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TMCNet:  ALDER BIOPHARMACEUTICALS INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

[August 05, 2014]

ALDER BIOPHARMACEUTICALS INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Edgar Glimpses Via Acquire Media NewsEdge) This section should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included in Part I, Item 1 of this report and our audited consolidated financial statements and related notes thereto and management's discussion and analysis of financial condition and results of operations for the year ended December 31, 2013 included in our prospectus dated May 7, 2014, filed with the Securities and Exchange Commission, or SEC, pursuant to Rule 424(b) under the Securities Act of 1933, as amended, or the Securities Act, on May 8, 2014.


Forward-Looking Statements This discussion contains certain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are identified by words such as "believe," "will," "may," "estimate," "continue," "anticipate," "intend," "should," "plan," "expect," "predict," "could," "potentially" or the negative of these terms or similar expressions. You should read these statements carefully because they discuss future expectations, contain projections of future results of operations or financial condition, or state other "forward-looking" information. These statements relate to our future plans, objectives, expectations, intentions and financial performance and the assumptions that underlie these statements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in this report in Part II, Item 1A - "Risk Factors," and elsewhere in this report. Forward-looking statements are based on our management's beliefs and assumptions and on information currently available to our management. These statements, like all statements in this report, speak only as of their date, and we undertake no obligation to update or revise these statements in light of future developments..

Overview We are a clinical-stage biopharmaceutical company that discovers, develops and seeks to commercialize therapeutic antibodies with the potential to meaningfully transform current treatment paradigms. We have developed a proprietary antibody platform designed to select antibodies that have the potential to maximize efficacy as well as speed of onset and durability of therapeutic response. In addition, we believe our ability to efficiently manufacture antibodies using our yeast-based manufacturing technology, MabXpress, allows us to target diseases that traditionally have not been addressed by antibodies. Both our lead product candidates were discovered internally, have achieved proof-of-concept and are expected to enter final Phase 2b dose-ranging trials in 2014 in preparation for progression to Phase 3 trials if supported by the data.

ALD403 is our wholly-owned novel monoclonal antibody targeted to calcitonin gene-related peptide, or CGRP, for migraine prevention. We recently completed a three month randomized, placebo-controlled proof-of-concept trial of ALD403 in 163 patients suffering from five to 14 migraine days per month, or high frequency migraine. In July 2014, we initiated a multiple dose, placebo-controlled trial of ALD403 to assess safety, pharmacodynamics and pharmacokinetics of a subcutaneous formulation of ALD403. We plan to initiate Phase 2b dose-ranging trials for the treatment of chronic migraines with an intravenous formulation and frequent episodic migraines with a subcutaneous formulation in the second half of 2014 and first half of 2015, respectively, with the goal of initiating pivotal Phase 3 trials in 2016.

Clazakizumab is a novel monoclonal antibody that inhibits the pro-inflammatory cytokine interleukin-6, or IL-6, and is being developed for both rheumatoid arthritis, or RA, and psoriatic arthritis, or PsA. In November 2009, we entered into a license and collaboration agreement with Bristol-Myers Squibb, or BMS, for the development and commercialization of Clazakizumab and received an $85 million upfront payment. BMS is responsible for paying 100% of worldwide development costs for all indications, except cancer, and reimbursing us for certain clinical supply and development costs, subject to us being responsible for approximately 50% of costs incurred by us for development of manufacturing process improvements up to certain caps with respect to such costs. To date, in addition to the upfront payment, we have received two milestone payments totaling $18.5 million in the aggregate and reimbursed clinical supply and development costs of $26.8 million. We may also receive additional development-based and regulatory-based milestone payments of up to $394.0 million in RA. In addition, if Clazakizumab is commercialized for RA, we may receive sales-based milestones up to $500.0 million and tiered royalties starting in the mid-teens up to 20% on net sales of Clazakizumab. Under the collaboration agreement, we are entitled to additional milestone payments and royalties for additional indications, subject to certain reductions.

We are currently evaluating four programs with the view of advancing at least one candidate into the clinic in 2015 for a disease indication where therapeutic antibodies have not previously played a role. We will continue to enhance our technologies to discover optimized product candidates that can be manufactured efficiently on a very large scale. We may seek to monetize our technology 11 --------------------------------------------------------------------------------platform by consummating partnerships with leading biotechnology and pharmaceutical companies. We also intend to continue to deploy capital to selectively develop our own portfolio of product candidates.

As of June 30, 2014, we had an accumulated deficit of $158.6 million. We expect to experience increasing operating losses for the foreseeable future. We expect our expenses will increase substantially in connection with our ongoing activities, as we: · conduct clinical trials for ALD403; · continue to evaluate our preclinical programs and advance at least one product candidate into the clinic; · enhance our proprietary antibody platform and conduct discovery and preclinical activities; · manufacture antibodies for our preclinical programs and clinical trials; · seek regulatory approval for our product candidates; and · operate as a public company.

We will not generate revenues from product sales unless and until we or our collaborators successfully complete development and obtain regulatory approval for one or more of our product candidates, which we expect will take a number of years and is subject to significant uncertainty. If we obtain regulatory approval for ALD403 or any future product candidate, we expect to incur significant commercialization expenses related to sales, marketing, manufacturing and distribution to the extent that such costs are not paid by future collaborators. Our ability to generate product revenues and become profitable may also depend upon BMS's ability to successfully commercialize Clazakizumab.

Recent Developments In May 2014, we completed our initial public offering, or IPO of 8,875,396 shares of common stock, which included 875,396 shares of common stock we issued pursuant to the underwriters' partial exercise of their over-allotment option, at an initial public offering price of $10.00 per share. The proceeds from the IPO were $80.3 million net of underwriting discounts and commissions and offering expenses.

Financial Operations Overview Revenues Substantially all of our revenues for the three and six months ended June 30, 2014 and 2013 were derived from our collaboration with BMS. Upfront fees, milestone payments and reimbursed clinical supply and development costs received under our collaboration agreements are deferred and are recognized as revenues over the development period using a time-based approach.

We have not generated any revenues from the sale of products. In the future, we may generate revenues from product sales and from collaboration agreements in the form of license fees, milestone payments, reimbursements for clinical supply and development costs and royalties on product sales. We expect that any revenues we generate will fluctuate from quarter to quarter as a result of the uncertain timing and amount of such payments and sales.

Research and Development Expenses Research and development expenses represent costs incurred by us for the discovery and development of our product candidates. The following items are included in research and development expenses: · external costs under agreements with clinical research organizations, or CROs, contract manufacturing organizations, or CMOs, and other significant third-party vendors or consultants used to perform preclinical, clinical and manufacturing activities; · internal costs including employee-related costs such as salaries, benefits, stock-based compensation expense, travel, laboratory consumables and services for our research and development personnel; and · allocated facilities, depreciation, and other expenses, which include rent and maintenance of facilities, information technology services and other infrastructure expenses.

We use our employee and infrastructure resources across multiple research and development programs directed toward evaluating our monoclonal antibodies for selecting product candidates. We manage certain activities such as preclinical toxicology studies, clinical trial operations and manufacture of product candidates through third-party CROs, CMOs or other third-party vendors.

12 -------------------------------------------------------------------------------- We track our significant external costs by each product candidate. We also track our human resource efforts on certain programs for purposes of billing our collaborators for time incurred at agreed upon rates. We do not, however, assign or allocate to individual product candidates or development programs our internal costs and we group these internal research and development activities into three categories: Category Description Preclinical discovery and development Research and development expenses incurred in activities substantially in support of discovery of new targets through the selection of a single product candidate. These activities encompass the discovery and translational medicine functions, including pharmacokinetic and drug metabolism preclinical studies, toxicology and early strain and assay development activities.

Pharmaceutical operations Research and development expenses incurred related to manufacturing preclinical study and clinical trial materials, including scale-up process development and quality control activities.

Clinical development Research and development expenses incurred related to Phase 1, Phase 2 and Phase 3 clinical trials, including regulatory affairs activities.

We plan to increase our research and development expenses for the foreseeable future as we continue the development of ALD403 and the evaluation and advancement of future product candidates into clinical development. The timing and amount of research and development expenses incurred will depend largely upon the outcomes of current and future clinical trials for our product candidates as well as the related regulatory requirements, manufacturing costs and any costs associated with the advancement of our preclinical programs. We cannot determine with certainty the duration and completion costs of the current or future 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, including: · the scope, rate of progress, and expense of our ongoing, as well as any additional, clinical trials and other research and development activities; · future clinical trial results; · potential changes in government regulation; and · the timing and receipt of any regulatory approvals.

A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate.

General and Administrative Expenses General and administrative expenses consist primarily of salaries and related benefits, including stock-based compensation, related to our executive, business development, intellectual property, finance, human resources and support functions. Other general and administrative expenses include allocated facility-related costs not otherwise included in research and development expenses, travel expenses and professional fees for auditing, tax and legal services, including intellectual property related legal services. We have incurred and expect to incur additional expenses as a result of operating as a public company, including expenses related to compliance with the rules and regulations of the SEC, and those of the NASDAQ Stock Market LLC, or NASDAQ, additional insurance expenses, investor relations activities and other administrative and professional services.

13 --------------------------------------------------------------------------------Results of Operations Comparison of the Three and Six Months Ended June 30, 2014 and 2013 Revenues Revenues recognized and cash payments received under our collaboration agreements were as follows: Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 (in thousands) (in thousands) Revenues recognized: Bristol-Myers Squibb: Amortization of deferred revenue from upfront payments $ 3,025 $ 3,025 $ 6,017 $ 6,017 Recognition of milestone payments 659 659 1,310 1,310 Recognition of reimbursed clinical supply and development costs 1,004 979 1,993 1,935 Bristol-Myers Squibb total 4,688 4,663 9,320 9,262 Other collaborations 15 - 165 - Total revenues recognized $ 4,703 $ 4,663 $ 9,485 $ 9,262 Cash payments received: Bristol-Myers Squibb: Reimbursed clinical supply and development costs $ 120 $ 105 $ 182 $ 143 Bristol-Myers Squibb total 120 105 182 143 Other collaborations - - 250 - Total cash payments received $ 120 $ 105 $ 432 $ 143 Revenues for the three and six months ended June 30, 2014 and 2013 were derived primarily from our collaboration agreement with BMS. For the three and six months ended June 30, 2014, revenues increased by 1% and 2%, respectively, compared to the same periods of 2013, due primarily to revenue recognized from other collaborations.

Research and Development Expenses Three Months Ended Six Months Ended June 30, June 30, 2014 2013 Dollar change % change 2014 2013 Dollar change % change (dollars in thousands) (dollars in thousands) External costs: ALD403 $ 4,291 $ 2,720 $ 1,571 58 % $ 6,399 $ 5,084 $ 1,315 26 % Clazakizumab 528 619 (91 ) (15 %) 995 1,769 (774 ) (44 %) Unallocated internal costs: Preclinical discovery and development 2,906 2,861 45 2 % 5,793 5,936 (143 ) (2 %) Pharmaceutical operations 1,280 1,203 77 6 % 2,464 2,496 (32 ) (1 %) Clinical development 372 742 (370 ) (50 %) 746 1,342 (596 ) (44 %) Total research and development expenses $ 9,377 $ 8,145 $ 1,232 15 % $ 16,397 $ 16,627 $ (230 ) (1 %) Research and development expenses increased by $1.2 million, or 15%, for the three months ended June 30, 2014 compared to the same period of 2013. During such period, external costs for ALD403 increased $1.6 million due to manufacturing costs incurred to advance our Phase 2 program for migraine. Unallocated internal costs also decreased by $0.2 million due primarily to a decrease in personnel-related costs.

14 -------------------------------------------------------------------------------- Research and development expenses decreased $0.2 million, or 1%, for the six months ended June 30, 2014 compared to the same period of 2013. During such period, external costs for ALD403 increased $1.3 million due to manufacturing costs incurred to advance our Phase 2 program for migraine. This increase was partially offset by a decrease of $0.8 million in external costs for our clinical trial in cancer for Clazakizumab, which, in 2013, we decided to discontinue. We anticipate incurring $1.2 million in expenses during 2014 as our clinical trial of Clazakizumab in cancer concludes. Unallocated internal costs also decreased $0.8 million due to decreased activities related to our preclinical programs, and decreases in personnel-related and other operating costs.

General and Administrative Expenses General and administrative expenses increased by $1.1 million, or 67%, for the three months ended June 30, 2014 compared to the same period of 2013. The increase was primarily due to increases in legal and other fees related to our patent filings of $0.5 million and higher consulting and professional fees to operate as a public company, personnel-related costs, business insurance and other administrative costs of $0.6 million.

General and administrative expenses increased by $2.4 million, or 70%, for the six months ended June 30, 2014 compared to the same period of 2013. The increase was primarily due to increases in legal and other fees related to our patent filings of $1.3 million, increases in other consulting and professional fees to operate as a public company of $0.7 million and other increases in personnel related costs, business insurance and other administrative costs of $0.4 million.

Interest Income The decrease of $7,000 in interest income for the three months ended June 30, 2014 compared to the same period of 2013 was due to a decrease in the average interest rate earned on our cash, cash equivalents and investments. The decrease of $26,000 in interest income for the six months ended June 30, 2014 compared to the same period of 2013 was due primarily to a decrease in the average balances of cash, cash equivalents and investments in addition to a decrease in the average interest rate earned.

Liquidity and Capital Resources Due to our significant research and development expenditures, we have generated significant operating losses since our inception. We have funded our operations primarily through sales of our convertible preferred stock, payments from our collaboration partners and proceeds from our IPO. As of June 30, 2014, we had available cash, cash equivalents and investments of $80.3 million, which consisted of cash, money market funds and negotiable certificates of deposit.

We believe that our available cash, cash equivalents and investments will be sufficient to meet our projected operating requirements through at least 2015.

We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect.

Furthermore, our operating plan may change, and we may need additional funds to meet operational needs and capital requirements for product development and commercialization sooner than planned. We currently have no credit facility or committed sources of capital other than potential milestones receivable under our collaboration agreement with BMS. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates and the extent to which we may enter into additional collaborations with third parties to participate in their development and commercialization, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our current and anticipated clinical trials. Our future funding requirements will depend on many factors, as we: · initiate or continue clinical trials of ALD403, our wholly-owned novel monoclonal antibody for prevention of migraine; · continue the research and development of our product candidates; · seek to discover additional product candidates; · seek regulatory approvals for our product candidates that successfully complete clinical trials; · establish a sales, marketing and distribution infrastructure and scale-up manufacturing capabilities to commercialize products which receive regulatory approval; · enhance operational, financial and information management systems and hire additional personnel, including personnel to support development of our product candidates and, if a product candidate is approved, our commercialization efforts; and · incur additional costs associated with being a public company.

15 -------------------------------------------------------------------------------- We plan to continue to fund our operations and capital funding needs through equity and/or debt financing. The sale of additional equity would result in additional dilution to our stockholders. The incurrence of debt financing would result in debt service obligations and the instruments governing such debt could provide for operating and financing covenants that would restrict our operations. We may also consider new collaborations or selectively partnering ALD403 for further clinical development and commercialization outside of the United States. To the extent that we raise additional capital through marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our product candidates, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us. If we do need to raise additional capital to fund our operations, funding may not be available to us on acceptable terms, or at all. If we are not able to secure adequate additional funding we may be forced to make reductions in spending, extend payment terms with suppliers, liquidate assets where possible, and/or suspend or curtail planned programs. Any of these actions could harm our business, results of operations and future prospects.

Historical Cash Flow Trends The following table summarizes our cash flows for the periods indicated: Six Months Ended June 30, 2014 2013 Net cash used in operating activities $ (23,171 ) $ (20,519 ) Net cash provided by (used in) investing activities (10,357 ) 3,338 Net cash provided by financing activities 80,547 16 Cash Used in Operating Activities Net cash used in operating activities in both periods resulted primarily from our net losses adjusted for non-cash charges and changes in components of working capital. Net cash used in operating activities was $23.2 million during the six months ended June 30, 2014 compared to $20.5 million during the same period of 2013. The increase in cash used in operating activities in the six months ended June 30, 2014 compared to the same period of 2013 was driven primarily by an increase in net loss of $2.0 million, changes in prepaid expenses and other assets and offset by changes in accounts payable.

Cash Provided by (Used in) Investing Activities Net cash used in investing activities was $10.4 million in the six months ended June 30, 2014 due primarily to purchases of investments and to a lesser extent, purchases of property and equipment. Net cash provided by investing activities was $3.3 million in the six months ended June 30, 2013 due primarily to the maturity of investments, offset in part by purchases of property and equipment.

Cash Provided by Financing Activities Cash provided by financing activities in the six months ended June 30, 2014 was $80.5 million due primarily to our IPO, in which we received proceeds of $82.5 million net of underwriting discounts and commissions. In addition, we incurred approximately $2.2 million in offering costs, of which $1.9 million were paid in the six months ended June 30, 2014 and $0.3 million were included in accounts payable and accrued liabilities at June 30, 2014. In the six months ended June 30, 2013, cash provided by financing activities was the result of stock option exercises.

Off-Balance Sheet Arrangements We did not have any off-balance sheet arrangements in the six months ended June 30, 2014.

Contractual Obligations Our future minimum contractual commitments as of December 31, 2013 were reported in our prospectus dated May 7, 2014 filed with the SEC pursuant to Rule 424(b) under the Securities Act of 1933, or Securities Act. There have been no other material changes from the contractual commitments previously disclosed in that prospectus.

16 --------------------------------------------------------------------------------Critical Accounting Policies and Significant Judgments and Estimates Our management's discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with United States generally accepted accounting principles, or U.S.

GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues generated and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. There have been no significant and material changes in our critical accounting policies during the three and six months ended June 30, 2014, as compared to those disclosed in "Management's Discussion and Analysis of Financial Conditions and Results of Operations - Critical Accounting Policies and Significant Judgments and Estimates" in our prospectus dated May 7, 2014 filed with the SEC pursuant to Rule 424(b) under the Securities Act. We believe that the accounting policies discussed in such prospectus are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management's judgments and estimates.

Newly Adopted Accounting Pronouncements In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in Accounting Standards Codification 605, Revenue Recognition. This ASU stipulates that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. This ASU is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted, and retrospective application is required. We are currently evaluating the impact of the adoption of this ASU on our consolidated financial statements.

JOBS Act As an "emerging growth company," the Jumpstart our Business Startups Act, or the JOBS Act, allows us to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. As a result, our financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective date for new or revised accounting standards that are applicable to public companies.

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