increases in event-free survival (EFS) and overall survival (OS) in a Phase 2 study with DSTAT versus placebo. Randomized Phase 2 data suggests that DSTAT may also accelerate platelet recovery post chemotherapy via inhibition of platelet factor 4, a negative regulator of platelet production that impairs platelet recovery following chemotherapy. BCV is a lipid conjugate DNA polymerase inhibitor in development as a medical countermeasure for smallpox. The Company expects to continue its evaluation of external innovation in order to license, acquire or otherwise gain access to molecules that further broaden its pipeline of investigational agents in cancer or other serious diseases.

Basis of Presentation

The accompanying unaudited consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the Company’s audited financial statements and notes thereto included in its Annual Report on Form 10-K for the year ended December 31, 2018. In the opinion of the Company’s management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of its financial position, operating results and cash flows for the periods presented have been included. Operating results for the three and nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the full year, for any other interim period or for any future year. 

Reclassifications

Certain prior period amounts in the accompanying consolidated financial statements have been reclassified to conform to the current year presentation. These reclassifications had no effect on previously reported net income or stockholders' equity (deficit).
 
Fair Value of Financial Instruments

The carrying amounts of certain financial instruments, including accounts receivable, accounts payable and accrued expenses approximate their fair values due to the short-term nature of such instruments.
 
For assets and liabilities recorded at fair value, it is the Company’s policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements, in accordance with the fair value hierarchy. Fair value measurements for assets and liabilities where there exists limited or no observable market data are based primarily upon estimates and are often calculated based on the economic and competitive environment, the characteristics of the asset or liability and other factors. Therefore, fair value measurements cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability. Additionally, there may be inherent weaknesses in any calculation technique and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the calculated current or future fair values. The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures.
 

8




The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. The determination of where an asset or liability falls in the hierarchy requires significant judgment. These levels are:
 
Level 1 — Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.
Level 2 — Valuations based on quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and models for which all significant inputs are observable, either directly or indirectly.
Level 3 — Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

At September 30, 2019, the Company had cash equivalents including money market accounts, and at December 31, 2018, the Company had cash equivalents including money market accounts and U.S. Treasury securities, whose value is based on quoted market prices. At September 30, 2019 and December 31, 2018, the Company had short-term investments including U.S. Treasury securities, whose value is based on quoted market prices. Accordingly, these securities are classified as Level 1.

At December 31, 2018, the Company had short-term investments including stock of a U.S. corporation, ContraVir Pharmaceuticals (ContraVir). The Company's investment in ContraVir common stock was categorized as a Level 1 asset and had a value based on ContraVir's common stock value at December 31, 2018. The Company sold its investment in ContraVir in September 2019. For the three and nine months ended September 30, 2019, the Company recorded a realized loss related to the Company's investment in ContraVir common stock of approximately $3,000 and $33,000, respectively, and for the three and nine months ended September 30, 2018, the Company recorded an unrealized loss related to the Company's investment in ContraVir common stock of approximately $99,000 and $311,000, respectively, which was included in interest income and other, net in the Consolidated Statements of Operations and Comprehensive Loss.
 
At September 30, 2019, the Company had short-term investments including commercial paper and corporate bonds. At December 31, 2018, the Company had cash equivalents including commercial paper and corporate bonds, and short-term investments including commercial paper and corporate bonds. As quoted prices are not available for these securities, they are valued using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Accordingly, these securities are classified as Level 2.
 
There was no material re-measurement to fair value of financial assets and liabilities that are not measured at fair value on a recurring basis. For additional information regarding the Company's investments, please refer to Note 2, "Investments."
 

9




Below are tables that present information about certain assets measured at fair value on a recurring basis (in thousands):
 
 
Fair Value Measurements
 
September 30, 2019
 
Total
 
Quoted Prices in
Active Markets
for Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable Inputs
(Level 3)
Cash equivalents
 
 
     Money market funds
$
16,983

 
$
16,983

 
$

 
$

          Total cash equivalents
16,983

 
16,983

 

 

Short-term investments
 
 
 
 
 
 
 
     U.S. treasury securities
23,213

 
23,213

 

 

     Commercial paper
34,853

 

 
34,853

 

     Corporate bonds
39,300

 

 
39,300

 

          Total short-term investments
97,366

 
23,213

 
74,153

 

               Total assets
$
114,349

 
$
40,196

 
$
74,153

 
$

 
 
 
 
 
 
 
 
 
Fair Value Measurements
 
December 31, 2018
 
Total
 
Quoted Prices in
Active Markets
for Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable Inputs
(Level 3)
Cash equivalents
 
 
 
 
 
 
 
     Money market funds
$
30,726

 
$
30,726

 
$

 
$

     U.S. treasury securities
11,482

 
11,482

 

 

     Commercial paper
29,677

 

 
29,677

 

     Corporate bonds
4,008

 

 
4,008

 

          Total cash equivalents
75,893

 
42,208

 
33,685

 

Short-term investments
 
 
 
 
 
 
 
     U.S. treasury securities
12,589

 
12,589

 

 

     Common stock of U.S. corporation
38

 
38

 

 

     Commercial paper
60,114

 

 
60,114

 

     Corporate bonds
32,683

 

 
32,683

 

          Total short-term investments
105,424

 
12,627

 
92,797

 

               Total assets
$
181,317

 
$
54,835

 
$
126,482

 
$

  
Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):
 
September 30, 2019
 
December 31, 2018
Accrued research and development expenses
$
2,683

 
$
4,525

Accrued compensation
3,139

 
2,469

Other accrued liabilities
1,054

 
1,168

Deferred revenue
5,081

 
113

Total accrued liabilities
$
11,957

 
$
8,275



10




Revenue Recognition

Policy

The Company’s revenues generally consist of (i) contract revenue - revenue generated under federal contracts, and (ii) collaboration and licensing revenue - revenue related to non-refundable upfront fees, royalties and milestone payments earned under license agreements. Revenue is recognized in accordance with the criteria outlined in Accounting Standards Codification (ASC) 606 issued by the Financial Accounting Standards Board (FASB). Following this accounting pronouncement, a five-step approach is applied for recognizing revenue, including (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performance obligation.

Biomedical Advanced Research and Development Authority (BARDA)

In February 2011, the Company entered into a contract with BARDA for the advanced development of BCV as a medical countermeasure in the event of a smallpox release. Under the contract, the Company may receive up to $75.8 million in expense reimbursement and $5.3 million in fees over the performance of 1 base segment and 4 option segments. Exercise of each option segment is solely at the discretion of BARDA. Currently, option segments 1 through 3 have been exercised. The Company assessed the services in accordance with the authoritative guidance and concluded that there is a potential of 5 separate contracts (1 base segment and 4 option segments) within this agreement, each of which has a single performance obligation. The transaction price for each segment, based on the transaction price as defined in each segment contract, is allocated to the single performance obligation for each contract. The transaction price is recognized over time by measuring the progress toward complete satisfaction of the performance obligation. The progress toward complete satisfaction is estimated based on the costs incurred to date relative to the total estimated costs per the terms of each contract. The Company typically invoices BARDA monthly as costs are incurred. The base segment and first option segment were completed prior to adoption of ASC 606. The Company is currently performing under the second and third option segments of the contract during which the Company may receive up to a total of $23.9 million and $14.1 million in expense reimbursement and fees, respectively. The second option and third option segments are scheduled to end on May 31, 2020.

SymBio Pharmaceuticals

On September 30, 2019, the Company entered into a license agreement with SymBio Pharmaceuticals Limited (SymBio) for the exclusive worldwide rights to develop, manufacture and commercialize BCV for all human indications, excluding the prevention and treatment of orthopoxviruses, including smallpox. The Company assessed the agreement in accordance with the authoritative guidance and concluded that the SymBio contract includes multiple performance obligations, which have not been fulfilled as of September 30, 2019. The SymBio contract has one fixed transaction amount of a $5.0 million upfront payment due to the Company on or before October 22, 2019 and several variable transaction amounts, up to $180 million, due to the Company at certain regulatory and commercial milestones, along with low double-digit royalties, due to the Company on annual net sales. All variable transaction amounts are fully constrained, therefore the allocated transaction price is $5.0 million. The majority of the transaction price of the contract has been allocated to the combined performance obligation of the granting of the license to BCV and associated technology transfer and will be recognized when the technology transfer is complete, which is expected to occur in the fourth quarter of 2019. The revenue from regulatory and commercial milestones and royalties from net sales will be recognized upon occurrence of the triggering events or when those transaction amounts are no longer fully constrained. At September 30, 2019, the Company recorded a $5.0 million receivable due from SymBio in prepaid expenses and other current assets and $5.0 million of deferred revenue in accrued liabilities.
 
Research and Development Prepaids and Accruals

As part of the process of preparing financial statements, the Company is required to estimate its expenses resulting from its obligation under contracts with vendors and consultants and clinical site agreements in connection with its research and development efforts. The financial terms of these contracts are subject to negotiations which vary contract to contract and may result in payment flows that do not match the periods over which materials or services are provided to the Company under such contracts.

The Company’s objective is to reflect the appropriate research and development expenses in its financial statements by matching those expenses with the period in which services and efforts are expended. The Company accounts for these expenses according to the progress of its research and development efforts. The Company determines prepaid and accrual estimates through discussion with applicable personnel and outside service providers as to the progress or state of communication of clinical trials, or other services completed. The Company adjusts its rate of research and development expense recognition if actual results differ from its estimates. The Company makes estimates of its prepaid and accrued expenses as of each balance sheet date in its financial

11




statements based on facts and circumstances known at that time. Although the Company does not expect its estimates to be materially different from amounts actually incurred, its understanding of status and timing of services performed relative to the actual status and timing of services performed may vary and may result in the Company reporting amounts that are too high or too low for any particular period. Through September 30, 2019, there had been no material adjustments to the Company’s prior period estimates of prepaid and accruals for research and development expenses. The Company’s research and development prepaids and accruals are dependent upon the timely and accurate reporting of contract research organizations and other third-party vendors.
 
Basic and Diluted Net Loss Per Share of Common Stock 

Basic net loss per share of common stock is computed by dividing net loss by the weighted-average number of shares of common stock outstanding during the period, excluding the dilutive effects of non-vested restricted stock, stock options, and employee stock purchase plan purchase rights. Diluted net loss per share of common stock is computed by dividing net loss by the sum of the weighted-average number of shares of common stock outstanding during the period plus the potential dilutive effects of warrants to purchase common stock, non-vested restricted stock, stock options, and employee stock purchase plan purchase rights outstanding during the period calculated in accordance with the treasury stock method, but are excluded if their effect is anti-dilutive. Because the impact of these items is anti-dilutive during the periods of net loss, there was no difference between basic and diluted loss per share of common stock for the three and nine months ended September 30, 2019 and 2018.

Impact of Recently Issued Accounting Standards

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which amends the impairment model by requiring entities to use a forward-looking approach on expected losses to estimate credit losses on certain financial instruments, including trade receivables and available-for-sale debt securities. The new guidance will be effective for the Company beginning in the first quarter of 2020, with early adoption permitted. The Company is currently evaluating the potential impact that this standard may have on its consolidated financial statements.

Impact of Recently Adopted Accounting Standards

In February 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-02, “Leases (Topic 842)”, which has been amended through subsequent ASUs, and which increases transparency and comparability among companies accounting for lease transactions. The most significant change of this update requires the recognition of lease assets and liabilities on the balance sheet for lessees for operating lease arrangements with lease terms greater than 12 months. This ASU is effective for financial statements issued for annual periods and interim periods within those annual periods, beginning after December 15, 2018. The Company adopted this standard effective January 1, 2019 using the alternative modified retrospective adoption method allowed by ASU 2018-11. The Company elected to use the package of three practical expedients which allows the Company not to reassess whether contracts are or contain leases, lease classification, and whether initial direct costs qualify for capitalization. The Company has completed its assessment of the impact of the standard and determined that the only material leases that the Company holds are real estate operating leases. Upon adoption of the standard, the Company recorded a right of use asset of $1.4 million and lease liability of $1.6 million on its consolidated balance sheets with no adjustment to beginning retained earnings in the period of adoption.


12




Note 2. Investments
 
The following tables summarize the Company's debt investments (in thousands):

 
 
September 30, 2019
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
Corporate bonds
 
$
39,249

 
$
54

 
$
(3
)
 
$
39,300

U.S. treasury securities
 
23,191

 
22

 

 
23,213

Commercial paper
 
34,837

 
18

 
(2
)
 
34,853

Total investments
 
$
97,277

 
$
94

 
$
(5
)
 
$
97,366

 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
Corporate bonds
 
$
32,724

 
$

 
$
(41
)
 
$
32,683

Commercial paper
 
60,159

 

 
(45
)
 
60,114

U.S. treasury securities
 
12,592

 

 
(3
)
 
12,589

Total investments
 
$
105,475

 
$

 
$
(89
)
 
$
105,386

 
The following tables summarize the Company's debt investments with unrealized losses, aggregated by investment type and the length of time that individual investments have been in a continuous unrealized loss position (in thousands, except number of securities):

 
 
September 30, 2019
 
 
Less than 12 Months
 
Greater than 12 Months
 
Total
 
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
Corporate bonds
 
$
2,493

 
$
(3
)
 
$

 
$

 
$
2,493

 
$
(3
)
Commercial paper
 
$
4,946

 
$
(2
)
 
$

 
$

 
$
4,946

 
$
(2
)
Total
 
$
7,439

 
$
(5
)
 
$

 
$

 
$
7,439

 
$
(5
)
Number of securities with unrealized losses
 
 
 
3

 
 
 

 
 
 
3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
Less than 12 Months
 
Greater than 12 Months
 
Total
 
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
Corporate bonds
 
$
32,683

 
$
(41
)
 
$

 
$

 
$
32,683

 
$
(41
)
Commercial paper
 
60,114

 
(45
)
 

 

 
60,114

 
(45
)
U.S. treasury securities
 
12,589

 
(3
)
 

 

 
12,589

 
(3
)
Total
 
$
105,386

 
$
(89
)
 
$

 
$

 
$
105,386

 
$
(89
)
Number of securities with unrealized losses
 
 
 
36

 
 
 

 
 
 
36


The Company periodically reviews available-for-sale debt investments for other-than-temporary declines in fair value below the cost basis and whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company evaluates, among other things, the duration and extent to which the fair value of a security is less than its cost; the financial condition of the issuer and any changes thereto; and the Company’s intent to sell, or whether it will more likely than not be required to sell, the security before recovery of its cost basis. At September 30, 2019, the Company did not intend to sell, and

13




was not more likely than not to be required to sell, the available-for-sale debt investments in an unrealized loss position before recovery of the cost basis of the securities, which may be at maturity. There were no such declines in value for the three and nine months ended September 30, 2019 and 2018. Unrealized gains and losses on debt investments are recorded to unrealized (loss) gain on investments, net in the Consolidated Statements of Operations and Comprehensive Loss. The Company recognizes interest income on an accrual basis in interest income in the Consolidated Statements of Operations and Comprehensive Loss.

The following table summarizes the scheduled maturity for the Company's debt investments at September 30, 2019 (in thousands):

Maturing in one year or less
$
97,366

Maturing after one year through two years

     Total debt investments
$
97,366

 
Note 3. Commitments and Contingencies
 
Leases

The Company leases its facilities under long-term operating leases that expire at various dates through 2021. The Company generally has options to renew lease terms on its facilities, which may be exercised at the Company's sole discretion. In addition, certain lease arrangements may be terminated prior to their original expiration date at the Company's discretion. The Company evaluates renewal and termination options at the lease commencement date to determine if it is reasonably certain to exercise the option and has concluded on all operating leases that it is not reasonably certain that any options will be exercised. The weighted-average remaining lease term for the Company's operating leases as of September 30, 2019 was 1.52 years.

Expense related to leases is recorded on a straight-line basis over the lease term. Lease expense under operating leases, including common area maintenance fees, totaled approximately $187,000 and $180,000, respectively, for the three months ended September 30, 2019 and 2018, and $563,000 and $531,000 for the nine months ended September 30, 2019 and 2018, respectively.

The discount rate implicit within the Company's leases is generally not determinable and therefore the Company determines the discount rate based on its incremental borrowing rate based on the information available at commencement date. As of September 30, 2019, the operating lease liabilities reflect a weighted-average discount rate of 13.06%.

The following table sets forth the operating lease right-of-use assets and liabilities as of September 30, 2019 (in thousands):

Assets
 
Operating Lease Right-of-Use Assets
$
836

 
 
Liabilities
 
Operating Lease Short-term Liabilities (recorded within Accrued liabilities)
$
630

Operating Lease Long-term Liabilities (recorded within Lease-related obligations)
352

     Total Operating Lease Liabilities
$
982


Operating lease payments over the remainder of the lease terms are as follows (in thousands):

Years Ending December 31,
As of September 30, 2019
2019
$
176

2020
719

2021
182

Total future minimum rental payments
$
1,077

     Less amount of lease payments representing interest
95

Total present value of lease payments
$
982


14





As of December 31, 2018, future minimum payments under operating leases under ASC 840 were as follows (in thousands):

Years Ending December 31,
As of December 31, 2018
2019
$
786

2020
797

2021
235

     Total future minimum rental payments
$
1,818


For the three months ended September 30, 2019 and 2018, the Company made lease payments of approximately $188,000 and $189,000, respectively, and for the nine months ended September 30, 2019 and 2018, the Company made lease payments of approximately $574,000 and $559,000, respectively, which are included in operating cash flows.

Sublease

The Company subleases 3,537 square feet of its office space under a non-cancelable operating lease that expires in February 2021. For the three and nine months ended September 30, 2019, the Company recognized approximately $18,000 and $53,000 of income in Interest income and other, net on the Consolidated Statement of Operations and Comprehensive Loss. For the three and nine months ended September 30, 2018, the Company recognized approximately $18,000 and $53,000 of a reduction of rent expense in operating expenses on the Consolidated Statement of Operations and Comprehensive Loss. Total future minimum rentals under the non-cancelable operating sublease are presented below (in thousands):

Years Ending December 31,
As of September 30, 2019
2019
$
19

2020
81

2021
14

     Total future minimum sublease rentals
$
114


Significance of Revenue Source

The Company is the recipient of federal research contract funds from BARDA, the sole source of the Company's contract revenue. Periodic audits are required under the Company’s BARDA agreement and certain costs may be questioned as appropriate under the BARDA agreement. Management believes that such amounts in the current year, if any, are not significant. Accordingly, no provision for refundable amounts under the BARDA agreement had been made as of September 30, 2019 and December 31, 2018.
 
Note 4. Equity Transactions and Share-based Compensation

Stock Options

The Company maintains a 2013 Equity Incentive Plan (the 2013 Plan), which provides for the grant of incentive stock options (ISOs), non-statutory stock options (NSOs), stock appreciation rights, restricted stock awards, restricted stock unit (RSU) awards, performance-based stock awards, and other forms of equity compensation (collectively, stock awards), all of which may be granted to employees, including officers, non-employee directors and consultants of the Company and its affiliates. Additionally, the 2013 Plan provides for the grant of performance cash awards. The number of shares of common stock reserved for future issuance automatically increases on January 1 of each calendar year by 4% of the total number of shares of capital stock outstanding on December 31 of the preceding calendar year, or a lesser number of shares determined by the Company’s board of directors. On January 1, 2019, the common stock reserved for issuance under the 2013 Plan was automatically increased by 2.0 million shares. As of September 30, 2019, there was a total of 1.9 million shares reserved for future issuance under the 2013 Plan. The Company issued approximately 5,000 and 19,000 shares of common stock pursuant to the exercise of stock options during the three and nine months ended September 30, 2019, respectively.


15




Employee Stock Purchase Plan

The Company maintains a 2013 Employee Stock Purchase Plan (ESPP), which provides for the issuance of shares of common stock pursuant to purchase rights granted to the Company’s employees or to employees of any of its designated affiliates. The Company has reserved a total of 3.1 million shares of common stock to be purchased under the ESPP, of which 2.3 million shares remained available for purchase as of September 30, 2019. The number of shares of common stock reserved for issuance automatically increases on January 1 of each calendar year, from January 1, 2014 through January 1, 2023 by the lesser of (a) 1% of the total number of shares of common stock outstanding on December 31 of the preceding calendar year, (b) 422,535 shares, or (c) a number determined by the Company’s board of directors that is less than (a) and (b). On January 1, 2019, the common stock reserved for issuance under the ESPP was automatically increased by an additional 422,535 shares.

The ESPP provides for an automatic reset feature to start participants on a new twenty-four month participation period in the event that the common stock market value on a purchase date is less than the common stock value on the first day of the twenty-four month offering period. Eligible employees may authorize an amount up to 15% of their salary to purchase common stock at the lower of a 15% discount to the beginning price of their offering period or a 15% discount to the ending price of each six-month purchase interval. The Company issued 96,000 shares of common stock pursuant to the ESPP during the three months ended September 30, 2019. The Company issued approximately 209,000 shares of common stock pursuant to the ESPP during the nine months ended September 30, 2019. Compensation expense for shares purchased under the ESPP related to the purchase discount and the “look-back” option and were determined using a Black-Scholes option pricing model.

Restricted Stock Units

The Company has issued RSUs to certain employees which vest based on service criteria. When vested, the RSU represents the right to be issued the number of shares of the Company's common stock that is equal to the number of RSUs granted. The grant date fair value for RSUs is based upon the market price of the Company's common stock on the date of the grant. The fair value is then amortized to compensation expense over the requisite service period or vesting term. The Company issued approximately 50,000 and 419,000 shares of common stock pursuant to the vesting of RSUs during the three and nine months ended September 30, 2019, respectively.

Stock-based Compensation

For awards with only service conditions and graded-vesting features, the Company recognizes compensation expense on a straight-line basis over the requisite service period. Total share-based compensation expense recognized related to stock options, the ESPP and RSUs was as follows (in thousands): 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Research and development expense
 
$
901

 
$
1,370

 
$
3,170

 
$
4,226

General and administrative expense
 
628

 
1,811

 
4,799

 
6,382

          Total share-based compensation expense
 
$
1,529

 
$
3,181

 
$
7,969

 
$
10,608


On February 5, 2019, Dr. M. Michelle Berrey, the Company's then President and Chief Executive Officer, resigned. The Company entered into a severance agreement with Dr. Berrey that provides for severance benefits to her in connection with her resignation. Among other benefits, Dr. Berrey received accelerated vesting of her outstanding stock options and RSUs as if she had continued service for an additional 15 month period. In addition, Dr. Berrey's vested options were modified to extend her exercise period to May 5, 2020. The Company recorded a charge of $1.8 million to compensation expense on the date of her resignation related to the acceleration of vesting and the modifications of her outstanding stock options and RSUs.

In April 2019, the Company granted stock options covering a total of 1,750,000 shares in connection with the hiring of its Chief Executive Officer and Chief Business Officer. These grants were non-qualified stock options, have a 10-year term and will vest over four years, with one-fourth vesting on the one-year anniversary of the grant date and remaining three-fourths vesting over the following three years in equal monthly installments. These stock options are subject to the terms of the Company's 2013 Equity Incentive Plan, but were granted outside of the 2013 Equity Incentive Plan, as they constituted inducement grants in accordance with Nasdaq Stock Market rules.

In May 2019, related to the Company’s reduction in workforce further discussed in Note 7, certain outstanding stock option and RSU grants received accelerated vesting as if the service period of the terminated employee continued for an additional 12 month

16




period. In addition, certain vested options were modified to extend their exercise period for 12 months. The Company recorded a charge of $0.7 million to compensation expense on the date of the reduction in workforce related to the acceleration of vesting and the modifications of the outstanding stock options and RSUs.


Note 5. Income Taxes
 
The Company estimates an annual effective tax rate of 0% for the year ending December 31, 2019 as the Company incurred losses for the nine month period ended September 30, 2019, and is forecasting an estimated net loss for both financial statement and tax purposes for the year ending December 31, 2019. Therefore, no federal or state income taxes are expected and none have been recorded at this time. Income taxes have been accounted for using the liability method in accordance with FASB ASC 740.

Due to the Company's history of losses since inception, there is not enough evidence at this time to support that the Company will generate future income of a sufficient amount and nature to utilize the benefits of its net deferred tax assets. Accordingly, the deferred tax assets have been reduced by a full valuation allowance, since the Company cannot currently support that realization of its deferred tax assets is more likely than not. However, the Company feels its deferred tax assets may be used upon the Company becoming profitable.
 
At September 30, 2019, the Company had no unrecognized tax benefits that would reduce the Company’s effective tax rate if recognized.

Note 6. Significant Agreements
  
The Regents of the University of California

In May 2002, the Company entered into a license agreement with The Regents of the University of California (UC) under which the Company obtained an exclusive, worldwide license to UC’s patent rights in certain inventions (the UC Patent Rights) related to lipid-conjugated antiviral compounds and their use, including certain patents relating to BCV. The license agreement was terminated effective September 29, 2019. The termination of the license to the UC Patent Rights does not affect the Chimerix solely-owned patents covering BCV composition of matter that currently are set to expire in 2034.
   
Biomedical Advanced Research and Development Authority (BARDA)

In February 2011, the Company entered into a contract with BARDA for the advanced development of BCV as a medical countermeasure in the event of a smallpox release. Under the contract, BARDA will reimburse the Company, plus pay a fixed fee, for the research and development of BCV as a broad-spectrum therapeutic antiviral for the treatment of smallpox infections. The contract consists of an initial performance period, referred to as the base performance segment, plus up to four extension periods, referred to as option segments, each of which may be exercised at BARDA’s sole discretion. The Company must complete the agreed upon milestones and deliverables in each discrete work segment before the next option segment is eligible to be exercised. Under the contract as currently in effect, the Company may receive up to $75.8 million in expense reimbursement and $5.3 million in fees.

The Company is currently performing under the second and third option segments of the contract during which the Company may receive up to a total of $23.9 million and $14.1 million in expense reimbursement and fees, respectively. The second and third option segments are scheduled to end on May 31, 2020. Of the $75.8 million in expense reimbursement and $5.3 million in fees that the Company may receive, approximately $74.3 million in expense reimbursement and fees has been funded. As of September 30, 2019, of the total funding the Company had invoiced an aggregate of $68.3 million with respect to the base performance segment and the first three option segments. For the three months ended September 30, 2019 and 2018, the Company recognized revenue under this contract of $2.0 million and $0.4 million, respectively, and for the nine months ended September 30, 2019 and 2018, the Company recognized revenue under this contract of $5.8 million and $2.4 million, respectively.

License and Development Agreement with Cantex Pharmaceuticals, Inc.
 
On July 26, 2019, the Company entered into a License and Development Agreement with Cantex Pharmaceuticals, Inc. (Cantex) pursuant to which the Company acquired exclusive worldwide rights to develop and commercialize, for any and all uses, a glycosaminoglycan biologic known as DSTAT, which is currently being studied for the treatment of acute myeloid leukemia. Under the terms of the license agreement, the Company will be responsible for, and bear the future costs of, worldwide development and commercialization of DSTAT. In connection with the transaction, Cantex assigned to the Company all of its rights under its DSTAT

17




supply agreements, including its bulk API agreement with Scientific Protein Laboratories LLC (SPL), pursuant to which SPL will exclusively produce DSTAT for the Company through October 2030.
 
In consideration for the license rights, the Company made an upfront cash payment of $30.0 million to Cantex and issued to Cantex 10.0 million shares of its common stock. For the three and nine months ended September 30, 2019, the Company recognized $65.0 million of acquired in-process research and development expenses for the $30.0 million upfront cash payment, the fair value of the 10.0 million shares of common stock issued to Cantex and $0.1 million of transaction costs. The license agreement obligates the Company to pay Cantex regulatory milestone payments of up to $202.5 million upon receipt of product approvals in the United States, the European Union and Japan, and sales milestone payments of up to $385.0 million upon achievement of specified net sales levels. The Company also agreed to pay Cantex tiered royalties based on percentages of net sales beginning at 10% and not to exceed the high-teens.

SymBio Pharmaceuticals

On September 30, 2019, the Company entered into a license agreement with Symbio for the exclusive worldwide rights to develop, manufacture and commercialize BCV for all human indications, excluding the prevention and treatment of orthopoxviruses, including smallpox. Under the terms of the license agreement, SymBio will be responsible for, and bear the future costs of, worldwide development and commercialization of BCV in the licensed indications. Either party may terminate the license agreement upon the occurrence of a material breach by the other party (subject to standard cure periods), or upon certain events involving the bankruptcy or insolvency of the other party. SymBio may also terminate the license agreement without cause on a country-by-country basis upon ninety days' prior notice.

In exchange for the license to BCV rights, the Company is due an upfront payment of $5.0 million on or before October 22, 2019. In addition, the Company is eligible to receive up to $180.0 million in clinical, regulatory and commercial milestones worldwide, as well as low double-digit royalties and additional milestones based on commercial sales. At September 30, 2019, the Company had a $5.0 million receivable due from SymBio recorded in Prepaid expenses and other current assets and a $5.0 million deferred revenue balance recorded in Accrued liabilities.

University of Michigan

In 2006, the Company entered into a license agreement with The Regents of the University of Michigan (UM) under which the Company obtained an exclusive, worldwide license to UM’s patent rights in certain inventions (UM Patent Rights) related to certain compounds originally synthesized at UM. Under the license agreement, the Company is permitted to research, develop, manufacture and commercialize products utilizing the UM Patent Rights, and to sublicense such rights subject to certain sublicensing fees and royalty payments.

In consideration for the rights granted to the Company, under the license agreement as amended in December 2016, the Company paid UM $50,000 in fees in 2016 and in January 2017 issued UM an aggregate of 33,058 shares of its common stock. In connection with the Company's commercialization or sublicensing of certain products covered by the license agreement, including CMX521, the Company could be required to pay royalties on net sales of such products ranging from 0.25% to 2%. Beginning in 2024, the Company is also subject to certain minimum annual royalty payments.

The UM license agreement requires that the Company use commercially reasonable efforts to develop and make commercially available licensed products as soon as practicable. Specifically, the Company has agreed to make the first commercial sale of a licensed product by June of 2026. UM may terminate the license agreement if the Company materially breaches the license agreement. The Company is currently in compliance with its milestone requirements.

Note 7. Restructuring Costs

In May 2019, the Company made the decision to discontinue the development of oral and IV BCV development programs for the treatment of Adenovirus (AdV) in stem-cell transplant (HCT) patients. The Company's development efforts with respect to BCV are now focused on the treatment of smallpox. As a result, the Company restructured its operations, which included a reduction in workforce of 43 full-time employees and the accrual of expenses to close-out the clinical trials for the oral and IV development programs of BCV in AdV (study 210, study 211, AdAPT) and other supportive BCV development programs. The Company recorded charges for one-time employee termination benefits of $3.3 million, contract close-out costs of $2.7 million, and other BCV development costs of $0.3 million during the nine months ended September 30, 2019. The $2.7 million of contract close-out costs were recorded through an increase in liabilities of $2.1 million with the remainder recognized through the expensing of prepaid balances. As of September 30, 2019, the Company had a clinical trial accrual balance related to the AdAPT, 210 and 211 trial terminations of $0.4 million and other development costs accrual balance of $0.1 million, which are

18




expected to be substantially paid by the end of the year. As of September 30, 2019, the Company had a severance accrual balance of $0.5 million, which is expected to be fully paid by June 2020.

The following table summarizes the restructuring charges (in thousands) recorded for the nine months ended September 30, 2019:

 
 
Employee Termination Benefits
 
Clinical Trial Close-out Costs
 
Other Development Costs
 
Total
Research and development
 
1,426

 
2,680

 
316

 
4,422

General and administrative
 
1,909

 

 

 
1.909

Total restructuring expenses
 
3,335

 
2,680

 
316

 
6,331


The following table sets forth the accrual activity for employee termination benefits and contract close-out costs (in thousands) for the three and nine months ended September 30, 2019. No additional charges are expected to be incurred.

 
 
Employee Termination Benefits
 
Clinical Trial Close-out Costs
 
Other Development Costs
 
Total
Balance at June 30, 2019
 
1,784

 
2,062

 
315

 
4,161

Revised estimates
 

 
36

 
1

 
37

Payments
 
(1,294
)
 
(1,664
)
 
(169
)
 
(3,127
)
Balance at September 30, 2019
 
490

 
434

 
147

 
1,071


 
 
Employee Termination Benefits
 
Clinical Trial Close-out Costs
 
Other Development Costs
 
Total
Balance at January 1, 2019
 

 

 

 

Accruals
 
3,335

 
2,131

 
315

 
5,781

Revised estimates
 

 
36

 
1

 
37

Payments
 
(2,845
)
 
(1,733
)
 
(169
)
 
(4,747
)
Balance at September 30, 2019
 
490

 
434

 
147

 
1,071


In addition to the approximately $37,000 of revised estimates to accrued liabilities, the Company revised estimates of prepaid clinical trial balances included in prepaid expenses and other current assets, which resulted in the reduction of clinical trial close-out costs by approximately $193,000 for the three and nine months ended September 30, 2019.

Note 8. Subsequent Events

The Company has evaluated subsequent events through the issuance date of these financial statements to ensure that this filing includes appropriate disclosure of events both recognized in the financial statements as of September 30, 2019, and events which occurred subsequently but were not recognized in the financial statements.


19




ITEM 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q and the audited financial statements and notes thereto as of and for the year ended December 31, 2018 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission (SEC) on March 5, 2019. Past operating results are not necessarily indicative of results that may occur in future periods.
 
Forward-Looking Statements
The information in this discussion contains forward-looking statements and information within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which are subject to the “safe harbor” created by those sections. These forward-looking statements include, but are not limited to, statements concerning our strategy, future operations, future financial position, future revenues, projected costs, prospects and plans and objectives of management. The words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements that we make. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those in the forward-looking statements, including, without limitation, the risks set forth in Part II, Item IA, “Risk Factors” in this Quarterly Report on Form 10-Q and in our other filings with the SEC. The forward-looking statements are applicable only as of the date on which they are made, and we do not assume any obligation to update any forward-looking statements.
 
OVERVIEW

Chimerix is a development-stage biopharmaceutical company dedicated to accelerating the advancement of innovative medicines that make a meaningful impact in the lives of patients living with cancer and other serious diseases. The two clinical-stage development programs are dociparstat sodium (DSTAT) and brincidofovir (BCV).

Dociparstat sodium is a potential first-in-class glycosaminoglycan biologic derived from porcine heparin that has low anticoagulant activity but retains the ability to inhibit activities of several key proteins implicated in the retention and viability of AML blasts and leukemic stem cells in the bone marrow during chemotherapy (e.g., CXCL12, p-selectin, HMGB1, galectin-3). Mobilization of AML blasts and leukemic stem cells from the bone marrow has been associated with enhanced chemosensitivity and may be a primary mechanism accounting for the observed increases in EFS and OS in Phase 2 with DSTAT versus placebo. Randomized Phase 2 data suggests that DSTAT may also accelerate platelet recovery post chemotherapy via inhibition of platelet factor 4, a negative regulator of platelet production that impairs platelet recovery following chemotherapy. BCV is a lipid conjugate DNA polymerase inhibitor in development as a medical countermeasure for smallpox. We expect to continue our evaluation of external innovation in order to license, acquire or otherwise gain access to molecules that further broaden our pipeline of investigational agents in cancer or other serious diseases.

Recent Developments

Dociparstat for First-Line Acute Myeloid Leukemia (AML)

In July 2019 we entered into a License and Development Agreement with Cantex Pharmaceuticals, Inc. (Cantex) pursuant to which we acquired exclusive worldwide rights to develop and commercialize DSTAT, for any and all uses. DSTAT is a potential first-in-class glycosaminoglycan biologic derived from porcine heparin that has low anticoagulant activity, but retains the ability to inhibit activities of several key proteins implicated in the retention and viability of AML blasts and leukemic stem cells in the bone marrow during chemotherapy (e.g., CXCL12, selectins, HMGB1). Under the terms of the license agreement, we will be responsible for, and bear the future costs of, worldwide development and commercialization of DSTAT.
 
In consideration for the license rights, we made an upfront cash payment of $30.0 million and issued 10,000,000 shares of our common stock to Cantex. The license agreement obligates us to pay Cantex regulatory milestone payments of up to $202.5 million upon receipt of product approvals in the United States, the European Union and Japan, and sales milestone payments of up to $385.0 million upon achievement of specified net sales levels. We also agreed to pay Cantex tiered royalties based on percentages of net sales beginning at 10% and not to exceed the high-teens.


20




DSTAT has received Fast Track and Orphan Drug Designations from the U.S. Food and Drug Administration for the treatment of AML.

In October 2019, we presented final results from the recently completed Phase 2b, randomized control trial of DSTAT in AML. The study evaluated DSTAT (4 mg/kg intravenous (IV) bolus followed by either 0.125 or 0.25 mg/kg/hr continuous IV infusion for 7 days) in combination with standard 7+3 chemotherapy versus chemotherapy alone in 75 subjects greater than 60 years of age with newly diagnosed AML. An analysis of the intent-to-treat (ITT) population in this study indicated that patients receiving DSTAT 0.25 mg/kg/hr exhibited improved hazard ratios for event-free survival (EFS, 0.67), overall survival (OS, 0.68) and relapse free-survival (RFS, 0.45) when compared to control patients. Complete response rates (CR/CRi) were similar between the arms. An analysis of subjects meeting the likely target inclusion criteria for the Phase 3 study, which excludes patients with feasible cytogenetics or secondary AML, indicated improved hazard ratios for DSTAT 0.25 mg/kg/hr versus control for EFS (0.58,Fig. 1), OS (0.51,Fig. 2), and RFS (0.39,Fig. 3).

http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=13180981&doc=15
Response Summary
% CR/CRi(a-c)
High Dose Arm
70% (14/20)
Control Arm
68% (13/19)
Reported Rates in the Literature ~ 50%

(a)
Complete Response (CR) or Complete Response without complete hematologic recovery (CRi)
(b)
CR/CRi was with bone marrow (BM) biopsy at day 14 or beyond and where less than 5% blasts were present
(c)
Responses and Kaplan-Meier curves do not include sub therapeutic low-dose arm


21




http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=13180981&doc=16

(a)    Relapse-Free Survival = survival without relapse following induction success (CR/CRi)
(b)    Responses and Kaplan-Meier curves do not include subtherapeutic low-dose arm

Combination treatment with 7+3 chemotherapy and DSTAT did not show significant added toxicity at the 0.125 or 0.25 mg/kg/hr doses. The most common serious adverse event in the DSTAT arm was febrile neutropenia. DSTAT also showed signs of accelerating platelet and neutrophil recovery following chemotherapy, consistent with the reported DSTAT inhibition of platelet factor 4, a negative regulator of platelet production that impairs platelet recovery following chemotherapy.

We plan to initiate a Phase 3 clinical trial of DSTAT for the treatment of AML in mid-2020, subject to an end-of-phase 2 meeting with the U.S. FDA expected to occur in early 2020.

Oral Brincidofovir for the Treatment of Smallpox

We intend to conduct a pre-NDA meeting with the FDA in the first quarter of 2020 and submit marketing applications for BCV in mid-2020, contingent upon final audited results of the animal efficacy studies and the finalization of animal PK analysis necessary to bridge to a recommended human dose. Earlier this year, we reported statistically significant and clinically meaningful reduction in mortality from GLP mousepox and rabbitpox studies. Data from these studies are intended to address the requirement under the FDA’s Animal Efficacy Rule for two different animal models of efficacy.

Data from these studies are intended to address the requirement under the FDA’s Animal Efficacy Rule for two different animal models of efficacy. Further confirmatory analyses (e.g. secondary endpoints) of these studies are currently underway.

License and Development Agreement with SymBio Pharmaceuticals, Ltd.

On September 30, 2019, we entered into a license agreement with SymBio Pharmaceuticals, Ltd. (SymBio) for the development and commercialization of BCV for all human indications with the exception of orthopoxviruses, including smallpox. In consideration for the license, we are due an upfront payment of $5.0 million with the potential for future clinical, regulatory and commercial milestones up to $180.0 million. In addition, we are eligible to receive low double-digit royalties on net sales of BCV worldwide.

Business Development Review

In addition to our recently completed transaction with Cantex, management is continuing to conduct a review and assessment of potential transaction opportunities with the goal of building our product candidate pipeline, including, but not limited to, licensing, merger or acquisition transactions, issuing or transferring shares of common stock, or the license, purchase or sale of specific assets, in addition to other potential actions aimed at maximizing stockholder value. There can be no assurance that this review will result in the identification or consummation of any additional transaction.

22





FINANCIAL OVERVIEW

Revenues

To date, we have not generated any revenue from product sales. All of our revenue to date has been derived from a government grant and contract and the receipt of up-front proceeds under our collaboration and license agreements.
 
In February 2011, we entered into a contract with BARDA, a U.S. governmental agency that supports the advanced research and development, manufacturing, acquisition, and stockpiling of medical countermeasures. The contract originally consisted of an initial performance period, referred to as the base performance segment, which ended on May 31, 2013, plus up to four extension periods, referred to as option segments. Subsequent option segments to the contract are not subject to automatic renewal and are not exercisable at our discretion. The contract is a cost plus fixed fee development contract. Under the contract as currently in effect, we may cumulatively receive up to $75.8 million in expense reimbursement and $5.3 million in fees if the remaining option segment is exercised. We are currently performing under the second and third option segments of the contract during which we may receive up to a total of $23.9 million and $14.1 million in expense reimbursement and fees, respectively. The second and third option segments are scheduled to end on May 31, 2020. Of the $75.8 million expense reimbursement and $5.3 million in fees that we may receive, approximately $74.3 million in expense reimbursement and fees has been funded. As of September 30, 2019, of the total funding the Company had invoiced an aggregate of $68.3 million with respect to the base performance segment and the first three option segments. Under the BARDA contract, we recognized revenue of $2.0 million and $0.4 million during the three months ended September 30, 2019 and 2018, respectively, and we recognized revenue of $5.8 million and $2.4 million during the nine months ended September 30, 2019 and 2018, respectively.

In September 2019, we entered into a license agreement with SymBio for worldwide rights to develop, manufacture and commercialize BCV in all human indications, excluding the use for treatment of orthopoxviruses, including smallpox. Under the contract, we received a $5.0 million upfront payment in October 2019 and could receive up to an additional $180.0 million in potential regulatory and commercial milestones. As of September 30, 2019, we had not recognized revenue under this agreement. The majority of the upfront payment will be recognized when the technology transfer is complete, which is expected to occur in the fourth quarter of 2019. The revenue from regulatory and commercial milestones and royalties from net sales will be recognized upon occurrence of the triggering events.
 
In the future, we may generate revenue from a combination of product sales, license fees, milestone payments and royalties from the sales of products developed under licenses of our intellectual property. We expect that any revenue we generate will fluctuate from quarter to quarter as a result of the timing and amount of license fees, milestone and other payments, and the amount and timing of payments that we receive upon the sale of our products, to the extent any are successfully commercialized. If we fail to complete the development of any product candidates in a timely manner or obtain regulatory approval for them, our ability to generate future revenue, and our results of operations and financial position, would be materially adversely affected.
 
Research and Development Expenses

Since our inception, we have focused our resources on our research and development activities, including conducting preclinical studies and clinical trials, manufacturing development efforts and activities related to regulatory filings for our product candidates. We recognize research and development expenses as they are incurred. Costs for certain development activities are recognized based on an evaluation of the progress to completion of specific tasks using information and data provided to us by our vendors. We cannot determine with certainty the duration and completion costs of the current or future clinical studies of any product candidates. Our research and development expenses consist primarily of:
 
fees paid to consultants and contract research organizations (CROs), including in connection with preclinical and clinical trials, and other related clinical trial fees, such as for investigator grants, patient screening, laboratory work, clinical trial database management, clinical trial material management and statistical compilation and analysis;
salaries and related overhead expenses, which include stock option, restricted stock units and employee stock purchase program compensation and benefits, for personnel in research and development functions;
payments to third-party manufacturers, which produce, test and package drug substance and drug product (including continued testing of process validation and stability);
costs related to legal and compliance with regulatory requirements; and
license fees for and milestone payments related to licensed products and technologies.
 

23




The table below summarizes our research and development expenses for the periods indicated (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Direct research and development expenses
 
$
3,730

 
$
6,290

 
$
18,680

 
$
21,718

Research and development personnel costs - excluding stock-based compensation
 
2,025

 
3,197

 
10,283

 
9,971

Research and development personnel costs - stock-based compensation
 
901

 
1,370

 
3,171

 
4,226

Indirect research and development expenses
 
797

 
1,035

 
2,661

 
4,048

Total research and development expenses
 
$
7,453

 
$
11,892

 
$
34,795

 
$
39,963

 
The successful development of product candidates is highly uncertain. At this time, we cannot reasonably estimate the nature, timing or costs of the efforts that will be necessary to complete the development of any product candidates or the period, if any, in which material net cash inflows from any product candidates may commence. This is due to the numerous risks and uncertainties associated with our business, as detailed in Part II, Item IA, “Risk Factors” in this Quarterly Report on Form 10-Q and in our other filings with the SEC.

Dociparstat sodium (DSTAT)

In July of 2019, we acquired DSTAT from Cantex Pharmaceuticals. In connection with the transaction we recorded a total of $65.0 million in expense. This is comprised of a $30.0 million upfront payment, $34.9 million in stock-based compensation and $0.1 million in transaction costs. To date, we have incurred minimal research and development costs in connection with the program. As we continue to focus on the development of DSTAT for first-line treatment of AML patients, we expect research and development expense to increase. We plan to initiate a Phase 3 trial in AML in mid-2020.

Brincidofovir

We are developing BCV for the treatment of smallpox. Under our cost plus fixed fee BARDA contract we incurred expense in connection with the development of orthopoxvirus animal models, the demonstration of efficacy and pharmacokinetics of BCV in the animal models, the conduct of an open label clinical safety study for subjects with DNA viral infections, and the manufacture and process validation of bulk drug substance and BCV 100 mg tablets.

Historically, the majority of our research and development efforts have been focused on completing our Phase 3 trial of BCV for prevention of CMV in HCT recipients (SUPPRESS), our trial of BCV as a treatment for AdV (AdVise), the AdAPT study in pediatric HCT recipients and our other clinical and preclinical studies and other work needed to provide sufficient data supporting the safety, tolerability and efficacy of BCV for approval in the United States and equivalent health authority approval outside the United States. In May 2019, we discontinued both the oral and IV development programs of BCV in AdV and the associated clinical trials.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and related costs for employees in executive, finance, marketing, investor relations, information technology, legal, human resources and administrative support functions, including share-based compensation expenses and benefits. Other significant general and administrative expenses include costs related to commercial readiness efforts, accounting and legal services, costs of various consultants, director and officer liability insurance, occupancy costs and information systems.
 
Interest Income and Other, Net

Interest income and other, net consists primarily of interest earned on our cash, cash equivalents, short-term investments and long-term investments and decreases in fair value as well as realized losses of our investment in ContraVir Pharmaceuticals common stock.
 
Share-based Compensation  

The Financial Accounting Standards Board authoritative guidance requires that share-based payment transactions with employees

24




be recognized in the financial statements based on their fair value and recognized as compensation expense over the vesting period. Total consolidated share-based compensation expense of $1.5 million and $3.2 million was recognized in the three months ended September 30, 2019 and 2018, respectively, and $8.0 million and $10.6 million was recognized in the nine months ended September 30, 2019 and 2018, respectively. The share-based compensation expense recognized included expense for stock options, RSUs and employee stock purchase plan purchase rights.
 
We estimate the fair value of our share-based awards to employees and directors using the Black-Scholes pricing model. This estimate is affected by our stock price as well as assumptions including the expected volatility, expected term, risk-free interest rate, expected dividend yield, expected rate of forfeiture and the fair value of the underlying common stock on the date of grant. 

For performance-based RSUs, we begin to recognize the expense when it is deemed probable that the performance-based goal will be achieved. We evaluate the probability of achieving performance-based goals on a quarterly basis.
 
CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATES
 
Our management’s discussion and analysis of financial condition and results of operations is based on our unaudited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate these estimates and judgments. We base our estimates on historical experience and on various assumptions that we believe to be reasonable under the circumstances. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities and the recording of revenues and expenses that are not readily apparent from other sources. Actual results and experiences may differ materially from these estimates. In addition, our reported financial condition and results of operations could vary if new accounting standards are enacted that are applicable to our business.

We discussed accounting policies and assumptions that involve a higher degree of judgment and complexity in Note 1 to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC on March 5, 2019. There have been no material changes during the nine months ended September 30, 2019 to our critical accounting policies, significant judgments and estimates disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018.

Acquired In-Process Research and Development (IPR&D) Expense
 
We have acquired and may continue to acquire the rights to develop and commercialize new drug candidates. In accordance with Accounting Standards Codification, or ASC, Subtopic 730-10-25, Accounting for Research and Development Costs, the up-front payments to acquire a new drug compound, as well as future milestone payments when paid or payable, are immediately expensed as acquired IPR&D in transactions other than a business combination provided that the drug has not achieved regulatory approval for marketing and, absent obtaining such approval, has no alternative future use. Upon obtaining regulatory approval for marketing, any subsequent milestone payments may be capitalized and amortized over the life of the asset.



25




RESULTS OF OPERATIONS 

Comparison of the Three Months Ended September 30, 2019 and September 30, 2018

The following table summarizes our results of operations for the three months ended September 30, 2019 and September 30, 2018, together with the changes in those items (in thousands, except percentages): 
 
 
 
Three Months Ended September 30,
 
Dollar Change
 
% Change
 
 
2019
 
2018
 
Increase/(Decrease)
Contract revenue
 
$
1,958

 
$
369

 
$
1,589

 
430.6
 %
Operating expenses:
 
 

 
 

 
 

 
 

Research and development
 
7,453

 
11,892

 
(4,439
)
 
(37.3
)%
General and administrative
 
4,024

 
5,187

 
(1,163
)
 
(22.4
)%
Acquired in-process research and development
 
65,045

 

 
65,045

 
*

Total operating expenses
 
76,522

 
17,079

 
59,443

 
348.0
 %
Loss from operations
 
(74,564
)
 
(16,710
)
 
(57,854
)
 
346.2
 %
Other (expense) income:
 
 
 
 
 
 
 
 
Interest income and other, net
 
834

 
631

 
203

 
32.2
 %
Net loss
 
$
(73,730
)
 
$
(16,079
)
 
$
(57,651
)
 
358.5
 %

* Not meaningful or not calculable

Contract Revenue

For the three months ended September 30, 2019, total contract revenue increased to $2.0 million compared to $0.4 million for the three months ended September 30, 2018. This change is related to an increase in reimbursable expenses related to our contract with BARDA.
 
Research and Development Expenses

For the three months ended September 30, 2019, our research and development expenses decreased to $7.5 million compared to $11.9 million for the three months ended September 30, 2018. The decrease of $4.4 million, or 37.3%, is primarily related to the following:

a decrease of $4.9 million mainly related to the discontinuation of both the oral and IV BCV development programs and CMX521 for norovirus;
a decrease of $1.5 million in compensation expenses as headcount was reduced as part of the Company's restructuring activities in May 2019; offset by
an increase of $2.1 million in expenses primarily related to the conduct of animal studies in the smallpox program.

General and Administrative Expenses

For the three months ended September 30, 2019, our general and administrative expenses decreased to $4.0 million compared to $5.2 million for the three months ended September 30, 2018. The decrease of $1.2 million, or 22.4%, is primarily related to the following:

a decrease of $1.6 million in compensation expenses due to the Company's restructuring activities in May 2019; and
a decrease of $0.4 million in expenses related to commercial readiness; offset by
an increase of $1.0 million related to business development expenses and to out-license BCV for non-smallpox indications.


26




Acquired In-Process Research and Development

We recorded $65.0 million of acquired in-process research and development expenses for the three months ended September 30, 2019, which included $30.0 million for an upfront payment to Cantex, $34.9 million related to the fair value of common stock issued to Cantex, and $0.1 million related to Cantex transaction costs consisting primarily of legal and professional fees.

Interest Income and Other, Net

For the three months ended September 30, 2019, our interest income increased to $0.8 million compared to $0.6 million for the three months ended September 30, 2018. This increase is attributable to increased interest earned on our cash and investments.

Comparison of the Nine Months Ended September 30, 2019 and September 30, 2018

The following table summarizes our results of operations for the nine months ended September 30, 2019 and September 30, 2018, together with the changes in those items (in thousands except percentages): 
 
 
 
Nine Months Ended September 30,
 
Dollar Change
 
% Change
 
 
2019
 
2018
 
Increase/(Decrease)
Contract revenue
 
$
5,752

 
$
2,352

 
$
3,400

 
144.6
 %
Operating expenses:
 
 
 
 
 
 

 
 

Research and development
 
34,795

 
39,963

 
(5,168
)
 
(12.9
)%
General and administrative
 
18,022

 
18,575

 
(553
)
 
(3.0
)%
Acquired in-process research and development
 
65,045

 

 
65,045

 
*

Total operating expenses
 
117,862

 
58,538

 
59,324

 
101.3
 %
Loss from operations
 
(112,110
)
 
(56,186
)
 
(55,924
)
 
99.5
 %
Other (expense) income:
 
 
 
 
 
 
 
 
Interest income and other, net
 
3,037

 
1,668

 
1,369

 
82.1
 %
Net loss
 
$
(109,073
)
 
$
(54,518
)
 
$
(54,555
)
 
100.1
 %

* Not meaningful or not calculable

Contract Revenue

For the nine months ended September 30, 2019, total contract revenue increased to $5.8 million compared to $2.4 million for the nine months ended September 30, 2018. The increase of $3.4 million, or 144.6%, is related to an increase in reimbursable expenses under our contract with BARDA.

Research and Development Expenses

For the nine months ended September 30, 2019, our research and development expenses decreased to $34.8 million compared to $40.0 million for the nine months ended September 30, 2018. The decrease of $5.2 million, or 12.9%, is primarily related to the following:

a decrease of $6.5 million in expenses related to the discontinuation of both the oral and IV BCV development programs and CMX521 for norovirus;
a decrease of $1.3 million in legal fees and operational expenses; and
a decrease of $0.6 million in compensation expenses; offset by
an increase of $3.1 million in expenses primarily related to the conduct of animal studies in the small pox program.

27





General and Administrative Expenses

For the nine months ended September 30, 2019, our general and administrative expenses decreased to $18.0 million compared to $18.6 million for the nine months ended September 30, 2018. The decrease of $0.6 million, or 3.0%, is primarily related to the following:

a decrease of $2.7 million in expenses related to commercial readiness; offset by
an increase of $1.8 million related to business development expenses and to out-license BCV for non-smallpox indications.

Acquired In-Process Research and Development

We recorded $65.0 million of acquired in-process research and development expenses for the three months ended September 30, 2019, which included $30.0 million for an upfront payment to Cantex, $34.9 million related to the fair value of common stock issued to Cantex, and $0.1 million related to Cantex transaction costs consisting primarily of legal and professional fees.

Interest Income and Other, Net

For the nine months ended September 30, 2019, our interest income and other, net increased to $3.0 million compared to $1.7 million for the nine months ended September 30, 2018. This increase is attributable to increased interest earned on our cash and investments.

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2019, we had capital available to fund operations of approximately $116.7 million. Cash in excess of immediate requirements is invested in accordance with our investment policy, primarily with a view to liquidity and capital preservation. We have incurred losses since our inception in 2000 and as of September 30, 2019, we had an accumulated deficit of $665.3 million. We anticipate that we will continue to incur losses for at least the next several years.

On November 8, 2017, we entered into an at-the-market (ATM) sales agreement with Cowen and Company, LLC to sell up to $75 million of our common stock under a shelf registration statement filed in November 2017. As of December 31, 2018, we had sold an aggregate of 2.8 million shares of common stock pursuant to the ATM at a weighted average price per share of $4.00 for net offering proceeds of $10.9 million. We have not sold any shares of our common stock pursuant to the ATM to-date in 2019.

We cannot assure that adequate funding will be available on terms acceptable to us, if at all. Any additional equity financings will be dilutive to our stockholders and any additional debt may involve operating covenants that may restrict our business. If adequate funds are not available through these means, we may be required to curtail significantly one or more of our research or development programs, and any launch and other commercialization expenses for any of our products that may receive marketing approval. We cannot assure you that we will successfully develop or commercialize our products under development or that our products, if successfully developed, will generate revenues sufficient to enable us to earn a profit.

We believe that our existing cash, cash equivalents, and investments will enable us to fund our current operating expenses and capital requirements for at least the next 12 months. However, changing circumstances beyond our control may cause us to consume capital more rapidly than we currently anticipate.


28




Cash Flows

The following table sets forth the significant sources and uses of cash (in thousands): 

 
 
Nine Months Ended September 30,
 
 
2019
 
2018
Cash sources and uses:
 
 

 
 

Net cash used in operating activities
 
$
(71,712
)
 
$
(45,425
)
Net cash provided by investing activities
 
9,611

 
39,050

Net cash provided by financing activities
 
344

 
10,818

Net (decrease) increase in cash and cash equivalents
 
$
(61,757
)
 
$
4,443

 
Operating Activities

Net cash used in operating activities of $71.7 million for the nine months ended September 30, 2019 was primarily the result of our $109.1 million net loss and the change in operating assets and liabilities, partially offset by the add-back of non-cash expenses. The change in operating assets and liabilities includes a decrease of $3.1 million in accounts payable and accrued liabilities, an increase in accounts receivable of $1.5 million related to work on the BARDA contract, partially offset by a decrease in prepaid expenses and other assets of $0.2 million. Non-cash expenses included add-backs of $34.9 million for the fair value of common stock issued in relation to the Cantex license agreement, $8.0 million for share-based compensation and $0.5 million of depreciation of property and equipment, offset by $1.6 million of amortization of discount/premium on investments. Net cash used in operating activities of $45.4 million for the nine months ended September 30, 2018 was primarily the result of our $54.5 million net loss and the change in operating assets and liabilities, partially offset by the add-back of non-cash expenses of $10.6 million for share-based compensation and $0.7 million of depreciation of property and equipment. The change in operating assets and liabilities includes a decrease of $3.6 million in accounts payable and accrued liabilities, partially offset by a decrease in accounts receivable of $1.4 million related to work on the BARDA contract.
 
Investing Activities

Net cash provided by investing activities of $9.6 million for the nine months ended September 30, 2019 was primarily the result of the maturity of $127.0 million in short-term investments and the sale of $13.1 million in short-term investments, partially offset by the purchase of $130.4 million in short-term investments. Net cash provided by investing activities of $39.1 million for the nine months ended September 30, 2018 was primarily the result of the sales and maturities of $104.5 million in short-term investments partially offset by the purchase of $59.3 million in short-term investments and $6.0 million in long-term investments.

Financing Activities

Net cash provided by financing activities of $0.3 million for the nine months ended September 30, 2019 was primarily the result of $0.4 million in proceeds from the exercise of stock options and stock purchases through our ESPP. Net cash provided by financing activities of $10.8 million for the nine months ended September 30, 2018 was the result of $10.5 million in proceeds from issuance of common stock, $0.7 million in proceeds from the exercise of stock options and stock purchases through our ESPP offset by $0.4 million of payments of deferred offering costs.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS
 
There have been no material changes to our contractual obligations and commitments outside the ordinary course of business from those disclosed under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Contractual Obligations and Commitments” as contained in our Annual Report on Form 10-K for the year ended December 31, 2018 filed by us with the SEC on March 5, 2019.
 
Off-Balance Sheet Arrangements

During the periods presented, we did not have, nor do we currently have, any off-balance sheet arrangements as defined under SEC rules.

29




ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of U.S. interest rates. Due to the short-term duration of our investment portfolio and the low risk profile of our investments, an immediate 10% change in interest rates would not have a material effect on the fair market value of our portfolio. Accordingly, we would not expect our operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates on our investment portfolio.
 
We do not believe that our cash, cash equivalents and available-for-sale investments have significant risk of default or illiquidity. While we believe our cash and cash equivalents and certificates of deposit do not contain excessive risk, we cannot provide absolute assurance that in the future our investments will not be subject to adverse changes in market value. In addition, we maintain certain amounts of cash and cash equivalents at one or more financial institutions that are in excess of federally insured limits.
 
Inflation generally affects us by increasing our cost of labor and clinical trial costs. We do not believe that inflation has had a material effect on our results of operations for the three and nine months ended September 30, 2019 or September 30, 2018.
 
ITEM 4.     CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures

Our principal executive officer and principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, or Exchange Act) as of September 30, 2019, have concluded that, based on such evaluation, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
 
Changes in Internal Control Over Financial Reporting

We routinely review our internal control over financial reporting and from time to time make changes intended to enhance the effectiveness of our internal control over financial reporting. We will continue to evaluate the effectiveness of our disclosure controls and procedures and internal control over financial reporting on an ongoing basis and will take action as appropriate. There have been no changes to our internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during the third quarter of 2019 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

30




PART II - OTHER INFORMATION
 
ITEM 1.     LEGAL PROCEEDINGS
 
None.
 
ITEM 1A.        RISK FACTORS

An investment in shares of our common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as the other information contained elsewhere in this report, before deciding whether to purchase, hold or sell shares of our common stock. The occurrence of any of the following risks could harm our business, financial condition, results of operations and/or growth prospects or cause our actual results to differ materially from those contained in forward-looking statements we have made in this report and those we may make from time to time. You should consider all of the risk factors described when evaluating our business. We have marked with an asterisk (*) those risk factors that reflect changes from the risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2018 filed with the Securities and Exchange Commission on March 5, 2019.

Risks Related To Our Financial Condition and Need For Additional Capital

We are evaluating external assets to build our pipeline of product candidates and there can be no assurance that we will be successful in identifying or completing a transaction for a candidate, that any such transaction will result in additional value for our stockholders or that the process will not have an adverse impact on our business.* 

Earlier this year, we initiated a review of external assets that could be added to our pipeline of product candidates. In July 2019, in connection with this process, we entered into a License and Development Agreement with Cantex Pharmaceuticals, Inc. (Cantex) pursuant to which we acquired exclusive worldwide rights to develop and commercialize, for any and all uses, a glycosaminoglycan biologic known as dociparstat (DSTAT), which is currently being studied for the treatment of acute myeloid leukemia (AML) and, potentially, other serious diseases. Under the terms of the license agreement, we will be responsible for, and bear the future costs of, worldwide development and commercialization of DSTAT. These costs will be substantial, and we may require additional capital in order to pursue the development and commercialization of DSTAT as planned. Moreover, the anticipated benefits of our license to DSTAT may never be realized due to the various risks and uncertainties associated with drug development detailed elsewhere in the following risk factors.

In addition to DSTAT, we may in-license or acquire additional assets, engage in a merger or acquisition transaction, issue additional shares of our common stock, or engage in other potential actions designed to maximize stockholder value. Our continuing review of external assets may not result in the identification or consummation of any transaction. The process of reviewing external opportunities may be time consuming and disruptive to our business operations and, if we are unable to effectively manage the process, our business, financial condition and results of operations could be adversely affected. We could incur substantial expenses associated with identifying, evaluating, negotiating, and consummating potential transactions. There can be no assurance that any potential additional transaction, if consummated, will provide greater value to our stockholders than that reflected in the current price of our common stock. In addition, once any potential additional transaction is consummated, we are likely to incur substantial costs associated with future development and testing of any new product candidate, which may require us to raise additional capital.

We have incurred significant losses since our inception. We anticipate that we will continue to incur significant losses for the foreseeable future, and we may never achieve or maintain profitability.*

We are a biopharmaceutical company focused primarily on developing DSTAT for the treatment of AML and brincidofovir (BCV) for the treatment of smallpox. We have incurred significant net losses in each year since our inception, including net losses of $109.1 million and $54.5 million for the nine months ended September 30, 2019 and 2018, respectively. As of September 30, 2019, we had an accumulated deficit of approximately $665.3 million.


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To date, we have financed our operations primarily through the sale of equity securities and, to a lesser extent, through government funding, licensing fees and debt. We have devoted most of our financial resources to research and development, including our preclinical development activities and clinical trials. We have not completed development of any product candidates. We expect to continue to incur losses and negative cash flows for the foreseeable future. The size of our losses will depend, in part, on the rate of future expenditures and our ability to generate revenues. In particular, we expect to incur substantial expenses as we seek to:

initiate development and manufacturing activities of DSTAT for the treatment of AML and other potential indications;
terminate our development activities of BCV for indications other than smallpox, including closing the AdAPT and IV studies of BCV;
continue the development of BCV for the treatment of smallpox as a medical countermeasure;
obtain regulatory approvals for DSTAT and BCV;
scale-up manufacturing capabilities to commercialize DSTAT and BCV in the event we receive regulatory approval;
identify and in-license additional product candidates to expand our research and development pipeline;
maintain, expand and protect our intellectual property portfolio; and
continue our internal research and development efforts and seek to discover additional product candidates.

To become and remain profitable, we must succeed in developing and eventually commercializing products with significant market potential. This will require us to be successful in a range of challenging activities, including acquiring or discovering product candidates, completing preclinical testing and clinical trials of our product candidates, obtaining regulatory approval for these product candidates, and manufacturing, marketing and selling those products for which we may obtain regulatory approval. We are only in the preliminary stages of some of these activities.

To date, we have not obtained regulatory approval for any product candidate, and none of our product candidates have been commercialized. We may never succeed in developing or commercializing any product candidate. If we do not successfully develop or commercialize any product candidate, or if revenues from any products that do receive regulatory approvals are insufficient, we will not achieve profitability and our business may fail. Even if we successfully obtain regulatory approval to market a product candidate in the United States, our revenues are also dependent upon the size of markets outside of the United States, as well as our ability to obtain market approval and achieve commercial success outside of the United States.

Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would depress the value of our company and could impair our ability to raise capital, expand our business, diversify our product offerings or continue our operations. A decline in the value of our company could cause you to lose all or part of your investment.

Our ability to generate future revenues from product sales is uncertain and depends upon our ability to successfully develop, obtain regulatory approval for, and commercialize product candidates.*

Our ability to generate revenue and achieve profitability depends on our ability, alone or with collaborators, to successfully complete the development, obtain the necessary regulatory approvals and commercialize product candidates. We do not anticipate generating revenues from product sales for the foreseeable future. Our ability to generate future revenues from product sales depends heavily on our success in:

obtaining favorable results for and advancing the development of DSTAT for the treatment of AML and BCV for the treatment of smallpox;
obtaining United States and foreign regulatory approval(s) for DSTAT and BCV;
generating, licensing or otherwise acquiring a pipeline of product candidates which progress to clinical development, regulatory approval, and commercialization.

Conducting preclinical testing and clinical trials is a time-consuming, expensive and uncertain process that takes years to complete, and we may never generate the necessary data required to obtain regulatory approval and achieve product sales. Our anticipated development costs would likely increase if we do not obtain favorable results or if development of any product candidate is delayed. In particular, we would likely incur higher costs than we currently anticipate if development of any product candidate is delayed because we are required by the FDA or foreign regulatory authorities to perform studies or trials in addition to those that we currently anticipate, or we decide to conduct additional studies or trials for strategic reasons.

Because of the numerous risks and uncertainties associated with pharmaceutical product development, we are unable to predict with certainty the timing or amount of any increase in our anticipated development costs that will result should any additional trials be necessary.

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In addition, any product candidate, if approved, may not achieve commercial success. Our commercial revenues, if any, will be derived from sales of products that we do not expect to be commercially available for a number of years, if at all. Even if any product candidate is approved for commercial sale, we anticipate incurring significant costs in connection with commercialization. As a result, we cannot assure you that we will be able to generate revenues from sales of any approved product candidate, or that we will achieve or maintain profitability even if we do generate sales.

If we fail to obtain additional financing, we could be forced to delay, reduce or eliminate our product development programs, seek corporate partners for the development of our product development programs or relinquish or license on unfavorable terms, our rights to technologies or product candidates.*

Developing pharmaceutical products, including conducting preclinical studies and clinical trials, is a time-consuming, expensive and uncertain process that takes years to complete. We believe that our existing capital available to fund operations will enable us to fund our current operating expenses and capital requirements for at least the next twelve months. Changing circumstances beyond our control may cause us to consume capital more rapidly than we currently anticipate, and our clinical trials may encounter technical, enrollment or other difficulties that could increase our development costs more than we expected, or because the FDA or foreign regulatory authorities require us to perform studies or trials in addition to those that we currently anticipate.

In July 2019, we entered into a License and Development Agreement with Cantex in which we acquired an exclusive worldwide license to develop and commercialize DSTAT. We plan to initiate a Phase 3 clinical trial of DSTAT for the treatment of AML in mid-2020 subject to discussions with FDA.

We are also pursuing additional external opportunities to build our pipeline of product candidates, and we may need to raise additional funds if we identify additional product candidates other than DSTAT and BCV, which we may obtain through one or more equity offerings, debt financings, government or other third-party funding, strategic alliances and licensing or collaboration arrangements.

Securing additional financing may divert our management from our day-to-day activities, which may adversely affect our ability to develop and commercialize DSTAT, BCV, or any other product candidate. In addition, we cannot guarantee that future financing will be available in sufficient amounts or on terms acceptable to us, if at all. If we are unable to raise additional capital when required or on acceptable terms, we may be required to:

significantly delay, scale back or discontinue the development or commercialization of DSTAT, BCV or any other product candidate;
seek corporate partners for DSTAT, BCV, or any other product candidate at an earlier stage than otherwise would be desirable or on terms that are less favorable than might otherwise be available; or
relinquish or license on unfavorable terms, our rights to technologies or product candidates that we otherwise would seek to develop or commercialize ourselves.

If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we will be prevented from pursuing development and commercialization efforts, which will have a material adverse effect on our business, operating results and prospects and on our ability to develop our product candidates.

 Risks Related To Clinical Development and Regulatory Approval

Our product candidates, DSTAT and BCV, are still under clinical development for the treatment of smallpox, AML and other potential indications, respectively, and may not obtain regulatory approval or be successfully commercialized.*

We have not marketed, distributed or sold any products. Our product candidates are DSTAT, which we are developing for the treatment of AML and other potential indications and BCV, which we continue to develop for the treatment of smallpox as a medical countermeasure. We plan to initiate a Phase 3 clinical trial of DSTAT for the treatment of AML in mid-2020 subject to discussions with FDA.

There is no guarantee that our current or future clinical trials will be approved by regulators, and no guarantee that they will be completed or, if completed, will be successful, or if successful, will result in an approval for the sale of any of our product candidates. The success of each of DSTAT and BCV will depend on several factors, including the following:

acceptance of data from our studies of oral BCV in animal models, including data necessary to bridge to a recommended human dose, by the FDA and foreign regulatory bodies;

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reaching agreement with the FDA on the design and conduct of a pivotal Phase 3 clinical trial to support approval of DSTAT;
receipt of marketing approvals from the FDA and corresponding regulatory authorities outside the United States;
establishing manufacturing capabilities necessary for a registration trial and commercialization of DSTAT;
establishing commercial manufacturing capabilities for BCV;
acceptance of the product, if approved for marketing;
effectively competing with other therapies;
a continued acceptable safety profile of the product following approval; and
obtaining, maintaining, enforcing and defending intellectual property rights and claims.

If we do not achieve one or more of these factors in a timely manner or at all, we could experience significant delays or an inability to successfully commercialize BCV, which would materially harm our business.

We have never obtained regulatory approval for a drug and we may be unable to obtain, or may be delayed in obtaining, regulatory approval for DSTAT and BCV.*

We have never obtained regulatory approval for a drug. It is possible that the FDA and/or foreign health authorities, such as the EMA, may refuse to accept our NDA (or corresponding foreign application) for substantive review or may conclude after review of our data that our application is insufficient to obtain regulatory approval of DSTAT, BCV or both.

Through our continuing development contract with BARDA, we recently completed the in-life segment of our second rabbitpox efficacy study as well as a pivotal efficacy study in the mouse model (ectromelia virus). We believe that efficacy data from these models could support the approval of BCV for the treatment of smallpox. The data from these trials is subject to on-going confirmatory studies and audit. In addition, we are preparing data necessary to bridge to a recommended human dose.

In July, we entered into a license agreement with Cantex where we acquired an exclusive license to global development and commercialization rights to DSTAT. We plan to initiate a Phase 3 clinical trial of DSTAT for the treatment of AML in mid-2020 subject to discussions with FDA.

We have not yet reached agreement with the FDA or foreign regulators regarding the adequacy of these planned studies, for either DSTAT or BCV, with respect to a potential approval for marketing. We may be required to conduct additional clinical, nonclinical or manufacturing validation studies and submit those data before reconsideration of our application occurs. Depending on the extent of these or any other required studies, approval of any NDA or application that we submit may be delayed by several years, or may require us to expend more resources than we have available. It is also possible that additional studies, if performed and completed, may not be considered sufficient by the FDA and/or foreign health authorities to approve our NDA or foreign application.

Any delay in obtaining, or an inability to obtain, regulatory approvals could prevent us from generating revenues and achieving and sustaining profitability. If any of these outcomes occur, we may be forced to abandon our development efforts for DSTAT and BCV, which would have a material adverse effect on our business and could potentially cause us to cease operations.

We depend on the successful completion of clinical trials for our product candidates, including DSTAT and BCV. The positive clinical results obtained for our product candidates in prior clinical studies may not be repeated in future clinical studies.*

Before obtaining regulatory approval for the sale of our product candidates, including BCV, we must conduct extensive clinical trials to demonstrate the safety and efficacy of our product candidates. Clinical testing is expensive, difficult to design and implement, can take many years to complete and is uncertain as to outcome. A failure of one or more of our clinical trials can occur at any stage of testing. The outcome of preclinical testing and early clinical trials may not be predictive of the success of later clinical trials, and interim results of a clinical trial do not necessarily predict final results. Moreover, preclinical and clinical data are often susceptible to varying interpretations and analyses, and many companies that have believed their product candidates performed satisfactorily in preclinical studies and clinical trials have nonetheless failed to obtain marketing approval for their products.

We may experience a number of unforeseen events during, or as a result of, clinical trials or animal efficacy studies for our product candidates, that could adversely affect the completion of our clinical trials, including:

regulators or institutional review boards may not authorize us or our investigators to commence a clinical trial or conduct a clinical trial at a prospective trial site;
clinical trials of our product candidates may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical trials or abandon product development programs;

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animal efficacy studies of our product candidates may produce negative or inconclusive results, and we may decide, or regulators may require us to conduct additional animal efficacy studies or abandon development programs;
we might be required to change one of our clinical research organizations (CROs) during ongoing clinical programs;
the number of subjects required for clinical trials of our product candidates may be larger than we anticipate, enrollment in these clinical trials may be insufficient or slower than we anticipate or subjects may drop out of these clinical trials at a higher rate than we anticipate;
our third-party contractors may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner, or at all;
we may have to suspend or terminate clinical trials of our product candidates for various reasons, including a finding that the subjects are being exposed to unacceptable health risks;
regulators or institutional review boards may require that we or our investigators suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements;
the cost of clinical trials of our product candidates may be greater than we anticipate;
we may encounter agency or judicial enforcement actions which impact our clinical trials;
the supply or quality of our product candidates or other materials necessary to conduct clinical trials of our product candidates may be insufficient or inadequate; or
our product candidates may have undesirable side effects or other unexpected characteristics, causing us or our investigators to suspend or terminate the trials.

We do not know whether any clinical trials we may conduct will demonstrate adequate efficacy and safety to result in regulatory approval to market our product candidates, including DSTAT and BCV. If later stage clinical trials do not produce favorable results, our ability to obtain regulatory approval for either or both of DSTAT and BCV may be adversely impacted.

Delays in clinical trials are common and have many causes, and any delay could result in increased costs to us and jeopardize or delay our ability to obtain regulatory approval and commence product sales.*

Clinical testing is expensive, difficult to design and implement, can take many years to complete, and is uncertain as to outcome. We may experience delays in clinical trials at any stage of development and testing of our product candidates. Our planned clinical trials may not begin on time, have an effective design, enroll a sufficient number of subjects, or be completed on schedule, if at all.

Events which may result in a delay or unsuccessful completion of clinical trials, including our currently planned or future clinical trials for either DSTAT, BCV or both, include:

inability to raise funding necessary to initiate or continue a trial;
delays in obtaining, or failure to obtain, regulatory approval of Investigational New Drug applications or to commence a trial;
delays in reaching agreement with the FDA and foreign health authorities on final trial design;
imposition of a clinical hold following an inspection of our clinical trial operations or trial sites by the FDA or other regulatory authorities;
delays caused by disagreements with existing CROs and/or clinical trial sites;
delays in reaching agreement on acceptable terms with prospective CROs and clinical trial sites;
delays in obtaining, or failure to obtain, required IRB or ethics committee (EC) approvals covering each site;
delays in recruiting suitable patients to participate in a trial;
delays in having subjects complete participation in a trial or return for post-treatment follow-up;
delays caused by subjects dropping out of a trial due to side effects or otherwise;
clinical sites declining to participate or dropping out of a trial to the detriment of enrollment;
agency or judicial enforcement actions against us;
time required to add new clinical sites; and
delays by our contract manufacturers to produce and deliver sufficient supply of clinical trial materials.

If initiation or completion of any of our clinical trials for our product candidates, including either DSTAT or BCV, are delayed for any of the above reasons, our development costs may increase, our approval process could be delayed, any periods during which we may have the exclusive right to commercialize our product candidates may be reduced and our competitors may have more time to bring products to market before we do. Any of these events could impair our ability to generate revenues from product sales and impair our ability to generate regulatory and commercialization milestones and royalties, all of which could have a material adverse effect on our business.


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Our product candidates may cause adverse effects or have other properties that could delay or prevent their regulatory approval or limit the scope of any approved label or market acceptance.*

Adverse events (AEs) caused by our product candidates could cause us, other reviewing entities, clinical study sites or regulatory authorities to interrupt, delay or halt clinical studies and could result in the denial of regulatory approval. For example, subjects enrolled in our clinical trials for BCV have experienced gastrointestinal AEs and liver-related safety laboratory value changes. In addition, BCV is related to the approved drug cidofovir, a compound which has been shown to result in significant renal toxicity and impairment following use. As a second example, subjects enrolled in clinical trials for DSTAT have experienced febrile neutropenia and liver enzyme elevations. If an unacceptable frequency and/or severity of AEs are reported in our clinical trials for our product candidates, our ability to obtain regulatory approval for product candidates may be negatively impacted.

If any of our approved products cause serious or unexpected side effects prior to or after receiving market approval, a number of potentially significant negative consequences could result, including:

regulatory authorities may approve the product only with a risk evaluation and mitigation strategy (REMS), potentially with restrictions on distribution and other elements to assure safe use (ETASU);
regulatory authorities may withdraw their approval of the product or impose restrictions on its distribution in a form of a modified REMS;
regulatory authorities may require the addition of labeling statements, such as warnings or contraindications;
we may be required to change the way the product is administered or to conduct additional clinical studies;
we could be sued and held liable for harm caused to patients; and
our reputation may suffer.

Any of these events could prevent us from achieving or maintaining market acceptance of the affected product candidate and could substantially increase the costs of commercializing our product candidates.

After the completion of our clinical trials, we cannot predict whether or when we will obtain regulatory approval to commercialize any of our product candidates and we cannot, therefore, predict the timing of any future revenue from DSTAT or BCV.*

We cannot commercialize our product candidates, including DSTAT and BCV, until the appropriate regulatory authorities have reviewed and approved the product candidate. The regulatory agencies may not complete their review processes in a timely manner, or we may not be able to obtain regulatory approval for either of our product candidates. Additional delays in the United States may result if either DSTAT or BCV is brought before an FDA advisory committee, which could recommend restrictions on approval or recommend non-approval of the product candidate. In the EU context, an Oral Explanation during MAA review could extend approval timelines and result in a Negative Opinion. A re-examination procedure is available in the EU whereby a Negative Opinion could be over-turned and become a Positive Opinion. New rapporteurs would be selected for the product. In addition, we may experience delays or rejections based upon additional government regulation from future legislation or administrative action, or changes in regulatory agency policy during the period of product development, clinical studies and the review process. As a result, we cannot predict when, if at all, we will receive any future revenue from commercialization of any of our product candidates.

Even if we obtain regulatory approval for DSTAT and BCV, we will still face extensive regulatory requirements and our products may face future development and regulatory difficulties.*

Even if we obtain regulatory approval, the granting authority may still impose significant restrictions on the indicated uses, distribution or marketing of our product candidates, including DSTAT and BCV, or impose ongoing requirements for potentially costly post-approval studies or post-market surveillance. For example, the labeling ultimately approved for our product candidates, including DSTAT and BCV, will likely include restrictions on use due to the specific patient population and manner of use in which the drug was evaluated and the safety and efficacy data obtained in those evaluations. In addition, the distribution of DSTAT and BCV may be tightly controlled through a REMS with ETASU, which are required medical interventions or other actions healthcare professionals need to execute prior to prescribing or dispensing the drug to the patient. Some actions may also be required in order for the patient to continue on treatment. For example, the label for BCV may be required to include a boxed warning, or “black box,” regarding BCV being carcinogenic, teratogenic and impairing fertility in animal studies, as well as a contraindication in patients who have had a demonstrated clinically significant hypersensitivity reaction to BCV or cidofovir or any component of the formulation. The BCV labeling may also include warnings or black boxes pertaining to gastrointestinal AEs or liver-related safety laboratory value changes.

DSTAT, BCV and any other product candidates will also be subject to additional ongoing regulatory requirements governing the labeling, packaging, storage, distribution, safety surveillance, advertising, promotion, record-keeping and reporting of safety and other post-market information. In the United States, the holder of an approved NDA is obligated to monitor and report AEs and

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any failure of a product to meet the specifications in the NDA. The holder of an approved NDA must also submit new or supplemental applications and obtain FDA approval for certain changes to the approved product, product labeling or manufacturing process. If a REMS is required, the NDA holder may be required to monitor and evaluate those in the healthcare system who are responsible for implementing ETASU measures. Advertising and promotional materials must comply with FDA rules and are subject to FDA review, in addition to other potentially applicable federal and state laws. Moreover, EU and member countries impose strict restrictions on the promotion and marketing of drug products. The off-label promotion of medicinal products is prohibited in the U.S., EU and in other territories. The promotion of medicinal products that are not subject to a marketing authorization is also prohibited in the EU. Violations of the rules governing the promotion of medicinal products in the EU and in other territories could be penalized by administrative measures, fines and imprisonment.

In addition, manufacturers of drug products and their facilities are subject to payment of user fees and continual review and periodic inspections by regulatory authorities for compliance with cGMP, and adherence to commitments made in the application. If we, or a regulatory agency, discover previously unknown problems with a product, such as quality issues or AEs of unanticipated severity or frequency, or problems with the facility where the product is manufactured, a regulatory agency may impose restrictions relative to that product or the manufacturing facility, including requiring recall or withdrawal of the product from the market or suspension of manufacturing.

If we fail to comply with applicable regulatory requirements following approval of any product candidates, a regulatory agency may:

issue an untitled or warning letter asserting that we are in violation of the law;
seek an injunction or impose civil or criminal penalties or monetary fines;
suspend or withdraw regulatory approval;
suspend any ongoing clinical trials;
refuse to approve a pending application or supplements to an application submitted by us;
recall and/or seize product; or
refuse to allow us to enter into supply contracts, including government contracts.

Any government investigation of alleged violations of law could require us to expend significant time and resources in response and could generate negative publicity. The occurrence of any event or penalty described above may inhibit our ability to commercialize DSTAT, BCV and any other product candidates and inhibit our ability to generate revenues.

Obtaining FDA approval for any one of our products in the United States does not mean we will ever obtain approval for or commercialize DSTAT, BCV, or any other products outside of the United States, nor does approval of any of our products outside the United States mean we will ever obtain approval for or commercialize any other products inside the United States, all of which could limit our ability to realize their full market potential.*

In order to market any products outside of the United States, we must establish and comply with numerous and varying regulatory requirements on a country-by-country basis regarding safety and efficacy. Approval by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions. In addition, clinical trials conducted in one country may not be accepted by regulatory authorities in other countries, and regulatory approval in one country does not guarantee regulatory approval in any other country. Approval processes vary among countries and can involve additional product testing and validation and additional administrative review periods. Seeking foreign regulatory approval could result in difficulties and costs for us and require additional preclinical studies or clinical trials which could be costly and time consuming. Regulatory requirements can vary widely from country to country and could delay or prevent the introduction of our products in those countries. We do not have any product candidates approved for sale in any jurisdiction, including international markets, and we do not have experience in obtaining regulatory approval in any markets. If we fail to comply with regulatory requirements in international markets or to obtain and maintain required approvals, or if regulatory approvals in international markets are delayed, our target market will be reduced and our ability to realize the full market potential of our products will be unrealized.

Conversely, approval by regulatory authorities outside the United States, such as the European Commission, does not ensure approval by the FDA. Moreover, clinical trials conducted outside the United States may not be accepted by the FDA.


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Our relationships with investigators, health care professionals, consultants, third-party payers, and customers may be subject to applicable anti-kickback, fraud and abuse and other healthcare laws and regulations, which could expose us to criminal sanctions, civil penalties, contractual damages, reputational harm and diminished profits and future earnings.

Healthcare providers, physicians and others play a primary role in the recommendation and prescribing of any products for which we obtain marketing approval. Our current business operations and future arrangements with investigators, healthcare professionals, consultants, third-party payers and customers may expose us to broadly applicable fraud and abuse and other healthcare laws and regulations. These laws may constrain the business or financial arrangements and relationships through which we research, market, sell and distribute our products for which we obtain marketing approval. Restrictions under applicable federal and state healthcare laws and regulations, include, but are not limited to, the following:

the federal healthcare anti-kickback statute which prohibits, among other things, persons or entities from knowingly and willfully soliciting, offering, receiving or paying remuneration (including any kickback, bribe or rebate), directly or indirectly, overtly or covertly, in cash or in kind, to induce or reward e