Business and Basis of Presentation
Overview
Galena Biopharma, Inc. (“we,” “us,” “our,” “Galena” or the “company”) is a biopharmaceutical company focused on developing and commercializing innovative, targeted treatments that address major unmet medical needs to advance cancer care. Our strategy is to build value for patients and shareholders by establishing and expanding our commercial capabilities, developing novel cancer immunotherapies, and expanding the breadth, depth, and pace of our pipeline.
Establishing and Expanding Commercial Capabilities
Our first commercial product, Abstral® (fentanyl) Sublingual Tablets, is approved for the treatment of breakthrough cancer pain (BTcP) which affects an estimated 40%-80% of all cancer patients. Abstral is approved by the U.S. Food and Drug Administration (FDA), as a sublingual (under the tongue) tablet for the management of breakthrough pain in patients with cancer, 18 years of age and older, who are already receiving, and who are tolerant to, opioid therapy for their persistent baseline cancer pain. The Abstral formulation delivers the analgesic power and increased bioavailability of micronized fentanyl in a sublingual tablet which is designed to dissolve under the tongue in seconds, provide relief of breakthrough pain within minutes, and match the duration of the pain episode. Abstral is a transmucosal immediate release fentanyl (TIRF) product with product class oversight by the TIRF Risk Evaluation and Mitigation Strategy (REMS) access program. Galena manufactures and markets Abstral in the United States through its commercial organization.
In July 2014 we expanded our commercial portfolio through the licensing from MonoSol Rx, LLC (MonoSol”) of our second commercial product, Zuplenz® (ondansetron) Oral Soluble Film, which is approved by the FDA in adult patients for the prevention of highly and moderately emetogenic chemotherapy-induced nausea and vomiting (CINV), radiotherapy-induced nausea and vomiting (RINV), and post-operative nausea and vomiting (PONV). Zuplenz is also approved in pediatric patients for moderately emetogenic CINV. Nausea and vomiting are two of the most common side-effects experienced by patients receiving chemotherapy or radiation, as well as post-surgery patients. It is estimated that up to 90% of chemotherapy and up to 80% of radiotherapy patients will experience CINV and RINV, respectively.
Zuplenz utilizes MonoSol’s proprietary PharmFilm® technology, an oral soluble film that dissolves on the tongue in less than thirty seconds. This eliminates the burden of swallowing pills during periods of emesis and in cases of oral irritation, therefore increasing patient adherence and reducing emergency room visits and hospitalization due to a lack of patient compliance or the patient's inability to keep the medication down without vomiting. The active pharmaceutical ingredient in Zuplenz, ondansetron, belongs to a class of medications called serotonin 5-HT3 receptor antagonists and works by blocking the action of serotonin, a natural substance that may cause nausea and vomiting. MonoSol will exclusively manufacture Zuplenz for marketing by Galena in the United States through its expanded commercial organization.
Developing Novel Cancer Immunotherapies
Galena is developing peptide vaccine (off-the-shelf) cancer immunotherapies, which address major patient populations of cancer survivors to prevent recurrence of their cancers. These therapies work by harnessing the patient’s own immune system to seek out and attack residual cancer cells. Using peptide immunogens has many clinical advantages, including an excellent safety profile, as these drugs lack the toxicities typical of most cancer therapies. They also evoke long-lasting protection through immune system activation and convenient mode of delivery. Our peptide vaccines are delivered with the immune adjuvant, recombinant human granulocyte macrophage-colony stimulating factor (rhGM-CSF).
Our lead immunotherapy product candidate, NeuVaxTM (nelipepimut-S) is the immunodominant nonapeptide derived from the extracellular domain of the HER2 protein, a well-established target for therapeutic intervention in breast carcinoma. In this case, approximately 25% of resectable node-positive breast cancer patients, despite having no evidence of disease following surgery and chemo/radiation therapy, will still relapse within three years. Increased presence of circulating tumor cells (CTCs) indicate decreased Disease Free Survival (DFS) and Overall Survival (OS), suggesting a dormancy of isolated micrometastases that over time lead to recurrence. The nelipepimut sequence stimulates specific cytotoxic T lymphocytes (CTLs) following binding to HLA-A2 or A3 molecules on antigen presenting cells (APC) to elicit a robust, specific and durable killer CD8+ CTL response. These activated specific CTLs recognize, neutralize and destroy, through cell lysis, HER2 expressing cancer cells, including occult cancer cells and micrometastatic foci. The nelipepimut immune response can also generate CTLs to other immunogenic peptides through inter- and intra-antigenic epitope spreading. We currently have four ongoing or planned trials with NeuVax:
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• | Phase 3 Ongoing: Based on our Phase 2 trial, the FDA granted NeuVax a Special Protocol Assessment (SPA) for its Phase 3 PRESENT (Prevention of Recurrence in Early-Stage, Node-Positive Breast Cancer with Low-to-Intermediate HER2 Expression with NeuVax Treatment) study. The PRESENT trial is enrolling HER2 1+ and 2+ patients globally. Additional information on the study can be found at www.neuvax.com. |
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• | Phase 2b Ongoing: A randomized, multicenter, investigator-sponsored, 300 patient Phase 2b clinical trial is currently enrolling HER2 1+ and 2+, node positive, and high-risk node negative patients to study NeuVax in combination with Herceptin® (trastuzumab; Genentech/Roche). |
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• | Phase 2 Planned: A randomized, multicenter, investigator-sponsored Phase 2 trial is expected to initiate in 2014 and enroll HER2 3+ patients who have received neoadjuvant therapy to study NeuVax in combination with Herceptin® (trastuzumab; Genentech/Roche). |
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• | Phase 2 Planned: In January 2014, we partnered NeuVax with Dr. Reddy’s in India for the commercialization of NeuVax in that region. Per the agreement, Dr. Reddy’s is responsible for running a Phase 2 gastric cancer trial of NeuVax in India that is expected to initiate in early 2015. |
Our second peptide immunotherapy product candidate, GALE-301 (Folate Binding Protein, or “FBP”), is derived from a protein that is over-expressed (20-80 fold) in more than 90% of ovarian and endometrial cancers. FBP is a highly immunogenic peptide that can stimulate CTLs to recognize and destroy preclinical FBP-expressing cancer cells. The FBP vaccine consists of the FBP peptide(s) combined with rhGM-CSF. Galena’s FBP vaccine is currently in a Phase 2 trial in ovarian cancer.
Expanding the Breadth, Depth and Pace of Our Pipeline
Our third product candidate, GALE-401 (anagrelide controlled release (CR)) was acquired on January 12, 2014. GALE-401 contains the active ingredient anagrelide, an FDA-approved product, which has been in use since the late 1990s for the treatment of patients with myeloproliferative neosplasms, including essential thrombocythemia (ET) to lower abnormally elevated platelet levels. GALE-401 is a reformulated, controlled release version of anagrelide that is currently only given as an immediate release (IR) version. Multiple Phase 1 studies in approximately 90 healthy subjects have shown the drug to be effective at lowering platelet levels while reducing side effects that prevent patients from taking their therapy regularly. Based on a regulatory meeting with the FDA, Galena believes a 505(b)(2) regulatory filing is an acceptable pathway for GALE-401 development, with the reference drug Agrylin® (anagrelide; Shire Pharmaceuticals). The Phase 1 program has demonstrated the targeted PK/PD (pharmacokinetic/pharmacodynamic) profile to enable the Phase 2 initiation in 2014.
In the future, we may pursue selective strategic alliances and acquisitions of other cancer treatments to complement or add to our existing cancer product pipeline.
Basis of Presentation and Significant Accounting Policies
The accompanying consolidated financial statements included herein have been prepared by Galena pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Unless the context otherwise indicates, references in these notes to the “company,” “we,” “us” or “our” refer (i) to Galena, our wholly owned subsidiary, Apthera, Inc., or “Apthera,” and our wholly owned subsidiary, Mills Pharmaceuticals, Inc. or "Mills."
Uses of Estimates in Preparation of Financial Statements — The preparation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from those estimates.
Principles of Consolidation — The consolidated financial statements include the accounts of Galena and its wholly owned subsidiaries. All material intercompany accounts have been eliminated in consolidation.
Reclassifications — Certain prior year amounts have been reclassified to conform to current year presentation. These reclassifications had no effect on net loss per share.
Cash and Cash Equivalents — The company considers all highly liquid debt instruments with an original maturity of 90 days or less to be cash equivalents. Cash equivalents consist primarily of amounts invested in money market accounts and demand deposits.
Restricted Cash — Restricted cash consists of certificates of deposit on hand with the company’s financial institutions as collateral for its corporate credit cards.
Fair Value of Financial Instruments — The carrying amounts reported in the balance sheet for cash equivalents, marketable securities, accounts receivable, accounts payable, and capital leases approximate their fair values due to their short-term nature and market rates of interest.
Accounts Receivable - The company maintains credit limits for all customers based upon several factors, including but not limited to financial condition and stability, payment history, published credit reports and use of credit references. Management performs analysis to evaluate accounts receivables to ensure recorded amounts reflect estimated net realizable value.
Inventories — Inventories are stated at the lower of cost or market value and are determined using the first-in, first-out ("FIFO") method. Inventories consist of Abstral work-in-process and finished goods. The company has entered into manufacturing and supply agreements for the manufacture and packing of Abstral finished goods. As of June 30, 2014, the company had inventories of $433,000, consisting of $233,000 of work-in-process and $200,000 of finished goods. As of December 31, 2013, the company had inventories of $386,000 consisting of $270,000 of work-in-process and $116,000 of finished goods.
Equipment and Furnishings — Equipment and furnishings are stated at cost and depreciated using the straight-line method based on the estimated useful lives (generally three to five years) of the related assets.
Goodwill and Intangible Assets — Goodwill and indefinite-lived intangible assets are not amortized but are tested annually for impairment at the reporting unit level, or more frequently if events and circumstances indicate impairment may have occurred. Factors the company considers important that could trigger an interim review for impairment include, but are not limited to, the following:
•Significant changes in the manner of its use of acquired assets or the strategy for its overall business;
•Significant negative industry or economic trends;
•Significant decline in stock price for a sustained period; and
•Significant decline in market capitalization relative to net book value.
Goodwill and other intangible assets with indefinite lives are evaluated for impairment first by a qualitative assessment to determine the likelihood of impairment. If it is determined that impairment is more likely than not, the company will then proceed to the two step impairment test. The first step is to compare the fair value of the reporting unit to the carrying amount of the reporting unit (the “First Step”). If the carrying amount exceeds the fair value, a second step must be followed to calculate impairment (the “Second Step”). Otherwise, if the fair value of the reporting unit exceeds the carrying amount, the goodwill is not considered to be impaired as of the measurement date. In its review of the carrying value of the goodwill for its single reporting unit and its indefinite-lived intangible assets, the company determines fair values of its goodwill using the market approach, and its indefinite-lived intangible assets using the income approach.
Intangible assets not considered indefinite-lived are reviewed for impairment when facts or circumstances suggest that the carrying value of these assets may not be recoverable. The company’s policy is to identify and record impairment losses, if necessary, on intangible assets when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts.
The company performed its review for impairment using the qualitative assessment for both goodwill and indefinite-lived intangible assets, as well as assets not considered to be indefinite-lived, and has determined that there has been no impairment to these assets as of June 30, 2014.
Revenue Recognition - The company recognizes revenue from the sale of Abstral. Revenue is recognized when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred and title has passed, (iii) the price is fixed or determinable and (iv) collectability is reasonably assured.
We sell Abstral product in the United States to wholesale pharmaceutical distributors and retail pharmacies, or our "customers," subject to rights of return. We recognize Abstral product sales at the time title transfers to our customer, and provide allowances for estimated future product returns, prompt pay discounts, wholesaler discounts, rebates, chargebacks, patient assistance program benefits and other deductions as needed. The company is required to make significant judgments and estimates in determining some of these allowances. If actual results differ from its estimates, the company will be required to make adjustments to these allowances in the future.
Returns - The company estimates future returns based on historical return information, as well as information regarding prescription information and sell-through trends, in relation to the estimated amount of product in the sales channels and product expiration dates. The allowance for returns is recorded as a reduction to revenue in the period in which the revenue is recognized, with a corresponding allowance against accounts receivable.
Prompt Pay Discounts - As an incentive for prompt payment, the company offers a cash discount to customers, which is generally 2% of gross sales. The company expects that all customers will comply with the contractual terms to earn the discount. The company records prompt pay discounts as a reduction to revenue in the period in which the revenue is recognized, with a corresponding allowance against accounts receivable.
Wholesaler Discounts - The company offers discounts on sales to wholesalers and distributors based on contractually determined rates. The company accrues the discount as a reduction of receivables due from the wholesalers upon shipment to the respective wholesale distributors and retail pharmacies and recognizes the discount as a reduction of revenue in the same period the related revenue is recognized.
Rebates - The company participates in certain rebate programs, which provide discounted prescriptions to members of certain managed care organizations, group purchasing organizations and specialty pharmacies. Under these rebate programs, the company pays the rebates generally two to three months after the end of the quarter in which prescriptions subject to the rebate are filled. The company estimates and accrues these rebates based on current contract prices, historical and estimated future percentages of product sold to qualifying member pharmacies and estimated levels of inventory in the distribution channel. Rebates are recognized as a reduction to revenue in the period that the related revenue is recognized, with a corresponding liability in accrued expenses and other current liabilities.
Chargebacks - The company provides discounts primarily to authorized users of the Federal Supply Schedule (FSS) of the General Services Administration under an FSS contract negotiated by the Department of Veterans Affairs and various organizations under Medicaid or Medicare contracts and regulations. These entities purchase products from the wholesale distributors at a discounted price, and the wholesale distributors then charge back to the company the difference between the current retail price and the price the entity paid for the product. The company estimates and accrues chargebacks based on estimated wholesaler inventory levels, current contract prices and historic chargeback activity. Chargebacks are recognized as a reduction of revenue in the period the related revenue is recognized, with a corresponding allowance against accounts receivable.
Patient Assistance Programs - The company offers discount card programs to patients for Abstral in which patients receive discounts on their Abstral prescriptions that are reimbursed by the company. The company estimates the total amount that will be recognized based on a percentage of actual redemption applied to inventory in the distribution and retail channel and recognizes the discount as a reduction of revenue and as an other current liability (see Note 3) in the same period the related revenue is recognized.
Acquisitions and In-Licensing — For all in-licensed products and technologies, we perform an analysis to determine whether we hold a variable interest or a controlling financial interest in a variable interest entity. On the basis of our interpretations and conclusions, we determine whether the acquisition falls under the purview of variable interest entity accounting and if so, consider the necessity to consolidate the acquisition. As of June 30, 2014, we determined there were no variable interest entities required to be consolidated.
We also perform an analysis to determine if the assets and liabilities acquired in an acquisition qualify as a "business." The excess of the purchase price over the fair value of the net assets acquired can only be recognized as goodwill in a business combination.
Contingent Purchase Price Consideration — Contingent consideration in business combinations is recorded at the estimated fair value as of the acquisition date. The fair value of the contingent consideration is re-measured at each reporting period with any adjustments in fair value included in our consolidated statement of comprehensive loss.
Patents and Patent Application Costs — Although the company believes that its patents and underlying technology have continuing value, the amount of future benefits to be derived from the patents is uncertain. Patent costs are, therefore, expensed as incurred.
Share-based Compensation — The company follows the provisions of the FASB ASC Topic 718, “Compensation — Stock Compensation” (“ASC 718”), which requires the measurement and recognition of compensation expense for all stock-based payment awards made to employees, non-employee directors, and consultants, including stock options and warrants. Stock compensation expense based on the grant date fair value estimated in accordance with the provisions of ASC 718 is recognized as an expense over the requisite service period.
For stock options and warrants granted as consideration for services rendered by non-employees, the company recognizes compensation expense in accordance with the requirements of FASB ASC Topic 505-50 (“ASC 505-50”), “ Equity Based Payments to Non- Employees.” Non-employee option and warrant grants that do not vest immediately upon grant are recorded as an expense over the vesting period. At the end of each financial reporting period prior to vesting, the value of these options and warrants, as calculated using the Black-Scholes option-pricing model, is re-measured using the fair value of the company’s common stock and the non-cash compensation recognized during the period is adjusted accordingly. Since the fair market value of options and warrants granted to non-employees is subject to change in the future, the amount of the future compensation expense will include fair value re-measurements until the stock options are fully vested.
Research and Development Expenses — Research and development costs are expensed as incurred. Included in research and development costs are wages, benefits and other operating costs, facilities, supplies, external services and overhead related to our research and development departments, and clinical trial expenses.
Clinical trial expenses include direct costs associated with contract research organizations (CROs), as well as patient-related costs at sites at which our trials are being conducted.
Direct costs associated with our CROs are generally payable on a time and materials basis, or when certain enrollment and monitoring milestones are achieved. Expense related to a milestone is recognized in the period in which the milestone is achieved or in which we determine that it is more likely than not that it will be achieved.
The invoicing from clinical trial sites can lag several months. We accrue these site costs based on our estimate of upfront set-up costs upon the screening of the first patient at each site, and the patient related costs based on our knowledge of patient enrollment status at each site.
Income Taxes — The company recognizes liabilities or assets for the deferred tax consequences of temporary differences between the tax basis of assets or liabilities and their reported amounts in the financial statements in accordance with FASB ASC 740-10, “Accounting for Income Taxes” (“ASC 740-10”). These temporary differences will result in taxable or deductible amounts in future years when the reported amounts of the assets or liabilities are recovered or settled. ASC 740-10 requires that a valuation allowance be established when management determines that it is more likely than not that all or a portion of a deferred asset will not be realized. The company evaluates the realizability of its net deferred income tax assets and valuation allowances as necessary, at least on an annual basis. During this evaluation, the company reviews its forecasts of income in conjunction with other positive and negative evidence surrounding the realizability of its deferred income tax assets to determine if a valuation allowance is required. Adjustments to the valuation allowance will increase or decrease the company’s income tax provision or benefit. The recognition and measurement of benefits related to the company’s tax positions requires significant judgment, as uncertainties often exist with respect to new laws, new interpretations of existing laws, and rulings by taxing authorities. Differences between actual results and the company’s assumptions or changes in the company’s assumptions in future periods are recorded in the period they become known.
There was no income tax expense or benefit for the three and six months ended June 30, 2014. For the three months ended June 30, 2013, we recognized income tax expense of $1,541,000. This expense offsets the tax impact related to the unrealized loss on our marketable securities, which is presented as other comprehensive income, net of tax, on our condensed consolidated statement of comprehensive loss. For the six months ended June 30, 2013, we recognized an income tax benefit of 1,221,000, which offsets the tax impact related to the unrealized gain on our marketable securities. We continue to maintain a full valuation allowance against our net deferred tax assets.
Concentrations of Credit Risk — Financial instruments that potentially subject the company to significant concentrations of credit risk consist principally of cash and cash equivalents. The company maintains cash balances in several accounts with two banks, which at times are in excess of federally insured limits. As of June 30, 2014, the company’s cash equivalents were invested in money market mutual funds. The company’s investment policy does not allow investment in any debt securities rated less than “investment grade” by national ratings services. The company has not experienced any losses on its deposits of cash and cash equivalents. The company maintains significant cash and cash equivalents at two financial institutions that are in excess of federally insured limits.
Comprehensive Loss — Comprehensive loss consists of our net loss and other comprehensive income related to the unrealized gain (loss), net of tax, on our marketable securities, which are classified as available-for-sale. The value of the marketable securities held by the company at June 30, 2013 was approximately $5,786,000, based on quoted market prices of the securities. The company fully liquidated its position in marketable securities during the year ended December 31, 2013.