$KITE Form 10-K

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Biotech Stocks

Form 10-K for KITE PHARMA, INC.


28-Feb-2017

Annual Report

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of OperationsThe following discussion contains management’s discussion and analysis of our financial condition and results of operations and should be read together with “Selected Financial Data” and the historical consolidated financial statements and the notes thereto included in “Financial Statements and Supplementary Data.” This discussion contains forward-looking statements that reflect our plans, estimates and beliefs and involve numerous risks and uncertainties, including but not limited to those described in the “Risk Factors” section of this Annual Report. Actual results may differ materially from those contained in any forward-looking statements. You should carefully read “Special Note Regarding Forward-Looking Statements” and “Risk Factors.” Overview
We are a clinical-stage biopharmaceutical company focused on the development and commercialization of novel cancer immunotherapy products designed to harness the power of a patient’s own immune system to target and kill cancer cells. We do this using our engineered autologous cell therapy, which we believe is a transformational approach to the treatment of cancer. Our therapy involves the genetic engineering of T cells to express either chimeric antigen receptors, or CARs, or T cell receptors, or TCRs. These modified T cells are designed to recognize and destroy cancer cells.

Our lead product candidate, KTE-C19, is a CAR-based therapy that targets the CD19 antigen, a protein expressed on the cell surface of B-cell lymphomas and leukemias. Since the second half of 2015, we have been conducting a Phase 2 clinical trial (ZUMA-1) of KTE-C19 in patients with relapsed or refractory aggressive diffuse large B cell lymphoma, or DLBCL, primary mediastinal B cell lymphoma, or PMBCL, or transformed follicular lymphoma, or TFL. DLBCL, PMBCL and TFL are types of aggressive non-Hodgkin lymphoma, or NHL. Based on the results from the primary analysis of ZUMA-1, we plan to submit a


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Biologics License Application, or BLA, in the first quarter of 2017 to the U.S. Food and Drug Administration, or FDA, for the accelerated approval of KTE-C19 for the treatment of patients with relapsed or refractory aggressive NHL, who are ineligible for autologous stem cell transplant. We plan to commercially launch KTE-C19 in 2017, if approved.

We are conducting other clinical studies of KTE-C19 for additional hematological indications. We are also advancing other CAR- and TCR-based product candidates. We filed an investigational new drug application, or IND, to initiate a Phase 1 clinical trial of our first lead TCR-based product candidate, KITE-718, at the end of 2016 and plan to open the trial for enrollment in the first half of 2017. Components of Operating Results
Revenues
As of December 31, 2016, our revenue has been limited to a portion of the upfront payment we received under the research collaboration and license agreement with Amgen, Inc., or the Amgen Agreement, reimbursed research and development costs relating to the Amgen targets and amounts received under a research, development and commercialization agreement with the Leukemia & Lymphoma Society, Inc., or LLS. We received an upfront payment of $60.0 million from Amgen in February 2015. Amgen will fund the research and development costs for all programs with certain limitations through any IND filing. We will reimburse Amgen for the research and development costs for any Kite program that progresses to an IND filing. Each company will then be responsible for clinical development and commercialization of their respective therapeutic candidates, including all related expenses. We may be responsible for the manufacturing and processing of Amgen program product candidates for a certain period following the completion of any Phase 2 clinical trials under a separately negotiated supply agreement, should Amgen choose not to transition manufacturing to itself or to a mutually agreed upon designee of Amgen. We applied the FASB Accounting Standards Update No. 2009-13, Multiple-Deliverable Revenue Arrangements, in evaluating the appropriate accounting for the upfront payment and research funding under the Amgen Agreement. In accordance with this guidance, we concluded that the Amgen Agreement should be accounted for as a single unit of accounting and the Amgen Agreement consideration should be recognized in the same manner as the final deliverable, which is research service. The $60.0 million upfront payment was recorded as deferred revenue and is being recognized over a four-year period, which is the estimated period of performance for the research service under this agreement. In addition, the Amgen research funding, which is due as the related services are performed under the Amgen Agreement, is recorded as revenue on a time and material basis, and the related costs are recorded as research and development expense in our consolidated statements of operations.
Under certain circumstances, we may be required to reimburse Amgen for research and development services for Kite targets. We will defer the recognition of revenue related to research and development services billed until the potential reimbursement contingency has lapsed. Any costs reimbursed by Amgen that relate to a Kite program that progresses to an IND filing are recorded as deferred revenue until either an IND is filed and we are required to reimburse Amgen for such expenses, or the program ends without an IND filing, at which point the revenue will be recognized.
During the year ended December 31, 2016 and 2015, we recognized $20.0 million and $17.1 million of revenue under the Amgen Agreement, respectively. As of December 31, 2016, we had deferred revenue relating to the Amgen Agreement of $34.8 million, of which $3.7 million related to Kite programs that would be paid back to Amgen in the event that the Kite programs progress to an IND filing. As of December 31, 2015, we had deferred revenue relating to the Amgen Agreement of $47.2 million, of which $1.1 million related to Kite programs that would potentially be paid back to Amgen in the event of an IND filing. In the future, we may generate revenue from a combination of product sales, government or other third-party funding, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements or a combination of these approaches. 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 our product candidates in a timely manner or obtain regulatory approval of them, our ability to generate future revenue, and our results of operations and financial position, will be materially adversely affected. Research and Development Expenses
Research and development costs are expensed as incurred. Research and development costs consist primarily of salaries, benefits, and other staff-related costs including associated stock-based compensation, laboratory supplies, facilities and overhead costs, clinical trial and related clinical manufacturing costs, costs related to manufacturing preparations, fees paid to


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other entities that conduct certain research and development activities on our behalf and payments made pursuant to license agreements. Clinical trial and other development costs incurred by third parties are expensed as the contracted work is performed.
We accrue for costs incurred as the services are being provided by monitoring the status of the trial or project and the invoices received from our external service providers. We adjust our accrual as actual costs become known. Where contingent milestone payments are due to third parties under research and development arrangements or license agreements, the milestone payment obligations are expensed when the milestone results are achieved.
Under certain circumstances, we may be required to reimburse Amgen for research and development services. We will defer the recognition of revenue related to research and development services billed until the potential reimbursement contingency has lapsed.
Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect our research and development expenses to increase over the next several years as our ZUMA clinical program progresses and as we seek to initiate clinical trials of additional product candidates. We also expect to incur increased research and development expenses as we selectively identify and develop additional product candidates. However, it is difficult to determine with certainty the duration and completion costs of our current or future preclinical programs and clinical trials of our product candidates.
The duration, costs and timing of clinical trials and development of our product candidates will depend on a variety of factors that include, but are not limited to, the following:
� per patient trial costs;

� the number of patients that participate in the trials;

� the number of sites included in the trials;

� the countries in which the trials are conducted;

� the length of time required to enroll eligible patients;

� the number of doses that patients receive;

� the drop-out or discontinuation rates of patients;

� potential additional safety monitoring or other studies requested by regulatory agencies;

� the duration of patient follow-up; and

� the efficacy and safety profile of the product candidates.

In addition, the probability of success for each product candidate will depend on numerous factors, including competition, manufacturing capability and commercial viability. We will determine which programs to pursue and how much to fund each program in response to the scientific and clinical success of each product candidate, as well as an assessment of each product candidate’s commercial potential.
Because our product candidates are still in the early stages of clinical and preclinical development and the outcome of these efforts is uncertain, we cannot estimate the actual amounts necessary to successfully complete the development and commercialization of product candidates or whether, or when, we may achieve profitability. Until such time, if ever, as we can generate substantial product revenue, we expect to finance our cash needs through a combination of equity or debt financings and collaboration arrangements. General and Administrative Expenses
General and administrative expenses consist primarily of salaries and other staff-related costs, including stock-based compensation, for personnel in executive, commercial, finance, accounting, legal, investor relations, facilities, business development and human resources functions. Other significant costs include costs relating to preparing for the potential commercial launch of KTE-C19, facilities and overhead costs, sublicense royalty expenses, legal fees relating to corporate and patent matters, insurance, public company expenses relating to maintaining compliance with NASDAQ listing rules and SEC requirements, investor relations costs, fees for accounting and consulting services, and other general and administrative costs. General and administrative costs are expensed as incurred, and we accrue for services provided by third parties related to the


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above expenses by monitoring the status of services provided and receiving estimates from our service providers, and adjusting our accruals as actual costs become known.

We anticipate that our general and administrative expenses will increase in the future to support our continued research and development activities, potential commercialization of our product candidates and the increased costs of operating as a public company. These increases will likely include increased costs related to the hiring of additional personnel, continuing the development of our commercial infrastructure, and fees to outside consultants, lawyers and accountants, among other expenses. The increased costs associated with being a public company include expenses related to services associated with maintaining compliance with NASDAQ listing rules and SEC requirements, insurance and investor relations costs.
T-Cell Factory Acquisition
On March 17, 2015, we entered into a stock purchase agreement, or TCF Purchase Agreement, with T-Cell Factory B.V., or TCF, and the shareholders of TCF to acquire all of the outstanding capital stock of TCF. The signing and closing of the transaction happened concurrently whereupon TCF became our wholly-owned subsidiary and was renamed Kite Pharma EU B.V., or Kite Pharma EU. The TCF Purchase Agreement contains certain representations, warranties, covenants and indemnities by the parties thereto, in each case customary for a transaction of this nature and scope. We acquired TCF for the opportunity to significantly expand our pipeline of TCR-based product candidates. Using its proprietary TCR-GENErator technology platform, we believe TCF may be able to systematically discover tumor-specific TCRs. For additional information, please see Note 12 to our financial statements appearing elsewhere in this Annual Report. Results of Operations
Comparison of the Years Ended December 31, 2016 and 2015 The following table sets forth our results of operations for the years ended December 31, 2016 and 2015.

                                     YEAR ENDED DECEMBER 31,         CHANGE
                                       2016            2015            $
                                                 (in thousands)
Revenues                          $     22,170     $   17,258     $    4,912
Operating expenses:
Research and development               197,934         76,369        121,565
General and administrative              97,423         44,839         52,584
Total operating expenses               295,357        121,208        174,149
Loss from operations                  (273,187 )     (103,950 )     (169,237 )
Other income (expense):
Interest income                          3,624          1,809          1,815
Interest expense                           (13 )          (26 )           13
Other income (expense), net               (388 )          514           (902 )
Total other income (expense), net        3,223          2,297            926
Loss before income taxes              (269,964 )     (101,653 )     (168,311 )
Benefit from income taxes                2,894              -          2,894
Net loss                          $   (267,070 )   $ (101,653 )   $ (165,417 )

Revenues
Revenues were $22.2 million and $17.3 million for the years ended December 31, 2016 and 2015, respectively. The increase in revenues during this period of $4.9 million was primarily due to increased revenues recognized under the Amgen Agreement and our agreement with LLS.
Research and Development Expenses
Research and development expenses were $197.9 million and $76.4 million for the years ended December 31, 2016 and 2015, respectively. The increase in research and development expenses during this period of $121.5 million was primarily due to:


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� $39.5 million in costs from an increase in headcount and related costs for our research and development personnel, including increased stock based compensation expense of $14.8 million, to support increased clinical trial activities, including clinical manufacturing, and activities related to preparing for commercial manufacturing;

� $38.3 million in costs related to research and clinical development activities, including from our clinical trials and licensing and collaborations;

� $27.8 million in costs related to expanded clinical manufacturing activities and preparation for commercial manufacturing; and

� $15.9 million of expenses related to facilities and overhead, depreciation and amortization, and other expenses.

General and Administrative Expenses

General and administrative expenses were $97.4 million and $44.8 million for the years ended December 31, 2016 and 2015, respectively. The increase in general and administrative expenses during this period of $52.6 million was primarily due to:
� $33.3 million in costs from an increase in headcount and related personnel costs, including increased stock based compensation expense of $18.1 million, to support our growing business and for preparation of commercial launch; and

� $19.3 million in costs related to increased professional services, consulting, and other external costs primarily due to the expansion of our information technology infrastructure, pre-commercial activities and higher legal, accounting and other costs to support our growing business.

Interest Income
Interest income was $3.6 million and $1.8 million for the years ended December 31, 2016 and 2015, respectively. The increase in interest income during this period of $1.8 million was primarily due to higher invested marketable securities balances.

Benefit From Income Taxes
Benefit from income taxes was $2.9 million and $0 for the years ended December 31, 2016 and 2015, respectively. The increase was primarily due to a tax benefit recognized that related to net operating losses from foreign operations for which we recorded income tax benefit to the extent of our foreign deferred tax liabilities. The excess tax benefit was not recorded due to a valuation allowance.

Comparison of the Years Ended December 31, 2015 and 2014 The following table sets forth our results of operations for the years ended December 31, 2015 and 2014.

                                     YEAR ENDED DECEMBER 31,        CHANGE
                                       2015            2014            $
                                                (in thousands)
Revenues                          $      17,258     $       -     $  17,258
Operating expenses:
Research and development                 76,369        23,089        53,280
General and administrative               44,839        13,569        31,270
Total operating expenses                121,208        36,658        84,550
Loss from operations                   (103,950 )     (36,658 )     (67,292 )
Other income (expense):
Interest income                           1,809           371         1,438
Interest expense                            (26 )      (6,269 )       6,243
Other income (expense), net                 514           (13 )         527
Total other income (expense), net         2,297        (5,911 )       8,208
Net loss                          $    (101,653 )   $ (42,569 )   $ (59,084 )


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Revenues
Revenues were $17.3 million and $0 for the years ended December 31, 2015 and 2014, respectively. The increase in revenues during this period was primarily due to revenues recognized under the Amgen Agreement of $17.1 million, as well as $0.2 million of revenues recognized related to an agreement with LLS. Research and Development Expenses
Research and development expenses were $76.4 million and $23.1 million for the years ended December 31, 2015 and 2014, respectively. The increase in research and development expenses during this period of $53.3 million was primarily due to:
� $14.5 million in costs related to growth in our product development program and Amgen pre-clinical development program;

� $12.9 million of expenses related to expanded clinical manufacturing, facilities, depreciation, travel, and other expenses;

� $11.8 million in compensation expense related to increased research and development staff and consultant costs;

� $10.0 million in stock-based compensation expense related to our increases of research and development staff and consultants; and

� $4.1 million in costs related to expanded our Kite Pharma EU operations.

General and Administrative Expenses
General and administrative expenses were $44.8 million and $13.6 million for the years ended December 31, 2015 and 2014, respectively. The increase in general and administrative expenses during this period of $31.2 million was primarily due to:
� $14.6 million of stock-based compensation expenses related to increase in our administrative staff and consultants;

� $8.2 million of expenses related to increased personnel costs, including employees and professional fees;

� $5.2 million of expenses related to increase in legal and accounting services, public company expenses, and other expenses; and

� $3.2 million of increase in expenses related to license obligations.

Interest Expenses
Interest expense was $26,000 and $6.3 million for the years ended December 31, 2015 and 2014, respectively. The decrease in interest expense during this period of $6.2 million was primarily due to the beneficial conversion feature on the 2014 Notes in fiscal 2014, as further described under Note 7 to our financial statements appearing elsewhere in this Annual Report. The 2014 Notes converted into common shares at the initial public offering, and therefore there were no similar expenses in 2015.
Liquidity and Capital Resources
As of December 31, 2016, we had $414.4 million in cash, cash equivalents, and marketable securities. In January 2017, we received a $50.0 million upfront payment as part of our Collaboration and License Agreement with Daiichi Sankyo Company, Limited. For more information regarding this agreement, see Note 13 to our financial statements appearing elsewhere in this Annual Report. 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 funded our operations principally from the sale of common stock, and through the Amgen collaboration. In 2015, we received an upfront payment of $60.0 million from Amgen, and raised approximately $300.7 million in net proceeds from our follow-on offering of common shares in December 2015 as well as from the net proceeds received in January 2015 from the underwriters’ exercise in full of their over-allotment option from our December 2014 follow-on offering of common shares.
We have incurred losses and cumulative negative cash flows from operations since our inception in 2009 and, as of December 31, 2016, we had an accumulated deficit of $426.7 million. We anticipate that we will continue to incur losses for the foreseeable future and our product candidates may never achieve commercialization. We expect that our research and development expenses, general and administrative expenses, and capital expenditures will continue to increase. As a result, until such time, if ever, as we can generate substantial product revenue, we expect to finance our cash needs through a combination of equity or debt financings and collaboration arrangements. Our primary uses of capital are, and we expect will


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continue to be, compensation and related expenses, third-party clinical research and development services, costs relating to preparing for the potential commercial launch of KTE-C19, license payments or milestone obligations that may arise, laboratory and related supplies, clinical costs, manufacturing costs, legal and other regulatory expenses and general overhead costs. Cash Flows
The following table sets forth the significant sources and uses of cash for the periods set forth below:

                                                YEAR ENDED DECEMBER 31,
                                            2016          2015          2014
                                                     (in thousands)
Net cash provided by (used in):
Operating activities                    $ (168,904 )   $ (19,032 )   $ (17,072 )
Investing activities                      (112,941 )    (106,540 )    (160,139 )
Financing activities                         3,695       309,068       364,152
Effect of exchange rate changes on cash       (132 )          49             -
Net change in cash and cash equivalents $ (278,282 )   $ 183,545     $ 186,941

Operating Activities
Net cash used in operating activities was $168.9 million during the year ended December 31, 2016 as compared to $19.0 million during the year ended December 31, 2015. The increase in cash used in operating activities of $149.9 million between the year ended December 31, 2016 and 2015 was primarily the result of increased operating expenses due to additional headcount, facilities related costs, research and development expenses, manufacturing development costs and clinical activities and less cash received under the Amgen Agreement. Net cash used in operating activities was $19.0 million during the year ended December 31, 2015 as compared to $17.1 million during the year ended December 31, 2014. The increase in cash used in operating activities of $1.9 million between the year ended December 31, 2015 and 2014 was primarily the result increased operating expenses due to additional headcount, facilities related costs, and payments made under the Cabaret license and other research and development and clinical activities, partially offset by cash received from Amgen as an upfront payment related to the Amgen Agreement. Investing Activities
Net cash used in investing activities was $112.9 million during the year ended December 31, 2016 as compared to $106.5 million during the year ended December 31, 2015. The increase in cash used in investing activities of $6.4 million between the year ended December 31, 2016 and 2015 was primarily the result of the investment of the proceeds from our December 2015 follow-on offering and transactional activity related to our marketable securities portfolio, as well as our investment in Cell Design Labs, partially offset by less cash used for the purchase of property and equipment and to fund the TCF acquisition.
Net cash used in investing activities was $106.5 million during the year ended December 31, 2015 as compared to $160.1 million during the year ended December 31, 2014. The decrease in cash used in investing activities of $53.6 million between the year ended December 31, 2015 and 2014 was primarily the result of increased transactional activity related to our marketable securities portfolio in 2014 as compared to 2015, offset by cash used to purchase equipment as well as cash used to fund the acquisition of TCF. Financing Activities
Net cash provided by financing activities was $3.7 million during the year ended December 31, 2016 as compared to $309.1 million during the year ended December 31, 2015. The decrease in cash provided by financing activities of $305.4 million between the year ended December 31, 2016 and 2015 was primarily due to the December 2015 follow-on offering of common shares, with no comparable activity in 2016.
Net cash provided by financing activities was $309.1 million during the year ended December 31, 2015 as compared to $364.2 million during the year ended December 31, 2014. The decrease in cash provided by financing activities of $55.1 million between the year ended December 31, 2015 and 2014 was primarily the result of greater proceeds from our initial public offering in June 2014 and . . .

 

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