News Column

IDERA PHARMACEUTICALS, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

August 12, 2014

GENERAL

We are a clinical stage biotechnology company advancing drug candidates for the treatment of certain genetically defined forms of B-cell lymphoma and for the treatment of orphan autoimmune diseases. These drug candidates are designed to inhibit over-activation of specific Toll-like receptors, or TLRs. In addition to our TLR program, we have initiated a research program to develop our gene silencing oligonucleotides, or GSOs, to inhibit the production of disease-associated proteins by targeting RNA.



Programs for Toll-like Receptor Antagonists

Our lead drug candidate in our TLR program is IMO-8400, an antagonist of TLR7, TLR8, and TLR9. A TLR antagonist is a compound that blocks activation of an immune response through the targeted TLR. IMO-8400 is in development for the treatment of certain genetically defined forms of B-cell lymphoma and for the treatment of selected orphan autoimmune diseases. We have completed a Phase 1 trial of IMO-8400 in healthy subjects and a Phase 2 randomized, placebo-controlled trial in patients with moderate to severe plaque psoriasis. In both trials, IMO-8400 was well tolerated and, in the Phase 2 trial, showed clinical activity. We currently are conducting a Phase 1/2 trial of IMO-8400 in patients with WaldenstrÖm's macroglobulinemia and a Phase 1/2 trial in patients with diffuse large B-cell lymphoma, or DLBCL, who harbor the MYD88 L265P oncogenic mutation. We are also advancing a second novel antagonist of TLR7, TLR8, and TLR9, IMO-9200, as a drug candidate for potential use in selected autoimmune disease indications. The Company has completed preclinical studies of IMO-9200 to support initiation of clinical development. 10



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Our business strategy is to develop IMO-8400, IMO-9200, and other TLR antagonist drug candidates for the treatment of certain genetically defined forms of B-cell lymphoma and for the treatment of orphan autoimmune diseases. In addition, we may seek to enter into collaborative alliances with pharmaceutical companies to advance our TLR antagonist candidates in broader autoimmune disease indications, such as psoriasis, lupus, and arthritis. Program in Genetically Defined Forms of B-cell Lymphoma. Independent research has suggested that the inhibition of specific TLRs may be a useful approach to the treatment of certain B-cell lymphoma characterized by the presence of the oncogenic mutation referred to scientifically as MYD88 L265P. Oncogenic mutations are changes in the DNA of tumor cells that promote the survival and proliferation of the tumor cells. The MYD88 L265P oncogenic mutation has been reported in patients with WaldenstrÖm's macroglobulinemia, diffuse large B-cell lymphoma, or DLBCL, and other forms of B-cell malignancies, including Burkitt's lymphoma, cutaneous diffuse large B-cell lymphoma (leg type), chronic lymphocytic leukemia, gastric mucosa-associated lymphoid tissue lymphoma, marginal zone lymphoma, and splenic marginal zone lymphoma. In this research, the inhibition of TLR7 and TLR9 suppressed MYD88 L265P induced signaling and promoted tumor cell death. We presented results from our preclinical studies of IMO-8400 in April 2014 at the annual meeting of the American Association for Cancer Research, and in August 2014 at the American Society of Hematology Meeting on Lymphoma Biology. In these studies, IMO-8400 induced cell death in human WaldenstrÖm's macroglobulinemia and DLBCL tumor cells harboring the MYD88 L265P oncogenic mutation. Consistent with its proposed mechanism of action, IMO-8400 treatment in these studies inhibited cell signaling pathways that promote tumor cell survival and proliferation including those referred to scientifically as IRAK1/4, NF-KB, STAT3 p38, and BTK. Further, in these studies, IMO-8400 suppressed tumor cell production of cytokines, such as interleukin-10, or IL-10, that create a favorable microenvironment for tumor cell survival and proliferation. In addition to inducing tumor cell death in vitro, IMO-8400 treatment of mice in xenograft models decreased tumor burden, even in studies where treatment was initiated after tumors had become well established. Tumor cells that did not harbor the MYD88 L265P mutation were not affected by IMO-8400 treatment, demonstrating the specificity of the treatment effect. The preclinical observations reported by independent researchers and the preclinical data generated by us with IMO-8400 support our plans for the clinical development of IMO-8400 in B-cell lymphomas harboring the MYD88 L265P oncogenic mutation. In April 2014, we initiated patient treatment in an open-label, dose-escalation Phase 1/2 clinical trial of IMO-8400 in patients with WaldenstrÖm's macroglobulinemia who have relapsed or were refractory to prior therapy. It has been reported that approximately 90% of patients with WaldenstrÖm's macroglobulinemia have the MYD88 L265P oncogenic mutation. Objectives of the trial include evaluation of safety and tolerability and assessment of the clinical activity of escalating IMO-8400 dose levels using disease-specific international guidelines for classifying clinical response. The initial dose level is 0.6 mg/kg once per week, administered by subcutaneous injection. We expect to enroll up to approximately 30 patients in this trial. Initial data from a limited number of patients are expected by year end 2014. We are also conducting an open-label, dose-escalation Phase 1/2 clinical trial of IMO-8400 in patients with DLBCL who have relapsed or were refractory to prior therapy. With the concurrence of the U.S. Food and Drug Administration, or FDA, Center for Devices and Radiological Health, or CDRH, we will enroll in this trial only patients who are positive for the presence of the MYD88 L265P oncogenic mutation. Objectives of the trial include evaluation of safety and tolerability and assessment of the clinical activity of escalating IMO-8400 dose levels using disease-specific international guidelines for classifying clinical response. The initial dose level is 0.3 mg/kg twice per week, administered by subcutaneous injection. We expect to enroll up to approximately 30 patients in this trial, and expect to initiate patient treatment in the second half of 2014. We believe that WaldenstrÖm's macroglobulinemia and DLBCL in patients with the MYD88 L265P mutation are each orphan indications with unmet medical need, based on prevalence of the indications. If we observe a therapeutic effect in either or both of our Phase 1/2 clinical trials, we plan to meet with regulatory authorities to discuss the possibility of an accelerated clinical development and regulatory path for the applicable program. We cannot predict whether or when any of our product candidates will prove effective or safe in humans, if we will be able to participate in FDA expedited review and approval programs, including breakthrough and fast track designation, or if they will receive regulatory approval. In May 2014, we entered into a collaboration with Abbott Molecular, Inc., or Abbott Molecular, for the development of a companion diagnostic that can be used to identify patients with the MYD88 L265P oncogenic mutation. Under the agreement, Abbott Molecular has agreed to develop the companion diagnostic to comply with the requirements of the FDA CDRH. We expect to pay approximately $6,700,000 in external development expenses over five years under the agreement to develop an assay as the prototype of the companion diagnostic, to validate the prototype during a Phase 2 clinical trial of IMO-8400, and to complete FDA regulatory requirements and launch activities of the resultant final version of the companion diagnostic. Such expenses are subject to increase if Abbott Molecular incurs additional expenses in order to meet unexpected material requirements or obligations not included in the agreement or if we are required to conduct additional or different clinical trials which result in Abbott Molecular incurring additional



costs. We will not receive any revenues from future sales, if any, of the companion diagnostic. We expect to use the prototype companion diagnostic developed by Abbott Molecular in our ongoing Phase 1/2 clinical trial of IMO-8400 in patients with DLBCL and in future clinical trials of IMO-8400.

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Program in Autoimmune Diseases with Orphan Designation. We are planning to initiate clinical development of IMO-8400 for the treatment of autoimmune diseases which have been designated as orphan indications. We have evaluated autoimmune diseases with orphan indications for which we may develop our TLR antagonist candidates using selection criteria that include: the reported involvement of altered TLR expression; cytokine profile indicative of key TLR-mediated pathways; auto-antibody profile indicative of self-derived nucleic acids that can induce TLR-mediated immune responses; the identification of prospective clinical biomarkers for evaluation in early clinical trials; high unmet medical need; and established clinical diagnosis. Based on these selection criteria, we have prioritized polymyositis, dermatomyositis, and graft-versus-host disease, or GvHD, as the initial orphan autoimmune disease indications for clinical evaluation. We anticipate initiating patient treatment in a clinical trial in patients with polymyositis or dermatomyositis and in a clinical trial in patients with GvHD by year end 2014. If we observe a therapeutic effect in one or more of these indications, we plan to meet with regulatory authorities to discuss the possibility of an accelerated clinical development and regulatory path for the applicable program. We cannot predict whether or when any of our product candidates will prove effective or safe in humans, if we will be able to participate in FDA expedited review and approval programs, including breakthrough and fast track designation, or if they will receive regulatory approval. We are continuing to use the above criteria to prioritize additional autoimmune diseases with orphan indications for which we may develop our TLR antagonist candidates. Expanding the Pipeline of TLR Antagonist Drug Candidates. We are developing a second novel antagonist of TLR7, TLR8, and TLR9, IMO-9200, as a drug candidate for potential use in selected autoimmune disease indications. We have completed preclinical studies of IMO-9200 to support initiation of clinical development in the second half of 2014. Clinical Proof-of-Concept for TLR Antagonism. We believe that clinical proof-of-concept for TLR antagonists as a potential therapeutic approach for autoimmune diseases has been demonstrated by the results of randomized, double-blinded Phase 2 clinical trials of TLR antagonists that we have conducted in patients with moderate to severe psoriasis. In a recently completed Phase 2 trial, we evaluated IMO-8400 at four dose levels of 0.075, 0.15, 0.3, and 0.6 mg/kg, or placebo, administered weekly for 12 weeks in 44 patients with moderate to severe plaque psoriasis. The primary objective of the trial was to evaluate safety and tolerability of IMO-8400 over a 12 week treatment period, with a secondary objective to evaluate the clinical activity of IMO-8400. The trial met its primary objective, as treatments at all dose levels were well tolerated with no treatment-related discontinuations, treatment-related serious adverse events, or dose reductions. The trial also met its secondary objective of demonstrating clinical activity in psoriasis patients, as assessed by Psoriasis Area Severity Index (PASI). We intend to submit data from the Phase 2 clinical trial of IMO-8400 in patients with psoriasis for presentation at a medical meeting within 2014. The Phase 2 trials in patients with psoriasis were conducted to establish clinical proof of concept for application of TLR antagonists in the treatment of diseases in which TLR-mediated immune responses are implicated. Based on our business strategy, we are advancing clinical development of IMO-8400 in orphan diseases such as genetically defined B-cell lymphomas, polymyositis, dermatomyositis, and GvHD.



Other TLR Programs

Our pipeline of drug candidates also includes IMO-2055, a TLR9 agonist for potential applications as an immune therapy for the treatment of cancer. A TLR agonist is a compound that stimulates an immune response through the targeted TLR. IMO-2055 has been well-tolerated and has shown evidence of clinical activity in completed Phase 1/2 trials in multiple cancer indications involving over 300 patients. Currently we are conducting preclinical studies of IMO-2055 to evaluate its therapeutic potential in combination with checkpoint inhibitors, which are therapies that target mechanisms by which tumor cells evade detection by the immune system.



Gene Silencing Oligonucleotide Technology to Target RNA

We are developing GSOs to inhibit the expression of disease-associated proteins by targeting RNA. Based on evaluations of GSOs targeted to disease-associated RNA in preclinical models, we believe our GSO technology has the potential to overcome several of the hurdles of antisense and RNA interference, or RNAi, technologies. We are currently undertaking an analysis of priority disease indications for development of drug candidates from our GSO technology. Our key considerations in identifying disease indications in our GSO program are: strong evidence that the disease is caused by a specific protein; clear criteria to identify a target patient population; biomarkers for early assessment of clinical proof-of-concept; a targeted therapeutic mechanism for action; and unmet 12



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medical need to allow for a rapid development path to approval. We expect to identify the first two disease indications to be targeted in our GSO program in the second half of 2014, with the goal of initiating disease model studies and an IND-enabling development program in the first half of 2015. Based on this timeline, we could initiate Phase 1 proof-of-concept clinical trials for the first two disease indications as early as the second half of 2015. Our business strategy for our GSO program is focused on the further development of our GSO technology. We may seek to enter into collaborative alliances with pharmaceutical companies with respect to applications of our GSO technology program.



At June 30, 2014, we had an accumulated deficit of $430,153,000. We expect to incur substantial operating losses in future periods. We do not expect to generate product revenue, sales-based milestones or royalties until we successfully complete development and obtain marketing approval for drug candidates, either alone or in collaborations with third parties, which we expect will take a number of years. In order to commercialize our drug candidates, we need to complete clinical development and comply with comprehensive regulatory requirements.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

This management's discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management 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 and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments, including those related to revenue recognition, stock-based compensation and our convertible preferred stock and related common stock warrants. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.



We regard an accounting estimate or assumption underlying our financial statements as a "critical accounting estimate" where:

the nature of the estimate or assumption is material due to the level of

subjectivity and judgment necessary to account for highly uncertain

matters or the susceptibility of such matters to change; and



the impact of the estimates and assumptions on financial condition or

operating performance is material.

Our significant accounting policies are described in Note 2 of the notes to our financial statements in our Annual Report on Form 10-K for the year ended December 31, 2013. Not all of these significant policies, however, fit the definition of critical accounting policies and estimates. We believe that our accounting policies relating to stock-based compensation and convertible preferred stock and related common stock warrants, as described under the caption "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates" in our Annual Report on Form 10-K for the year ended December 31, 2013, fit the description of critical accounting estimates and judgments. There were no changes in these policies during the three and six months ended June 30, 2014.



RESULTS OF OPERATIONS

Three and Six Months Ended June 30, 2014

Alliance Revenue

Alliance revenue consisted primarily of reimbursement by licensees of costs associated with patent maintenance, amounting to $38,000 and $29,000 in the three months ended June 30, 2014 and 2013, respectively, and $41,000 and $36,000 in the six months ended June 30, 2014 and 2013, respectively.

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Research and Development Expenses

Research and development expenses increased by $3,640,000, or 182%, from $1,997,000 for the three months ended June 30, 2013, to $5,637,000 for the three months ended June 30, 2014. Research and development expenses increased by $8,245,000, or 191%, from $4,325,000 for the six months ended June 30, 2013 to $12,570,000 for the six months ended June 30, 2014. In the following table, research and development expenses are set forth in the following four categories which are discussed beneath the table: Three Months Ended June 30, Percentage Six Months Ended June 30, Percentage (in thousands) Increase (in thousands) Increase 2014 2013 (Decrease) 2014 2013 (Decrease)



IMO-8400 external development expense $ 1,407 $ 596

136 % $ 3,840$ 1,196 221 % Companion diagnostic external development expense 500 - - 1,300 - - Other drug development expense 1,885 617 206 % 4,409 1,526 189 % Basic discovery expense 1,845 784 135 % 3,021 1,603 88 % $ 5,637$ 1,997 182 % $ 12,570$ 4,325 191 % IMO-8400 External Development Expenses. These expenses include external expenses that we have incurred in connection with IMO-8400 since October 2012, when we commenced clinical development of IMO-8400. These external expenses include payments to independent contractors and vendors for drug development activities conducted after the initiation of IMO-8400 clinical development but exclude internal costs such as payroll and overhead expenses. Since October 2012, we have incurred approximately $7,803,000 in external development expenses through June 30, 2014, including costs associated with our Phase 1 clinical trial in healthy subjects, preparation for and conduct of our Phase 2 clinical trial in patients with psoriasis, preparation for and conduct of our ongoing Phase 1/2 clinical trial in patients with WaldenstrÖm's macroglobulinemia and our ongoing Phase 1/2 clinical trial in patients with DLBCL, and additional nonclinical studies. The increases in our IMO-8400 external development expenses in the three and six months ended June 30, 2014, as compared to the three and six months ended June 30, 2013, were primarily attributable to costs incurred in 2014 in connection with preparation for and conduct of our Phase 1/2 clinical trials in patients with genetically defined forms of B-cell lymphoma and the conduct of long-term nonclinical safety studies. The increase in the six months ended June 30, 2014 was also attributable to costs incurred in the first quarter of 2014 in connection with the manufacture of additional drug substance for use in our ongoing and planned clinical trials. These increases were partially offset by 2013 costs associated with our Phase 1 clinical trial of IMO-8400 in healthy subjects and with our Phase 2 clinical trial of IMO-8400 in patients with psoriasis. We expect our IMO-8400 external development expenses to increase in the second half of 2014 due to patient enrollment as we conduct our ongoing Phase 1/2 clinical trials of IMO-8400 in patients with genetically defined forms of B-cell lymphoma, our planned Phase 1/2 clinical trial of IMO-8400 in patients with polymyositis or dermatomyositis, and our planned Phase 1/2 clinical trial of IMO-8400 in patients with GvHD, and due to manufacturing costs for additional drug supplies of IMO-8400 for use in our ongoing and planned clinical trials and the conduct of ongoing long-term nonclinical safety studies of IMO-8400. Companion Diagnostic External Development Expenses. These expenses include external expenses associated with our collaboration with Abbott Molecular for the development of a companion diagnostic for identification of patients with B-cell lymphomas harboring the MYD88 L265P oncogenic mutation since January 2014, when development of the companion diagnostic commenced. During the three and six months ended June 30, 2014, we incurred $500,000 and $1,300,000, respectively, in companion diagnostic external development expenses, reflecting costs associated with start-up activities and the initiation of development of an assay as the prototype of the companion diagnostic. We will not receive any revenues from future sales of the companion diagnostic, if any. Other Drug Development Expenses. These expenses include external expenses associated with preclinical development of identified compounds in anticipation of advancing these compounds into clinical development. In addition, these expenses include internal costs, such as payroll and overhead expenses, associated with preclinical development and products in clinical development. The external expenses associated with preclinical compounds include payments to contract vendors for manufacturing and the related stability studies, preclinical studies, including animal toxicology and pharmacology studies, and professional fees. Internal expenses associated with products in clinical development include costs associated with our Autoimmune Disease Scientific Advisory Board. Other drug development expenses also include costs associated with compounds that were previously being developed but are not currently being developed. 14



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The increases in other drug development expenses in the three and six months ended June 30, 2014, as compared to the three and six months ended June 30, 2013, were primarily due to costs of preclinical studies and manufacturing activities to support the initiation of a planned Phase 1 clinical trial of IMO-9200 in the second half of 2014. Increasing payroll costs, including the addition of a Chief Medical Officer in January 2014 and additional headcount associated with our increasing drug development programs and higher stock based compensation costs attributable to options granted after May 15, 2013, also contributed to the increase in other drug development expenses during the three and six months ended June 30, 2014. The increase in other drug development expenses in the three and six months ended June 30, 2014 was partially offset by a decrease in IMO-3100 development expenses, reflecting our decision in the second quarter of 2013 to focus our resources on the development of IMO-8400. We expect other drug development expenses to increase in the second half of 2014 due to costs associated with the planned clinical development of IMO-9200 and increased headcount to support our drug development programs. Basic Discovery Expenses. These expenses include our internal and external expenses relating to our discovery efforts with respect to our TLR-targeted programs, including agonists and antagonists of TLR3, TLR7, TLR8 and TLR9, TLR antisense, and our GSO program. These expenses reflect payments for laboratory supplies, external research, and professional fees, as well as payroll and overhead expenses. The increases in basic discovery expenses in the three and six months ended June 30, 2014, as compared to the three and six months ended June 30, 2013, were primarily due to increases in the cost of employee compensation and laboratory supplies reflecting increased activity and headcount associated with our GSO program. We anticipate an increase in basic discovery expenses in 2014 as we increase headcount and laboratory supply expenses consistent with our strategic plans to identify lead drug candidates for the first two disease indications to be targeted in our GSO program. We do not know if we will be successful in developing any drug candidate from our research and development programs. At this time, and without knowing the results from our ongoing and planned clinical trials of IMO-8400 and IMO-9200 and our planned IND-enabling development programs and subsequent Phase 1 proof-of-concept clinical trials in each of the first two disease indications selected for further development in our GSO program, we cannot reasonably estimate or know the nature, timing, and costs of the efforts that will be necessary to complete the remainder of the development of, or the period, if any, in which material net cash inflows may commence from, any drug candidate from our research and development programs. Moreover, the clinical development of any drug candidate from our research and development programs is subject to numerous risks and uncertainties associated with the duration and cost of clinical trials, which vary significantly over the life of a project as a result of unanticipated events arising during clinical development.



General and Administrative Expenses

General and administrative expenses increased by $1,131,000, or 71%, from $1,599,000 in the three months ended June 30, 2013, to $2,730,000 in the three months ended June 30, 2014 and increased by $1,647,000, or 53%, from $3,126,000 in the six months ended June 30, 2013 to $4,773,000 in the six months ended June 30, 2014. General and administrative expenses consist primarily of salary expense, stock compensation expense, consulting fees and professional legal fees associated with our patent applications and maintenance, our corporate regulatory filing requirements, our corporate legal matters, and our business development initiatives. The increases in general and administrative expenses during the three and six months ended June 30, 2014, as compared to the three and six months ended June 30, 2013, were primarily due to higher stock based compensation costs primarily attributable to options granted after May 15, 2013, higher cash compensation costs, including additional headcount associated with our strategic focus on our orphan disease and oncology programs and the accrual of incentive compensation, and increases in corporate communications, investor relations and recruiting expenses.



Investment Income, Net

Investment income, net increased by $14,000, from $2,000 in the three months ended June 30, 2013 to $16,000 in the three months ended June 30, 2014, and by $27,000, from $4,000 in the six months ended June 30, 2013 to $31,000 in the six months ended June 30, 2014 primarily due to an increase in investment balances, including corporate debt securities, in the 2014 periods resulting from our follow-on underwritten public offerings in September 2013 and February 2014 and warrant and option exercises.



Foreign Currency Exchange Gain (Loss)

Our foreign currency exchange gains were $5,000 and $2,000 in the three and six months ended June 30, 2014, respectively, primarily due to the impact that the increasing value of the U.S. dollar had on our Euro-denominated accrued liabilities during these periods. Our foreign currency exchange loss was $26,000 in the three months ended June 30, 2013 primarily due to the impact that the decreasing value of the U.S. dollar had on our Euro-denominated accrued liabilities during this period. Our foreign currency exchange gain was $13,000 in the six months ended June 30, 2013 primarily due to the impact that the increasing value of the U.S. dollar had on our Euro-denominated accrued liabilities during this period. 15



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Loss on Extinguishment of Convertible Preferred Stock and Preferred Stock Dividends

The $118,000 in preferred stock dividends in the three months ended June 30, 2014 reflects dividends accrued on shares of our Series E convertible preferred stock, or Series E preferred stock. The $303,000 in preferred stock dividends in the six months ended June 30, 2014 reflects dividends accrued on shares of our Series D convertible preferred stock, or Series D preferred stock, and our Series E preferred stock. Our Series D preferred stock was converted into common stock on February 6, 2014 at which time dividends on our Series D preferred stock ceased to accrue. The $2,030,000 in preferred stock dividends in the three months ended June 30, 2013 consisted of $1,750,000 related to the loss on extinguishment of the Series D preferred stock and the Series E preferred stock that we charged to net loss applicable to common stockholders as a preferred stock dividend, $211,000 in dividends payable on shares of our Series D preferred stock and $69,000 in dividends payable on shares of our Series E preferred stock. The $2,309,000 in preferred stock dividends in the six months ended June 30, 2013 consisted of $1,750,000 related to the loss on extinguishment, of the Series D preferred stock and the Series E preferred stock that we charged to net loss applicable to common stockholders as a preferred stock dividend, $422,000 in dividends payable on shares of our Series D preferred stock and $137,000 in dividends payable on shares of our Series E preferred stock. The $1,750,000 loss on extinguishment of the Series D preferred stock and the Series E preferred stock in the three and six months ended June 30, 2013 was recorded following the irrevocable waiver by the holder of our Series D preferred stock of the Series D preferred stock redemption rights and liquidation preferences and by the holders of the Series E preferred stock of Series E preferred stock liquidation preferences, which irrevocable waivers became effective when we completed our follow-on underwritten public offering on May 7, 2013. We determined that the irrevocable waivers represented changes to the fundamental terms of both the Series D preferred stock and the Series E preferred stock and therefore accounted for them as an extinguishment of the Series D preferred stock and the Series E preferred stock.



Net Loss Applicable to Common Stockholders

As a result of the factors discussed above, our net loss applicable to common stockholders was $8,426,000 for the three months ended June 30, 2014, compared to $5,621,000 for the three months ended June 30, 2013 and $17,572,000 for the six months ended June 30, 2014 compared to $9,707,000 for the six months ended June 30, 2013. Since January 1, 2001, we have primarily been involved in the development of our TLR pipeline. From January 1, 2001 through June 30, 2014, we incurred losses of $169,960,000. We also incurred net losses of $260,193,000 prior to December 31, 2000 during which time we were primarily involved in the development of non-TLR targeted antisense technology. Since our inception, we had an accumulated deficit of $430,153,000 through June 30, 2014. We expect to continue to incur substantial operating losses in the future.



LIQUIDITY AND CAPITAL RESOURCES

Sources of Liquidity

We require cash to fund our operating expenses and to make capital expenditures. Historically, we have funded our cash requirements primarily through the following:

sale of common stock, preferred stock and warrants and warrant exercises;

debt financing, including capital leases;



license fees, research funding and milestone payments under collaborative

and license agreements; and interest income.



February 10, 2014 Follow-on Underwritten Public Offering

On February 10, 2014, we closed a follow-on underwritten public offering, in which we sold 7,867,438 shares of common stock at a price to the public of $4.00 per share and pre-funded warrants to purchase up to 2,158,750 shares of common stock at a price to the public of $3.99 per share for aggregate gross proceeds of $40.1 million. The pre-funded warrants have an exercise price of $0.01 per share and will expire if not exercised by February 10, 2021. The estimated net proceeds to us from the offering, after deducting underwriters' discounts and commissions and other offering costs and expenses and excluding the proceeds of the exercise of the warrants, if any, were approximately $37.2 million. 16



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Cash Flows

Six Months Ended June 30, 2014

As of June 30, 2014, we had approximately $64,734,000 in cash, cash equivalents and investments, a net increase of approximately $29,142,000 from December 31, 2013. Net cash used in operating activities totaled $13,757,000 during the six months ended June 30, 2014, reflecting our $17,269,000 net loss, as adjusted for non-cash income and expenses, including stock-based compensation, depreciation and amortization. Net cash used in operating activities also reflects changes in our prepaid expenses and accounts payable, accrued expenses and other liabilities. The net cash used in investing activities during the six months ended June 30, 2014 reflects the purchase of $2,619,000 of available-for-sale securities, which are investments that we do not have the positive intent to hold to maturity at the time of purchase, the maturity of $2,000,000 of available-for-sale securities, and payments for the purchase of $533,000 in property and equipment. The $43,517,000 net cash provided by financing activities during the six months ended June 30, 2014 primarily reflects $37,302,000 in net proceeds from our follow-on underwritten public offering of our securities in February 2014, which were partially offset by $100,000 in costs related to our 2013 financings, and $6,780,000 in net proceeds from the exercise of common stock options and warrants and employee stock purchases under our 1995 Employee Stock Purchase Plan, or ESPP, which were partially offset by dividends paid on our Series D preferred stock and our Series E preferred stock.



Six Months Ended June 30, 2013

As of June 30, 2013, we had approximately $16,301,000 in cash and cash equivalents, a net increase of approximately $6,205,000 from December 31, 2012. Net cash used in operating activities totaled $8,006,000 during the six months ended June 30, 2013, reflecting our $7,398,000 net loss, as adjusted for non-cash income and expenses, including stock-based compensation and depreciation. It also reflects changes in our prepaid expenses and accounts payable, accrued expenses and other liabilities. The $14,212,000 net cash provided by financing activities during the six months ended June 30, 2013 primarily reflects $14,832,000 in net proceeds from our follow-on underwritten public offering of our securities in May, 2013 which were partially offset by $111,000 in costs related to our 2012 Series E financing that were paid in 2013 and dividends paid on our Series D preferred stock and our Series E preferred stock. Funding Requirements We have incurred operating losses in all fiscal years except 2002, 2008 and 2009, and we had an accumulated deficit of $430,153,000 at June 30, 2014. We expect to incur substantial operating losses in future periods. These losses, among other things, have had and will continue to have an adverse effect on our stockholders' equity, total assets and working capital. We have received no revenues from the sale of drugs. As of July 15, 2014, almost all of our revenues have been from collaboration and license agreements. We have devoted substantially all of our efforts to research and development, including clinical trials, and we have not completed development of any drugs. Because of the numerous risks and uncertainties associated with developing drugs, we are unable to predict the extent of any future losses, whether or when any of our products will become commercially available or when we will become profitable, if at all. We do not expect to generate significant additional funds internally until we successfully complete development and obtain marketing approval for products, either alone or in collaboration with third parties, which we expect will take a number of years. In addition, we have no committed external sources of funds. We had cash, cash equivalents and investments of approximately $64,734,000 at June 30, 2014.We believe that our existing cash, cash equivalents and investments will be sufficient to fund our operations through the second quarter of 2016. Specifically, we believe that our existing cash, cash equivalents and investments will be sufficient to enable us to: finalize our Phase 2 clinical trial of IMO-8400 in patients with psoriasis; complete our ongoing Phase 1/2 clinical trial in patients with WaldenstrÖm's macroglobulinemia and our ongoing Phase 1/2 clinical trial in patients with DLBCL and the MYD88 L265P oncogenic mutation; conduct a Phase 1 clinical trial of IMO-9200; conduct a Phase 1/2 clinical trial of IMO-8400 in patients with polymyositis or dermatomyositis and a Phase 1/2 clinical trial of IMO-8400 in patients with GvHD as the initial orphan



indications that

we have selected for further development in our autoimmune disease program; 17



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conduct disease model studies and IND-enabling development programs in

each of the first two disease indications selected for further development in our GSO program; and



conduct a Phase 1 proof-of-concept clinical trial in each of the first

two disease indications selected for further development in



our GSO

program.



We will need additional funds in order to conduct further clinical development of IMO-8400 or IMO-9200, or to conduct any further development of our GSO technology and our other drug candidates or technologies.

We may seek additional funding through collaborations, the sale or license of assets or financings of equity or debt securities. We believe that the key factors that will affect our ability to obtain funding are:

the results of our clinical and preclinical development activities in our

autoimmune disease and genetically defined forms of B-cell lymphoma

programs and our GSO program and our ability to advance our product

candidates and GSO technology on the timelines anticipated; the cost, timing and outcome of regulatory reviews;



competitive and potentially competitive products and technologies and

investors' receptivity to our drug candidates and the technology underlying them in light of competitive products and technologies;



the receptivity of the capital markets to financings by biotechnology

companies generally and companies with drug candidates and technologies

such as ours specifically; and



our ability to enter into additional collaborations with biotechnology and

pharmaceutical companies and the success of such collaborations.

In addition, increases in expenses or delays in clinical development may adversely impact our cash position and require additional funds or further cost reductions. Financing may not be available to us when we need it or may not be available to us on favorable or acceptable terms or at all. We could be required to seek funds through collaborative alliances or through other means that may require us to relinquish rights to some of our technologies, drug candidates or drugs that we would otherwise pursue on our own. In addition, if we raise additional funds by issuing equity securities, our then existing stockholders will experience dilution. An equity financing that involves existing stockholders may cause a concentration of ownership. 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, and are likely to include rights that are senior to the holders of our common stock. Any additional debt financing or equity that we raise may contain terms, such as liquidation and other preferences, or liens or other restrictions on our assets, which are not favorable to us or our stockholders. The terms of any financing may adversely affect the holdings or the rights of existing stockholders. If we are unable to obtain adequate funding on a timely basis or at all, we will be required to terminate, modify or delay preclinical or clinical trials of one or more of our drug candidates, significantly curtail or terminate discovery or development programs for new drug candidates or relinquish rights to portions of our technology, drug candidates and/or products.



Contractual Obligations

During the six months ended June 30, 2014, there were no material changes outside the ordinary course of our business to our contractual obligations as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013.


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Source: Edgar Glimpses


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