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AGIOS PHARMACEUTICALS INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.

May 9, 2014

Forward-looking Statements

The following discussion of our financial condition and results of operations should be read with our unaudited condensed consolidated interim financial statements as of March 31, 2014 and for the three months ended March 31, 2014 and 2013 and related notes included in Part I. Item 1 of this Quarterly Report on Form 10-Q, as well as the audited consolidated financial statements and notes and Management's Discussion and Analysis of Financial Condition and Results of Operations and Risk Factors, included in our Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC on March 18, 2014. This Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations, estimates, forecasts, and projections and the beliefs and assumptions of our management and include, without limitation, statements with respect to our expectations regarding our research, development and commercialization plans and prospects, results of operations, general and administrative expenses, research and development expenses, and the sufficiency of our cash for future operations. Words such as "anticipate," "believe," "estimate," "expect," "intend," "may," "plan," "predict," "project," "target," "potential," "will," "would," "could," "should," "continue," and similar statements or variation of these terms or the negative of those terms and similar expressions are intended to identify these forward-looking statements. Readers are cautioned that these forward-looking statements are predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Among the important factors that could cause actual results to differ materially from those indicated by our forward-looking statements are those discussed under the heading "Risk Factors" in Part II, Item 1A and elsewhere in this report. We undertake no obligation to revise the forward-looking statements contained herein to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Overview

We are a biopharmaceutical company committed to applying our scientific leadership in the field of cellular metabolism to transform the lives of patients with cancer and inborn errors of metabolism, or IEMs, which are a subset of orphan genetic metabolic diseases. Metabolism is a complex biological process involving the uptake and assimilation of nutrients in cells to produce energy and facilitate many of the processes required for cellular division and growth. We believe that dysregulation of normal cellular metabolism plays a crucial role in many diseases, including certain cancers and IEMs. We singularly focus our efforts on using cellular metabolism, an unexploited area of biological research with disruptive potential, as a platform for developing potentially transformative small molecule medicines for cancer and IEMs.

The lead product candidates in our most advanced programs are aimed at druggable targets which have undergone rigorous validation processes. Our most advanced cancer product candidates, AG-221 and AG-120, which target mutant isocitrate dehydrogenase 2 and 1, or IDH2 and IDH1, respectively, have demonstrated strong proof of concept in preclinical models. In September 2013, we initiated a phase 1 study for AG-221 in patients with advanced hematologic malignancies with an IDH2 mutation. AG-221 is an orally available, selective, potent inhibitor of the mutated IDH2 protein, making it a highly targeted therapeutic candidate for the treatment of patients with cancers that harbor IDH2 mutations, including those with acute myelogenous leukemia or AML. On April 6, 2014, we announced in a press release, as well as presented, the initial findings from the dose escalation portion of the ongoing phase 1 study of AG-221 at the American Association for Cancer Research (AACR) Annual Meeting 2014 in San Diego, California. In March 2014, we initiated two phase 1 studies for AG-120, one in patients with advanced hematologic malignancies and the second in patients with advanced solid tumors, both trials only enrolling patients with an IDH1 mutation. The lead candidate in our IEM program, AG-348, targets pyruvate kinase for the treatment of pyruvate kinase deficiency. We have completed IND-enabling studies and initiated a phase 1 clinical trial for AG-348 in April 2014.

We are leveraging our expertise in metabolic pathways to discover, validate, develop and commercialize a pipeline of novel drug candidates with a focus in cancer. In April 2010, and subsequently amended in October 2011, we entered into a collaboration agreement with Celgene Corporation, or Celgene, focused on cancer metabolism. Under the collaboration, we are leading discovery, preclinical and early clinical development for all cancer metabolism programs. The discovery phase of the collaboration was initially set to expire in April 2014, subject to Celgene's option to extend the discovery phase for up to two additional years. In December 2013, Celgene notified us of its intent to extend the discovery phase for an additional year through April 2015. Celgene has the option to obtain exclusive rights for the further development and commercialization of certain of these programs, and we will retain rights to the others. For the programs that Celgene chooses to license, we may elect to participate in a portion of sales activities for the medicines from such programs in the United States. In addition, for certain of these programs, we may elect to retain full rights to develop and commercialize medicines from these programs in the United States. Through March 31, 2014, we have received approximately $141.2 million in payments from Celgene and $50.3 million in equity investments and are entitled to a $20.0 million payment in 2014 as a result of the discovery term extension exercised in December 2013. We are also eligible to receive an additional extension payment, payments upon the successful achievement of specified milestones, reimbursements for certain development expenses and royalties on any product sales.

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Since inception, our operations have focused on organizing and staffing our company, business planning, raising capital, assembling our core capabilities in cellular metabolism, identifying potential product candidates, undertaking preclinical studies and conducting a clinical trial. To date, we have financed our operations primarily through funding received from our collaboration agreement with Celgene, private placements of our preferred stock, and the initial public offering, or IPO, of our common stock and concurrent private placement of common stock to an affiliate of Celgene, completed on July 29, 2013. Since March 31, 2014, we have raised additional net proceeds of $94.7 million through a follow-on public offering of our common stock. Substantially all of our revenue to date has been collaboration revenue. In connection with the IPO, our Board of Directors and stockholders approved a 1-for-2.75 reverse stock split of our common stock. The reverse stock split became effective on July 11, 2013. All share and per share amounts in the consolidated financial statements have been retroactively adjusted for all periods presented to give effect to this reverse stock split, including reclassifying an amount equal to the reduction in par value of common stock to additional paid-in capital.

Since inception, we have incurred significant operating losses. Our net losses were $12.2 million and $7.2 million for the three months ended March 31, 2014 and 2013, respectively. As of March 31, 2014, we had an accumulated deficit of $125.7 million. We expect to continue to incur significant expenses and operating losses over the next several years. Our net losses may fluctuate significantly from year to year. We anticipate that our expenses will increase significantly as we continue to transition from IND-enabling to clinical development activities for our lead programs AG-221, AG-120, and AG-348; continue to discover, validate and drug product candidates; expand and protect our intellectual property portfolio; and hire additional development and scientific personnel.

Financial Operations Overview

Revenue

To date, we have not generated any revenue from product sales and do not expect to generate any revenue from product sales in the near future. All of our revenue to date has been derived from our collaboration with Celgene and funding from research grant agreements. Under our Celgene collaboration we are recognizing revenue related to the upfront license fee of $121.2 million, the implied premium of $3.1 million paid on the purchase of $8.8 million of series B convertible preferred stock and the $20.0 million extension payment received in October 2011 to extend the discovery phase until April 2014, ratably over the period over which we expect to fulfill our performance obligations, which we refer to as the performance period. In December 2013, Celgene elected to extend the term of the initial discovery period from four to five years, to April 2015. As a result of the extension, we are entitled to receive a $20.0 million extension payment from Celgene which payment is expected in May 2014. The amount is being combined with the unamortized upfront payments and implied premium and is being recognized as revenue on a straight-line basis over the performance period. We may also be eligible to receive an additional $20.0 million extension payment in the event Celgene elects to extend the discovery phase until April 2016. As of March 31, 2014, we have not received any milestone or royalty payments under the Celgene collaboration agreement. We expect that any revenue we generate from our collaboration agreement will fluctuate from quarter to quarter as a result of the uncertain timing and amount of milestone payments, royalties and other payments.

In the future, we will seek to generate revenue from a combination of product sales and upfront payments, extension payments, milestone payments, and royalties on future product sales in connection with our Celgene collaboration, or other strategic relationships.

Research and Development Expenses

Research and development expenses consist primarily of costs incurred for our research activities, including our drug discovery efforts, and the development of our product candidates, which include:

employee-related expenses including salaries, benefits, and stock-based compensation expense; expenses incurred under agreements with third parties, including contract research organizations, or CROs, that conduct research and development, including both preclinical and clinical activities, on our behalf as well as the cost of consultants; the cost of lab supplies and acquiring, developing, and manufacturing preclinical and clinical study materials; and facilities, depreciation, and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, insurance, and other operating costs.



Research and development costs are expensed as incurred. Nonrefundable advance payments for goods or services to be received in the future for use in research and development activities are deferred and capitalized. The capitalized amounts are expensed as the related goods are delivered or the services are performed.

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The following summarizes our most advanced current research and development programs.

AG-221: Lead IDH2 Program

AG-221 is an orally available, selective, potent inhibitor of the mutated IDH2 protein, making it a highly targeted therapeutic candidate for the treatment of patients with cancers that harbor IDH2 mutations, including those with AML. Based on our established preclinically-based target profiling, as well as preclinical in vitro and in vivo efficacy data, there is a clear rationale to develop AG-221 in defined target populations that harbor an IDH2 mutation.

We have conducted exploratory pharmacology studies to develop a model of IDH2 mutant-induced tumorigenesis and to characterize the binding, inhibition, and selectivity of AG-221. We have demonstrated in in vitro experiments and in in vivo models that exposure to AG-221 reduces 2HG levels to those found in normal cells, reverses 2HG-induced histone hypermethylation, and induces differentiation in multiple leukemia cell models. Targeted inhibition of the IDH2 mutant also reversed the differentiation block in both TF-1 leukemia cells and primary AML cells derived from patients.

During 2013, we successfully completed IND-enabling studies on AG-221. The molecule has excellent pharmacological properties with a wide therapeutic index. In September 2013, we initiated our first phase 1 study for AG-221 in patients with advanced hematologic malignancies with an IDH2 mutation. This multi-center, global, multiple ascending dose trial primarily assesses safety and tolerability for AG-221 in adults with AML or related diseases. Secondary endpoints evaluate the pharmacokinetics and pharmacodynamics properties of AG-221 and determine if preliminary efficacy signals can be measured. The initial proof of mechanism requires the reduction of the metabolite 2HG in response to drug treatment. In April 2014, we reported initial findings from the first two cohorts of patients treated with AG-221. The initial phase 1 data were presented during a symposium titled "Novel Immune and Targeted Therapies for Hematological Malignancies and Solid Tumors" at the AACR Annual Meeting 2014. A total of 10 patients with relapsed or refractory AML, which means that disease had progressed after or was refractory to between one and four prior therapies, were treated with either 30 mg or 50 mg of AG-221 orally twice daily. At the time of data submission to the AACR Annual Meeting 2014, seven of the 10 patients were evaluable for efficacy as they had completed the first 28 day cycle of therapy. Within the first dose cohort at the 30 mg twice-daily dose, three patients did not complete a full 28-day cycle of therapy and died due to complications of disease-related infection common in patients with relapsed or refractory AML. Of the seven evaluable patients, six patients had investigator-assessed objective responses, including three patients who achieved complete remission (CR), two patients who achieved complete remission with incomplete platelet recovery (CRp) and one patient with a partial response (PR). A complete remission is determined by using well-established criteria which requires no evidence of leukemia in the bone marrow and blood accompanied by full restoration of all blood counts to normal ranges. A complete remission with incomplete platelet recovery means all the criteria for CR are met except that platelet counts are outside of the normal range. Platelets are one of the three major types of blood cells. A partial response means all the criteria for CR are met except that the immature defective blood cells, or leukemia, in the bone marrow are in the 5% to 25% range and are decreased by at least 50% over pretreatment. One patient with a CR elected to be removed from the study to undergo a bone marrow transplant; all other patients with objective responses are continuing to receive the drug.

The mechanism of response is consistent with preclinical studies, including substantial reduction of plasma 2HG levels, as well as evidence of cellular differentiation and normalization of cell counts in the bone marrow and blood. This differentiation effect is distinct from that seen with traditional chemotherapeutics commonly used to treat AML.

AG-221 has been well-tolerated to date, with no dose-limiting toxicities reported. Within the 22 patients enrolled as of March 20, 2014, possible drug-related severe adverse events were reported in two patients. These included one patient with an abnormally elevated white blood count and one patient with confusion and respiratory failure concomitant with infection common in patients with AML and related diseases due to a lack of infection-fighting white blood cells.

We are encouraged by the degree of clinical activity and tolerability observed in the first two cohorts of patients (30 mg and 50 mg twice daily). Preliminary analysis of pharmacokinetics at the 30 mg and 50 mg dose levels demonstrated excellent oral AG-221 exposure and a mean plasma half-life of greater than 40 hours. As the maximum tolerated dose has not been reached for AG-221, the dose escalation portion of the trial continues. Given the long half-life observed, we have expanded the trial to include once daily dosing cohorts, beginning with 100 mg. We expect to report on the dose-escalation portion of the ongoing Phase 1 study of AG-221 at the 19th Congress of European Hematology Association (EHA), which is scheduled for June 12-15, 2014. Multiple expansion cohorts are expected to begin later this year after an appropriate dose and schedule are selected.

We intend to conduct subsequent trials in patients with other cancers carrying an IDH2 mutation and in combination with other anti-cancer agents. We plan to pursue additional clinical studies, evaluating both single-agent as well as combination therapy in patients with serious and life-threatening hematological and solid tumors that harbor an IDH2 mutation, in the most efficient manner as we seek to establish the safety and effectiveness of AG-221. The potential regulatory pathway (i.e., conventional or accelerated approval) will be determined by data emerging from the early development program.

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AG-120: Lead IDH1 Program

AG-120 is an orally available, selective, potent inhibitor of the mutated IDH1 protein, making it a highly targeted therapeutic candidate for the treatment of patients with cancers that harbor IDH1 mutations. Importantly, mutations in IDH1 have been identified in difficult to treat cancers such as chondrosarcoma and cholangiocarcinoma where both the treatment options and prognosis for patients are poor. These are indications where the standard of care treatment options are limited, thus providing an opportunity for more rapid development of an IDH1 mutant inhibitor. Based on our preclinical in vitro and in vivo efficacy data, there is a clear rationale to develop AG-120 in defined target populations that harbor an IDH1 gene mutation. We have successfully filed an IND for AG-120 that has been accepted by the FDA. The molecule has excellent pharmacological properties with a wide therapeutic index. In March 2014, we initiated two phase 1 studies for AG-120, one in patients with advanced hematologic malignancies and the second in patients with advanced solid tumors; both trials will only enroll patients that carry an IDH1 mutation.

Celgene has the exclusive option to license development and commercialization rights to AG-120 outside the United States and, in January 2014, we elected to exercise our option to retain development and commercialization rights to AG-120 in the U.S. If Celgene exercises its option, we and Celgene will equally fund the global development costs of AG-120 that are not specific to any particular region or country, Celgene will be responsible for development and commercialization costs specific to countries outside the United States, and we will be responsible for development and commercialization costs specific to the United States.

AG-348: Pyruvate Kinase Deficiency Program

AG-348 is an orally available, potent small molecule activator of PKR enzyme, an isoform of PK that when mutated leads to PK deficiency. Preclinical in vitro data demonstrate that these activators can significantly enhance both the activity and the stability of the majority of the common PKR mutants. This degree of enzyme activation leads to a meaningful correction of the metabolic imbalance normally found within mutant cells. Red blood cells have been obtained from patients with severe and moderate PK deficiency where ex vivo studies have demonstrated enzyme activation and metabolic improvement. We have successfully completed IND-enabling studies and filed an IND for AG-348 that has been accepted by the FDA. The molecule has excellent pharmacological properties with a wide therapeutic index. We started a single ascending dose-escalation phase 1 clinical trial for AG-348 in healthy volunteers in April 2014 and expect to start a multiple ascending dose-escalation phase 1 clinical trial in healthy volunteers in mid-2014.

We believe the clinical and regulatory strategy for our PK deficiency program has well-established primary and secondary endpoints similar to that of other approved medicines developed for the treatment of other anemias.

We have retained worldwide development and commercial rights to AG-348 and expect to fund the future development and commercialization costs related to this program.

Other Research and Platform Programs

Other research and platform programs include activities related to exploratory efforts, target validation, lead optimization for our validated programs and our proprietary metabolomics platform.

We track our internal and external research and development costs on a program-by-program basis. We use our employee and infrastructure resources across multiple research and development programs, and we allocate internal employee-related and infrastructure costs, as well as certain third party costs, to each of these programs based on the personnel resources allocated to such program. Our research and development expenses, by major program for the three months ended March 31, 2014 and 2013, are outlined in the table below:

Three Months Ended March 31, (in thousands) 2014 2013 AG-221 (IDH2) $ 3,348$ 2,486 AG-120 (IDH1) 3,613 2,734 AG-348 (PK deficiency) 3,143 1,200 Other research and platform programs 7,303 5,042 Total research and development expenses $ 17,407$ 11,462 17



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The successful development of our product candidates is highly uncertain. As such, at this time, we cannot reasonably estimate or know the nature, timing and estimated costs of the efforts that will be necessary to complete the remainder of the development of these product candidates. We are also unable to predict when, if ever, material net cash inflows will commence from AG-221, AG-120, AG-348, or any of our other product candidates. This is due to the numerous risks and uncertainties associated with developing medicines, including the uncertainty of:

establishing an appropriate safety profile with IND-enabling toxicology studies; successful enrollment in, and completion of clinical trials; receipt of marketing approvals from applicable regulatory authorities; establishing commercial manufacturing capabilities or making arrangements with third-party manufacturers; obtaining and maintaining patent and trade secret protection and regulatory exclusivity for our product candidates; launching commercial sales of the products, if and when approved, whether alone or in collaboration with others; and continuing acceptable safety profile of the products following approval.



A change in the outcome of any of these variables with respect to the development of any of our product candidates would significantly change the costs and timing associated with the development of that product candidate.

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 research and development costs to increase significantly for the foreseeable future as our product candidate development programs progress. However, we do not believe that it is possible at this time to accurately project total program-specific expenses through commercialization. There are numerous factors associated with the successful commercialization of any of our product candidates, including future trial design and various regulatory requirements, many of which cannot be determined with accuracy at this time based on our stage of development. Additionally, future commercial and regulatory factors beyond our control will impact our clinical development programs and plans.

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, legal and human resources functions. Other significant costs include facility costs not otherwise included in research and development expenses, legal fees relating to patent and corporate matters and fees for accounting and consulting services.

We anticipate that our general and administrative expenses will increase in the future to support continued research and development activities, potential commercialization of our product candidates and 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. Additionally, we anticipate increased costs associated with being a public company including expenses related to services associated with maintaining compliance with exchange listing and Securities and Exchange Commission requirements, insurance, and investor relations costs.

Critical Accounting Policies and Estimates

Our critical accounting policies are those policies which require the most significant judgments and estimates in the preparation of our consolidated financial statements. Management has determined that our most critical accounting policies are those relating to revenue recognition, income taxes, accrued research and development expenses and stock-based compensation. There have been no significant changes to our critical accounting policies discussed in the Annual Report on Form 10-K for the year ended December 31, 2013.

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Results of Operations

Comparison of Three Months Ended March 31, 2014 and 2013

The following table summarizes our results of operations for the three months ended March 31, 2014 and 2013, together with the changes in those items in dollars and as a percentage:

Three Months Ended March 31, (in thousands) 2014 2013 Dollar Change % Change Total revenue $ 8,411$ 6,268 $ 2,143 34 % Operating expenses: Research and development 17,407 11,462 5,945 52 General and administrative 3,288 1,852 1,436 78 Loss from operations (12,284 ) (7,046 ) (5,238 ) 74 Interest income 36 8 28 350 Provision for income taxes - (190 ) 190 100 Net loss $ (12,248 )$ (7,228 )$ (5,020 ) 69 %



Revenue. Revenue increased by $2.1 million to $8.4 million for the three months ended March 31, 2014 from $6.3 million for the three months ended March 31, 2013, an increase of 34%. The increase in revenue was the result of additional revenue recognized associated with Celgene's December 2013 election to extend the discovery phase of the collaboration agreement through April 2015.

Research and development expense. Research and development expense increased by $5.9 million to $17.4 million for the three months ended March 31, 2014 from $11.5 million for the three months ended March 31, 2013, an increase of 52%. The increase in research and development expenses was attributable to an increase of $3.5 million in external services and $2.4 million in internal expenses. The increase in external services for the three months ended March 31, 2014 was attributable to the following:

approximately $2.1 million of costs related to external phase 1 clinical studies, IND-enabling preclinical studies and manufacturing activities for our lead product candidates targeting IDH1 and PK deficiency; approximately $0.8 million of costs related to other early research and platform programs; and approximately $0.6 million for external phase 1 clinical studies and manufacturing activities for our lead product candidate targeting IDH2.



We incurred approximately $2.4 million of additional internal research and development expenses related to the following:

additional personnel costs of $1.8 million primarily from additional hires increasing our internal headcount by 17%; and approximately $0.2 million for facilities and other related expenses, $0.3 million for milestone payments payable under a collaboration agreement, and $0.1 million for research materials related to our expanded research efforts.



General and administrative expense. General and administrative expenses increased by $1.4 million to $3.3 million for the three months ended March 31, 2014 from $1.9 million for the three months ended March 31, 2013, an increase of 78%. The increase in general and administrative expenses was primarily attributable to the following:

additional personnel costs of $0.7 million primarily from additional hires increasing our internal headcount by 44%; an increase of $0.5 million in professional service costs related to being a public company; an increase of $0.2 million certain operating expenses, including travel and facility costs.



Interest income. Interest income increased $28,000 to $36,000 for the three months ended March 31, 2014 from $8,000 for the three months ended March 31, 2013, an increase of 350%. The increase is attributable to interest earned on the net proceeds from our IPO in July 2013.

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Provision for income tax. The provision for income taxes decreased by $0.2 million to no provision for income taxes for the three months ended March 31, 2014, from $0.2 million for the three months ended March 31, 2013, a decrease of 100%. The decrease in our provision for income taxes for the three months ended March 31, 2014 was attributable to no penalties and interest being accrued for the non-payment of U.S. federal income taxes related to the year ended December 31, 2011. During the three months ended March 31, 2014, we paid $6.0 million as payment in full of our U.S. federal income tax liability related to the year ended December 31, 2011, including $1.5 million of interest and penalties accrued. For the three months ended March 31, 2013, the provision for income taxes was primarily attributable to penalties and interest accrued for the non-payment of U.S. federal income taxes.

Liquidity and Capital Resources

Sources of Liquidity

On July 29, 2013, we closed the initial public offering of our common stock, which resulted in net proceeds to us of $111.0 million after deducting underwriting discounts, commissions, and expenses payable by us. Additionally, an affiliate of Celgene purchased shares of common stock in a separate private placement concurrent with the completion of the offering, which resulted in aggregate proceeds to us of $12.8 million.

Since our inception, and through March 31, 2014, we have raised an aggregate of approximately $384.9 million to fund our operations, of which approximately $141.2 million was through upfront and extension payments related to our collaboration agreement with Celgene, approximately $120.0 million was from the issuance of preferred stock, $111.0 million was received from our initial public offering, after deducting underwriting discounts, commissions, and expenses and approximately $12.8 million was received from the concurrent private placement of common stock to an affiliate of Celgene. As of March 31, 2014, we had $167.3 million in cash, cash equivalents and marketable securities.

In addition to our existing cash, cash equivalents and marketable securities, we are eligible to earn a significant amount of milestone and other payments under our collaboration agreement with Celgene, including $20.0 million anticipated to be received in May 2014 as a result of Celgene's exercise of an extension of the discovery term in December 2013. Our ability to earn these milestones and other payments and the timing of achieving these milestones are dependent upon the outcome of our research and development activities and are uncertain at this time. Our right to payments under our collaboration agreement is our only committed potential external source of funds.

On April 29, 2014, we completed a public offering of 2,000,000 shares of our common stock at a public offering price of $44.00 per share, before underwriting commissions and discounts. We received net proceeds from this offering of $82.3 million, after deducting underwriting discounts, commissions and expenses payable by us. Celgene purchased 294,800 shares of our common stock in the offering. In addition, we granted the underwriters the right to purchase up to an additional 300,000 shares of our common stock which was exercised in May 2014 resulting in additional net proceeds to us of $12.4 million, after underwriting discounts and commissions paid by us.

Cash Flows

The following table provides information regarding our cash flows for the three months ended March 31, 2014 and 2013:

Three Months Ended, March 31, (in thousands) 2014 2013 Net cash used in operating activities $ (27,040 )$ (11,981 ) Net cash (used in) provided by investing activities (12,265 ) 4,036 Net cash provided by financing activities 582 25 Net decrease in cash and cash equivalents $ (38,723 )$ (7,920 )



Net Cash Used in Operating Activities

The use of cash in all periods resulted primarily from funding our net losses adjusted for non-cash charges and changes in components of working capital. Net cash used in operating activities was $27.0 million during the three months ended March 31, 2014 compared to $12.0 million during the three months ended March 31, 2013. The increase in cash used in operating activities was driven primarily by an increase in the change in net loss of $5.0 million for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013 due to our expansion of research and development activities, increased overall headcount and increased costs relating to being a public company. In addition, there was an increase in the change in unbilled collaboration receivable of $2.1 million related to extension of our

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Celgene agreement exercised in December 2013 for the three months ended March 31, 2014 and a decrease in the change in accrued expenses of $2.4 million related primarily to the payment of bonuses accrued at December 31, 2013. We made a U.S. federal income tax payment of approximately $6.0 million in the three months ended March 31, 2014 compared to no income tax payments in the three months ended March 31, 2013. These cash uses are offset by an increase in the change in stock-based compensation expense of $1.1 million.

Net Cash (Used in) Provided by Investing Activities

Net cash used in investing activities was $12.3 million during the three months ended March 31, 2014 compared to cash provided by investing activities of $4.0 million during the three months ended March 31, 2013. The cash used in investing activities for the three months ended March 31, 2014 was primarily the result of more purchases of marketable securities than proceeds from maturities and sales of marketable securities. The cash provided by investing activities for the three months ended March 31, 2013 was primarily the result of fewer purchases of marketable securities than the proceeds from maturities and sales of marketable securities.

Net Cash Provided by Financing Activities

Net cash provided by financing activities was $0.6 million during the three months ended March 31, 2014 compared to $0.1 million during the three months ended March 31, 2013. The increase in cash provided by financing activities for the three months ended March 31, 2014 was primarily the result of an increase in proceeds from exercises of stock option of $0.5 million.

Funding Requirements

We expect our expenses to increase in connection with our ongoing activities, particularly as we continue the research, development and clinical trials of, and seek marketing approval for, our product candidates. In addition, if we obtain marketing approval for any of our product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution to the extent that such sales, marketing and distribution are not the responsibility of Celgene or other collaborators. Furthermore, we expect to continue to incur additional costs associated with operating as a public company. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. If we are unable to raise capital when needed or on attractive terms, we would be forced to delay, reduce or eliminate our research and development programs or future commercialization efforts.

We expect that our existing cash, cash equivalents and marketable securities, the $94.7 million from our public offering initiated in April 2014, the $20.0 million anticipated from Celgene as a result of its December 2013 exercise of its option to extend the discovery term of our agreement for an additional year, the $4.5 million in anticipated refundable income taxes, anticipated interest income and anticipated expense reimbursements under our collaboration agreement with Celgene, will enable us to fund our operating expenses and capital expenditure requirements until at least mid-2017. Our future capital requirements will depend on many factors, including:

the scope, progress, results and costs of drug discovery, preclinical development, laboratory testing and clinical trials for our product candidates; the success of our collaboration with Celgene; whether Celgene exercises its remaining option to extend the discovery phase under our collaboration agreement which would trigger an extension payment to us; the extent to which we acquire or in-license other medicines and technologies; the costs, timing and outcome of regulatory review of our product candidates; the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims; and our ability to establish and maintain additional collaborations on favorable terms, if at all.



Identifying potential product candidates and conducting preclinical testing and clinical trials is a time-consuming, expensive and uncertain process that takes years to complete, and we may never generate the necessary data or results required to obtain marketing approval and achieve product sales. In addition, our product candidates, if approved, may not achieve commercial success. Our commercial revenues, if any, will be derived from sales of medicines that we do not expect to be commercially available for many years, if at all. Accordingly, we will need to continue to rely on additional financing to achieve our business objectives. Adequate additional financing may not be available to us on acceptable terms, or at all.

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Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances and licensing arrangements. We do not have any committed external source of funds, other than our collaboration with Celgene. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.

If we raise funds through additional collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

Off-balance Sheet Arrangements

We did not have, during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under applicable Securities and Exchange Commission rules.

Contractual Obligations

During the three months ended March 31, 2014, we entered into agreements in the normal course of business with contract research organizations for clinical trials and clinical supply manufacturing and with vendors for preclinical research studies and other services and products for operating purposes. These contractual obligations are cancelable at any time by us, generally upon 30 days' prior written notice to the vendor. Under these agreements as of March 31, 2014 we are obligated to pay up to $27.3 million to these vendors. There were no other material changes to our contractual obligations and commitments described under Management's Discussion and Analysis of Financial Condition and Results of Operations in the Annual Report on Form 10-K for the year ended December 31, 2013.


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Source: Edgar Glimpses