ACHIEVE LIFE SCIENCES, INC. annual report, FY2011

ACHIEVE LIFE SCIENCES, INC. — Filing identity and period

Important: The supplied filing is OncoGenex Pharmaceuticals, Inc.’s Form 10-K for the fiscal year ended December 31, 2011, filed March 8, 2012—not a filing under the name Achieve Life Sciences, Inc. It reports annual results; fourth-quarter figures are presented only as unaudited supplementary information.

Business context

OncoGenex was a clinical-stage biopharmaceutical company developing cancer therapies intended to address treatment resistance. Its candidates were custirsen and OGX-427 (clinical-stage), and OGX-225 and CSP-9222 (preclinical). It had no approved products or product-sale revenue; collaboration revenue came from Teva’s custirsen arrangement.

Financial performance and liquidity

Revenue fell 60% year over year, mainly because Teva directly paid certain manufacturing costs and SATURN-related clinical costs declined. R&D expense rose about 17%, primarily from OGX-427 trials and manufacturing. The 2011 net loss included a $7.4 million noncash gain from revaluing warrants; results therefore reflect a material fair-value item as well as operating investment.

At December 31, 2011, total assets were $68.0 million, current assets $67.3 million, current liabilities $30.8 million, total liabilities $37.1 million, and shareholders’ equity $30.9 million. The company reported no borrowing or credit facilities. Cash and investments declined about $20.2 million during 2011. Management believed available resources would fund planned operations into 2014, subject to its stated assumptions and development plan. The filing reports no product-sales margins; conventional operating margins are not meaningful for this development-stage business.

Contractual obligations totaled $15.0 million, including $13.7 million for the Bothell office lease. The balance sheet also included $7.0 million in excess-facility lease liability. The company had an $18.3 million remaining contribution toward custirsen development under the Teva agreement; Teva was responsible for other plan expenses. Deferred collaboration revenue was $18.3 million at year-end and was expected to be recognized by the fourth quarter of 2012.

Material changes and developments

• Compared with 2010, revenue decreased, R&D expense increased, and annual net loss widened, despite a much smaller operating cash outflow. The $7.4 million warrant revaluation gain partly offset the loss.
• Cash and investments decreased from $85.1 million to $64.9 million. 2011 financing cash flow was only $0.2 million, versus $47.5 million in 2010, when the company completed a major equity-and-warrant offering.
• In March 2012, after year-end, OncoGenex and Teva amended the clinical plan: the planned second-line prostate cancer survival trial with cabazitaxel would replace the SATURN pain-palliation trial. The revised plan also included the ongoing SYNERGY trial and a planned first-line non-small-cell lung cancer trial.
• The company discontinued further development and out-licensing efforts for SN2310 in 2011.

Outlook, risks and unusual items

• Management expected R&D spending to increase as custirsen and OGX-427 development advanced. It did not expect Teva milestone payments in 2012 and stated that future milestone and royalty receipts were uncertain.
• SYNERGY targeted approximately 1,000 patients, with enrollment expected to finish in the second half of 2012 and primary survival results projected for the fourth quarter of 2013. The replacement cabazitaxel trial was expected to begin in the second half of 2012; the NSCLC program was also expected to begin in 2012. These are forecasts, not outcomes.
• Preliminary Phase 2 OGX-427 prostate results and early bladder-cancer findings were encouraging as reported by the company, but were based on small or interim datasets and do not establish efficacy. Custirsen Phase 2 findings likewise require confirmation in Phase 3.
• Key risks include clinical-trial failure or delay, regulatory uncertainty, dependence on Teva for custirsen, reliance on third-party manufacturers and research organizations, competition, patent and licensing risks, and the need for additional financing if plans or assumptions change. The company had recurring losses, an $80.7 million accumulated deficit, and no product revenue.
• Auditors issued an unqualified opinion on the financial statements and internal controls; management also reported effective disclosure controls and internal control over financial reporting.

Most important facts for investors to verify

• Confirm the issuer and reporting period: this document identifies OncoGenex Pharmaceuticals, Inc. and FY 2011, despite the request metadata naming Achieve Life Sciences and 2011 Q4.
• Review the audited statements and cash-flow assumptions behind management’s forecast that funding would last into 2014, including the remaining $18.3 million custirsen contribution and lease obligations.
• Track enrollment, timing, protocol details, and results for SYNERGY and the planned cabazitaxel and NSCLC trials; verify the March 2012 Teva amendment and allocation of trial responsibilities.
• Assess the effect of the $7.4 million warrant revaluation gain and the $7.9 million year-end warrant liability when comparing reported losses across periods.
• Examine the Teva agreement’s milestone and royalty terms and the unresolved potential sharing of certain Teva payments with Isis.