Puma Biotechnology(PBYI) - 2018 Q4 - Annual Report

Part I This section details the company's biopharmaceutical business, product pipeline, regulatory framework, and critical risk factors Item 1. Business Puma Biotechnology, Inc. develops and commercializes innovative cancer care products, primarily NERLYNX (neratinib) for HER2-positive breast cancer Company Overview Puma Biotechnology, Inc. focuses on developing and commercializing innovative cancer care products, primarily NERLYNX (neratinib), with global approvals - Puma Biotechnology, Inc. was formed on April 27, 2007, and focuses on the development and commercialization of innovative products for cancer care[10] - The company in-licenses global development and commercialization rights to three drug candidates: PB272 (neratinib, oral), PB272 (neratinib, intravenous), and PB357[10] - NERLYNX (neratinib) received FDA approval in July 2017 for extended adjuvant treatment of early-stage HER2-positive breast cancer[11] - The European Commission granted marketing authorization for NERLYNX in September 2018 for early-stage hormone receptor positive HER2-overexpressed/amplified breast cancer[12] Strategy The company's strategy focuses on building neratinib into a significant oncology franchise through global expansion and pipeline development - Primary objective is to build neratinib into a significant oncology franchise as a single agent and potentially in combination with other therapies[17] - Key strategic elements include seeking regulatory approval and commercialization of neratinib outside the U.S., advancing development for other HER2-positive or HER2 mutated breast cancer indications, expanding the product pipeline with additional neratinib applications, building a sustainable pipeline through disciplined decision criteria, and evaluating commercialization strategies on a product-by-product basis[17][21] Breast Cancer Overview Breast cancer, particularly HER2-positive, represents a significant global health challenge with a need for new treatments like neratinib - Breast cancer is the leading cause of cancer death among women worldwide, with 20-25% of tumors over-expressing the HER2 protein[18] - Existing HER2-targeting drugs include trastuzumab, pertuzumab, lapatinib, and T-DM1, but disease often progresses, highlighting a need for alternatives like neratinib[19][21] - Estimated patient populations: ~28,300 in US and ~37,000 in EU for early-stage HER2-positive breast cancer; ~6,400 in US for third-line and ~4,700 for fourth-line HER2-positive metastatic breast cancer[22] - Worldwide Herceptin adjuvant revenue was approximately $4.5 billion to $5.0 billion in 2015, and Tykerb sales for this indication were approximately $186 million in 2017[22] Product Development Pipeline The company's pipeline focuses on neratinib for various breast cancer indications and other solid tumors, including oral and intravenous formulations Neratinib Neratinib is a potent irreversible tyrosine kinase inhibitor targeting HER1, HER2, and HER4, with potential in various HER2-positive cancers - Neratinib is a potent irreversible tyrosine kinase inhibitor (TKI) that blocks signal transduction through HER1, HER2, and HER4 receptors[25] - It is believed to offer an advantage over existing treatments for HER2-positive metastatic breast cancer due to more potent inhibition at a different site and mechanism[25] - Neratinib also has potential clinical application in non-small cell lung cancer and other tumor types with HER2 over-expression or mutation[26] PB272 (neratinib oral)—Early Stage Breast Cancer This section details neratinib's efficacy and safety in early-stage HER2-positive breast cancer, including extended adjuvant and neoadjuvant settings Extended Adjuvant Breast Cancer Neratinib significantly reduces recurrence risk in extended adjuvant HER2-positive breast cancer, with diarrhea as a key manageable adverse event - The ExteNET trial (Phase III) for extended adjuvant treatment of early-stage HER2-positive breast cancer showed neratinib reduced the risk of invasive disease recurrence or death by 33% (p=0.009) at two years, and 27% (p=0.008) at five years, compared to placebo[27][28][31] - The most frequent adverse event was diarrhea (39.9% Grade 3 or higher in ExteNET without prophylaxis) Prophylactic loperamide significantly reduced Grade 3 diarrhea rates in other studies (0-17%)[28][34] - For hormone receptor positive patients, neratinib showed a 49% reduction in risk of invasive disease recurrence or death at two years (p=0.001) and 40% at five years (p=0.002)[29][32] Neoadjuvant Breast Cancer Neratinib-containing regimens show promising pathological complete response rates in neoadjuvant HER2-positive breast cancer, with effective diarrhea management - I-SPY 2 TRIAL: Neratinib-containing regimen (neratinib + paclitaxel) showed an estimated pCR rate of 55.6% in HER2 positive/HR negative patients, compared to 32.6% in the control arm[39] - FB-7 Trial: Neratinib + trastuzumab + paclitaxel combination achieved a pCR rate of 50.0% in the intent-to-treat population, and 73.7% in HR- patients[45] - In the FB-7 trial, high-dose loperamide prophylaxis for the entire first cycle (4 weeks) reduced Grade 3 diarrhea rates to 15% (Arm 2) and 23% (Arm 3)[46] - Biomarker analysis from FB-7 suggested higher phosphoHER2 and p95HER2 levels in patients achieving pCR with neratinib, indicating potential mechanisms of action and resistance overcoming[48] PB272 (neratinib, oral)—Metastatic Breast Cancer Neratinib demonstrates efficacy as a single agent and in combination therapies for HER2-positive metastatic breast cancer, including those with brain metastases Trials of Neratinib as a Single Agent Neratinib monotherapy shows objective response rates and progression-free survival in HER2-positive metastatic breast cancer, particularly in trastuzumab-naive patients - A Phase II trial of neratinib monotherapy in HER2-positive metastatic breast cancer showed objective response rates of 24% for trastuzumab-pretreated patients and 56% for those without prior trastuzumab[50] - Median PFS was 22.3 weeks for pretreated patients and 39.6 weeks for those without prior trastuzumab[50] Other Trials of Neratinib in Combination with Other Anti-Cancer Drugs Neratinib in combination therapies shows comparable efficacy, reduced CNS metastases, and improved PFS in HER2-positive metastatic breast cancer - NEfERTT trial (Phase II) of neratinib + paclitaxel vs. trastuzumab + paclitaxel for first-line HER2-positive metastatic breast cancer showed comparable PFS (12.9 months for both arms) but a 52% reduction in CNS metastases incidence with neratinib (p=0.002)[51][52] - NALA trial (Phase III) of neratinib + capecitabine vs. lapatinib + capecitabine in third-line HER2-positive metastatic breast cancer showed statistically significant improvement in centrally confirmed PFS with neratinib (p=0.0059)[14][57] - NALA trial also showed improvement in time to intervention for symptomatic CNS disease with neratinib + capecitabine (p=0.043)[14][57] Metastatic Breast Cancer with Brain Metastases Neratinib combined with capecitabine shows promising CNS response and improved survival in HER2-positive metastatic breast cancer patients with brain metastases - A Phase II trial of neratinib + capecitabine in HER2-positive metastatic breast cancer patients with brain metastases (Cohort 3A, no prior lapatinib) showed a 49% CNS Objective Response Rate by composite criteria and 24% by RANO-BM criteria[62][64] - Median time to CNS progression was 5.5 months and median overall survival was 13.5 months in Cohort 3A[64] - NERLYNX (neratinib) in combination with capecitabine is included as a Category 2A treatment option in NCCN Guidelines for Breast Cancer patients with brain metastases (off-label use)[66] Safety Database Diarrhea is the most significant adverse event associated with neratinib, with prophylaxis strategies effectively reducing its incidence and severity - The most significant Grade 3 or higher adverse event associated with neratinib is diarrhea, occurring in approximately 30% of patients[67] - The CONTROL trial (Phase II) investigated loperamide prophylaxis, with or without budesonide or colestipol, to reduce neratinib-associated diarrhea[68][69] CONTROL Trial Interim Efficacy Results for Diarrhea (as of Dec 2017) | Study | Loperamide (n=137) | Loperamide + budesonide (n=64) | Loperamide + colestipol (n=120) | ExteNET (Loperamide prn, n=1408) | | :--- | :--- | :--- | :--- | :--- | | Diarrhea, % | | | | | | Any grade | 79.6 | 86.0 | 66.7 | 95.4 | | Grade 3a | 30.7 | 26.6 | 10.8 | 39.8 | | Median cumulative duration, days | | | | | | Grade ≥3a | 3.0 | 2.0 | 3.0 | 5.0 | | Discontinuation due to diarrhea, % | 20.4 | 10.9 | 1.7 | 16.8 | PB272 (neratinib, oral)—Other Potential Applications Neratinib is being explored for other HER2-mutated solid tumors, including non-small cell lung cancer and various basket trial indications Non-Small Cell Lung Cancer (NSCLC) Neratinib monotherapy or in combination shows partial responses and clinical benefit in HER2-mutated NSCLC, with manageable diarrhea rates - Approximately 2-4% of NSCLC patients have a HER2 mutation, which is believed to increase tyrosine kinase activity and PI3K/mTOR activation[73] - A Phase II trial of neratinib monotherapy or neratinib + temsirolimus in HER2-mutated NSCLC showed 21% partial response and 64% clinical benefit with the combination therapy[74][75] - High-dose loperamide prophylaxis reduced Grade 3 diarrhea to 8% for monotherapy and 14% for combination therapy in the NSCLC trial[74] HER2 Mutation-Positive Solid Tumors The SUMMIT trial evaluates neratinib in various HER2-mutant solid tumors, showing clinical responses in breast, biliary tract, and cervical cancers - The SUMMIT basket trial (Phase II) evaluates neratinib in solid tumors with activating HER2 or HER3 mutations, including breast, lung, bladder, and colorectal cancers[77][79] - Interim results from SUMMIT (as of March 2017) showed clinical responses in HER2-mutant breast (32% ORR), biliary tract (22.2% ORR), cervical (20% ORR), and non-small-cell lung cancers (3.8% ORR)[80][83] SUMMIT Trial Interim Efficacy Results (as of March 10, 2017) | | HER2mut Breast (n=25) | HER2mut Bladder (n=16) | HER2mut Lung (n=26) | HER2mut Colorectal (n=12) | HER2mut Biliary tract (n=9) | HER2mut Cervical (n=5) | HER3mut NOS (n=17) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | ORR at week 8, n (%) | 8 (32.0) | 0 (0.0) | 1 (3.8) | 0 (0.0) | 2 (22.2) | 1 (20.0) | 0 (0.0) | | Clinical benefit rate, n (%) | 10 (40.0) | 3 (18.8) | 11 (42.3) | 1 (8.3) | 3 (33.3) | 3 (60.0) | 2 (11.8) | | Median PFS, months | 3.5 | 1.8 | 5.5 | 1.8 | 2.8 | 20.1 | 1.7 | - Updated SUMMIT results (as of Oct 2018) for HER2-mutant, HR-positive metastatic breast cancer (neratinib + fulvestrant, n=47) showed a 30% objective response rate (4 CR, 10 PR) and 47% clinical benefit rate Median PFS was 5.4 months[84][86] HER2-Mutant, HR-Positive Metastatic Breast Cancer Phase II SUMMIT Trial Interim Efficacy Summary (as of October 19, 2018) | Efficacy Endpointa: | All Patients (n=47) | Prior Fulvestrant (n=25) | Prior CDK4/6 Inhibitor -Based Therapy (n=20) | | :--- | :--- | :--- | :--- | | Objective response (confirmed)b – n | 14 | 4 | 6 | | CR | 4 | 0 | 1 | | PR | 10 | 4 | 5 | | Objective response rate (95% CI) | 30 (17–45) | 16 (5–36) | 30 (12–54) | | MedianC DOR, months (95% CI) | 9.2 (5.5–16.6 ) | | | | Clinical benefitd – n | 22 | 9 | 8 | | Clinical benefit rate (95% CI) | 47 (32–62) | 36 (18–58) | 40 (19–64) | | MedianC PFS (95% CI) time to event, months | 5.4 (3.7–9.2) | 3.7 (3.5–6.9) | 4.1 (1.9–10.9) | - In the neratinib + fulvestrant cohort, 23% of patients reported Grade 3 diarrhea, with a median duration of 1.5 days No patients permanently discontinued due to diarrhea[88] PB272 (neratinib, intravenous) The company plans to develop an intravenous formulation of neratinib, potentially offering enhanced efficacy due to higher exposure levels - The company plans to develop an intravenous formulation of neratinib, which showed higher exposure levels in pre-clinical models, potentially leading to enhanced efficacy[89] PB357 PB357 is an orally administered irreversible TKI, structurally similar to neratinib, blocking HER1, HER2, and HER4 receptors - PB357 is an orally administered irreversible TKI, structurally similar to neratinib, that blocks HER1, HER2, and HER4 Pfizer completed single-dose Phase I trials[90] Clinical Testing of Our Products in Development Product development requires extensive, expensive, and time-consuming pre-clinical and clinical testing under GLP and GCP standards, often utilizing CROs - All products in development require extensive pre-clinical and clinical testing for safety and efficacy before regulatory approval, a process that is expensive and time-consuming[91] - Testing is conducted in accordance with Good Laboratory Practices (GLP) and Good Clinical Practice (GCP) standards, including EU standards for trials in Europe[92] - The company uses Clinical Research Organizations (CROs) for initiating, managing, and conducting clinical trials[93] Competition The cancer treatment market is highly competitive, with larger, more resourced companies competing on efficacy, safety, price, and intellectual property - The cancer treatment market is highly competitive, with major pharmaceutical, biotechnology, and specialty cancer companies, including Genentech, Novartis, and Roche[94] - Many competitors have significantly more financial and technical resources, and greater experience in development, manufacturing, regulatory, and commercialization processes[94] - Competition is based on product efficacy, safety, reliability, availability, price, reimbursement, and patent position[95] Sales and Marketing The company established a U.S. sales force for NERLYNX and is evaluating independent or alliance-based commercialization strategies for international markets - Following FDA approval of NERLYNX in July 2017, the company hired a U.S. specialty sales force of approximately 85 sales specialists to promote the product to oncologists[96][97] - A commercialization committee was formed in November 2018 to accelerate U.S. commercialization efforts, assess infrastructure, and optimize commercial results[99] - For international markets, the company may commercialize independently or through strategic alliances, similar to existing out-license agreements[98] Intellectual Property and License Agreements The company's intellectual property strategy involves in-licensing neratinib from Pfizer and out-licensing commercialization rights globally In-License Agreement The company holds an exclusive worldwide license from Pfizer for neratinib and PB357, involving milestone payments and royalties, with patents expiring through 2030 - The company holds a worldwide exclusive license from Pfizer for neratinib (oral and intravenous) and PB357, covering 18 granted U.S. patents and five pending U.S. applications[100][112] - Key U.S. patents include composition of matter for neratinib (expires 2025), use in breast cancer (expires 2025), extended adjuvant treatment of HER2-positive breast cancer (expires 2030), and NERLYNX formulation (expires 2030)[101] - Milestone payments totaling $187.5 million are due to Pfizer upon achievement of certain milestones, with one triggered by FDA approval of NERLYNX in July 2017[114][115] - Annual royalties to Pfizer on net sales of licensed products were reduced from a tiered 10-20% to a fixed low-to-mid teens rate in July 2014[115][117] - The company is responsible for expenses incurred in ongoing legacy clinical trials after December 31, 2013, previously Pfizer's responsibility[116] Out-License Agreements The company has strategic out-license agreements for neratinib commercialization in various international territories, including upfront and milestone payments Specialised Therapeutics Agreement This agreement grants STA exclusive commercialization rights for neratinib in Australia, Southeast Asia, and New Zealand, with upfront, milestone, and royalty payments - Entered into with STA in November 2017 for exclusive commercialization rights of neratinib in the STA Territory (Australia, Southeast Asia, New Zealand, etc)[119] - Upfront and milestone payments up to $4.5 million, plus significant double-digit royalties on net sales[121] CANbridge Agreement This agreement grants CANbridge exclusive development and commercialization rights for neratinib in Greater China, involving significant upfront, milestone, and royalty payments - Entered into with CANbridge in January 2018 for exclusive development and commercialization rights of neratinib in the People's Republic of China (mainland, Hong Kong, Macao, Taiwan)[123] - Received an upfront payment of $30 million and a regulatory milestone payment of $10 million Potential for up to $30 million in additional regulatory milestones and $185 million in sales-based milestones, plus significant double-digit royalties[125] Pint Agreement This agreement grants Pint exclusive development and commercialization rights for neratinib in Central and South America, and Mexico, with upfront, milestone, and royalty payments - Entered into with Pint in March 2018 for exclusive development and commercialization rights of neratinib in Pint Territory (Central and South America, Mexico)[127] - Received an upfront payment of $10 million Eligible for regulatory and sales-based milestone payments totaling up to $24.5 million, plus double-digit royalties[129] Knight Agreement This agreement grants Knight exclusive commercialization rights for neratinib in Canada, including upfront and milestone payments, plus double-digit royalties - Entered into with Knight in January 2019 for exclusive commercialization rights of neratinib in Canada[131] - Will receive upfront and milestone payments up to $7.2 million, plus double-digit royalties on net sales[134] Government Regulation The company's drug development and commercialization are subject to extensive U.S. FDA and foreign regulations, including approval processes, post-market requirements, and pricing controls United States—FDA Process Drug products are extensively regulated by the FDA, requiring rigorous pre-clinical and clinical testing, NDA submission, and post-approval compliance - Drug products are extensively regulated by the FDA under the FDCA, requiring pre-clinical tests, IND submission, human clinical trials (Phase I, II, III), NDA submission, and manufacturing facility inspections (cGMP compliance)[136][137][139] - The FDA offers expedited review programs like fast track, priority review, accelerated approval, and breakthrough therapy designation for serious or life-threatening conditions[145][146] - Post-approval requirements include additional clinical studies (Phase IV), adverse event reporting, compliance with advertising/promotional labeling, and ongoing cGMP compliance[147][148] - The Hatch-Waxman Amendments allow for up to five years of patent term extension for approved drugs[149] - The FDCA provides five years of non-patent data exclusivity for new chemical entities and three years of marketing exclusivity for new clinical investigations of existing drugs[150] Foreign Regulation Commercialization in the EEA requires Marketing Authorization, with specific data and marketing exclusivity periods, and adherence to EU clinical trial directives - Commercialization in the European Economic Area (EEA) requires Marketing Authorization (MA), obtainable through Centralized or National Procedures[152][153] - EU marketing approval typically grants eight years of data exclusivity and 10 years of marketing exclusivity, with a potential additional one-year marketing exclusivity for new therapeutic indications with significant clinical benefit[153][154] - Clinical trials in the EU must adhere to the Clinical Trials Directive (soon to be replaced by the Clinical Trials Regulation in 2019)[155] Coverage and Reimbursement Product sales depend on adequate coverage and reimbursement from third-party payors, influenced by evolving healthcare laws like the ACA and governmental pricing scrutiny - Sales and revenue generation depend on adequate coverage and reimbursement from third-party payors (governments, managed care, private insurers)[156] - The Patient Protection and Affordable Care Act (ACA) significantly changed healthcare financing, introducing fees on branded prescription drugs, Medicare Part D discounts, and increased Medicaid rebates[158][159] - Ongoing legislative and regulatory proposals, including potential changes to the ACA, could impact reimbursement rates, discounts, and rebates, affecting future revenues[157][159][160] Sales and Marketing The FDA strictly regulates drug marketing and promotion, limiting communications to approved indications, with non-compliance leading to significant penalties - The FDA strictly regulates marketing, labeling, advertising, and promotion of prescription drugs, limiting promotion to approved indications[163] - Physicians may prescribe drugs off-label, but manufacturers face stringent restrictions on communicating off-label uses[164] - Failure to comply with FDA regulations can lead to enforcement actions, product withdrawal, fines, and reputational harm[163][164] Manufacturing The company relies on third-party manufacturers for all drug production, ensuring sufficient supply for commercialization and clinical development - The company does not own manufacturing facilities and relies on third-party manufacturers for pre-clinical, clinical, and commercial production of NERLYNX and other drug candidates[166][167] - Sufficient quantities of NERLYNX have been manufactured to support at least the first year of launch for the extended adjuvant breast cancer indication[166] Other Healthcare Laws The company is subject to federal and state healthcare fraud, abuse, and privacy laws (HIPAA, HITECH, GDPR), with potential for substantial penalties for non-compliance - The company is subject to federal and state healthcare fraud and abuse laws, including anti-kickback laws and false claims laws, which prohibit illegal remuneration and fraudulent claims[168] - HIPAA and HITECH impose requirements for privacy, security, and transmission of individually identifiable health information, with significant penalties for non-compliance[169][172] - The GDPR in Europe (effective May 2018) introduces stringent data protection obligations and significant fines for non-compliance[171][173] - Violations of these laws can result in criminal/civil sanctions, fines, exclusion from federal healthcare programs, and reputational harm[170] Other Laws and Regulatory Processes As a public company, Puma Biotechnology adheres to SEC and NASDAQ regulations, alongside laws governing working conditions and hazardous substance handling - As a public company, Puma Biotechnology is subject to SEC financial disclosure and securities trading regulations, as well as NASDAQ rules[176] - The company is also subject to various laws and regulations concerning safe working conditions, laboratory practices, animal use, and handling of hazardous substances[177] Research and Development Expenses Research and development expenses decreased in 2018, primarily due to reduced stock-based compensation and clinical trial costs Research and Development Expenses (in millions) | Year Ended December 31, | Amount (in millions) | | :---------------------- | :----- | | 2018 | $164.9 | | 2017 | $207.8 | | 2016 | $222.8 | - R&D expenses decreased by $42.9 million (20.7%) from 2017 to 2018, primarily due to a reduction in stock-based compensation and clinical trial costs[178][344] Employees As of December 31, 2018, the company had 272 full-time employees, with anticipated growth in commercial activities and continued reliance on CROs - As of December 31, 2018, the company had 272 full-time employees, with 125 hired in 2017 for sales, marketing, and commercial activities[179] - The company anticipates hiring approximately 44 additional full-time employees in the next year, mostly for commercial activities[179] - The company continues to rely on CROs and third parties for clinical studies and manufacturing[180] Corporate Information and History Puma Biotechnology, Inc. was incorporated in 2007, underwent a reverse acquisition in 2011, and established a UK subsidiary for European clinical trials - Puma Biotechnology, Inc. was originally incorporated in Delaware in April 2007 as Innovative Acquisitions Corp. and adopted its current name after merging with Former Puma in October 2011[183] - The merger was accounted for as a reverse acquisition, with Former Puma deemed the acquirer for accounting purposes[183][184] - Puma Biotechnology Ltd. was established in November 2012 as a wholly-owned subsidiary to serve as the legal representative in the UK and EU for clinical trial activity[185] Item 1A. Risk Factors The company faces significant risks including limited operating history, consistent losses, dependence on NERLYNX, and challenges in financing, regulatory approvals, and third-party reliance Risks Related to our Business Business risks include limited operating history, consistent losses, dependence on NERLYNX commercialization, supply chain reliance, clinical trial uncertainties, and regulatory compliance - The company has a limited operating history and is not profitable, with net losses of $113.6 million in 2018, $292.0 million in 2017, and $276.0 million in 2016, and an accumulated deficit of approximately $1,202.0 million as of December 31, 2018[188] - Future profitability depends on successful commercialization of NERLYNX and other drug candidates, requiring substantial capital for development, regulatory approval, manufacturing, and sales/marketing[189][190] - Commercial success of NERLYNX is subject to risks such as market acceptance, patient/physician adoption, competition, and the ability to establish and support a qualified sales force[191][192] - The company depends on a limited number of customers (CVS/Caremark, Accredo/Acaria, Diplomat) for a significant portion of its revenue, making it vulnerable to loss or reduced purchases from these customers[198] - Undesirable side effects, particularly diarrhea, associated with NERLYNX could delay or prevent regulatory approval for new indications, limit commercial potential, or lead to negative consequences post-approval[207][208] - The company relies exclusively on third parties for drug formulation and manufacturing, creating risks related to identifying manufacturers, ensuring sufficient quantities and quality, and compliance with cGMP regulations[213][215] - Clinical trials are expensive, time-consuming, and uncertain, with potential for delays in patient enrollment, unforeseen safety issues, or failure to meet endpoints, which could harm commercial prospects[218][219][220][221][222] - Expansion into international markets subjects the company to additional business and regulatory risks, including competition, coverage/reimbursement issues, intellectual property enforcement, and compliance with foreign laws like the FCPA[225][227] - The company is subject to ongoing regulatory review and post-approval obligations for NERLYNX, with potential for labeling restrictions, market withdrawal, or penalties for non-compliance[233] - Healthcare reform measures, such as the ACA, and governmental scrutiny over drug pricing could lead to reductions in reimbursement, increased discounts, and downward pressure on product prices[242][243][246][248] - Failure to obtain or maintain adequate coverage and reimbursement for products could limit marketability and revenue generation[251][252] - The company is exposed to federal and state healthcare fraud and abuse laws, false claims laws, and privacy/security laws (HIPAA, GDPR), with potential for substantial penalties for non-compliance[253][254][257] - Intense competition in the cancer drug market from larger, more experienced pharmaceutical companies could hinder market share achievement and revenue[261][262] Risks Related to Our Intellectual Property Intellectual property risks involve reliance on the Pfizer license, patent enforceability challenges, trade secret protection, and potential third-party infringement claims - The company's business heavily relies on its in-license agreement with Pfizer; termination of this license would significantly harm its prospects[272] - Proprietary rights, including patents, may not adequately protect intellectual property and potential products, and patent positions are highly uncertain and subject to challenge, invalidation, or unenforceability[273][274] - Reliance on trade secrets carries risks of unintentional or willful disclosure by employees or third parties, and enforcement can be difficult and costly[276][277] - The ability to commercialize products depends on avoiding infringement of third-party patent rights, and infringement lawsuits could be costly, time-consuming, and lead to substantial damages or cessation of product activities[278][279][281] Risks Related to Owning our Common Stock Risks to common stock ownership include price volatility, potential dilution from future financing, securities litigation, and limitations on net operating loss utilization - The company's stock price may fluctuate significantly due to various factors, including operational results, clinical trial announcements, competitor actions, intellectual property disputes, and general market conditions[284][285] - Sales of large blocks of common stock by significant stockholders could adversely affect the trading price[283] - The company has been subject to securities litigation, including a class action lawsuit where a jury found liability on one statement and awarded $4.50 per share in damages, with total estimated damages ranging from $9 million to $18 million[286] - Future equity financing could result in significant dilution for existing stockholders[288] - The company does not foresee paying cash dividends in the foreseeable future, as earnings will be retained for growth, and dividend payments are restricted under its credit facility[295] - The ability to use net operating losses (NOLs) and R&D credit carryforwards to offset future taxable income may be limited by ownership changes under Sections 382 and 383 of the Internal Revenue Code[296] Item 1B. Unresolved Staff Comments This item is not applicable to the company Item 2. Properties The company leases adequate office space for its corporate headquarters in Los Angeles and additional space in South San Francisco, with leases extending to 2026 - The company leases approximately 65,656 square feet of office space in Los Angeles, California, for its corporate headquarters, with the lease terminating in March 2026[298] - An additional 29,470 square feet of office space is leased in South San Francisco, California, with its lease also terminating around March 2026, with an option to extend[298] - The existing office space is believed to be adequate for current and anticipated future requirements[298] Item 3. Legal Proceedings The company is involved in several legal proceedings, including a class action lawsuit with estimated damages, a defamation lawsuit, and derivative actions - In Hsu v. Puma Biotechnology, Inc., et al., a class action lawsuit, a jury found liability on one of four alleged misstatements, awarding $4.50 per share in damages Total aggregate class-wide damages are estimated to range from $9 million to $18 million[299] - Fredric N. Eshelman filed a lawsuit against the company and its CEO, Alan H. Auerbach, alleging defamatory statements The matter is set for trial in March 2019[300] - Multiple derivative lawsuits (Xie, McKenney, Van Der Gracht De Rommerswael, Duran vs. Auerbach) were filed against officers and directors, alleging breach of fiduciary duty, unjust enrichment, and mismanagement[302][303][304] - A settlement in principle was reached for the Xie, Rommerswael, and Duran lawsuits in July 2018, with the Rommerswael case settlement approved in January 2019[305] Item 4. Mine Safety Disclosure This item is not applicable to the company Part II This part covers the company's market for common equity, selected financial data, management's discussion and analysis, and controls and procedures Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock is traded on NASDAQ, with no cash dividends anticipated due to growth retention and credit facility restrictions - The company's common stock has been quoted on the NASDAQ Global Select Market under the symbol 'PBYI' since January 3, 2017[308] - As of February 15, 2019, there were 7 holders of record and approximately 18,855 additional owners holding common stock in 'Street Name'[309] - The company has never declared or paid cash dividends and does not anticipate doing so in the foreseeable future, as dividend payments are restricted under its credit facility[310] - No sales of unregistered securities were made during fiscal year 2018, and no equity securities were purchased by the issuer or affiliated purchasers during the fourth quarter of 2018[312][313] Cumulative Total Return (December 31, 2013 = $100) | | 12/31/2013 | 12/31/2014 | 12/31/2015 | 12/31/2016 | 12/31/2017 | 12/31/2018 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Puma Biotechnology, Inc. | 100.00 | 182.82 | 75.73 | 29.65 | 95.48 | 19.66 | | Nasdaq Biotechnology Index | 100.00 | 134.40 | 150.22 | 118.15 | 143.71 | 130.97 | | Nasdaq Composite Index | 100.00 | 114.75 | 122.74 | 133.62 | 173.22 | 168.30 | Item 6. Selected Financial Data This section summarizes the company's consolidated financial data from 2014 to 2018, showing increased revenue, continued net losses, and negative operating cash flows Consolidated Statement of Operations Data (in millions, except share and per share data) | | 2018 | 2017 | 2016 | 2015 | 2014 | | :--- | :--- | :--- | :--- | :--- | :--- | | Product revenue, net (in millions) | $200.5 | $26.2 | $— | $— | $— | | License revenue (in millions) | $50.5 | $1.5 | $— | $— | $— | | Total revenue (in millions) | $251.0 | $27.7 | $— | $— | $— | | Cost of sales (in millions) | $34.6 | $5.6 | $— | $— | $— | | Selling, general and administrative (in millions) | $146.2 | $106.7 | $53.8 | $31.8 | $19.4 | | Research and development (in millions) | $164.9 | $207.8 | $222.8 | $208.5 | $122.9 | | Operating loss (in millions) | $(94.7) | $(292.4) | $(276.6) | $(240.3) | $(142.3) | | Net loss (in millions) | $(113.6) | $(292.0) | $(276.0) | $(239.3) | $(142.0) | | Net loss per common share—basic and diluted | $(2.99) | $(7.85) | $(8.29) | $(7.45) | $(4.73) | Consolidated Balance Sheet Data (in millions) | | 2018 | 2017 | 2016 | 2015 | 2014 | | :--- | :--- | :--- | :--- | :--- | :--- | | Total assets (in millions) | $259.1 | $165.5 | $252.8 | $239.8 | $162.8 | | Total liabilities (in millions) | $224.8 | $112.2 | $43.0 | $33.8 | $45.7 | | Total stockholders' equity (in millions) | $34.3 | $53.3 | $209.8 | $206.0 | $117.0 | Other Financial Data (in millions) | | 2018 | 2017 | 2016 | 2015 | 2014 | | :--- | :--- | :--- | :--- | :--- | :--- | | Net cash used in operating activities (in millions) | $(24.1) | $(172.5) | $(141.7) | $(154.5) | $(77.2) | | Net cash (used in) provided by investing activities (in millions) | $(57.6) | $(15.4) | $142.2 | $(85.9) | $(63.3) | | Net cash provided by financing activities (in millions) | $108.5 | $75.1 | $162.4 | $233.4 | $136.0 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes the company's financial performance, highlighting revenue growth from NERLYNX, expense trends, liquidity, and critical accounting policies Overview Puma Biotechnology focuses on developing and commercializing neratinib for cancer care, with efforts shifting to commercialization and capital generation - Puma Biotechnology is a biopharmaceutical company focused on developing and commercializing innovative products for cancer care, primarily neratinib for HER2-positive breast cancer[321] - The company's efforts shifted from technology acquisition and capital raising to commercialization of NERLYNX following FDA approval in July 2017 and EC marketing authorization in September 2018[322] - Major sources of working capital include product and license revenue, public offerings of common stock, and proceeds from credit facilities[323] Summary of Income and Expenses This section outlines the components of product and license revenue, cost of sales, and trends in selling, general and administrative, and research and development expenses Product revenue, net Net product revenue is derived from NERLYNX sales to specialty pharmacies and distributors, recorded after estimating variable consideration - Product revenue, net, is derived from sales of NERLYNX to specialty pharmacies and distributors in the U.S., recorded at net sales price after estimating variable consideration (discounts, returns, rebates)[324] License revenue License revenue stems from satisfied performance obligations under agreements, with upfront fees recognized upon license commencement and data delivery - License revenue comes from performance obligations satisfied under license agreements, with non-refundable upfront fees recognized when the license term commences and licensed data/technology is delivered[325] Cost of sales Cost of sales includes third-party manufacturing, freight, overhead, Pfizer royalties, amortization of milestone payments, and inventory adjustments - Cost of sales includes third-party manufacturing costs, freight, indirect overhead, Pfizer royalties, amortization of milestone payments, and inventory adjustments[326] Selling, general and administrative expenses SG&A expenses, primarily salaries and professional fees, are expected to increase in 2019 due to expanded U.S. and international sales and marketing activities - SG&A expenses primarily consist of salaries, professional fees, business insurance, rent, and other corporate expenses[327] - SG&A expenses are expected to increase in 2019 due to expanded sales and marketing activities in both U.S. and international markets[328] Research and development expenses R&D expenses cover CRO services, clinical manufacturing, trials, and personnel, with clinical R&D expected to decline while regulatory costs increase - R&D expenses include costs for CRO services, clinical material manufacturing, clinical trials, consultants, salaries, and stock-based compensation[329] - Clinical R&D expenses are expected to decline in 2019, but medical affairs, pharmacovigilance, and regulatory affairs costs are projected to increase for global regulatory approval of NERLYNX[330] Results of Operations This section details the year-over-year changes in revenue, cost of sales, operating expenses, and other income/expenses, highlighting key financial drivers Year Ended December 31, 2018 Compared to Year Ended December 31, 2017 This section compares the company's financial performance in 2018 versus 2017, showing significant revenue growth, increased SG&A, and decreased R&D expenses Revenue Comparison (2018 vs. 2017) | Revenue Type | 2018 (in millions) | 2017 (in millions) | Change (in millions) | Change (%) | | :------------- | :-------------- | :-------------- | :---------------- | :--------- | | Total revenue | $251.0 | $27.7 | $223.3 | 806.1% | | Product revenue, net | $200.5 | $26.2 | $174.3 | 665.3% | | License revenue | $50.5 | $1.5 | $49.0 | 3266.7% | | Cost of sales | $34.6 | $5.6 | $29.0 | 517.9% | - Product revenue, net, increased due to increased sales of NERLYNX following its commercial launch in July 2017[333] - License revenue increased due to upfront payments from out-license agreements where performance obligations were satisfied[334] - Cost of sales increased due to twelve months of amortization of a Pfizer milestone payment, increased Pfizer royalties, and product costs related to higher NERLYNX sales[335] SG&A Expenses Comparison (2018 vs. 2017) | SG&A Category | 2018 (in thousands) | 2017 (in thousands) | Change (in thousands) | Change (%) | | :-------------- | :--------------- | :--------------- | :----------------- | :--------- | | Total SG&A expenses | $146,188 | $106,693 | $39,495 | 37.0% | | Payroll and related costs | $42,730 | $23,839 | $18,891 | 79.2% | | Travel and meetings | $11,771 | $3,593 | $8,178 | 227.6% | | Professional fees and expenses | $46,366 | $40,383 | $5,983 | 14.8% | | Stock-based compensation | $34,913 | $31,194 | $3,719 | 11.9% | R&D Expenses Comparison (2018 vs. 2017) | R&D Category | 2018 (in thousands) | 2017 (in thousands) | Change (in thousands) | Change (%) | | :------------- | :--------------- | :--------------- | :----------------- | :--------- | | Total R&D expenses | $164,854 | $207,810 | $(42,956) | (20.7%) | | Stock-based compensation | $52,026 | $77,541 | $(25,515) | (32.9%) | | Clinical trial expense | $55,736 | $72,527 | $(16,791) | (23.2%) | | Consultant and contractors | $12,813 | $15,423 | $(2,610) | (16.9%) | | Internal R&D | $44,279 | $42,319 | $1,960 | 4.6% | Other (Expenses) Income Comparison (2018 vs. 2017) | Category | 2018 (in thousands) | 2017 (in thousands) | Change (in thousands) | Change (%) | | :------- | :--------------- | :--------------- | :----------------- | :--------- | | Interest income | $1,796 | $1,256 | $540 | 43.0% | | Interest expense | $(10,985) | $(720) | $(10,265) | 1425.7% | | Class action verdict expense | $(9,000) | $— | $(9,000) | NM | - Interest expense increased significantly due to a full year's interest on amounts borrowed under the loan and security agreement, as well as increased borrowings and a higher interest rate[348] Year Ended December 31, 2017 Compared to Year Ended December 31, 2016 This section compares the company's financial performance in 2017 versus 2016, reflecting the initial commercial launch of NERLYNX and associated revenue and cost increases Revenue Comparison (2017 vs. 2016) | Revenue Type | 2017 (in millions) | 2016 (in millions) | Change (in millions) | Change (%) | | :------------- | :-------------- | :-------------- | :---------------- | :--------- | | Total revenue | $27.7 | $0 | $27.7 | NM | | Product revenue, net | $26.2 | $0 | $26.2 | NM | | License revenue | $1.5 | $0 | $1.5 | NM | | Cost of sales | $5.6 | $0 | $5.6 | NM | - Product revenue, net, and cost of sales increased from zero in 2016 due to the commercial launch of NERLYNX in July 2017[337][339] - License revenue increased due to an upfront payment from an out-license agreement[338] SG&A Expenses Comparison (2017 vs. 2016) | SG&A Category | 2017 (in thousands) | 2016 (in thousands) | Change (in thousands) | Change (%) | | :-------------- | :--------------- | :--------------- | :----------------- | :--------- | | Total SG&A expenses | $106,693 | $53,798 | $52,895 | 98.3% | | Professional fees and expenses | $40,383 | $13,671 | $26,712 | 195.4% | | Payroll and related costs | $23,839 | $7,004 | $16,835 | 240.4% | | Stock-based compensation | $31,194 | $26,623 | $4,571 | 17.2% | | Travel and meetings | $3,593 | $621 | $2,972 | 478.6% | R&D Expenses Comparison (2017 vs. 2016) | R&D Category | 2017 (in thousands) | 2016 (in thousands) | Change (in thousands) | Change (%) | | :------------- | :--------------- | :--------------- | :----------------- | :--------- | | Total R&D expenses | $207,810 | $222,798 | $(14,988) | (6.7%) | | Stock-based compensation | $77,541 | $90,641 | $(13,100) | (14.5%) | | Clinical trial expense | $72,527 | $79,933 | $(7,406) | (9.3%) | | Internal R&D | $42,319 | $38,981 | $3,338 | 8.6% | | Consultant and contractors | $15,423 | $13,243 | $2,180 | 16.5% | Other (Expenses) Income Comparison (2017 vs. 2016) | Category | 2017 (in thousands) | 2016 (in thousands) | Change (in thousands) | Change (%) | | :------- | :--------------- | :--------------- | :----------------- | :--------- | | Interest income | $1,256 | $958 | $298 | 31.1% | | Interest expense | $(720) | $— | $(720) | NM | - Interest expense in 2017 was due to amounts borrowed under a loan and security agreement in October 2017[351] Non-GAAP Financial Measures The company presents non-GAAP adjusted net loss and per share figures by excluding stock-based compensation to provide a clearer view of operational performance Reconciliation of GAAP Net Loss to Non-GAAP Adjusted Net Loss (in thousands, except share and per share data) | | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | GAAP net loss (in thousands) | $(113,575) | $(291,955) | $(276,011) | | Stock-based compensation - SG&A (in thousands) | 34,914 | 31,194 | 26,623 | | Stock-based compensation - R&D (in thousands) | 52,025 | 77,541 | 90,641 | | Non-GAAP adjusted net loss (in thousands) | $(26,636) | $(183,220) | $(158,747) | | GAAP net loss per share—basic and diluted | $(2.99) | $(7.85) | $(8.29) | | Non-GAAP adjusted basic net loss per share | $(0.70) | $(4.93) | $(4.77) | - Stock-based compensation represented approximately 76.5% of the net loss for the twelve months ended December 31, 2018[352] Liquidity and Capital Resources The company relies on financing to cover consistent losses and negative operating cash flows, with a credit facility providing $155 million in term loans Net Losses and Cash Flows from Operations (in millions) | Year Ended December 31, | Net Loss (in millions) | Net Cash Used in Operating Activities (in millions) | | :---------------------- | :------- | :------------------------------------ | | 2018 | $(113.6) | $(24.1) | | 2017 | $(292.0) | $(172.5) | | 2016 | $(276.0) | $(141.7) | - Net cash used in operating activities for 2018 was $24.1 million, adjusted for non-cash items like $86.9 million in stock-based compensation and $7.4 million in depreciation/amortization[356] - Net cash used in investing activities was $57.6 million in 2018, primarily due to the purchase of available-for-sale securities ($107.5 million) offset by maturities ($50.5 million)[359] - Net cash provided by financing activities was $108.5 million in 2018, mainly from $105.0 million in incremental proceeds from the amended loan and security agreement[362] - The company has a credit facility with SVB and Oxford for $155 million in term loans, maturing May 1, 2023, secured by personal property (excluding IP) and 65% of Puma Biotechnology Ltd. stock[365] - The credit facility requires monthly interest-only payments until July 2020, then principal and interest, and includes a final payment of 7.5% of the original principal upon repayment[366] - Covenants include achieving product revenue greater than or equal to 50% of board-approved projections for fiscal year 2019[368] - Estimated R&D spending for the next 12 months is $120 million to $130 million (excluding stock-based compensation), and SG&A expenses are expected to increase[371][372] - As of December 31, 2018, cash and cash equivalents totaled $108.4 million, and marketable securities totaled $57.0 million[373] Off-Balance Sheet Arrangements The company does not have any off-balance sheet arrangements as defined by SEC regulations - The company does not have any 'off-balance sheet arrangements' as defined by SEC regulations[375] Contractual Obligations Contractual obligations include operating leases and long-term debt, with contingent liabilities like Pfizer milestone payments excluded due to timing uncertainty Contractual Obligations as of December 31, 2018 (in thousands) | Contractual Obligations | Total (in thousands) | Less than 1 year (in thousands) | 1 - 3 years (in thousands) | 3 - 5 years (in thousands) | More than 5 years (in thousands) | | :---------------------- | :---- | :--------------- | :---------- | :---------- | :---------------- | | Operating Lease Obligations | $39,756 | $4,924 | $10,442 | $11,094 | $13,296 | | Long Term Debt Obligations (principal and interest) | $207,682 | $13,525 | $102,241 | $91,916 | $— | | Total | $247,438 | $18,449 | $112,683 | $103,010 | $13,296 | - Milestone payments totaling approximately $187.5 million under the Pfizer in-license agreement are not included in the table due to uncertainty in timing[377] - Royalty obligations to Pfizer are at a fixed low-to-mid teens rate on net sales of licensed products[377] - Unrecognized tax benefits of $8.8 million as of December 31, 2018, are also not included in the table due to uncertain timing of payment[378] Critical Accounting Policies Critical accounting policies involve significant estimates for revenue recognition under ASC Topic 606, covering product revenue net of variable consideration and license revenue - Critical accounting policies require significant estimates and assumptions, particularly for revenue recognition, affecting reported assets, liabilities, and expenses[379][479] - The company adopted ASC Topic 606 - Revenue from Contracts with Customers on January 1, 2017, recognizing revenue when customers obtain control of goods or services[381][490] - Product revenue is recorded net of variable consideration, including trade discounts, product returns, provider chargebacks, government rebates, payor rebates, and patient assistance programs[386][492][501] - License revenue from sub-license agreements (e.g., CANbridge, Pint) is recognized for non-refundable upfront fees when performance obligations are satisfied, with future milestones and royalties recognized upon achievement[382][384][385][496][499][500] - Estimates for variable consideration are probability-weighted to ensure no significant reversal of cumulative revenue in future periods[387][502] Recently Issued Accounting Standards The company adopted new accounting standards in 2018 with no material impact, but anticipates ASU No. 2016-02 (Leases) will materially increase balance sheet assets and liabilities in 2019 - Adopted ASU No. 2016-01 (Financial Instruments) in Q1 2018 with no impact on consolidated financial statements[394][530] - Adopted ASU 2016-15 (Cash Flows Classification) in Q1 2018 with no impact on consolidated financial statements[396][532] - Adopted ASU No. 2016-18 (Restricted Cash) in Q1 2018, resulting in a change in the presentation of restricted cash within the statement of cash flows[397][533] - ASU No. 2016-02 (Leases), effective Q1 2019, is expected to materially increase assets and liabilities on the consolidated balance sheets by up to approximately $30 million due to the recognition of right-of-use assets and lease liabilities[395][531] Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company's market risks primarily involve interest rate fluctuations affecting cash equivalents and variable-rate term loans, with minimal material impact observed in 2018 - The company's investment activities prioritize liquidity and principal preservation, with excess cash invested primarily in short-term cash equivalents like money market investments[398] - A 10% increase in interest rates is not expected to have a material effect on the realized value of cash equivalents due to their short-term maturities[399] - The company has interest rate exposure from $155 million in outstanding term loans, which bear variable interest rates (greater of 8.25% or prime rate + 3.5%)[401] - A 100 basis point increase in interest rates would not have materially affected interest expense for the year ended December 31, 2018[401] Item 8. Financial Statements and Supplementary Data This item refers to the consolidated financial statements and supplementary data presented in Part IV of this Annual Report - All financial statements and supplementary data required by this Item are listed in Part IV, Item 15 of this Annual Report and are presented beginning on Page F-1[402] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure This item is not applicable to the company Item 9A. Controls and Procedures Management and the independent auditor concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2018 - Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of December 31, 2018[405] - There were no material changes in internal control over financial reporting during the year ended December 31, 2018[406] - Management concluded that the company's internal co