KITE Form 10-K

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Biotech Stocks

Form 10-K for KITE PHARMA, INC.


26-Mar-2015

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 eradicate cancer cells. We do this using our engineered autologous cell therapy, or eACT, which we believe is a market-redefining approach to the treatment of cancer. eACT 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. We have a Cooperative Research and Development Agreement, or CRADA, with the U.S. Department of Health and Human Services, as represented by the National Cancer Institute, or the NCI, through which we are funding the research and development of eACT-based product candidates utilizing CARs and TCRs for the treatment of advanced solid and hematological malignancies. We currently fund multiple early single phase (1-2a and 2) clinical trials of CAR- and TCR-based therapies that are each being conducted by our collaborator, the NCI.

We plan to initiate a company-sponsored multicenter Phase 1-2 clinical trial in the first half of 2015 for our lead product candidate KTE-C19, a CAR-based therapy, in patients with refractory diffuse large B cell lymphoma, or DLBCL, including primary mediastinal B cell lymphoma, or PMBCL, and transformed follicular lymphoma, or TFL. DLBCL, PMBCL and TFL are types of aggressive non-Hodgkin’s lymphoma, or NHL. If we believe the data are compelling, we plan to discuss with the U.S. Food and Drug Administration, or FDA, the filing of a Biologics License Application, or BLA, for accelerated approval of KTE-C19 as a treatment for patients with refractory DLBCL, PMBCL and TFL. In addition, we plan to begin Phase 2 clinical trials in 2015 for KTE-C19 in patients with relapsed/refractory mantle cell lymphoma, or MCL, chronic lymphocytic leukemia, or CLL, and acute lymphoblastic leukemia, or ALL. If we believe the data are compelling, we plan to pursue FDA approval for the additional indications.

Recent Developments

Expansion of the CRADA

On February 24, 2015, we amended the CRADA to expand the research plan to include (1) the research and development of the next generation of TCR-based product candidates that are engineered to recognize neo-antigens, which are specific to the unique genetic profile of a patient’s own tumor, (2) the optimization of new methods to manufacture this next generation of TCR-based product candidates and (3) the advancement of CAR-based product candidates for the treatment of clear cell renal cell carcinoma and TCR-based product candidates for the treatment of certain epithelial tumors such as lung and colorectal cancer.

T-Cell Factory Acquisition

On March 17, 2015, we acquired T-Cell Factory, B.V., or TCF, a privately-held biotechnology company headquartered in the Netherlands, which was renamed Kite Pharma EU. The TCF acquisition has the potential to significantly expand our pipeline of TCR-based product candidates. Using its proprietary TCR-GENErator technology platform, TCF can rapidly and systematically discover tumor-specific TCRs.

The TCF acquisition also brings us expertise from Europe’s leading scientists in the field of T cell immuno-oncology as well as a strong partnership with the Netherlands Cancer Institute-Antoni Van Leeuwenhoek, or NKI-AVL, which is the only dedicated cancer center in the Netherlands and maintains an important role as a national and international center of scientific and clinical expertise, development and training. Antonius Schumacher, Ph.D., a preeminent scientist in the field of T cell immuno-oncology, will serve as Chief Scientific Officer of Kite Pharma EU. Dr. Schumacher is currently the Deputy Director and Principal Investigator of the NKI-AVL. TCF also has a license agreement with the NKI-AVL for know-how, materials and protocols, and the right of first negotiation of certain intellectual property rights with relevance to TCRs that may be developed in Dr. Schumacher’s lab at the NKI-AVL over the next five years.

Our Research and Development and License Agreements

Pursuant to the CRADA, we have an exclusive option to negotiate commercialization licenses from the National Institutes of Health, or the NIH, to intellectual property relating to CAR- and TCR-based product candidates developed in the course of the CRADA research plan. We currently have three patent license agreements with the NIH for intellectual property relating to various TCR-based product candidates and a CAR-based product candidate. We also have a license agreement with Cabaret Biotech Ltd., or Cabaret, and


its founder relating to intellectual property and know-how owned or licensed by Cabaret and relating to CAR constructs that encompass KTE-C19.On December 31, 2014, we entered into the Amgen Agreement pursuant to which we and Amgen expect to develop and commercialize CAR-based product candidates directed against a number of Amgen cancer targets. Under the terms of the Amgen Agreement, we and Amgen will jointly create preclinical development plans through IND filing with the FDA for the research and development of CAR-based product candidates that target certain antigens expressed on the cell surface of various cancers. We and Amgen expect to progress multiple Amgen programs, each consisting of the development of one or more CAR-based product candidates directed against a certain Amgen selected cancer target. We and Amgen also expect to progress multiple Kite programs, each consisting of the development of one or more CAR-based product candidates directed against a certain Kite selected cancer target. Under certain circumstances, the collaboration may be expanded to include the research and development of other product candidates.

For additional information regarding the CRADA and our license agreements, see Note 6 to our financial statements appearing elsewhere in this Annual Report.

Components of Operating Results

Revenues

As of December 31, 2014, we have not generated any revenue. 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

To date, our research and development expenses have related primarily to the development of eACT. Research and development expenses consist of expenses incurred in performing research and development activities, including compensation and benefits for research and development employees and consultants, facilities expenses, overhead expenses, cost of laboratory supplies, manufacturing expenses, fees paid to third parties, including the NCI and contract research organizations.

Research and development costs are expensed as incurred. 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 and license agreements, the milestone payment obligations are expensed when the milestone results are achieved.

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 we seek to conduct our planned Phase 1-2 single-arm multicenter clinical trial of KTE-C19 in subjects with refractory DLBCL and additional studies in subjects with other B cell lymphomas and leukemias. 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 eACT is 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 related costs, including stock-based compensation, for personnel in executive, finance, accounting, business development and human resources functions. Other significant costs include facility costs not otherwise included in research and development expenses, legal fees relating to corporate matters and fees for accounting and consulting services.

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 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.

Results of Operations

Comparison of the Years Ended December 31, 2014 and 2013

The following table sets forth our results of operations for the years ended December 31, 2014 and 2013.

                                        YEAR ENDED DECEMBER 31,         CHANGE
                                          2014              2013           $
                                             (in thousands)
         Operating expenses:
         Research and development     $      23,089       $  5,088     $  18,001
         General and administrative          13,569          1,339        12,230
         Total operating expenses            36,658          6,427        30,231
         Loss from operations               (36,658 )       (6,427 )     (30,231 )
         Other income (expense):
         Interest income                        371             52           319
         Interest expense                    (6,269 )           (4 )      (6,265 )
         Other income (expense)                 (13 )           13           (26 )
         Total other income (expense)        (5,911 )           61        (5,972 )
         Net loss                     $     (42,569 )     $ (6,366 )   $ (36,203 )

Research and Development Expenses

Research and development expenses were $23.1 million and $5.1 million for the years ended December 31, 2014 and 2013, respectively. The increase in research and development expenses during this period of $18.0 million was primarily due to:

� $9.9 million in stock-based compensation expense related to our research and development staff and non-employees;

� $3.7 million in compensation expense related to increased research and development staff and consultant costs;

� $3.4 million in costs related to our eACT development program; and

� $1.0 million in other research and development expenses related to depreciation, training, travel, facilities occupancy and office expenses,


General and Administrative ExpensesGeneral and administrative expenses were $13.6 million and $1.3 million for the years ended December 31, 2014 and 2013, respectively. The increase in general and administrative expenses during this period of $12.3 million was primarily due to:

� $6.1 million of stock-based compensation expenses related to our administrative personnel;

� $4.2 million of expenses related to increased personnel costs, including employees and consultants;

� $1.4 million related to increased corporate expenses, primarily related to NASDAQ listing and investor relations; and

� $0.6 million related to increased insurance and facilities occupancy expenses.

Interest Expense

Interest expense was $6.3 million and $3,562 for the years ended December 31, 2014 and 2013, respectively. The increase in interest expense during this period of $6.3 million was primarily due to the beneficial conversion feature on the 2014 Notes, as further described under Note 7 to our financial statements appearing elsewhere in this Annual Report.

Comparison of the Years Ended December 31, 2013 and 2012

The following table sets forth our results of operations for the years ended December 31, 2013 and 2012.

                                       YEAR ENDED DECEMBER 31,         CHANGE
                                         2013             2012           $
                                            (in thousands)
          Operating expenses:
          Research and development   $      5,088       $   1,811     $  3,277
          General and administrative        1,339             770          569
          Total operating expenses          6,427           2,581        3,846
          Loss from operations             (6,427 )        (2,581 )     (3,846 )
          Other income (expense):
          Interest income                      52              36           16
          Interest expense                     (4 )            (1 )         (3 )
          Other income (expense)               13             (27 )         40
          Total other income                   61               8           53
          Net loss                   $     (6,366 )     $  (2,573 )   $ (3,793 )

Research and Development Expenses

Research and development expenses were $5.1 million and $1.8 million for the years ended December 31, 2013 and 2012, respectively. The increase in research and development expenses during this period of $3.3 million was primarily due to:

� $2.0 million in compensation expense related to increased research and development staff and consultant costs;

� $1.0 million in costs related to our eACT development program; and

� $0.3 million related to increased insurance and facilities occupancy expenses.

General and Administrative Expenses

General and administrative expenses were $1.3 million and $0.8 million for the years ended December 31, 2013 and 2012, respectively. The increase in general and administrative expenses during this period of $0.5 million was primarily due to:

� $0.2 million of expenses related to increased personnel costs, including employees and consultants;

� $0.2 million related to increased corporate expenses, primarily related to IPO expenses and investor relations; and

� $0.1 million related to increased travel and facilities occupancy expenses.

Liquidity and Capital Resources

Prior to our IPO, we primarily funded our operations through private placements of convertible preferred stock and convertible notes. In February 2011, March 2011 and November 2012, we issued and sold convertible promissory notes in the aggregate principal amount of $15.3 million. In May 2013, the aggregate principal amount of approximately $15.0 million of convertible notes converted into 9,522,672 shares of Series A convertible preferred stock at a conversion price equal to $1.5751, representing a 15% discount to


the purchase price, and the November 2012 note converted into 137,289 shares of Series A convertible preferred stock at a conversion price of $1.8531. We also issued an additional 10,655,436 shares of our Series A convertible preferred stock for $1.8531 per share and received $19.6 million in net proceeds. In April 2014, we issued and sold the 2014 Notes in the aggregate principal amount of $50.0 million. In addition, we received approximately $3.0 million in connection with the exercise of options by certain of our executive officers in April 2014, which includes the exercise by Dr. Belldegrun, our Founder and Chief Executive Officer, of all of his options for $2.7 million.On June 20, 2014, we completed our IPO and sold 7,500,000 shares of our common stock at a price of $17.00 per share. Additionally, the underwriters exercised their option to purchase an additional 1,125,000 shares at $17.00 per share. As a result of our IPO, we raised a total of approximately $134.1 million in net proceeds after deducting underwriting discounts and commissions of $10.3 million and offering expenses of $2.2 million. Costs directly associated with our IPO were capitalized and recorded as deferred IPO costs prior to the completion of our IPO. These costs have been recorded as a reduction of the proceeds received from the IPO. Upon completion of our IPO, (1) all outstanding shares of our Series A convertible preferred stock, plus accrued dividends, were converted into 20,393,906 shares of common stock, (2) all outstanding warrants to purchase Series A convertible preferred stock converted into warrants to purchase 159,049 shares of common stock and (3) we issued 3,300,735 shares of common stock as a result of the automatic conversion of the $50.0 million aggregate principal amount of the 2014 Notes, plus accrued interest thereon.

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

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

As of December 31, 2014, we had $209.3 million in cash and cash equivalents, and $157.7 million in marketable securities. 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 2009 and, as of December 31, 2014, we had an accumulated deficit of $58.0 million. We anticipate that we will continue to incur losses for at least the next several years. Our primary uses of capital are, and we expect will continue to be, compensation and related expenses, third-party clinical research and development services, laboratory and related supplies, clinical costs, legal and other regulatory expenses and general overhead costs.

Because eACT is 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.

Cash Flows

The following table sets forth the significant sources and uses of cash for the periods set forth below:

                                                    YEAR ENDED DECEMBER 31,
                                                 2014          2013         2012
                                                         (in thousands)
      Net cash provided by (used in):
      Operating activities                    $  (17,072 )   $ (5,612 )   $ (2,786 )
      Investing activities                      (160,139 )       (279 )         (2 )
      Financing activities                       364,152       19,597          255
      Net change in cash and cash equivalents $  186,941     $ 13,706     $ (2,533 )

Operating Activities

Net cash used in operating activities was $17.1 million during the year ended December 31, 2014 as compared to $5.6 million during the year ended December 31, 2013. The increase in cash used in operating activities of $11.5 million between the year ended December 31, 2014 and 2013 was primarily the result of increased operating expenses due to additional headcount, payment of annual bonuses, insurance premiums, facilities related costs, and payments made under the Cabaret license and other research and development and clinical activities.


Investing ActivitiesNet cash used in investing activities was $160.1 million during the year ended December 31, 2014 as compared to $0.3 million during the year ended December 31, 2013. The increase in cash used in investing activities of $159.8 million between the year ended December 31, 2014 and 2013 was primarily the result of transactional activity related to our marketable securities portfolio, as well as the acquisition of laboratory equipment.

Financing Activities

Net cash provided by financing activities was $364.2 million during the year ended December 31, 2014 as compared to $19.6 million during the year ended December 31, 2013. The increase in cash provided by financing activities of $344.6 million between the year ended December 31, 2014 and 2013 was primarily the result of proceeds from the convertible debt offering, our IPO and the follow-on public offering.

Contractual Obligations and Commitments

The following summaries our significant contractual obligations as of December
31, 2014

                                             LESS THAN      1 TO 3      3 TO 5       MORE THAN
                                 TOTAL        1 YEAR         YEARS       YEARS        5 YEARS
                                                        (in thousands)
 Lease obligations(1)           $ 5,937     $       635     $ 1,425     $ 1,371     $     2,506
 Minimum license agreements(2)    1,348             977         192         179               -
 Minimum manufacturing costs(3)     216             216           -           -               -
 Total                          $ 7,501     $     1,828     $ 1,617     $ 1,550     $     2,506

(1) Consists of our lease agreement for a 20,000 square foot facility used for administrative and research and development activities. The lease commenced on June 15, 2013 and has a 10-year initial term expiring on June 15, 2023.

(2) Consists of $250,000 required to be paid under the CRADA, $457,000 under the NIH license agreements and $631,000 under the sponsored research agreement with the Medical Research, Infrastructure and Health Services Fund of the Tel Aviv Medical Center.

(3) Consistent of payments for costs incurred with a third-party manufacturer.

Each of the CRADA and certain of our license agreements under which we may be required to pay quarterly or annual fees is generally cancelable by us, given appropriate prior written notice and, as such, is excluded from the table above, unless the fees were already incurred at December 31, 2014. The annual amount payable by us to maintain the CRADA and certain of our license agreements is approximately $3.1 million. Other than as disclosed in the table above, the payment obligations under the license agreements, as well as under the Amgen Agreement, are contingent upon future events such as our achievement of specified development, regulatory and commercial milestones and we are required to make development milestone payments and royalty payments in connection with the sale of products developed under these agreements. See “Item 1. Business-Our Research and Development and License Agreements” for additional information regarding these payment obligations. As of December 31, 2014, we were unable to estimate the timing or likelihood of achieving the milestones or making future product sales and, therefore, any related payments are not included in the table above.

In addition, after December 31, 2014, we entered into two lease agreements. For additional information regarding these lease agreements, including our payment . . .

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